Question

The partnership of Frick, Wilson, and Clarke has elected to cease all operations and liquidate its business property. A balance sheet drawn up at this time shows the following account balances:

Cash 60,000
Noncash assets 219,000
Liabilities 40,000
Frick, capital (60%) 129,000
Wilson, capital (20%) 35,000
Clarke, capital (20%) 75,000
Part A: Prepare a predistribution plan for this partnership.
Part B: The following transactions occur in liquidating this business:
1. Distributed cash based on safe balances immediately to the partners. Liquidation expenses of $8,000 are estimated as a basis for this computation.
2. Sold noncash assets with a book value of $94,000 for $60,000.
3. Paid all liabilities
4. Distributed cash based on safe capital balances again
5. Sold remaining noncash assets for $51,000
6. Paid actual liquidation expenses
7. Distributed remaining cash to the partners and closed the financial records of the business permanently.
Produce a final statement of liquidation for this partnership using the predistribution plan to determine payments of cash to partners based on safe capital balances.
Part C: Prepare journal entries to record the liquidation transactions reflected in the final statement of liquidation.

Answer 1

The predistribution plan for the partnership involves determining safe capital balances for each partner. The final statement of liquidation is prepared using the predistribution plan to calculate cash distributions to the partners based on safe capital balances. Journal entries are then recorded to reflect the liquidation transactions.

Step-by-step explanation:

Part A: To prepare a predistribution plan for the partnership, we need to determine the safe capital balances for each partner. We can do this by calculating the partners' capital account balances as a percentage of the total capital account balance. In this case, Frick's safe capital balance would be $77,400 (60% of $129,000), Wilson's safe capital balance would be $12,900 (20% of $64,500), and Clarke's safe capital balance would be $25,800 (20% of $129,000).

Part B: Using the predistribution plan, we can now determine the cash distributions to the partners. First, we distribute cash based on safe capital balances and subtract the estimated liquidation expenses. After selling noncash assets and paying liabilities, we again distribute cash based on safe capital balances. Finally, we sell the remaining noncash assets, pay actual liquidation expenses, and distribute the remaining cash to the partners.

Part C: To record the liquidation transactions, we would need to prepare journal entries based on the final statement of liquidation. These journal entries would include debiting and crediting various accounts, such as Cash, Noncash Assets, Liabilities, and the individual partner capital accounts.

Answer 2

A predistribution plan involves setting aside cash for estimated liquidation expenses and distributing remaining cash to partners. The final statement of liquidation involves the distribution of cash after assets are sold and liabilities are settled. Journal entries record these transactions, impacting the relevant accounts.

Step-by-step explanation:

Part A: Predistribution Plan

The predistribution plan outlines the distribution of cash and other assets to partners prior to the liquidation of the partnership's assets and settlement of liabilities. The given balance sheet information shows that the partners' capital accounts total $239,000, which is calculated from Frick's $129,000 (60%), Wilson's $35,000 (20%), and Clarke's $75,000 (20%). The noncash assets are $219,000 and cash is $60,000, with liabilities of $40,000.

The predistribution plan would follow these steps: first, set aside cash for the estimated liquidation expenses ($8,000), then distribute the remaining safe balance of cash to the partners according to their respective percentages. Since liabilities exceed the liquidation expenses, the full amount of liabilities must be settled before any distribution.

Part B: Final Statement of Liquidation

• 
  
• Distributed cash based on safe balances immediately to the partners.
• 
  
• Sold noncash assets worth $94,000 for $60,000, then distributed cash accordingly.
• 
  
• Paid all liabilities of $40,000.
• 
  
• Distributed cash based on safe capital balances again after assets were sold and liabilities paid.
• 
  
• Sold remaining noncash assets for $51,000 and distributed cash accordingly.
• 
  
• Paid actual liquidation expenses ($8,000).
• 
  
• Distributed remaining cash to partners.

Part C: Journal Entries

Journal entries would be made to record each step of the liquidation process, reflecting the sale of assets, payment of liabilities and expenses, and distribution of cash to partners. These would be standard accounting entries debiting and crediting the appropriate accounts.