Question

After the accounts are closed on April 10, prior to liquidating the partnership, the capital accounts of Zach Fairchild, Austin Lowes, and Amber Howard are $42,000, $7,500, and $36,500, respectively. Cash and noncash assets total $23,500 and $84,500, respectively. Amounts owed to creditors total $22,000. The partners share income and losses in the ratio of 1:1:2. Between April 10 and April 30, the noncash assets are sold for $48,500, the partner with the capital deficiency pays the deficiency to the partnership, and the liabilities are paid.

Instructions:

1. Prepare a statement of partnership liquidation, indicating (a) the sale of assets and division of loss, (b) the payment of liabilities, (c) the receipt of the deficiency (from the appropriate partner), and (d) the distribution of cash.

2. Assume that the partner with the capital deficiency declares bankruptcy and is unable to pay the deficiency. Journalize the entries to (a) allocate the partner’s deficiency and (b) distribute the remaining cash.

Answer 1

Solution:

1.

2. a.     Zach Fairchild, Capital...................................................                 500

              Amber Howard, Capital..................................................              1,000

                          Austin Lowes, Capital........................................                                    1,500

       The $1,500 deficiency of Lowes would be divided between the other partners, Fairchild and Howard, in their in­come-sharing ratio (1:2 respectively). Therefore, Fairchild would absorb 1/3 of the $1,500 deficiency, or $500, and Howard would absorb 2/3 of the $1,500 deficiency, or $1,000.

b.    Zach Fairchild, Capital...........................................................           32,500*

              Amber Howard, Capital..................................................           17,500**

                          Cash........................................................................                                  50,000

        *$33,000 – $500

        **$18,500 – $1,000