Peters, Chong, and Aaron are dissolving their partnership. Their partnership agreement allocates each partner an equal share of all income and losses. The current period's ending capital account balances are Peters, $54,000; Chong, $42,000; and Aaron, $(2,000). After all assets are sold and liabilities are paid, there is $94,000 in cash to be distributed. Aaron is unable to pay the deficiency. The journal entry to record the distribution should be:
A) Debit Peters, Capital $54,000; debit Chong, Capital $40,000; credit Cash $94,000.
B) Debit Peters, Capital $53,000; debit Chong, Capital $41,000; credit Cash $94,000.
C) Debit Cash $94,000; credit Peters, Capital $47,000; credit Chong, Capital $47,000.
D) Debit Cash $94,000, debit Aaron, Capital $2,000, credit Peters, Capital $54,000, credit Chong, Capital $42,000.
E) Debit Peters, Capital $54,000; debit Chong, Capital $42,000; credit Cash $96,000.

Question

Quizplus · Accepted Answer

The current period's ending capital account balances are Peters, $54,000; Chong, $42,000; and Aaron, $(2,000), which totals $94,000. Since Aaron is unable to pay the deficiency, the remaining balance of -$2,000 needs to be absorbed by Peters and Chong equally. Therefore, the journal entry should be a debit of $53,000 to Peters' Capital account, a debit of $41,000 to Chong's Capital account, and a credit of $94,000 to Cash. This would result in Peters and Chong each receiving $53,000 in cash, and their final capital account balances would be $54,000 and $42,000, respectively.

Peters, Chong, and Aaron Are Dissolving Their Partnership