Question

After closing the temporary owners' equity accounts into Income Summary, and after allocating the net income and closing the partners' drawing accounts, assume the partners' capital accounts had credit balances as follows: Rhodes, $40,000; Serrata, $60,000; Shepard, $75,000. Partners share profits and losses as follows: Rhodes, 20%; Serrata, 30%; and Shepard, 50%. If Shepard retired and withdrew $85,000 in settlement of his equity and settlements are allocated according to capital interests, the amount entered in Rhodes' capital account would be a

a.$4,000 debit.
b.$4,000 credit.
c.$6,000 debit.
d.$6,000 credit.

Answer 1

The amount entered in Rhodes' capital account would be a $4,000 debit.

Step-by-step explanation:

After Shepard's retirement and withdrawal of $85,000 in settlement of his equity, the remaining partners' capital accounts need to be adjusted based on their profit-sharing ratios. To calculate the amount entered in Rhodes' capital account, we need to determine the adjustment needed to allocate Shepard's share of the settlement.

Shepard's share of the settlement is 50% of $85,000, which is $42,500. Since Shepard's capital account had a credit balance of $75,000 before the retirement, we need to reduce it by $42,500. Therefore, the amount entered in Rhodes' capital account would be a $4,000 debit.