Question

The partners of Jensen, Smith & Hart LLP shared net income and losses in the ratio of 5:3:2, respectively. The partners decided to liquidate the partnership when its assets consisted of cash, $40,000, and other assets, $210,000. The liabilities and partners' capital were as follows:

Liabilities $60,000
Jensen, capital 48,000
Smith, capital 72,000
Hart, capital 70,000
If other assets with a carrying amount of $120,000 realized $90,000, the amount of cash that each partner may receive at that time is:
Jensen Smith Hart
A) $45,000 $27,000 $18,000
B) $35,000 $21,000 $14,000
C) $0 $30,000 $40,000
D) $0 $28,800 $41,200

Answer 1

To determine the cash distribution among the partners during a partnership liquidation, we must first account for the loss on asset sales and settle liabilities. The remaining cash is then distributed based on the partners' remaining capital and their profit and loss sharing ratio. None of the given answer choices (A-D) correctly represent the cash distribution after liquidation.

Step-by-step explanation:

The question involves partnership liquidation and the allocation of cash after realizing a loss on the sale of assets in a partnership. First, we need to determine the loss on the other assets - with a carrying amount of $120,000 but realizing only $90,000, the loss is $30,000. Before distributing the remaining cash, liabilities must be paid, and then the remaining cash is distributed to the partners based on their agreed profit and loss sharing ratios.

Step 1: Determine total available cash:
Available Cash = Initial Cash + Realized Amount from Other Assets - Liabilities = $40,000 + $90,000 - $60,000 = $70,000.

Step 2: Allocate the loss based on the partnership ratio:
Loss Distribution = Jensen (5/10 * $30,000) = $15,000;
Smith (3/10 * $30,000) = $9,000;
Hart (2/10 * $30,000) = $6,000.

Step 3: Determine the remaining capital for each partner after loss allocation:
Jensen: $48,000 - $15,000 = $33,000;
Smith: $72,000 - $9,000 = $63,000;
Hart: $70,000 - $6,000 = $64,000.

Step 4: Allocate available cash according to the remaining capital assuming no priority:
Total Capital: $33,000 + $63,000 + $64,000 = $160,000;
Cash Distribution (if ratio preserved):
Jensen: $70,000 * ($33,000 / $160,000);
Smith: $70,000 * ($63,000 / $160,000);
Hart: $70,000 * ($64,000 / $160,000).

However, because we do not have enough cash to give everyone their full capital back, cash is distributed based on their profit and loss sharing ratios until depleted, which does not align with any of the answer choices (A-D) provided. Therefore, the correct cash distribution cannot be determined based on the given options.