Question

Alex and Bess have been in partnership for many years. The partners, who share profits and losses on a 70:30 basis, respectively, wish to retire and have agreed to liquidate the business. Liquidation expenses are estimated to be $4,500. At the date the partnership ceases operations, the balance sheet is as follows:

Cash	$	46,000	Liabilities	$	35,000
Noncash assets		115,000	Alex, capital		80,500
			Bess, capital		45,500
Total assets	$	161,000	Total liabilities and capital	$	161,000

Part A: Prepare journal entries for the following transactions that occurred in chronological order:

1. Distributed safe cash payments to the partners.
2. Paid $21,000 of the partnership’s liabilities.
3. Sold noncash assets for $126,000.
4. Distributed safe cash payments to the partners.
5. Paid remaining partnership liabilities of $14,000.
6. Paid $3,300 in liquidation expenses; no further expenses will be incurred.
7. Distributed remaining cash held by the business to the partners.

Answer 1

. Preparation of journal entries.

    

a.                    Cash           Noncash Asset         Liabilities   Alex Capital (70%) Bess Capital (30%)

Beginning Balances:       46,000            115,000                      (35,000)               (80,500)             (45,500)

Worst Case                          0                (115,000)                         0                      80,500                34,500

Liquidation                      (4,500)                 0                                 0                       3,150               1,350

Updated Balances                                                                                                  (3,150)                9,650

Alex Deficit                                                                                                               3,150                (3,150)

Updated Balances                                                                                                        0                    6,500

    

          Bess, Capital............................................................      6,500

               Cash ...................................................................           6,500

     b. Liabilities ................................................................      21,000

               Cash ...................................................................           21,000

    

     c. Cash.........................................................................      126,000

               Alex, Capital (70% of gain) ................................           7,700

               Bess, Capital (30% x 10,000)..............................           3,300

               Noncash assets..................................................           115,000

    

     Alex and Bess now have capital balances of $88,200 and $42,300, respectively.

         

d. To determine the safe payments to be made at this point in the liquidation, the accountant prepares the following proposed schedule of liquidation:

                                                                                           

                                                                                                                                             Alex,        Bess,

                                                           Non-cash                                                               Capital      Capital

                                                Cash       Assets                                         Liabilities             (70%)    (30%)

Beginning balances              $46,000    $115,000                                           $(35,000)   $(80,500) $(45,500)

Distribution to partners            (6,500)              -0- -0- -0- 6,500

Paid liabilities                        (21,000)              -0-                                              21,000               -0-            -0-

Sold noncash assets            126,000     (115,000)                                                 -0-            (7,700)       (3,300)

Updated balances                144,500               -0-                                             (14,000)     (88,200)   (42,300)

Maximum liabilities                (14,000)      14,000

Max. liquidation expenses       (4,500       -0-   -0-             3,150          1,350

Safe balances                     $126,000          -0- -0-         $(85,050)   $(40,950)

                                                                                                                                                                                                                     

Safe payments of $85,050 and $40,950 can be made to Alex and Bess, respectively, at this point in the liquidation.

     Alex, Capital ............................................................      85,050

     Bess, Capital ...........................................................      40,950

          Cash ...................................................................                     126,000

    

     e. Liabilities ................................................................      14,000

               Cash ...................................................................           14,000

     f.   Alex, Capital (70% of expense) ...............................      2,310

          Bess, Capital (30%)..................................................      990

               Cash....................................................................           3,300

     g. $1,200 cash remains after paying liquidation expenses because the acual expenses were $3,300 and not $4,500. The partners have positive capital balances of $840 and $360, respectively, and the remaining partnership cash can be distributed based on these ending balances.

          Alex, Capital ............................................................      840

          Bess, Capital ...........................................................      360

               Cash ...................................................................           1,200