Nice one, I only got it right by choosing the answer closest to my calculation
According to my book distributions upon termination are made in order 1. amounts owed for loans 2. partners cap accounts 3. amounts owed for profit
not sure is the loss allocated based on loss/profit %%, not capital ratio
Smith and James were partners in S and J Partnership. The partnership agreement stated that all profits and losses were allocated 60% to Smith and 40% to James. The partners decided to terminate and wind up the partnership. The following was the balance sheet for S and J on the day of the windup:
Cash $40,000
Accounts receivable 12,000
Property and equipment 38,000
Total assets $90,000
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Accounts payable $24,000
Smith, capital 30,000
James, capital 36,000
Total liabilities
and capital $90,000
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Of the total accounts receivable, $10,000 was collected and the remainder was written off as bad debt. All liabilities of S and J were paid by the partnership. The property and equipment are sold for $32,000. Under the Uniform Partnership Act, what amount of cash was distributed to Smith?
Correct A.
$25,200
B.
$26,000
C.
$30,000
D.
$34,800
You are correct, the answer is A.
Upon dissolution of a partnership:
creditors are paid first,
loans to partners are repaid second,
return of capital contributions is paid third, and
then any profit or loss is distributed, according to the terms of the partnership agreement.
Cash available for distribution is:
Beginning cash $40,000
Plus receivables collected 10,000
Plus amount realized from
sale of equipment 32,000
Total cash available
for distribution $82,000
Out of the $82,000, $24,000 must pay off the accounts payable. This leaves $58,000 in cash.
Smith is due his capital contribution, but he must also be allocated his share of the $8,000 in losses of the partnership, according to the partnership agreement. The losses are $2,000 from bad debt ($12,000 of receivables, less $10,000 collected) plus $6,000 from the sale of property and equipment ($38,000 value, less $32,000 received).
The losses are allocated to the partners in this manner:
Loss
Smith 4,800 60%
James 3,200 40%
Total 8,000
Smith would receive his $30,000 capital contribution less $4,800 in partnership losses, or $25,200.
James would receive his $36,000 capital contribution less $3,200 in partnership losses, or $32,800.
$25,200 + $32,800 = $58,000 in cash to be distributed.
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