Joined: 18 Oct 2009
Online Status: Offline Posts: 84
Posted: 30 Dec 2009 at 23:00 | IP Logged
Below is the Q&A for a partnership- liquidation problem.
----------------------------------------
The following condensed balance sheet is presented for the
partnership of Smith and Jones, who share profits and losses in the ratio of
60:40, respectively:
Other assets $450,000
Smith, loan 20,000
$470,000
Accounts
payable $120,000
Smith, capital ; ; 195,000
Jones, capital ; ; 155,000
$470,000
The
partners have decided to liquidate the partnership. If the other assets are
sold for $385,000, what amount of the available cash should be distributed to
Smith?
I dont understand why 136,000 was distributed, not 159,000. Cash left over for distribution totaled 265,000 (which I was able to get), but if it was a 60/40 distribution ratio why did Smith get 136,000? 136,000 is 51%.
Joined: 20 Nov 2009 Location: United States
Online Status: Offline Posts: 761
Posted: 31 Dec 2009 at 13:57 | IP Logged
Smith Jones Total Capital ; 195,000 155,000 350,000 Loss on sale (39,000) (26,000) (65,000) Balance ; 156,000 129,000 285,000 Loan to Smith (cash available (20,000) Nil (20,000) is $265,000) Final Balance 136,000 129,000 265,000
Cash available is only $265,000, since there is an obvious shortage, loan/advance given to Smith should be netted off against his capaital balance. Therefore his balance is now $136,000 while Jones's balance is $129,000. This is the final amount that would be paid to settle the partners. Cash is available fully to settle now, so you don't have to apply profit/loss sharing ratio. If you do that, Smith would end up getting a higher amount while Jones's capital would still show some balance to be paid. It is a liquidation.
Hope you got it.
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Joined: 18 Oct 2009
Online Status: Offline Posts: 84
Posted: 03 Jan 2010 at 22:48 | IP Logged
Thank you both so much for all your help! So we basically pay back the partners based on how much capital they have in their accounts, not based on the %.
Let's say the partnership had 400 in cash to distribute, and had extra money left over after paying off the capital accounts. In this scenario, will the extra moola be distributed under the P/L %?
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Topic: partnership Q (Becker hw prob)
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