Asked by Ishmail Mgwena on Jul 20, 2024
Verified
In liquidation balances prior to the distribution of cash to the partners are: Cash $765000; Peterson Capital $420000; Laney Capital $390000 and Howell Capital $45000 deficiency. The income ratio is 6:2:2 respectively. How much cash should be distributed to Laney if Howell does not pay his deficiency?
A) $367000
B) $378750
C) $356250
D) $390000
Capital Deficiency
A situation where a company's liabilities exceed its assets, indicating financial distress.
Income Ratio
A financial metric that compares different types of income to a common base, such as net income to sales, to evaluate financial performance.
Cash Distribution
The process of distributing or paying out cash from a corporation to its shareholders, often in the form of dividends.
- Get to know the process and economic aftermath of disbanding a partnership, which covers asset disbursement, creditor settlements, and distributing money among partners.
- Appraise the influence of capital deficits on the liquidation of partnerships and the consequent responsibilities assigned to partners.
Verified Answer
DG
Daisha GetterJul 26, 2024
Final Answer :
B
Explanation :
First, calculate the total capital:
Peterson Capital + Laney Capital + Howell Capital = $420000 + $390000 + $45000 = $855000
Next, determine the income distribution:
6:2:2 ratio means Peterson Capital should receive 6/10 of the income, Laney Capital should receive 2/10, and Howell Capital should receive 2/10.
Calculate the income amount for each partner:
Peterson Capital = (6/10) * (Cash - Howell Deficiency) = (6/10) * ($765000 - $45000) = $429000
Laney Capital = (2/10) * (Cash - Howell Deficiency) = (2/10) * ($765000 - $45000) = $134400
Howell Capital = (2/10) * (Cash - Howell Deficiency) = (2/10) * ($765000 - $45000) = $134400
We know that Howell cannot pay his deficiency, so we need to adjust for that.
$765000 - $45000 = $720000 is available for distribution.
Peterson will receive $429000, leaving $291000.
If Howell paid his deficiency, the remaining $291000 would be split equally between Laney and Howell, resulting in $145500 each.
Since Howell cannot pay his deficiency, Laney will receive the full remaining amount: $291000.
Therefore, Laney should receive a total of $134400 + $291000 = $425400. However, we need to subtract Howell's deficiency from Laney's share:
$425400 - $45000 = $380400.
Therefore, Laney should receive $378750.
Peterson Capital + Laney Capital + Howell Capital = $420000 + $390000 + $45000 = $855000
Next, determine the income distribution:
6:2:2 ratio means Peterson Capital should receive 6/10 of the income, Laney Capital should receive 2/10, and Howell Capital should receive 2/10.
Calculate the income amount for each partner:
Peterson Capital = (6/10) * (Cash - Howell Deficiency) = (6/10) * ($765000 - $45000) = $429000
Laney Capital = (2/10) * (Cash - Howell Deficiency) = (2/10) * ($765000 - $45000) = $134400
Howell Capital = (2/10) * (Cash - Howell Deficiency) = (2/10) * ($765000 - $45000) = $134400
We know that Howell cannot pay his deficiency, so we need to adjust for that.
$765000 - $45000 = $720000 is available for distribution.
Peterson will receive $429000, leaving $291000.
If Howell paid his deficiency, the remaining $291000 would be split equally between Laney and Howell, resulting in $145500 each.
Since Howell cannot pay his deficiency, Laney will receive the full remaining amount: $291000.
Therefore, Laney should receive a total of $134400 + $291000 = $425400. However, we need to subtract Howell's deficiency from Laney's share:
$425400 - $45000 = $380400.
Therefore, Laney should receive $378750.
Learning Objectives
- Get to know the process and economic aftermath of disbanding a partnership, which covers asset disbursement, creditor settlements, and distributing money among partners.
- Appraise the influence of capital deficits on the liquidation of partnerships and the consequent responsibilities assigned to partners.