Question

Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows: ASSETS: Cash $100,000 Noncash assets 300,000 LIABILITIES: Payables $100,000 CAPITAL ACCOUNTS: Bill, capital $25,000 Page, capital 110,000 Larry, capital 100,000 Scott, capital 65,000 During the winding up of the partnership, the other assets are sold for $250,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. Bill, Page, Larry, and Scott share profits and losses in the ratio of 4:2:1:3. Based on the preceding information, what amount will be distributed to Page upon liquidation of the partnership? (Points : 4)

       $11,667
       $100,000
       $80,000
       $68,333

Answer 1

The correct answer is B $100000 will be distributed to Page upon liquidation.

Rationale:

??In the given case of liquidation, Realisation loss would be accounted to $50000 (as only loss on non cash assets) which needed to be shared by partners in their profit and loss ratio. When we distribute this loss then Bill, Page, Larry & Scot will respectively have loss of $20000, $10000,$5000 & $15000. Since we can see that all partners have sufficient capital to abosorb the losses there will be no implication of insolvency. Hence Page will be paid out his capital after absorbing the realisation loss of $10000 which will be $ 100000.

However, in case Bill or Scot (who are insolvent) does not have sufficient capital or say their capital is below than their realisation loss share then remaining solvent partners (Page & larry) has to bear the unabsorbed amount of loss of Bill or Scot or in their capital ratio.