Simon and Keith have a profit and loss sharing agreement where: (1) salaries of $25 000 each are credited, (2) 8% interest is allowed on capital balances (3) the remaining profit or loss is split 60-40, respectively. At the end of the year, before the distribution of profits or losses, capital account balances were $40 000 for Simon and $20 000 for Keith. There was a profit of $50 000 before distributions to the partners. What is Keith's year-end capital account balance assuming capital balances are adjusted to reflect profits and losses?
A) $43 080
B) $44 680
C) $46 600
D) $24 680

Question

Quizplus · Accepted Answer

First, we need to calculate the interest on the capital balances:
Simon's interest = 8% x $40 000 = $3 200
Keith's interest = 8% x $20 000 = $1 600
Next, we add the salaries for the year:
Simon's capital account = $40 000 + $3 200 + $25 000 = $68 200
Keith's capital account = $20 000 + $1 600 + $25 000 = $46 600
Now we can calculate the profit distribution:
Total profit to be distributed = $50 000 - ($25 000 + $25 000) - ($3 200 + $1 600) = $5 200
Simon's share = 60% x $5 200 = $3 120
Keith's share = 40% x $5 200 = $2 080
Finally, we add the profit distribution to the capital accounts:
Simon's year-end capital account = $68 200 + $3 120 = $71 320
Keith's year-end capital account = $46 600 + $2 080 = $48 680
Therefore, the answer is B.

Simon and Keith Have a Profit and Loss Sharing Agreement