Asked by Manisha Reddy on May 13, 2024
Verified
Dawn Garret and Josh have partnership capital account balances of $225000 $450000 and $105000 respectively. The income sharing ratio is Dawn 50%; Garret 40%; and Josh 10%. Dawn desires to withdraw from the partnership and it is agreed that partnership assets of $195000 will be used to pay Dawn for her partnership interest. The balances of Garret's and Josh's Capital accounts after Dawn's withdrawal would be
A) Garret $450000; Josh $105000.
B) Garret $474000; Josh $111000.
C) Garret $426000; Josh $99000.
D) Garret $435000; Josh $90000.
Capital Account
An account used to summarize the owner's equity in a business, including funds contributed by investors or profits retained in the business rather than distributed.
Income Sharing
A financial arrangement where profits or revenues are distributed among participants or partners, often seen in partnerships and joint ventures.
Partnership Assets
Resources owned jointly by partners in a partnership arrangement, used in the operation of the partnership business.
- Ascertain the new values of capital accounts after a partner decides to retire or withdraw.
Verified Answer
Garret's share of the income for the year would be $900,000 x 40% = $360,000.
Josh's share of the income for the year would be $900,000 x 10% = $90,000.
Since the total income for the year is ($112,500 + $360,000 + $90,000) = $562,500, Garret's share of the income after Dawn's withdrawal would be $360,000/$562,500 x ($900,000 - $195,000) = $474,000.
Josh's share of the income after Dawn's withdrawal would be $90,000/$562,500 x ($900,000 - $195,000) = $111,000.
Therefore, Garret's capital account balance after Dawn's withdrawal would be $450,000 + $474,000 = $924,000, and Josh's capital account balance after Dawn's withdrawal would be $105,000 + $111,000 = $216,000.
Learning Objectives
- Ascertain the new values of capital accounts after a partner decides to retire or withdraw.
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