Question

A partnership has the following balance sheet prior to liquidation (partners’ profit and loss ratios are in parentheses):

Cash	$	33,000	Liabilities	$	50,000
Other assets		100,000	Playa, capital (40%)		24,000
			Bahia, capital (30%)		29,000
			Arco, capital (30%)		30,000
Total	$	133,000	Total	$	133,000

During liquidation, other assets are sold for $80,000, liabilities are paid in full, and $15,000 in liquidation expenses are paid. What amount of cash does each partner receive as a result of this liquidation?

Multiple Choice

• Playa, $16,000; Bahia, $23,000; Arco, $24,000.

• Playa, $19,200; Bahia, $14,400; Arco, $14,400.

• Playa, $6,000; Bahia, $4,500; Arco, $4,500.

• Playa, $10,000; Bahia, $18,500; Arco, $19,500.

Answer 1

Answer: Option 4 - Playa, $10,000; Bahia, $18,500; Arco, $19,500

Allocation Summary:

				Partners
	Cash	Other Assets	Liabilities	Playa	Bahia	Arco
Balances	33000	100000	50000	24000	29000	30000
Sell other assets	80000	-100000		-8000	-6000	-6000
Pay liabilities	-50000		-50000
Liquidation expenses	-15000			-6000	-4500	-4500
Remaining cash	48000	0	0	10000	18500	19500
Distribute	-48000			-10000	-18500	-19500
Total	0	0	0	0	0	0

Notes:

1. The loss on sale of other assets $20,000 ($100,000 - $80,000) and the liquidation expenses $15,000 are borne by the partners in the profit and loss ratio of 40 : 30 : 30.

2. The cash remaining after payment of all liabilities and liquidation expenses which is $48,000 ($33,000 + $80,000 - $50,000 - $15,000) is distributed to the partners in their capital ratio after allocation of all losses which is 10 : 18.5 : 19.5.