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.

Answer 1

Journal entries

1. Amount safely paid to partner = cash – liabilities – liquidation expense = 100000-80000-10000 = 10000

Maximum loss = non cash assets + liquidation expense = 200000+10000 = 210000

Potential capital = current capital balance – share of maximum loss

Fred = 100000-(60%*210000) = -26000

George = 120000-(40%*210000) = 36000

Fred as potential deficit capital balance, therefore 10000 i.e. amount safely paid to partner will be distributed to George.

Journal entry:

Transaction	Account titles and explanation	Debit	Credit
A	George, Capital	10000
	cash		10000

1. Journal entry

Transaction	Account titles and explanation	Debit	Credit
B	Liabilities	40000
	cash		40000

1. Gain on sale of noncash assets = 220000-200000 = 20000

Journal entry

Transaction	Account titles and explanation	Debit	Credit
C	Cash	220000
	Fred, capital (60%*20000)		12000
	George, capital (40%*20000)		8000
	Noncash assets		200000

1. Safe payment to partners = capital balance -distribution to partners + gain on sale of noncash assets-maximum liquidating expense

Fred = 100000-0+12000-6000 = 106000

George = 120000-10000+8000-4000 = 114000

Transaction	Account titles and explanation	Debit	Credit
D	Fred, capital	106000
	George, capital	114000
	Cash		220000

1. Journal entry:

	Account titles and explanation	Debit	Credit
E	Liabilities	40000
	cash		40000

1. Journal entry:

Transaction	Account titles and explanation	Debit	Credit
F	Fred, capital   (60%*8000)	4800
	George, capital (40%*8000)	3200
	Cash		8000

1. Journal entry:

Transaction	Account titles and explanation	Debit	Credit
G	Fred, capital   (60%*2000)	1200
	George, capital (40%*2000)	800
	Cash		2000