Question

Question 40 (2.4 points) A & B are in business as the AB partnership. The partnership is undergoing an installment liquidation. A and B share income in a 4:1 ratio, and have current capital balances of $40,000 and $70,000, respectively. $30,000 in cash is available for distribution. Assuming all liabilities have been paid, what is the amount of the safe payment to B? $24,000 $30,000 $20,000 SO Previous Page Next Page Page 36 of 49

Answer 1

QUESTION 1

Available Cash Balance - $30,000

Capital Balance of A - $40,000

Capital Balance of B - $70,000

Total Potential Loss to be borne by partners  - $40,000(Capital of A)+$70,000(Capital of B) Less $30,000(Cash)

= $80,000

PARTICULRS A B

Capital Balance   $40,000 $70,000

Profit Sharing Ratio 4 : 1

Apportionment of Potential Loss (Above) ($64,000) ($16,000)

($80,000*4/5) ($80,000*1/5)

($24,000) $54,000

Excess Loss of A to be absorbed by B $24,000 ($24,000)

Safe Payments    0 $30,000

Therefore B is entitled to a safe payment of $30,000 in Cash

QUESTION 2

PARTICULARS M N 0 TOTAL

Capital Balances $ 1,50,000 $ 3,20,000 $,1,80,000 $ 6,50,000

Income Share 25% 50% 25% 100%

Income Ratio after purchase of O's Int   33.33% 66.67% 100% (See below Calculation)

Share of o's capital in the above ratio $ 60,000 $ 1,20,000 ( $1,80,000) 0

($1,80,000*33.33%) ($1,80,000*66.67%)

Total Capital Balance $2,10,000 $ 4,40,000 0 $6,50,000

Total M's Capital Balance is $2,10,000

Calculation of New INcome Share

Income Share M N Total

Pre transaction 25% 50% 75%

POst TRansaction 33.33% 66.67% 100%

  (25%*100%/75%)   (50%*100%/75%)