Question

Partners Alice and Betty have decided to liquidate their business. The ledger shows the following account balances:

Cash	$ 20,000		Accounts Payable	$70,000
Inventory	380,000		A, Capital	190,000
			B, Capital	140,000
Total Assets	$400,000		Total Liability and Capital	$400,000

Alice and Betty share profits and losses in a 6:4 ratio. During the first month of liquidation, $180,000 is paid for 3/4 of inventory. $40,000 is paid to creditors. During the second month, the rest of the inventory was sold for $50,000, and the remaining accounts payable were paid. Cash was distributed at the end of each month, and the liquidation was completed at the end of the second month.

Required:

Prepare a statement of partnership realization and liquidation with a schedule of safe payments for the two-month liquidation period.

Answer 1

In this problem, partners are to be paid after realization of all the assets i.e. inventory here and payment of all the liabilities i.e. accounts payable here. Safe payment means that in 1st month itself, the potential loss on unsold inventory has to be accounted for

				Alice Capital	Betty capital
	Cash	Inventory	Accounts Payable	60%	40%
Balances	20000	380000	-70000	-190000	-140000
Sale of inventory	180000	-285000		63000	42000
Payment to creditors	-40000		40000
Balances	160000	95000	-30000	-127000	-98000
Payment to partners (working note)	-130000			70000	60000
Balance	30000	95000	-30000	-57000	-38000
Sale of inventory in 2nd month	50000	-95000		27000	18000
Payment to creditors	-30000		30000
Balance	50000	0	0	-30000	-20000
Payment to partners	-50000			30000	20000
Balance	0			0	0

Working notes

	Alice	Betty
Capital Balances	-127000	-98000
Potential loss on remaining inventory 95,000 in 6:4	57000	38000
Safe payment to partners	-70000	-60000