The Best Company at December 31 has cash $20,000, noncash assets $100,000, liabi

Question

The Best Company at December 31 has cash $20,000, noncash assets $100,000, liabilities $55,000, and the following capital balances: Rodriguez $45,000 and Escobedo $20,000. The firm is liquidated, and $110,000 in cash is received for the noncash assets. Rodriguez and Escobedo income ratios are 60% and 40%, respectively. Complete the cash distribution schedule The Best Company - Schedule of Cash Payments (Chart-like set up) Item-----Cash + Noncash Assests = Liabilities + Rodriguez, Capital + Escobeo, Caspital Balances before liquidation X + X = X + X + X Sale of noncash assests and X + X = X + X + X allocation of gain New balances X + X = X + X + X Pay Liabilities X + X = X + X + X New Balances X + X = X + X + X Cash distribution to partners X + X = X + X + X Final Balances X + X = X + X + X

Explanation / Answer

Here's the distribution - put these figures into whatever schedule you want:

Cash -
A. Original balance $20,000
B. Received for noncash assets $110,000
C. Total Cash (A+B) = $130,000

Reductions in cash:
D. Pay off all liabilities ($55,000)
E. Re-Pay Rodriguez Capital account ($45,000)
F. Re-Pay Escobedo Capital acocunt ($20,000)

G. Total "easy" cash reductions" $120,000 (D+E+F)

H. Balance left (C minus G) = $10,000. Since this represents a "gain" of $10,000 on the liquidation of the noncash assets, it should be divided among the two partners on the basis of their income-sharing ratios (i.e., 60/40). Rodriguez gets 60% or $6,000 and Escobedo gets 40% of $4,000.

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