Adam, Ben and Erica are liquidating their partnership. Before selling the assets

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?

Explanation / Answer

CAPITAL BALANCES BEFORE SELLING ASSETS AND PAYING LIABILITIES:

ADAM=$41,000

BEN=$31,000

ERICA=$20,000

PROFIT SHARING RATIO=1:1:2

1.CALCULATION OF CASH EACH PARTNER WILL RECEIVE IN FINAL LIQUIDATION IF NONCASH ASSETS SOLD FOR $50,000:

CASH AVAILABLE =$72,000

ADD:CASH RECEIVED FROM SALE OF NON-CASH ASSETS=$50,000

$1,22,000

LESS:CASH PAID AGAINST ACCOUNTS PAYABLE =$20,000

CASH TO BE DISTRIBUTED =1,02,000

CASH ADAM WILL RECEIVE=$1,02,000*1/4=$25,500

CASH BEN WILL RECEIVE=$1,02,000*1/4=$25,500

CASH ERICA WILL RECEIVE=$1,02,000*2/4=$51,000

2.CALCULATION OF CASH EACH PARTNER WILL RECEIVE IN FINAL LIQUIDATION IF NON CASH ASSETS SOLD FOR $25,000:

CASH AVAILABLE =$72,000

ADD:CASH RECEIVED FROM SALE OF NON-CASH ASSETS=$25,000

$97,000

LESS:CASH PAID AGAINST ACCOUNTS PAYABLE =$20,000

CASH TO BE DISTRIBUTED =77,000

CASH ADAM WILL RECEIVE=$77,000*1/4=$19,250

CASH BEN WILL RECEIVE=$77,000*1/4=$19,250

CASH ERICA WILL RECEIVE=$77,000*2/4=$38,500

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