Norr and Caylor established a partnership on January 1, 2010. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:

- 12% interest on the yearly beginning capital balance;
- $10 per hour of work that can be billed to the partnership's clients; and
- the remainder divided in a 3:2 ratio.

The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month.
For 2010, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2011, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours, respectively. Each partner withdrew $1,000 per month throughout 2010 and 2011.
Required:
(A) Determine the amount of net income allocated to each partner for 2010.
(B) Determine the balance in both capital accounts at the end of 2010

Answer and Explanation:

a. The net income allocated to each partner is shown below:-

                                      Norr               Caylor                Total

Interest                         $12,000         $9,600               $21,600

Compensation             $10,000         $14,000              $24,000

Subtotals                      $22,000        $23,600             $45,600

Allocation of reminder $14,640         $9,760                $24,400

Totals                             $36,640       $33,360             $70,000

b. The balance in both capital accounts is shown below:-

                                                  Norr               Caylor

Beginning capital balances    $100,000       $80,000

Share of income                       $36,640       $33,360

Withdrawals                              ($12,000)      ($12,000)

Ending capital balances         $124,640      $101,360

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

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