At the end of the first year, net prof- its totaled $11,000 before any moneys had been distributed to partners. Explain how the $11,000 should be allocated to Dianne, Greg, Knox, and Laura.

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At the end of the first year, net prof- its totaled $11,000 before any moneys had been distributed to partners. Explain how the $11,000 should be allocated to Dianne, Greg, Knox, and Laura.

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ABCD Company is a general partnership. It consists of Dianne, Greg, Knox, and Laura, whose capital contributions were as follows: Dianne 1⁄4 $5,000, Greg 1⁄4 $7,500, Knox 1⁄4 $10,000, and Laura 1⁄4 $5,000. The partnership agreement provided that the partnership would continue for three years and that no withdrawals of capital were to be made without the consent of all the partners. The agreement also provided that all advances would be entitled to interest at 10 percent per year. Six months after the partnership was formed, Dianne advanced $10,000 to the partnership. At the end of the first year, net prof- its totaled $11,000 before any moneys had been distributed to partners. Explain how the $11,000 should be
allocated to Dianne, Greg, Knox, and Laura.

Explanation & AnswerSolution by a verified expert

Explanation

Comment 4 to Section 401(c) of the Revised Uniform Partnership Act states that the amount lent by Individual D is a liability for the partnership firm, which gives Individual D the status of a creditor to the firm.
As per general accounting, the distribution of profits is done after the settlement of credits of the organization, which should be followed in this case.
$11,000 represents the basic amount borrowed, plus 10% per annum interest.

Verified Answer

The whole amount of $11,000 is going to be paid to Individual D, owing to the advancement made to the partnership.

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