Exercise 12-10 Liquidation of partnership LO P4
Turner, Roth, and Lowe are partners who share income and loss in a 1:3:6 ratio. After lengthy disagreements among the partners and several unprofitable periods, the partners decide to liquidate the partnership. Immediately before liquidation, the partnership balance sheet shows total assets, $116,000; total liabilities, $87,000; Turner, Capital, $1,200; Roth, Capital, $8,700; and Lowe, Capital, $19,100. The cash proceeds from selling the assets were sufficient to repay all but $21,500 to the creditors.
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| (a) | Calculate the gain (loss) from selling the assets. |
| (b) |
Allocate the gain (loss) to the partners. (Do not round intermediate calculations. Losses and deficits should be indicated with a minus sign.)
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| (c) |
Determine the amount of the remaining liability to be paid by each partner. (Do not round intermediate calculations.)
Explanation:
| (a) |
| Loss from selling assets |
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| Total book value of assets | | | | | $ | 116,000 | | |
| Total liabilities (before liquidation) | $ | 87,000 | | | | | | |
| Total liabilities remaining after paying | | | | | | | | |
| proceeds of asset sales to creditors | | (21,500 | ) | | | | | |
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| Cash proceeds from sale of assets | | | | | | (65,500 | ) | |
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| Loss on sale of assets* | | | | | $ | 50,500 | | |
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| *Alternative computation |
| 1) $21,500 = $87,000 – Cash from asset sale |
| (This implies $65,500 cash from asset sale) |
| 2) Loss on sale of assets = Book value of assets – Cash received |
| = $116,000 – $65,500 = $50,500 |
| | Turner | | Roth | | Lowe | | Total | |
| Capital balances before loss liquidation | $ | 1,200 | | | $ | 8,700 | | | $ | 19,100 | | | $ | 29,000 | | |
| Allocation of loss | | | | | | | | | | | | | | | | |
| $50,500 × 1 / 10 | | (5,050 | ) | | | | | | | | | | | | | |
| $50,500 × 3 / 10 | | | | | | (15,150 | ) | | | | | | | | | |
| $50,500 × 6 / 10 | | | | | | | | | | (30,300 | ) | | | (50,500 | ) | |
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| Capital balances after loss | $ | (3,850 | ) | | $ | (6,450 | ) | | $ | (11,200 | ) | | $ | (21,500 | ) | |
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Chapter 12 homework Question 8
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