Question

Problem 10-21 (LO 10-2, 10-4) Alex and Bess have been in partnership for many years. The partners, who share profits and losses on a 70:30 basis, respectively, wish to retire and have agreed to liquidate the business. Liquidation expenses are estimated to be $5,500. At the date the partnership ceases operations, the balance sheet is as follows: Cash Noncash assets $ 48,000 135,000 Liabilities Alex, capital Bess, capital Total liabilities and capital $ 30,000 94,500 52,500 $ 183,000 Total assets $ 183,000 Part A: Prepare journal entries for the following transactions: a. Distributed safe cash payments to the partners. b. Paid $21,600 of the partnership's liabilities. c. Sold noncash assets for $147,000. d. Distributed safe cash payments to the partners. e. Pald remaining partnership liabilities of $14,400. f. Paid $4,100 in liquidation expenses: no further expenses will be incurred. g. Distributed remaining cash held by the business to the partners.

Answer 1

Part-A:

Answer-A: Distribution of Safe Assets to Partners:

To calculate the safe payment to partners, we need to prepare proposed schedule of liquidation assuming that all future events will result in total losses as under:

	Cash	Non Cash	Liabilities	Alex, Capital	Bess Capital
Beginning Balance	48000	135000	36000	94500	52500
Maximum Loss on Non Cash Asset		-135000		-94500	-40500
Maximum Liquidation Expense	-5500			-3850	-1650
Payment of Liabilities	-36000		-36000
Potential Balance	6500	0	0	-3850	10350
Assume Alex to be insolvent				3850	-3850
Safe Balance	6500	0	0	0	6500

Journal Entry

S.No.	General Journal	Debit	Credit
a.	Bess, Capital	6,500
	Cash		6,500

Answer-B: Payment of Partnership Liabilities:

S.No.	General Journal	Debit	Credit
b.	Liabilities	21,600
	Cash		21,600

Answer-C: Sale of Non-Cash Assets for $147,000. Gain on sale of assets $12,000 (147,000 – 135,000) to be shared by partners in profit and loss sharing ratio;

S.No.	General Journal	Debit	Credit
	Cash	147,000
	Alex, Capital (12000 *70%)		8,400
	Bess, Capital (12000 * 30%)		3,600
	Non Cash Assets		135,000

Answer-D: Distribution of Safe Cash Payments to Partners:

Again, prepare a proposed prepare proposed schedule of liquidation after considering above entries and assuming that all future events will result in total losses as under:

	Cash	Non Cash	Liabilities	Alex, Capital	Bess Capital
Begnning Balance	48000	135000	36000	94500	52500
Capital Distribution- Safe Assets	-6500				-6500
Payment of Liabilities	-21600		-21600
Disposal of Non- Cash Assets	147000	-135000		8400	3600
Cureent Balance	166900	0	14400	102900	49600
Maximum Liquidation Expense	-5500			-3850	-1650
Payment of Liabilities	-14400		-14400
Potential Balance	147000	0	0	99050	47950

Journal Entry:

S.No.	General Journal	Debit	Credit
d.	Alex, Capital	99,050
	Bess, Capital	47,950
	Cash		147,000

Answer-E: Payment of Remaining Partnership Liabilities:

S.No.	General Journal	Debit	Credit
b.	Liabilities	14,400
	Cash		14,400

Answer-F: Payment of Liquidation Expense:

S.No.	General Journal	Debit	Credit
	Alex, Capital (4100 *70%)	2,870
	Bess, Capital (4100 * 30%)	1,230
	Cash		4100

Answer-G: Distribute remaining cash to partners:

S.No.	General Journal	Debit	Credit
d.	Alex, Capital	980
	Bess, Capital	420
	Cash		1,400

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