Question

Fred and George have been in partnership for many years. The partners, who share profits and losses on a 60:40 basis, respectively, wish to retire and have agreed to liquidate the business. Liquidation expenses are estimated to be $10,000. At the date the partnership ceases operations, the balance sheet is as follows:

  

Cash	$	100,000	Liabilities	$	80,000
Noncash assets		200,000	Fred, capital		100,000
			George, capital		120,000
Total assets	$	300,000	Total liabilities and capital	$	300,000

1.	Prepare journal entries for the following transactions: (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

a.	Distributed safe cash payments to the partners.
b.	Paid $40,000 of the partnership’s liabilities.
c.	Sold noncash assets for $220,000.
d.	Distributed safe cash payments to the partners.
e.	Paid all remaining partnership liabilities of $40,000.
f.	Paid $8,000 in liquidation expenses; no further expenses will be incurred.
g.	Distributed remaining cash held by the business to the partners

2

Prepare a final statement of partnership liquidation. (Enter all account balances (including updated balances) as positive amounts. Enter deductions and negative balances with a minus sign.)    FRED AND GEORGE PARTNERSHIP Statement of Partnership Liquidation Cash Noncash Assets Liabilities Fred, Capital George, Capital Beginning balances Distribution to partners Paid liabilities Sold noncash assets Updated balances $0 $0 $0 $0 $0 Distribution to partners Updated balances $0 $0 $0 $0 $0 Paid liabilities Paid liquidation expenses Updated balances $0 $0 $0 $0 $0 Distribution to partners Closing balances $0 $0 $0 $0 $0

Answer 1

1)

a) The partnership has $1,00,000 in cash and a liabilities of $80,000 and estimate liquidation expense of $10,000. This amount is allocated to the two partner assuming that non cash assets scrapped for a loss of $2,00,000 and liquidation expense are $10,000.

Partners	current capital balance	share of maximum loss	potential capital
Fred	$100,000	60% × 210,000 = $126,000
George	$120,000	40% × 210,000 = $84,000	$36,000

Note:- 200,000 + 10,000 =210,000

Because Fred has a potential deficit capital balance, the entire $10,000 currently available is distributed to George, that reduce this partner capital balance to $110,000.

	Accounts Titles and Explanations	Debit	credit
a)	George capital	$10,000
	Cash		$10,000
	(To record distribution of safe balance)
b)	Liabilities	$40,000
	Cash		$40,000
	( To record payment of Liabilities)
c)	cash	$220,000
	Fred capital (60% of $20,000 gain)		$12,000
	George capital (40% of $20,000 gain)		$8,000
	Noncash assets		$2,00,000
	( To record sold of noncash assets)

d)

	Cash	Noncash assets	Liabilities	Fred capital (60%)	George capital (40%)
Beginning balance	$1,00,000	$2,00,000	($80,000)	($1,00,000)	($120,000)
Distribution to partners	($10,000)				$10,000
Paid liabilities	($40,000)		$40,000
Sold noncash assets	$220,000	($2,00,000)		($12,000)	($8,000)
Update balances	$270,000	0	($40,000)	($112,000)	($118,000)
Maximum liabilities	($40,000)		$40,000
Maximum liquidation expense	(10,000)			$6,000	$4,000
Safe balances	$220,000	0	0	($106,000)	($114,000)

Safe payments are $106,000 and $114,000

	Accounts Titles and Explanations	Debit	Credit
d)	Fred capital	$106,000
	George capital	$114,000
	Cash		$220,000
	(To record distribution of safe balance )
e)	Liabilities	$40,000
	Cash		$40,000
	(To record payment of Liabilities)
f)	Fred capital (60% of $8,000)	$4800
	George capital (40% of $8,000)	$3,200
	Cash		$8,000
	(To record payment of liquidation expense)
g)	Fred capital	$1,200
	George capital	$800
	Cash (Requirement 2)		$2,000
	( To record distribution of remaining cash)

Requirement 2)

Fred and George partnerships
Statement of partnership Liquidation
	Cash	Non cash assets	Liabilities	Fred capital	George capital
Beginning balance	$1,00,000	$2,00,000	($80,000)	($100,000)	($120,000)
Distribution to partners	($10,000)				$10,000
Paid liabilities	($40,000)		$40,000
Sold noncash assets	$220,000	($2,00,000)		(12,000)	(8,000)
Updated balances	$270,000	$0	($40,000)	($112,000)	(118,000)
Distribution to partners	($220,000)			$106,000	$114,000
Updated balances	$50,000	$0	($40,000)	($6,000)	($4,000)
Paid liabilities	(40,000)		$40,000
Paid liquidation expense	(8,000)			$4,800	$3,200
Updated balances	$2,000	$0	$0	($1,200)	($800)
Distribution to partners	($2,000)			$1200	$800
Closing balances	$0	$0	$0	$0	$0