In: Accounting
A partnership has the following balance sheet prior to liquidation (partners’ profit and loss ratios are in parentheses):
Cash | $ | 33,000 | Liabilities | $ | 50,000 |
Other assets | 100,000 | Playa, capital (40%) | 24,000 | ||
Bahia, capital (30%) | 29,000 | ||||
Arco, capital (30%) | 30,000 | ||||
Total | $ | 133,000 | Total | $ | 133,000 |
During liquidation, other assets are sold for $80,000, liabilities are paid in full, and $15,000 in liquidation expenses are paid. What amount of cash does each partner receive as a result of this liquidation?
Multiple Choice
Playa, $16,000; Bahia, $23,000; Arco, $24,000.
Playa, $19,200; Bahia, $14,400; Arco, $14,400.
Playa, $6,000; Bahia, $4,500; Arco, $4,500.
Playa, $10,000; Bahia, $18,500; Arco, $19,500.
Answer: Option 4 - Playa, $10,000; Bahia, $18,500; Arco, $19,500
Allocation Summary:
Partners | ||||||
Cash | Other Assets | Liabilities | Playa | Bahia | Arco | |
Balances | 33000 | 100000 | 50000 | 24000 | 29000 | 30000 |
Sell other assets | 80000 | -100000 | -8000 | -6000 | -6000 | |
Pay liabilities | -50000 | -50000 | ||||
Liquidation expenses | -15000 | -6000 | -4500 | -4500 | ||
Remaining cash | 48000 | 0 | 0 | 10000 | 18500 | 19500 |
Distribute | -48000 | -10000 | -18500 | -19500 | ||
Total | 0 | 0 | 0 | 0 | 0 | 0 |
Notes:
1. The loss on sale of other assets $20,000 ($100,000 - $80,000) and the liquidation expenses $15,000 are borne by the partners in the profit and loss ratio of 40 : 30 : 30.
2. The cash remaining after payment of all liabilities and liquidation expenses which is $48,000 ($33,000 + $80,000 - $50,000 - $15,000) is distributed to the partners in their capital ratio after allocation of all losses which is 10 : 18.5 : 19.5.