[Oimie]

NINJA Question –

Okay I’ve been staring at this problem for so long but I cannot seem to figure it out. Based on the question below, the logical procedure would seem to be using the $385,000 of cash to repay the the $120,000 A/P before they distribute the leftover of $265,000 proportionately. My method was wrong. Fine. I take a look at the correct method of doing it. No where in their calculation do I see them paying back the account’s payable. But surprisingly the total of the two ending balances add up to $265,000. It’s as if the A/P just vanished. I am so mindf**ked right now. Can someone unmindf**k me please? (Excuse me for my language, but there is no better way to describe my current state.)

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

Total: $470,000

Accounts payable $120,000

Smith, capital: 195,000

Jones, capital: 155,000

Total: $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?

Answer: $136,000

Smith’s capital: 195,000 – 39,000 loss on sale of asset – 20,000 loan= $136,000

Jones capital: 155,000 – 26,000 loss on sale of asset = 129,000

Ending balances: $136,000 + 129,000 = >>>$265,000<<<

And there you go. Magic. Just sell the asset and realize the loss on disposal and A/P is automatically paid off. That $265,000 is the same $265,000 you get when you take the $385,000 of cash and repaying A/P of $120,000.

I’ve been up for 16 hours studying. My brain is too dead to figure out this puzzle. ㅠ_ㅠ

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Missy]

It is simply a coincidence that it worked out the same in this case. With a more complex balance sheet you would absolutely need to know the mechanics of calculating the loss, subtracting loans and the loss from each partner's capital balance. Its nice to know the math but you must understand the mechanics.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Oimie]

@mla11692: Actually l learned it in my review but never practiced it so I kind of forgot. So instead of picking up my review book I thought I could've figured it out using logic which failed lol. But yes, I'm going to get some more practice on partnerships.

As for the A/P problem, I don't think it was a coincidence. The explanation provided a nice chart and it lined them up as if it is suppose to be that way. But I couldn't figure out where the A/P disappeared to in the chart. I'll post the chart after I'm done with my last few questions.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Missy]

What I mean by coincidence is that AP was the only liability and all assets were apparently lumped together, so of course it worked out that way. Very few balance sheets only have one asset and one liability.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Thrawn]

Look at it using the accounting equation and maybe it will make more sense to you.

Assets 450 (other assets) + cash loan from partner 20 = Liabilities 120 (AP) + equity 195+155 (cap accounts).

For simplicity remove the loan from both sides (algaebra) 450 = 120 + 175 + 155

Now sell other assets for cash.

Dr. Cash 385

Dr. Loss on Sale of Assets 65

Cr. Other Assets (450)

Dr. Partners capital account

smith 39

jones 26

cr. loss on sale of assets

Cash 385 = Liab 120 + equity 136 + 129

now do more algaebra and subtract AP from each side

Cash 385 – Liab 120 = Equity136 + 129

265 = Equity 136 + 129

The reason they don't need to show the repayment, is the maximum cash available to pay to owners is the value of their capital accounts, which happens to equal net assets (split by the adjustment for the loan and the share of the loss).

BEC 87 Feb 14
REG 84 Apr 14
FAR 82 Nov 14
AUD 86 Feb 15

[Oimie]

@mla11692: Ohhh I see. Thanks a lot btw!

@Thrawn: Okay, I think I kind of see what I didn't see before but I can't fully make the connection yet. I am going to need a nap first from this 17 hours of MCQ before I get back to this. Thank you!

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

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