Question

 

1. Ali, Ahmed, and Khalid are liquidating their partnership. Before selling the assets and paying the liabilities, the capital balances are Ali, OR 60,000; Ahmed, OR 70,000; and Khalid, OR 50,000. The profit and loss ratio has been 2:3:1 for Ali, Ahmed, and Khalid, respectively. The partnership has OR 35,000 cash, OR 170,000 non cash assets, OR 25,000 accounts payable

Required: Journalize the sale of the non-cash assets for OR 200,000, the payment of the liabilities, and the payment to the partners.

 

2. Discuss admission of new partner by purchasing an existing partner’s interest

Answer 1

Journal entries

Transaction	General Journal	Debit	Credit
1	Cash	200,000
	Non cash Assets		170,000
	Ali's capital		10,000
	Ahmed's capital		15,000
	Khalid's capital		5,000
	Non cash assets sold
2	Accounts payable	25,000
	Cash		25,000
	Liabilities paid
3	Ali's capital	70,000
	Ahmed's capital	85,000
	Khalid's capital	55,000
	Cash		210,000
	Partnership liquidated and partners paid in cash

Workig notes

1.On sale of non cash assets for 200,000 a gain is arised as book value of non cash assets is 170,000

So,

Gain on sale of assets=200,000-170,000

=OR 30,000

This gain is distributed among partners in the profit sharing ratio of 2:3:1

Ali's share= 30,000*2/6=10,000

Ahmeds share=30,000*3/6=15,000

Khalid's share=30,000*1/6=5,000

2.

Closing cash balance of partners capital after payment of liabilities and selling of assets is as follows

Ali;s capital=60,000+10,000=70,000

Ahmed;s capital=70,000+15,000=85,000

Khalid's capital=50,000+5,000=55,000

Now Admission of new partner by purchasing old partner interest

Admission of new partner involves dissolution of existing partnership, when a new partner purchase old partner interest at book value new partners capital is credited and old partners capital is debited.Other than that no journal entries are required.The arrangement between the old and new partner is private one and does not involve any other transaction in partnership books.New partners gets the same profit sharing ratio as old partner.