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Chapter 12: Problem 24

After closing the accounts on July 1, prior to liquidating the partnership, the capital account balances of Dills, Gordon, and Chavez are \(\$ 32,000, \$ 40,000\), and \(\$ 15,000\), respectively. Cash, noncash assets, and liabilities total \(\$ 42,000, \$ 90,000\), and \(\$ 45,000\), respectively. Between July 1 and July 29 , the noncash assets are sold for \(\$ 66,000\), the liabilities are paid, and the remaining cash is distributed to the partners. The partners share net income and loss in the ratio of \(3: 2: 1\). Prepare a statement of partnership liquidation for the period July 1-29.

Short Answer

Expert verified
Partners receive \( \$20,000, \$32,000, \$11,000 \) respectively after liquidation.

Step by step solution

01

Calculate Loss on Sale of Noncash Assets

The noncash assets are originally valued at \\(90,000 and are sold for \\)66,000. To find the loss, subtract the sale amount from the original value: \( 90,000 - 66,000 = 24,000 \). Therefore, the loss on the sale of noncash assets is \$24,000.
02

Distribute Loss Among Partners

The partners share net income or loss in the ratio of 3:2:1. Distribute the \$24,000 loss among the partners: - Dills: \( \frac{3}{6} \times 24,000 = 12,000 \) - Gordon: \( \frac{2}{6} \times 24,000 = 8,000 \) - Chavez: \( \frac{1}{6} \times 24,000 = 4,000 \). Adjust their capital accounts accordingly.
03

Update Partners' Capital Accounts

Subtract each partner's share of the loss from their initial capital account balance: - Dills: \( 32,000 - 12,000 = 20,000 \)- Gordon: \( 40,000 - 8,000 = 32,000 \)- Chavez: \( 15,000 - 4,000 = 11,000 \). These are the adjusted capital balances after accounting for the loss.
04

Check Remaining Cash After Liabilities

Total initial cash is \\(42,000. The liabilities are \\)45,000, which are then paid off entirely. Thus, add the cash received from the sale of noncash assets: \( 42,000 + 66,000 = 108,000 \) total cash available before liabilities are paid. After paying liabilities, remaining cash is \( 108,000 - 45,000 = 63,000 \).
05

Distribute Remaining Cash to Partners

The remaining cash of \\(63,000 is distributed to the partners according to their final capital account balances: - Dills: receives \\)20,000. - Gordon: receives \\(32,000. - Chavez: receives \\)11,000. This distribution is in line with their adjusted capital accounts.
06

Prepare the Statement of Liquidation

Create a statement showing the initial balances, adjustments due to the sale of noncash assets, final balances after paying liabilities, and distribution of remaining cash. It outlines: start balances, loss adjustment, capital account changes, and final cash distributions.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Understanding Capital Accounts
In the context of a partnership business, capital accounts are a reflection of each partner's ownership stake or financial contribution to the partnership. When a partnership is being liquidated, like in our exercise, these accounts must be carefully adjusted to account for profits or losses and the distribution of remaining assets. Initially, each partner has a set capital balance, which may be adjusted post-liquidation proceeds or loss allocations.
  • **Starting Balances:** Each partner begins with a specific capital balance that reflects their ownership in the firm. In our example, Dills, Gordon, and Chavez started with balances of $32,000, $40,000, and $15,000, respectively. These balances represent their individual stakes before any liquidation adjustments.
  • **Adjustment for Losses:** Losses, especially those from asset sales below book value, must be distributed among partners in proportion to their agreed-upon income and loss sharing ratio. If there is a loss, as there was with a $24,000 deficit in the sale of noncash assets here, each partner's capital account is decreased by their share of the loss.
  • **Final Balance Calculation:** After distributing losses, the capital accounts are adjusted to give final balances, which guide the subsequent cash distributions as the business winds up.
When partnerships are liquidated, partners use these adjusted balances to receive their final cash distributions, marking the closure of financial obligations among them.
What Are Noncash Assets?
Noncash assets include any assets of a business that are not in the form of cash. These could be physical items like machinery, inventory, property, or less tangible items like patents and trademarks. During partnership liquidations, noncash assets must often be sold off to settle liabilities or distribute remaining assets among partners.
  • **Valuation and Sale:** Initially, noncash assets are recorded at their book value, which in this exercise is $90,000. However, market conditions may affect the actual sale price. Here, the noncash assets were sold for $66,000, reflecting a $24,000 loss from their recorded book value.
  • **Impact of Sale:** The outcome of such sales impacts the partnership's financial statements and the eventual cash balance available for distribution. In our example, this realization of a lower-than-expected cash inflow amplifies the financial calculations needed to conclude business operations satisfactorily.
  • **Distribution of Proceeds:** Any proceeds from the sale of noncash assets after settling liabilities should be distributed to partners according to their revised capital accounts. This ensures each partner receives a fair share based on the liquidation outcomes.
By understanding the role and impact of noncash assets in a partnership, partners can better plan for and manage their financial responsibilities during liquidation.
Net Income Distribution Simplified
Net income distribution regards how profits and losses are shared among partners in a partnership. When partnerships are structured, one of the vital aspects agreed upon is the ratio or method by which income and losses are split. In liquidation, handling this effectively becomes paramount due to its direct impact on partners' final financial settlements.
  • **Agreed Ratios:** Partners agree on specific income or loss distribution ratios at the onset of their partnership. In our scenario, the partners decided on a 3:2:1 ratio, meaning Dills receives three parts, Gordon two parts, and Chavez one part of any net gains or shouldering losses harmoniously.
  • **Calculating Distributions:** Calculation uses this ratio to determine each partner's share in any realized profit or loss. With a $24,000 loss from noncash assets, the computations were straightforward using simple proportional allocation based on their agreed ratio.
  • **Financial Adjustments:** These calculated shares directly adjust the partners鈥� capital accounts, affecting financial outcomes. As these accounts dictate partners鈥� end-position cash recoveries, methods of net income/loss distribution are critical in ensuring fairness.
Understanding how net income is distributed provides clarity, ensuring that each partner knows their expected financial standing when liquidation concludes.

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Most popular questions from this chapter

Charles Shivers and Gong Zhao are partners who share in the income equally and have capital balances of \(\$ 120,000\) and \(\$ 62,500\), respectively. Shivers, with the consent of Zhao, sells one-third of his interest to Theresa Pepin. What entry is required by the partnership if the sales price is (a) \(\$ 30,000\) ? (b) \(\$ 50,000\) ?

Glenn Powell is to retire from the partnership of Powell and Associates as of March 31 , the end of the current fiscal year. After closing the accounts, the capital balances of the partners are as follows: Glenn Powell, \(\$ 260,000\); Tammie Sawyer, \(\$ 125,000\); and Joe Patel, \(\$ 140,000\). They have shared net income and net losses in the ratio of \(3: 2: 2\). The partners agree that the merchandise inventory should be increased by \(\$ 30,000\), and the allowance for doubtful accounts should be increased by \(\$ 6,200\). Powell agrees to accept a note for \(\$ 165,000\) in partial settlement of his ownership equity. The remainder of his claim is to be paid in cash. Sawyer and Patel are to share equally in the net income or net loss of the new partnership. Journalize the entries to record (a) the adjustment of the assets to bring them into agreement with current market prices and (b) the withdrawal of Powell from the partnership.

Media Properties, LLC, has three members: KXT Radio Partners, Rachel Sizemore, and Daily Sun Newspaper, LLC. On January 1, 2008, the three members had equity of \(\$ 240,000, \$ 40,000\), and \(\$ 160,000\), respectively. KXT Radio Partners contributed an additional \(\$ 50,000\) to Media Properties, LLC, on June 1, 2008. Rachel Sizemore received an annual salary allowance of \(\$ 139,800\) during 2008. The members' equity accounts are also credited with \(8 \%\) interest on each member's January 1 capital balance. Any remaining income is to be shared in the ratio of \(4: 3: 3\) among the three members. The net income for Media Accounting for Partnerships and Limited Liability Companies Properties, LLC, for 2008 was \(\$ 570,000\). The salary and interest allowances were distributed to the members. a. Determine the division of income among the three members. b. Prepare the journal entry to close the net income and withdrawals to the individual member equity accounts. c. Prepare a statement of members' equity for 2008 .

Crystal Clean Services, LLC, provides cleaning services for office buildings. The firm has 10 members in the LLC, which did not change between 2007 and 2008 . During 2008, the business expanded into four new cities. The following revenue and employee information is provided: \begin{tabular}{lrr} & \multicolumn{1}{c}{2008} & \multicolumn{1}{c}{2007} \\ \hline Revenues (in thousands) & \(\$ 38,000\) & \(\$ 32,500\) \\ Number of employees (excluding members) & 380 & 260 \end{tabular} a. For 2007 and 2008, determine the revenue per employee. b. Interpret the trend between the two years.

The capital accounts of Kris Perry and Melvin Newman have balances of \(\$ 100,000\) and \(\$ 90,000\), respectively. Paul Lester and Steve Hurd are to be admitted to the partnership. Lester buys one-fifth of Perry's interest for \(\$ 30,000\) and one-fourth of Newman's interest for \(\$ 15,000\). Hurd contributes \(\$ 40,000\) cash to the partnership, for which he is to receive an ownership equity of \(\$ 40,000\). a. Journalize the entries to record the admission of (1) Lester and (2) Hurd. b. What are the capital balances of each partner after the admission of the new partners?
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