Question

Henry, Luther, and Gage are dissolving their partnership. Their partnership agreement allocates each partner 1/3 of all income and losses. The current period's ending capital account balances are Henry, $45,000; Luther, $37,000; and Gage, $(5,000). After all assets are sold and liabilities are paid, there is $77,000 in cash to be distributed. Gage is unable to pay the deficiency. The journal entry to record the distribution should be: Multiple Choice

Debit Henry, Capital $25,667; debit Luther, Capital $25,667; debit Gage, Capital $25,666; credit Cash $77,000.

Debit Henry, Capital $42,500; debit Luther, Capital $34,500; credit Cash $77,000. Debit Henry, Capital $45,000; debit Luther, Capital $37,000; credit Gage, Capital $5,000; credit Cash $77,000.

Debit Cash $77,000, debit Gage, Capital $5,000, credit Henry, Capital $45,000, credit Luther, Capital $37,000.

Debit Cash $77,000; credit Henry, Capital $25,667; credit Luther, Capital $25,667; credit Gage, Capital $25,666.

Answer 1

Capital, Henry = $45,000

Capital, Luther = $37,000

Capital, Gage = -$5,000

Deficiency in capital account of Gage $5,000 will be borne equally by Henry and Luther.

Deficiency to be borne by Henry = 5,000 x 1/2

= $2,500

Deficiency to be borne by Luther = 5,000 x 1/2

= $2,500

Final capital balance of Henry = 45,000 - 2,500

= $42,500

Final capital balance of Luther = 37,000 - 2,500

= $34,500

Hence, journal entry to record the distribution should be :

Journal

Account Title and Explanation	Debit	Credit
Henry, capital	42,500
Luther, capital	34,500
Cash		77,000

Correct option is second

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