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jsn123
Regular
Joined: 22 Dec 2009
Location: United States
Online Status: Offline
Posts: 107
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| Posted: 11 Feb 2010 at 08:55 | IP Logged
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Can anybody explain me why the answer is C?
Able, Baker, and Cannon are partners. Able gets 70
percent of the profits and losses and has a capital
balance of $100,000. Baker gets 20 percent of the
profits and losses and has a capital balance of $60,000.
Cannon gets 10 percent of the profits and losses and has
a capital balance of $10,000. The partnership has
$170,000 in assets but no liabilities. The partnership
is being liquidated. Assets of $70,000 are sold for
$40,000 in cash. Which of the partners gets this
available cash?
A Able gets $28,000, Baker gets $8,000, and Cannon gets
$4,000
B Able gets $13,333, Baker gets $13,333, and Cannon gets
$13,334
C Able gets $6,667 and Baker gets $33,333
D Able gets $20,000 and Baker gets $20,000
Answer is C because The actual sale of these assets
created a $30,000 loss ($70,000 less $40,000). That loss
is assigned 70 percent to Able ($21,000 bringing the
capital down to $79,000), 20 percent to Baker ($6,000
bringing the capital down to $54,000), and 10 percent to
Cannon ($3,000 bringing the capital down to $7,000). To
decide what to do with the available cash, the
partnership must assume that the remaining $100,000 in
assets ($170,000 less $70,000) are a total loss. In that
case, this $100,000 anticipated loss is assigned 70
percent to Able ($70,000 bringing the capital down to
$9,000), 20 percent to Baker ($20,000 bringing the
capital down to $34,000), and 10 percent to Cannon
($10,000 bringing the capital down to a negative $3,000).
Then, finally, the remaining negative $3,000 balance in
Cannon’s capital must be divided between Able and Baker
based on their relative profit and loss ratios or 70/90
of the $3,000 to Able or $2,333 and 20/90 of the $3,000
to Baker or $667. This final allocation reduces Able’s
capital from $9,000 to $6,667 and Baker’s capital from
$34,000 to $33,333. That is how the available cash is
distributed.
Any advise is highly appreciated.
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RR_CPA
Major Contributor
Joined: 02 Mar 2009
Location: Canada
Online Status: Offline
Posts: 338
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| Posted: 11 Feb 2010 at 12:14 | IP Logged
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| Try in this way to understand... |
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| Loss from sale $30,000 (Assets 70,000 - 40,000) |
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| Other Loss 100,000 (as total assets were 170,000) sold for 40,000. |
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A |
B |
C |
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| Contribution |
100,000 |
60,000 |
10,000 |
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| Loss on Sale (30,000) |
(21,000) |
(6,000) |
(3,000) |
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79,000 |
54,000 |
7,000 |
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| Other Loss (100,000) |
(70,000) |
(20,000) |
(10,000) |
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| Remaining |
9,000 |
34,000 |
(3,000) |
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| As this is partnership each partner is liable for loss, 3000 loss of Cannon will distribute to A & B |
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| Cannon Loss |
3000X70/90% |
3000X20/90% |
0 |
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(2,333) |
(667) |
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| Remaining to A & B only |
6,667 |
33,333 |
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Nothing for C.
Read explaination again now.
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Topic: Partnership
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