Question

Henry, Luther, and Gage are dissolving their partnership. Their partnership agreement allocates each partner 1/3 of all income and losses. The current period's ending capital account balances are Henry, $45,000; Luther, $37,000; and Gage, $(5,000). After all assets are sold and liabilities are paid, there is $77,000 in cash to be distributed. Gage is unable to pay the deficiency. The journal entry to record the distribution should be:

Answer 1

Answer and Explanation:

The journal entry to record the distribution is as follows;

But before that following calculations need to be required

Capital, Henry = $45,000

Capital, Luther = $37,000

Capital, Gage = -$5,000

Now there is a deficiency in the gage capital account i.e. $5,000 should be borne by Henry and Luther in equal ratio i.e. $2,500 each  

Now the henry final balance is

= $45,000 - $2,500

= $42,500

And, the luther final balance is

= $37,000 - $2,500

= $34,500

Now the journal entry is  

Henry, capital $42,500  

Luther, capital $34,500  

                  To Cash $77,000

(Being distribution is recorded)

here the capital account is credited as it reduce the stockholder equity and cash is credited as it also reduced the assets