Question

The SAD partnership is to be liquidated. The income ratios for partners Sawyer, Adams, and Darby are 6:3:1, respectively. Assume that the noncash assets are sold for $50,000 in cash. The ledger shows the following: Sawyer, Capital $30,000 Liabilities $ 20,000 Adams, Capital $ 40,000 Darby, Capital $5,000 Loss on Liquidation = Noncash Labels Cash Assets here $ 15,000 $ 80000 Liquidation 50,000 1680.000) Assets Balance 65,000 Q 130,000) of Gan/Loss Distribution Balance 65,000 Payment of Liabilities (20,000) 20,000 30,000 (40,000 5,000 (30,000) (18,000) (9,000) (3,000) 30,000 20,000/12,000/31,000/2,000 & (20,000) [12,000 /31,000/2,000 (12,000) 131,000) |12,000) Balance 45.000/ o Distribution to Partners (45,000 Balance o Extra Credit: List the two ways to settle a capital deficiency:

Please explain how they arrived at these numbers. I don't understand what to do when there is a cap or a limit on something. I don't understand which ones have caps and how to apply those to the problem. I understand what to do once the numbers are in this table. I just don't understand how to arrive at all these numbers. Also explain 2 ways to settle a capital deficiency please.

Answer 1

Here I am solving this problem step by step :

At the beginning following was given in the question

Cash $ 15,000

Non cash assets $ 80,000 =

Liabilities $ 20,000

Sayer capital $ 30,000

Adams capital $ 40,000

Darby capital $ 5,000

We know, assets = liabilities + capital

If we made an extension of it then it looks like as

Assets = liabilities + [ Contributed capital + retained earnings ]

In the question of liquidation, loss on liquidation treated as negative value of retained earnings and if any profit is there it shows the positive figure of retained earnings.

Due to the double entry system of accounting , every transaction affects the above basic accounting equation.

Transaction 1:  Non current asset sold for $ 50,000 in cash.

Effect : It reduced non current asset by $ 80,000 and increased cash by $ 50,000 and loss on sale of assets in liquidation [ $ 80,000 - $ 50,000 ] reduced the balance of retained earnings by $ 30,000 and posted as $ ( 30,000)

	Cash	Non cash assets =	Liabilities	Sawyer capital	Adams Capital	Darby capital	Loss on liquidation
Beginning Balance	$ 15,000	$ 80,000	$ 20,000	$ 30,000	$ 40,000	$ 5,000
Assets sold for cash at a loss	$ 50,000	$( 80,000)					$( 30,000)
Balance	$ 65,000	$ 0	$ 20,000	$ 30,000	$ 40,000	$ 5,000	$ ( 30,000)

Transaction 2 : $ 30,000 Loss on sale of assets distribution

When you distribute loss, then retained earnings will be increased and partners capital must have to be decreased. Because due to loss distribution partners are loosing their contribution . So, $ 30,000 increased to retained earnings and retained earnings finally nullified and $ 30,000 deducted from partners capital as per their profit sharing ratio, i.e 6:3:1.

	Cash	non cash assets =	Liabilities	Sawyer capital	Adams capital	Darby capital	Loss on liquidation
After first transaction balance	$ 65,000	$ 0	$ 20,000	$ 30,000	$ 40,000	$ 5,000	$ (30,000)
Distribution of loss on sale of assets				$ (18,000)	$ (9,000)	$ (3,000)	$ 30,000
Balance	$ 65,000	$ 0	$ 20,000	$ 12,000	$ 31,000	$ 2,000	$ 0

Transaction 3: Payment of liabilities of $ 20,000

When you are paying liability by cash , cash will be reduced and similar amount of liability also gets reduced. Here, both cash and liabilities are deducted by $ 20,000.

	Cash	Non cash assets =	Liabilities	Sawyer capital	Adams capital	Darby capital	Loss on liquidation
Balance after 2nd transaction	$ 65,000	$ 0	$ 20,000	$ 12,000	$ 31,000	$ 2,000	$ 0
Liabilities paid off	$( 20,000)		$ (20,000)
Balance	$ 45,000	$ 0	$ 0	$ 12,000	$ 31,000	$ 2,000	$ 0

Transaction 4: Available cash balance distributed between partners:

Finally available cash balance distributed between partners. It reduced the balance of cash and also reduced contributed capital. Because after paying cash to the partners ,their contributed capital paid back. So, $ 45,000 deducted from cash and same amount deducted from their capital as per their available credit balance of capital.

	Cash	Non cash assets =	Liabilities	Sawyer capital	Adams capital	Darbey capital	Loss on liquidation
Balance after 3rd transaction	$ 45,000	$ 0	$ 0	$ 12,000	$ 31,000	$ 2,000	$ 0
Available cash distributed	$( 45,000)			$( 12,000)	$(31,000)	$ (2,000)
Balance	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0	$ 0

2) Two ways to settle capital deficiency :

1. The cash distributed to each partners is the difference between the present capital balance and the loss that the partner may have to absorb if the capital deficiency is not paid.

2. The allocation of the deficiency is made on the income ratios that exists between the partners with credit balances.