The Hylands Hotels are liquidating their partnership. Before selling the assets

Question

The Hylands Hotels are liquidating their partnership. Before selling the assets and paying liabilities, the capital balances for the partners are: Martha $45,000; Nathan $36,000 and Orin $26,000. The profit and loss sharing ratio has been 2:2:1 for Martha, Nathan and Orin respectively. The partnership has cash $50,000, $75,000 noncash assets and $36,000 Accounts payable.

Assume the partnership sells the non-cash assets and received $84,000 in cash.

Assume the partnership sells the noncash assets and received $35,000.

Instructions

Under both assumptions, prepare the entries to record:

(a)      The sale of noncash assets.

(b)      The allocation of the gain or loss on liquidation to the partners.

(c)      Payment of creditors.

(d)      Distribution of cash to the partners.

Explanation / Answer

Computation of Accumulated losses at the time of liquidation: Total capital: 107,000 Martha 45,000 Nathan 36,000 Orin 26,000 Accounts payable 36,000 Total liabilities 143,000 Less: Total Assets Cash 50,000 Non Cash Assets 75,000 125,000 Accumulated Losses at the time of liquidation 18,000 (Dr. Balance of Reserves and surplus) ASSUMPTION: Non Cash Assets sold for $ 84,000 JOURNAL ENTRIES Accounts Titles and Explanations DR in $ Cr in $ For Sale of Non Cash Assets Cash Account Dr. 84,000 Non Cash Assets Cr. 75,000 Gain On Liquidation Cr. 9,000 For Allocation of Gain On liquidation Gain On Liquidation Dr. 9,000 Martha Capital Cr. 3,600 Nathan Capital Cr. 3,600 Orin Capital Cr. 1,800 (Gain on Liquidation allocated between partners in the ratio of 2:2:1) For Payment of Creditors Accounts payable Dr. 36,000 Cash Account Cr. 36,000 For Distribution of Accumulated Losses among the partners Martha Capital Dr. 7,200 Nathan Capital Dr. 7,200 Orin Capital Dr. 3,600 Reserves and surplus Cr. (See note above) 18,000 (For distribution of losses among partners in 2:2:1) For Distribution of cash to partners Martha Capital Dr. (45,000+3,600-7,200) 41,400 Nathan Capital Dr. (36,000+3,600-7,200) 32,400 Orin Capital Dr. (26,000+1,800-3,600) 24,200 Cash Account Cr. 98,000 (For distribution of cash for opening capital and gain on liquidation after accumulated losses) Assumption: Non Cash assets sold for $ 35,000 JOURNAL ENTRIES Accounts Titles and Explanations DR in $ Cr in $ For Sale of Non Cash Assets Cash Account Dr. 35,000 Loss on Liquidation Dr. 40,000 Non Cash Assets Cr. 75,000 For Allocation of Loss On liquidation Martha Capital Dr. 16,000 Nathan Capital Dr. 16,000 Orin Capital Dr. 8,000 Loss on Liquidation Cr. 40,000 (Loss on Liquidation allocated between partners in the ratio of 2:2:1) For Payment of Creditors Accounts payable Dr. 36,000 Cash Account Cr. 36,000 For Distribution of Accumulated Losses among the partners Martha Capital Dr. 7,200 Nathan Capital Dr. 7,200 Orin Capital Dr. 3,600 Reserves and surplus Cr. (See note above) 18,000 (For distribution of losses among partners in 2:2:1) For Distribution of cash to partners Martha Capital Dr. (45,000-16,000-7,200) 21,800 Nathan Capital Dr. (36,000-16,000-7,200) 12,800 Orin Capital Dr. (26,000-8,000-3,600) 14,400 Cash Account Cr. 49,000 (For distribution of cash for opening capital after adjusting loss on liquidation and accumulated losses)

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