Frank and Jenny are in partnership

Accounting Sep 10, 2020

Frank and Jenny are in partnership. They have built up a business over many years. The balance sheet shows proprietorship/capital in the business as $200,000. This amount is represented by the goodwill of the business. There is no revaluation of assets shown in the accounts. Frank and Jenny decide to restructure the business. Each purport to withdraw $50,000 of capital from the business and replace it with borrowed funds. Frank uses the money to purchase a yacht for his family's personal use. Jenny uses the money to start a new business with Rick.

Which of the following is correct?

		The use of the withdrawn funds doesn’t relate to the business so the interest expense is not deductible to the partnership
		Only half the interest expense will be deductible to the partnership as only Jenny’s withdrawn half is being used for income producing purposes
		Interest on borrowings to replace partnership capital which is represented by internally generated goodwill will not be deductible to the partnership
		The interest on borrowings to refinance funds employed in the partnership business will be deductible because these funds represent partnership capital

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