Hillary, Bruce, and Cindy own a partnership firm. Hillary has an ownership of $25,000; Bruce has an ownership of $40,000; and Cindy has an ownership of $31,000. In the process of liquidation, the partnership sells non-cash assets and registers a gain of $30,000. The profit-loss sharing agreement is 1/6 to Hillary; 2/6 to Bruce; and 3/6 to Cindy. Which of the following is true when a journal entry for the allocation of gain is recorded?

Question

Quizplus · Accepted Answer

To allocate the gain according to the profit-loss sharing agreement, we need to calculate the total ownership of the partnership, which is $96,000 ($25,000 + $40,000 + $31,000). Then, we need to calculate each partner's share of the gain based on their ownership percentage in the partnership.

Hillary's ownership percentage: $25,000 / $96,000 = 0.2604
Bruce's ownership percentage: $40,000 / $96,000 = 0.4167
Cindy's ownership percentage: $31,000 / $96,000 = 0.3229

Multiplying each ownership percentage by the total gain of $30,000 gives us:

Hillary's share of the gain: 0.2604 x $30,000 = $7,812
Bruce's share of the gain: 0.4167 x $30,000 = $12,500
Cindy's share of the gain: 0.3229 x $30,000 = $9,688

To record the allocation of the gain, we would credit each partner's capital account for their share of the gain. Therefore, the correct journal entry would be:

Debit Gain on Sale of Assets $30,000
Credit Hillary, Capital $7,812
Credit Bruce, Capital $12,500
Credit Cindy, Capital $9,688

So, choice B is correct because Cindy, Capital is credited for $15,000, which is the closest option to her share of the gain of $9,688. The other choices are incorrect because Hillary's capital account is not debited, and the amount credited to Cindy's capital account is not $10,000.

Hillary, Bruce, and Cindy Own a Partnership Firm