Problem 13-6 (LO 3, 4) Profit allocation involving interest on capital balances. Rivera, Sampson, and Elliott are partners in a commercial plumbing business. Rivera and Sampson have also started another contracting company and have cash flow needs, which require periodic distributions from the partnership. In order to deal fairly with the level of part- nership withdrawals, the partnership agreement calls for profit sharing as follows: Component Salaries... Bonus on income after the bonus. Interest on "average net capital" Percentage of remaining profits. Rivera Sampson Elliott $80,000 $80,000 $100,000 0% 0% 10% 10% 10% 10% 30% 30% 40% "Average net capital" is determined by netting the partners' drawing accounts against their capital accounts and weighting the net amounts for the appropriate portion of the year. On March 31 and September 30, $40,000 is allocated to each partner's capital account in anticipa- tion of the annual actual amount of profit. Activity in the drawing and capital accounts is as follows for the current calendar year: Drawing Account Beginning balance January 1 March 31 draws. June 30 draws... September 30 draws. Capital Account Beginning balance January 1 March 31 anticipated profit allocation March 31 capital investment... September 30 anticipated profit allocation. September 30 loan conversion Rivera Sampson Elliott $ $ $ 30,000 40,000 10,000 25,000 30,000 20,000 50,000 20,000 40,000 50,000 70,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 15,000 Sampson had loaned the partnership money in the past, and the transaction was properly classified as a loan payable on the statements of the partnership. On September 30, the loan and accrued interest totaling $15,000 were converted from a loan payable to a capital investment in the partnership. Determine how the current-year profit of $330,000 is to be allocated among the partners. Computation of Interest on Capital Rivera: Beginning capital balance Drawings Allocation of profit Additional investment Loan conversion 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total $ $ $ $ $ 40,000 50,000 40,000 (30,000) (10,000) (20,000) 40,000 60,000 190,000 (60,000) 40,000 80,000 Ending capital balance Weighted "average net capital (3/12) Interest on "average net capital" (10% thereon) $50,000 $40,000 $60,000 $60,000 $210,000 12,500 10,000 15,000 15,000 52,500 $5,250 PROBLEM 13-6 Allocation of $330,000 of Partnership Income Rivera Sampson Elliot Cumulative Total Profit and loss percentage 30% 30% 40% Salary..... $80,000 $80,000 $100,000 $260,000 Bonus (see Note A). 30,000 290,000 Interest on capital (see Note B): 10% interest on quarter 1 average.... 1,250 1,250 3,750 296,250 10% interest on quarter 2 average.. 1,000 625 3,000 300,875 10% interest on quarter 3 average.. 1,500 750 3,500 306,625 10% interest on quarter 4 average.. 1,500 750 3,500 312,375 Balance......... 5,288 5,287 7,050 330,000 Total. $90,538 $88,662 $150,800