Asked by Martevus Blount on May 13, 2024
Verified
In liquidation balances prior to the distribution of cash to the partners are: Cash $204000; Paley Capital $112000; Stengel Capital $104000 and King Capital $12000 deficiency. The income ratio is 6:2:2 respectively. How much cash should be distributed to Stengel if King does not pay his deficiency?
A) $98000
B) $101000
C) $95000
D) $104000
Capital Deficiency
A financial state where a company's liabilities exceed its assets, indicating financial distress.
Distribution of Cash
The allocation or disbursement of cash funds by a business to its stakeholders or for operational purposes.
Income Ratio
A metric that compares various components of income, such as net income to revenue, to assess a company's financial health.
- Appreciate the mechanism and financial consequences of partnership elimination, including the liquidation of assets, discharging liabilities, and allocating cash amongst partners.
- Examine the repercussions of capital inadequacies on winding up partnerships and the subsequent liabilities of partners.
Verified Answer
HA
Hajjami AbderrahmaneMay 14, 2024
Final Answer :
B
Explanation :
King's deficiency means his capital account has a negative balance of $12,000, which he is unable to pay. This deficiency must be absorbed by Paley and Stengel according to their income ratio of 6:2:2. The total deficiency absorbed is $12,000. Paley absorbs 6/8 of the deficiency, and Stengel absorbs 2/8 of the deficiency. Stengel's share of the deficiency is $12,000 * (2/8) = $3,000. Stengel's initial capital is $104,000. After absorbing part of King's deficiency, Stengel's adjusted capital is $104,000 - $3,000 = $101,000, which is the amount of cash to be distributed to Stengel.
Learning Objectives
- Appreciate the mechanism and financial consequences of partnership elimination, including the liquidation of assets, discharging liabilities, and allocating cash amongst partners.
- Examine the repercussions of capital inadequacies on winding up partnerships and the subsequent liabilities of partners.