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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Liquidating partnerships—capital deficiency

Nettles, King, and Tanaka are partners sharing income 3:2:1. After the firm's loss from liquidation is distributed, the capital account balances were as follows: Nettles, $15,000 Dr.; King, $46,000 Cr; and Tanaka, $71,000 Cr. If Nettles is personally bankrupt and unable to pay any of the $15,000, what will be the amount of cash received by King and Tanaka upon liquidation?

To determine

Partnership

It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio.

Liquidating Partnership

The winding up of process of partnership is called liquidation of partnership. At the time of liquidation of partnership, loss on realization or gain on realization is determined.

To determine: The amount of cash received by K and T upon liquidation.

Explanation

The following table shows the amount of cash received by K and T upon liquidation:

N K T

Capital balances after realization

(A)

-$15,000 $46,000 $71,000

Distribution of partner deficiency

(B)

$15,000 -$10,000 -$5,000

Capital balances after deficiency distribution

(A) – (B)

$0 $36,000 $66,000

Table (1)

Working Note

When a partner with capital deficiency declares bankruptcy, his or her capital deficiency balance will be shared between other partners in their income-sharing ratio. Here Partner N is bankrupt and unable to pay any of $15,000.

K and T share income sharing ratio as 2:1 respectively. So,

The share of partner’s capital deficiency absorbed by K:

CapitaldeficiencyabsorbedbyK}=(CapitaldeficiencyofN)×(Income/losssharing </

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