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16 February, 11:43

The Hylands Hotels are liquidating their partnership. Before selling the assets and paying liabilities, the capital balances for the partners are: Martha $45,000; Nathan $36,000 and Orin $26,000. The profit and loss sharing ratio has been 2:2:1 for Martha, Nathan and Orin respectively. The partnership has cash $68,000, $75,000 noncash assets and $36,000 Accounts payable. I. Assume the partnership sells the non-cash assets and received $84,000 in cash. II. Assume the partnership sells the noncash assets and received $35,000. Instructions Under both assumptions, prepare the entries to record: (a) The sale of noncash assets. (b) The allocation of the gain or loss on liquidation to the partners. (c) Payment of creditors. (d) Distribution of cash to the partners.

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  1. 16 February, 12:07
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    Ia. Debit Cash $84,000

    Credit Non-cash asset $75,000

    Gain on sale $9,000

    Ib. Debit Gain on sale $9,000

    Credit Martha, capital $3,600

    Credit Nathan, capita $3,600

    Credit Orin, capital $1,800

    Ic. Debit Accounts payable $36,000

    Credit Cash $36,000

    Id. Debit Martha, capital $48,600

    Debit Nathan, capita $39,600

    Debit Orin, capital $27,800

    Credit Cash $116,000

    IIa. Debit Cash $35,000

    Loss on sale $40,000

    Credit Non-cash asset $75,000

    IIb. Debit Martha, capital $16,000

    Debit Nathan, capital $16,000

    Debit Orin, capital $8,000

    Credit loss on sale $40,000

    IIc. Debit Accounts payable $36,000

    Credit Cash $36,000

    IId. Debit Martha, capital $29,000

    Debit Nathan, capita $20,000

    Debit Orin, capital $18,000

    Credit Cash $67,000

    Explanation:

    Ia. During the sale on non-cash asset, we debit the cash we received during the sale and credit the the non-cash asset and another credit of gain on sale. So we debit cash $84,000 credit Non-cash asset to remove it from the book in the amount of $75,000 and another credit of $9,000 gain on sale.

    Ib. The gain we credited earlier will be allocated to the partners based on the profiy and loss sharing ratio.

    Debit Gain on sale $9,000

    Credit Martha, capital (9,000 x 2/5) $3,600

    Credit Nathan, capital (9,000 x 2/5) $3,600

    Credit Orin, capital (9,000 x 2/5) $1,800

    Ic. To record payment to creditor, we simply debit Accounts payable in the amount of $36,000 and credit Cash in the same amount of $36,000.

    Id. The cash subject for allocation is the remaining amount after we deduct the cash we paid to outside creditor plus the amount we received from the sale on non-cash asset.

    Beginning cash $68,000 - $36,000 (payment to creditor) + $84,000 (cash received from sale of non-cash assets) = $116,000

    $116,000 - (45,000 + 36,000 + 26,000) = $9,000

    We now allocate the cash based on the capital balances of the partners and divide the excess based on the profit or loss sharing ratio.

    Debit Martha, capital (45,000 + (9,000 x 2/5) $48,600

    Debit Nathan, capital (36,000 + (9,000 x 2/5) $39,600

    Debit Orin, capital (26,000 + (9,000 x 2/5) $27,800

    Credit cash $116,000

    IIa. During the sale on non-cash asset, we debit the cash we received during the sale and credit the the non-cash asset. The difference between Cash received and the value of an asset will be charged to gain or loss. So we debit cash $35,000 and another debit of loss on sale in the amount of $40,000 then credit Non-cash asset to remove it from the book in the amount of $75,000 ...

    Ib. The loss we Debited earlier will be allocated to the partners based on the profit and loss sharing ratio.

    $75,000 - $35,000 = $40,000

    Debit Martha, capital (40,000 x 2/5) $16,000

    Debit Nathan, capital (40,000 x 2/5) $16,000

    Debit Orin, capital (40,000 x 2/5) $8,000

    Credit loss on sale $40,000

    Ic. To record payment to creditor, we simply debit Accounts payable in the amount of $36,000 and credit Cash in the same amount of $36,000.

    Id. The cash subject for allocation is the remaining amount after we deduct the cash we paid to outside creditor plus the amount we received from the sale on non-cash asset.

    Beginning cash $68,000 - $36,000 (payment to creditor) + $35,000 (cash received from sale of non-cash assets) = $67,000

    $67,000 - (45,000 + 36,000 + 26,000) = ($40,000)

    We now allocate the cash based on the capital balances of the partners and divide the losses based on the profit or loss sharing ratio.

    Debit Martha, capital (45,000 - (40,000 x 2/5)) $29,000

    Debit Nathan, capital (36,000 + (40,000 x 2/5)) $20,000

    Debit Orin, capital (26,000 + (40,000 x 2/5)) $18,000

    Credit cash $67,000
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