Chapter 12, Problem 6PA

1. a

To determine

Prepare statement of partnership liquidation.

Answer to Problem 6PA

Partnership: It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio.

Liquidation of Partnership: The process of winding up of the partnership firm is called as liquidation of partnership. At the time of liquidation of partnership, loss on realization or gain on realization is determined.

The statement of partnership liquidation of S, W and G is as follows:

S, W, AND G
Statement of Partnership Liquidation
For the Period November 1–30
	Cash +	Non Cash Assets  =	Liabilities +	Capital
				S (2/5)	W (2/5)	G (1/5)
Balances before realization	$32,000	$128,000	$20,000	$58,000	$72,000	$10,000
Sale of assets and division of gain (1)	$156,000	-$128,000		$11,200	$11,200	$5,600
Balances after realization	$188,000	$0	$20,000	$69,200	$83,200	$15,600
Payment of liabilities	-$20,000		-$20,000
Balances after payment of liabilities	$168,000	$0	$0	$69,200	$83,200	$15,600
Cash distributed to partners	$168,000			-$69,200	-$83,200	-$15,600
Final balances	$0	$0	$0	$0	$0	$0

Table (1)

Explanation of Solution

Working note 1

Calculation of division of realization Profit among partners:

The following table determines the realization profit.

Sale price of Non cash asset (A)	$  156,000
Book value of Non cash asset (B)	$  128,000
Realization profit (A) – (B)	$  28,000

Table (2)

The profit and loss sharing ratio among partners is 2:2:1

The following table shows the division of profit among partners S, W and G as per their profit and loss sharing ratio.

	S	W	G	Total
Share of partners in firm	(2/5)	(2/5)	(1/5)	1
Share of realization profit (2:2:1)	$11,200	$11,200	$5,600	$28,000

Table (3)

1. b

To determine

Prepare statement of partnership liquidation.

Answer to Problem 6PA

The statement of partnership liquidation of S, W and G is as follows:

S, W, AND G
Statement of Partnership Liquidation
For the Period November 1–30
	Cash +	Non Cash Assets  =	Liabilities +	Capital
				S (2/5)	W (2/5)	G (1/5)
Balances before realization	$32,000	$128,000	$20,000	$58,000	$72,000	$10,000
Sale of assets and division of loss (2)	$55,000	-$128,000		-$29,200	-$29,200	-$14,600
Balances after realization	$87,000	$0	$20,000	$28,800	$42,800	-$4,600
Payment of liabilities	-$20,000		-$20,000
Balances after payment of liabilities	$67,000	$0	$0	$28,800	$42,800	-$4,600
Receipt of deficiency (3)	$4,600					$4,600
Balances	$71,600	$0	$0	$28,800	$42,800	$0
Cash distributed to partners	-$71,600			-$28,800	-$42,800
Final balances	$0	$0	$0	$0	$0	$0

Table (4)

Explanation of Solution

Working note 2

Calculation of division of realization Loss among partners:

The following table determines the realization loss.

Sale price of Non cash asset (A)	$  55,000
Book value of Non cash asset (B)	$  128,000
Realization loss (A) – (B)	$  73,000

Table (5)

The profit and loss sharing ratio among partners is 2:2:1

The following table shows the division of loss among partners S, W and G as per their profit and loss sharing ratio.

	S	W	G	Total
Share of partners in firm	(2/5)	(2/5)	(1/5)	1
Share of realization loss (2:2:1)	$29,200	$29,200	$14,600	$73,000

Table (6)

Working note 3

As per the instruction, partner with deficiency will pay the deficiency amount to the partnership. Thus, G has paid $4,600 to the partnership for his deficiency. Therefore G’s capital account is credited or increased with $4,600 and cash is increased with $4,600.

2. a

To determine

Record the journal entry to allocate the partner’s deficiency, assuming that the partner with capital deficiency declares bankruptcy.

Answer to Problem 6PA

When a partner with capital deficiency declares bankruptcy, his or her capital deficiency balance will be shared between other partners in their income- sharing ratio.

The journal entry to allocate the partner’s deficiency, when the partner with capital deficiency declares bankruptcy is as follows:

Date		Account Titles and Explanation	Debit ($)	Credit ($)
		S, Capital (4)	$2,300
		W, Capital (5)	$2,300
		G, Capital		$4,600
		(To record the allocation of partner’s capital deficiency.)

Table (4)

Explanation of Solution

Working Note 4

 S and W share income sharing ratio as 2:2 respectively. So,

The share of partner’s capital deficiency absorbed by S:

$\begin{array}{c}\begin{array}{l}\text{Capital}\text{deficiency}\\ \text{absorbed}\text{by}\text{S}\end{array}\}\text{=}\left(\begin{array}{l}\text{Capital}\\ \text{deficiency}\text{of}\text{G}\end{array}\right)\text{×}\left(\begin{array}{l}\text{Income/loss}\\ \text{sharing}\text{ratio}\text{of}\text{S}\end{array}\right)\\ \text{=}\left(\text{\$4,600}\right)\text{×}\frac{\text{2}}{\text{4}}\\ \text{=\$2,300}\end{array}$

Working Note 5

The share of partner’s capital deficiency absorbed by W:

$\begin{array}{c}\begin{array}{l}\text{Capital}\text{deficiency}\\ \text{absorbed}\text{by}\text{W}\end{array}\}\text{=}\left(\begin{array}{l}\text{Capital}\\ \text{deficiency}\text{of}\text{G}\end{array}\right)\text{×}\left(\begin{array}{l}\text{Income/loss}\\ \text{sharing}\text{ratio}\text{of}\text{W}\end{array}\right)\\ \text{=}\left(\text{\$4,600}\right)\text{×}\frac{\text{2}}{\text{4}}\\ \text{=\$2,300}\end{array}$

2. b

To determine

Record the journal entry to distribute the cash among the partners, assuming that the partner with capital deficiency declares bankruptcy.

Answer to Problem 6PA

The journal entry to distribute the cash among the partners, when the partner with capital deficiency declares bankruptcy is as follows:

Date		Account Titles and Explanation	Debit ($)	Credit ($)
		S, Capital (6)	$26,500
		W, Capital (7)	$40,500
		Cash		$67,000
		(To record the distribution of cash between the partners.)

Table (4)

Explanation of Solution

Calculation of cash to be distributed between the partners

$\begin{array}{l}\text{Cash}\text{distributed}\\ \text{to}\text{partners}\end{array}\}\text{=}\left(\begin{array}{l}\text{Balance}\text{in}\text{partners}\\ \text{capital}\text{account}\text{after}\\ \text{payment}\text{of}\text{liabilities}\end{array}\right)\text{-}\left(\begin{array}{l}\text{Share}\text{in}\\ \text{deficiency}\text{account}\end{array}\right)$

Working Note 6

Cash distributed to S:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{distributed}\\ \text{to}\text{S}\end{array}\}\text{=}\left(\text{\$28,800}\right)\text{-}\left(\text{\$2,300}\right)\\ \text{=}\text{\$26,500}\end{array}$

Working Note 7

Cash distributed to W:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{distributed}\\ \text{to}\text{W}\end{array}\}\text{=}\left(\text{\$42,800}\right)\text{-}\left(\text{\$2,300}\right)\\ \text{=}\text{\$40,500}\end{array}$