Question

D, E & F are partners. According to the articles of copartnership they agree to share profit and loss in the ratio of 40%. 40% and 20%... The partners have agreed to liquidate and anticipate liquidation expense would total $28,000. Prior to liquidation the following balance were available:

Cash $50,000

Noncash Assets $400,000

Notes Payable to E $24,000

Other liabilities $330,000

D Capital $80,000

E Capital $36,000

F Capital (Deficit) ($20,000)

Instructions: Assuming actual liquidation expenses are $40,000 and that noncash assets sold for$360,000.

Determine how the assets will be distributed. F had net personal assets of $20,000.

Answer 1

On liquidation of a partnership the following steps are to be taken:

1. The assets of the firm are to be realised including goodwill.

2. The liabilities are to be repaid from the vailable cash balance and the amount realised from sale of assets.

3. If any amount is left after above steps it is to be distributed among partners in profit sharing ratio.

For this whole exercise, we open an account called Realisation A/c and transfer all the assets (except cash in Hand and Cash at bank) and liabilities at their respective book values.

The amount realised from assets is credited to realisation account and amount settled to creditors is debited to realisation a/c.

The expenses incurred on liquidation is also debited to realisation a/c. The profit or loss on realisation is shared among partners in their profit sharing ratio.The realisation account then looks as following image:

The capital accounts of partners are as follows:( I collectively made D, E,F accounts in a single account)

Points to be understood in Capital Accounts:

1.The realisation account loss is debited to partners a/c in profit sharing ratio.

2. The actual liability of Mr.F is to bring in 36000 to the firm to settle his deficit. Since he has net assets of only 20,000 the remaining 8,000 is borne by Mr.D and Mr.E in their profit sharing ratio.(1:1)

The capital account looks as follows:

The cash account after liquidation is thus closed as follows:

Conclusion:Mr.D can take home an amount of 40,000 and Mr.E has to bring in cash of 4,000 and Mr.F has to bring in his Net personal assets of 20,000.