Xavier, Yates, and Zale are partners in a dry-cleaning business. Their partnership agreement provides that the partners shall receive interest on their respective average yearly capital balances at the rate of 8%. Any residual profits or losses shall be divided equally among the partners. The following information is available for the current calendar year:
a. Partners’ capital balances as of the beginning of the current year:
Xavier . .... .. . .. . . .. . . . . .. $24,000
Yates .. .... .. . .. . . .. . . . . .. 17,500
Zale . .. .... .. . .. . . .. . . . . .. 13,000
b. Additional investments were made during the current year as follows:
Xavier .. .. .. . . . . .. $4,500 on April 1
Zale . .. ... .. . . .. .. $2,000 on July 1
$15,000 on September 1
c. The drawing accounts of the partners have the following debit balances at the end of the current year:
Xavier . .... .. . .. . . .. . . . . .. $1,000
Yates .. .... .. . .. . . .. . . . . .. 1,000
Zale . .. .... .. . .. . . .. . . . . .. 500
d. Partnership income for the year is $21,100.
1. Discuss the advantages and disadvantages of using the weighted-average capital balance as the base for determining interest on capital contributed.
2. Determine the interest on weighted-average capital balances that partners Xavier, Yates, and Zale should receive for the current year. Assume that the partners’ withdrawals are not to influence the capital balances for purposes of computing interest.
3. Determine the capital account balances for Xavier, Yates, and Zale after all closing entries have been journalized and posted at the end of the current year. Supporting schedules should be in good form.