Asked by Thomas DeAngelis on Apr 26, 2024
Verified
Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of $100,000 and $140,000 at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on realization should be allocated to Winston?
A) $110,000
B) $97,500
C) $42,500
D) $82,500
Loss On Realization
The loss recognized when assets are sold for less than their carrying amount during the liquidation of a company.
Noncash Assets
Assets that cannot be easily converted into cash, such as machinery, buildings, and inventory.
Capital Balances
The amount of money contributed to a company by its owners or shareholders plus retained earnings.
- Understand the distribution of profits or losses among partners as per the partnership agreement.
- Examine the computation of losses upon realization and how they are allocated among partners.
Verified Answer
(H
(K12_HN) Hoang Hai LongApr 27, 2024
Final Answer :
D
Explanation :
First, we need to calculate the total amount of capital available for distribution:
Soledad's Capital Balance = $100,000
Winston's Capital Balance = $140,000
Total Capital = $240,000
Since they share income in the ratio of 1:3, we can find the total income:
Total Income = 1x + 3x = $240,000
4x = $240,000
x = $60,000
Soledad's income = $60,000
Winston's income = $180,000
Now, we need to calculate the total amount of cash available for distribution:
Cash Balance = $130,000
Total Loss on Realization = Soledad's Capital Balance + Winston's Capital Balance - Total Income + Cash Balance
Total Loss on Realization = $100,000 + $140,000 - ($60,000 + $180,000) + $130,000
Total Loss on Realization = $30,000
To allocate the loss on realization, we use the income-sharing ratio:
Soledad's Loss = $30,000 x (1/4) = $7,500
Winston's Loss = $30,000 x (3/4) = $22,500
Since Winston's loss exceeds his capital balance, he has a deficit of $117,500. This means he owes the partnership this amount.
Therefore, the amount of loss on realization allocated to Winston is $82,500 (total loss - Winston's deficit).
The answer is D.
Soledad's Capital Balance = $100,000
Winston's Capital Balance = $140,000
Total Capital = $240,000
Since they share income in the ratio of 1:3, we can find the total income:
Total Income = 1x + 3x = $240,000
4x = $240,000
x = $60,000
Soledad's income = $60,000
Winston's income = $180,000
Now, we need to calculate the total amount of cash available for distribution:
Cash Balance = $130,000
Total Loss on Realization = Soledad's Capital Balance + Winston's Capital Balance - Total Income + Cash Balance
Total Loss on Realization = $100,000 + $140,000 - ($60,000 + $180,000) + $130,000
Total Loss on Realization = $30,000
To allocate the loss on realization, we use the income-sharing ratio:
Soledad's Loss = $30,000 x (1/4) = $7,500
Winston's Loss = $30,000 x (3/4) = $22,500
Since Winston's loss exceeds his capital balance, he has a deficit of $117,500. This means he owes the partnership this amount.
Therefore, the amount of loss on realization allocated to Winston is $82,500 (total loss - Winston's deficit).
The answer is D.
Learning Objectives
- Understand the distribution of profits or losses among partners as per the partnership agreement.
- Examine the computation of losses upon realization and how they are allocated among partners.