Question

David and Goliath share profits and losses in a 3:1 ratio, respectively. During the first month of liquidation, half the inventory is sold for $70,000, and $50,000 of the accounts payable are paid. During the second month, the rest of the inventory is sold for $55,000, and the month. Refer to the information provided above. Assume instead that the remaining inventory was sold for $20,000 in the second month. What payments will be made to David and Goliath at the end of the second month?

Answer 1

At the end of the second month, David will receive $71,250, and Goliath will receive $23,750.

How to determine what payments will be made to David and Goliath at the end of the second month

To calculate the payments to David and Goliath at the end of the second month, we need to determine the profits or losses for each month and distribute them according to the 3:1 ratio.

Let's calculate the profits or losses for each month:

First month:

Revenue from inventory sold: $70,000

Payment of accounts payable: $50,000

Profit/Loss = Revenue - Expenses

= $70,000 - $50,000

= $20,000 (profit)

Second month (with remaining inventory sold for $20,000):

Revenue from inventory sold: $55,000 + $20,000 = $75,000

No additional expenses mentioned, assuming no other costs in the second month.

Profit/Loss = Revenue - Expenses

= $75,000 - $0 (assuming no additional expenses)

= $75,000 (profit)

Now, let's distribute the profits or losses according to the 3:1 ratio:

Total profit = Profit from the first month + Profit from the second month

= $20,000 + $75,000

= $95,000

David's share = 3/4 of the total profit

= (3/4) * $95,000

= $71,250

Goliath's share = 1/4 of the total profit

= (1/4) * $95,000

= $23,750

Therefore, at the end of the second month, David will receive $71,250, and Goliath will receive $23,750.

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