The partners in Cottage Country Company decided to liquidate the company on April 30, 2014, when balances in the company's accounts were as follows:

Cash..................................$11,700..............Accumulated depreciation............$16,800

Accounts receivable..................23,500........................Accounts payable.............30,200

Allowance for doubtful accounts...1,700.........................A. Hoffer, capital.............42,100

Inventory..............................47,100.......................K. Lonseth, capital.............18,800

Equipment............................28,600..........................D. Posca, capital...............1,300

The partners share profit and loss 5:3:2 for Hoffer, Lonseth, and Posca, respectively. During the process of liquidation, the transactions below were completed in the sequence shown:

1. A total of $18,000 was collected from the accounts receivable on May 4.

2. The inventory and equipment were sold for $50,000 cash on May 6.

3. Liabilities were paid in full on May 7.

4. Posca paid his capital deficiency on May 9.

5. Cash was paid to the partners with credit balances on May 12.

Instructions

(a) Prepare the entries to record the transactions.

(b) Post the transactions to the cash and capital accounts.

(c) Assume instead that Posca is unable to repay his capital deficiency. Prepare the entry to record (1) the reallocation of his deficiency, and (2) the final distribution of cash.

Taking It Further

When determining how the cash is distributed to partners in a liquidation, the profit and loss ratio should be used. Is this correct or incorrect? Why?