Question

Ames and Barton are partners who share income in the ratio of 1:2 and have capital balances of $40,000 and $70,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $80,000. What amount of loss on realization should be allocated to Barton?
a. $80,000
b. $30,000
c. $10,000
d. $20,000

Answer 1

Answer:

d. $20,000

Explanation:

Loss on realization is shared by the partners in their profit sharing ratio. Upon termination of a partnership, all assets are realized and liabilities are paid off. The resultant surplus/deficit on realization is to be shared by the partners in their profit sharing ratio.

In the given case, partners are to be paid the balances standing to the credit of their capital accounts i.e total payment of $ 40,000 and $70,000 which is a total of $110,000

But the available cash balance being only $80,000.

Thus, the loss of $110,000 less $80,000 i.e $30,000 would be borne by the partners in their profit sharing ratio. The journal entry would be

Ames Capital A/C                                                     Dr.10,000

Barton's Capital A/C  (2/3 of 30,000)                    Dr.20,000

     To Loss on Realization A/C                                                  30,000

(Being loss on realization account being borne by partners in their income sharing ratio of 1:2 recorded)