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A partnership has a partnership agreement which stipulates:
Interest on capital = 5% pa
Partners’ capital: A $100,000; B $80,000; C $120,000
Profit sharing ratio: A:B:C 2:3:4
Additionally partner A had made a loan of $50,000 to the partnership of $50,000 on which interest of
6% would be charged.
Profits for a year before any interest $90,000.
What is the total amount of profits appropriated to partner A?
A $19,000
B $16,000
C $24,000
D $21,000
why is the correct answer D($21000) ?Interest on a loan from a partner is a business expense just like paying interest to a bank.
If profits before interest are 90,000 and interest is 50000 x 6% = 3000, profits after interest are 87000.
From this profits are appropriated:
Interest on capital: A 5000, B 4000, C 6000. Total = 15,000. This leaves 87000 – 15000 = 72000.
Of this 2/9 is A’s ie 2/9 x 72000 = 16000.
Totland profits going to A (NB not interest on the loan) are 5000 + 16000 = 21000.
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