Question

The partnership of Edmonds, Beatty, and Elder has elected to cease all operations and liquidate its business property. A balance sheet drawn up at this time shows the following account balances:

Cash Noncash assets $105,600 389,400 Liabilities Frick, capital (60%) Wilson, capital (20%) Clarke, capital (20%) Total liabilities and capital $77,000 222,200 61,600 134,200 $495,000 Total assets $495,000

The following transactions occur in liquidating this business:

• Distributed safe capital balances immediately to the partners. Liquidation expenses of $19,800 are estimated as a basis for this computation.
• Sold noncash assets with a book value of $176,000 for $105,600.
• Paid all liabilities.
• Distributed safe capital balances again.
• Sold remaining noncash assets for $96,800.
• Paid liquidation expenses of $15,400.
• Distributed remaining cash to the partners and closed the financial records of the business permanently.

Answer 1

First Need to determine the schedule of future payments Development of Predistribution Schedule Frick Capital Wilson Capital Wilson Clarke, Capital Beginning Balances 222,200 61,600 134,200 Loss 308,000 in the ration of 60:20:20 (184,800) (61,600) (61,600) Step one balances 37,400 72,600 Loss 49,867 in the ratio of 60:20 (37,400) (12,467) Step two balances 60,133 Loss (60,133) Final Balances Predistribution Plan 1) Payment of Liabilities and Liquidation expenses must be paid first after that 60,133 paid to clark 2) Next 49,867 paid to Frick and Clarke in the ratio 60:20 3) After the above payments next payment would be split between all three partners in the ratio of 60:20:20 Working Notes 1) Calculation of most vulnerable loss Frick Capital Wilson Capital Clarke, Capital Beginning Capital Balance 222,200 61,600 134,200 Profit Ratio 60% 20% 20% Maximum loss that can be absored 370.333 308,000 671,000 (222,200 x 100/60) (61,600 x 100 / 20) (134,200 x 100/ 20) Based on the above working Wilson in the most vulnerable position because a loss 308,000 would reduce its capital account to 0. 20% 2) Calculation of Most Vulnerable loss at adjusted Balance Frick Capital Clarke, Capital Adjusted Capital Balance 37,400 72,600 Profit Ratio 60% Maximum loss that can be absored 49,867 290,400 (39,000 ~ 80/60) (56,000 x 80/20) Based on the above working Frick in the most vulnerable position because a another loss of 49,867 would reduce its capital account to 0.

Beginning Balance Distribution Updated Balance Noncash Assets sold Updated Balance Liabilities paid Updated Balance First (remainder of first distribution) (43,000 - 26,000) Next Next Updated Balance Noncash Assets sold Updated Balance Liquidation expenses paid Updated Balance Final distribution based on ending capital account balance Ending Balance FRICK, WILSON AND CLARKE Statement of Partnership Liquidation Final Balances Frick Capital Wilson, Capital Clarke, Capital Cash Noncash Assets Liabilites (60%) (20%) (20%) 105,600 389,400 77,000 222,200 61,600 134,200 (8,800) (8,800) 96,800 389,400 77,000 222,200 61,600 125,400 105,600 (176,000) (42,240) (14,080) (14,080)| 202,400 213,400 77,000 179,960 47,520 111,320 (77,000) (77,000) 125,400 213,400 179,960 47,520 111,320 (51,333) (51,333) (49,867) (37,400) (12,467) (4,400) (2,640) (880) (880) 19,800 213,400 139,920 46,640 46,640 96,800 (213,400) (69,960) (23,320) (23,320) 116,600 69,960 23,320 23,320 (15,400) (9,240) (3,080) (3,080) 101,200 60,720 20,240 20,240 (101,200) (60,720) (20,240) (20,240)

Working Notes: 1. Distribution of Excess Cash after deduction of estimated Liquidation expenses and Creditors Cash 105,600 Less: Liabilities (77,000) Less: Estimated Liquidation expenses (19,800) Excess Cash 8,800 176,000 (105,600) 70,400 2. Loss on sale of Noncash Assets and distribution of loss Book Value of assets sold Less: Sales proceeds Loss on sale Distribution of loss in the ratio of 60%:20%:20% Frick (70,400 x 60%) Wilson (70,400 x 20%) Clarke (70,400 x 20%) 42,240 14,080 14,080 105 con 3. Distribution of Excess Cash after deduction of estimated Liquidation expenses Updated Cash Balance 125,400 Less: Estimated Liquidation expenses (19,800) Excess Cash to be distributed 105,600 So as per Plan distribution remainder of first instalment i.e. (60,133 - 8,800) i.e. 51,333 Paid to Clark Then next 49,867 goes to Frick and Clark in the ratio of 60:20 And the remaineder i.e. 4,400 (105,600 - 51,333 - 49,867) goes to all the partners in the ratio 60:20:20 4. Loss on sale of remaining Noncash Assets and distribution of loss Book Value of assets sold 213,400 Less: Sales proceeds (96,800) Loss on sale 116,600 Distribution of loss in the ratio of 60%:20%:20% Frick (116,600 x 60%) 69,960 Wilson (116,600 x 20%) 23,320 Clarke (116,600 x 20%) 23,320

C) Journal Entry
Transaction	General Journal	Debit	Credit
1)	Clarke, Capital	8,800
	Cash		8,800
	(to record cash payment are made to partners in accordance with the predistribution plan)
2)	Cash	105,600
	Frick, Capital	42,240
	Wilson, Capital	14,080
	Clarke, Capital	14,080
	Noncash Assets		176,000
	(to record sale of non cash assets)
3)	Liabilities	77,000
	Cash		77,000
	(to record liabilities paid)
4)	Frick, Capital	40,040
	Wilson, Capital	880
	Clarke, Capital	64,680
	Cash		105,600
	(to record cash payments are made to partners in accordance with the predistribution plan)
5)	Cash	96,800
	Frick, Capital	69,960
	Wilson, Capital	23,320
	Clarke, Capital	23,320
	Noncash Assets		213,400
	(to record sale of non cash assets)
6)	Frick, Capital	9,240
	Wilson, Capital	3,080
	Clarke, Capital	3,080
	Cash		15,400
	(to record payment of liquidation expenses)
7)	Frick, Capital	60,720
	Wilson, Capital	20,240
	Clarke, Capital	20,240
	Cash		101,200
	(to record final payments are made to partners based on ending capital balances.)