Question

In: Accounting

A partnership has the following balance sheet prior to liquidation (partners’ profit and loss ratios are...

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.

Solutions

Expert Solution

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.


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