Question

Adam, Ben and Erica are liquidating their partnership. Before selling the assets and paying the liabilities, the capital balances are Adam $41,000, Ben $31,000 and Erica $20,000. The profit and loss sharing ratio has been 1:1:2 for Adam, Ben and Erica, respectively. The partnership has $72,000 cash, $40,000 non-cash assets, and $20,000 accounts payable. Requirement 1. Assuming the partnership sells the non-cash assets for $50,000, how much cash will each partner receive in final liquidation? Requirement 2. Assuming the partnership sells the non-cash assets for $25,000, how much cash will each partner receive in final liquidation?

Answer 1

Answer:

Adam = $41,000 , Ben = $31,000 , Erica =$20,000

Profit and loss sharing Ratio respectively =1:1:2

Requirement 1

Cash available                                 $72,000

Add: Cash received from sale of   $50,000

non-cash assets

                                                         $122,000

Less: Cash paid against account   $20,000

receivables  

Cash to be distributed                    $102,000

Distribution

Adam= $102,000 * 1/4 = $25,500

Ben = $102,000 * 1/4 = $25,500  

Erica = $102,000 * 2/4 = $51,000

Requirement 2

Cash available                                 $72,000

Add: Cash received from sale of   $25,000

non-cash assets

                                                         $97,000

Less: Cash paid against account   $20,000

receivables  

Cash to be distributed                    $77,000

Distribution

Adam= $77,000 * 1/4 = $19,250

Ben = $77,000 * 1/4 = $19,250

Erica = $77,000 * 2/4 = $38,500