Sand, Mell, and Rand are partners who share incomes and losses in a 1:4:5 ratio.

Question

Sand, Mell, and Rand are partners who share incomes and losses in a 1:4:5 ratio. After lengthy disagreements among the partners and several unprofitable periods, the partners decided to liquidate the partnership. Before the liquidation, the partnership balance sheet showed the following: Cash $10,000 Total "other assets," $106,000 Total liabilities, $88,000 Sand, Capital, $1,200 Mell, Capital, $11,700 Rand, Capital, $15,100 The "other assets" were sold for $ 85,000.Provide an explanation between 200 and 300 words in length of the requirements for liquidating the partnership. What documents will be needed How will the money be distributed? What other options might there be in place of liquidation

Explanation / Answer

Ans:

Question 1

General Journal

GENERAL JOURNAL

      Date

     Account Titles and Explanation

P. R.

Debit

Credit

   Cash

$85,000

          Total others Assets

$106,000

    Loss on Realization

$21,000

(to record realization of assets)

Question 2

Sand, Capital Account

Mell, Capital Account

Rand, Capital Account

Balance

$2,100

$1,200

Balance

$8,400

$11,700

Balance

$10,500

$15,100

Balance

$900

Balance

$3,300

Balance

$4,600

Question 3

Payment Deficiency Method

      Date

     Account Titles and Explanation

P. R.

Debit

Credit

Cash

$900

      Sand, Capital

$900

    (to record capital deficiency by Sand)

Account balances after posting the entry

Sand, Capital Account

Mell, Capital Account

Rand, Capital Account

Balance

$2,100

$1,200

Balance

$8,400

$11,700

Balance

$10,500

$15,100

$900

Balance

       -0-

Balance

$3,300

Balance

$4,600

Cash balance of $7,000 is now equal to the credit balance in the capital accounts ( Mell, $3300 + Rand, $4,600)

Therefore, Sand will end up with $ 0.00, Mell with $ 3,300 and Rand with $ 4,600

Question 4

When a partnership is liquidated, it means that it the business has ended. Partnership termination involves the selling of the business assets, paying of liabilities, and distribution of any remaining assets, usually cash to the partners. Termination of a partnership type of business can result from a number of issues pertaining to the partners. Partnership can be dissolved because of the following reasons.

Partner has become of unsound mind therefore cannot make decisions or is likely to disrupt the smooth running of a partnership. As a result, partners can continue to maintain the mutual agreement under such circumstances. Another factor that may contribute to dissolution of a partnership is when a partner is permanently becomes unable to discharge their duties (Jurinski & Zwick, 2012). Equally important is when the agreement of the partnership is broken and members cannot agree how to discipline the doers. Furthermore, if a business runs in a series of losses then it will not be prudent to continue with the association.

The key documents that may be needed during the process of liquidation are declaration of solvency documents and a liquidation plan. The above are particularly useful in a voluntary liquidation. In case of court settlement, additional documents will be necessary (Pratt & Kulsrud, 2012). For instance, completion of bankruptcy forms, and reaffirmation of agreement documents will be needed.

Before a partnership ends, the noncash assets are sold for cash. The difference between the book value and the cash proceeds, either a gain or loss on realization is allocated to partners as per their income ratios (Warren, Reeve, & Duchac, 2015). The partnership must first pay its creditors, and any proceeds remaining will then be shared among the associates.

Instead of ending a partnership, other options can be used to avoid termination of a partnership. For example, partners who might want to continue running the business can do so after compensating the aggrieved partner. In addition, other partners can go to court to have one of the partners declared of unsound mind. In this case he/ she will be discontinued from being a partner after compensation.

General Journal

GENERAL JOURNAL

      Date

     Account Titles and Explanation

P. R.

Debit

Credit

   Cash

$85,000

          Total others Assets

$106,000

    Loss on Realization

$21,000

(to record realization of assets)

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