Partners David and Goliath have decided to liquidate their business.The following information is available:
David and Goliath share profits and losses in a 3:1 ratio,respectively.During the first month of liquidation,half the inventory is sold for $70,000,and $50,000 of the accounts payable are paid.During the second month,the rest of the inventory is sold for $55,000,and the remaining accounts payable are paid.Cash is distributed at the end of each month,and the liquidation is completed at the end of the second month.
-Refer to the information provided above.How much cash will be distributed to David at the end of the second month?

Question

Partners David and Goliath have decided to liquidate their business.The following information is available:
  David and Goliath share profits and losses in a 3:1 ratio,respectively.During the first month of liquidation,half the inventory is sold for $70,000,and $50,000 of the accounts payable are paid.During the second month,the rest of the inventory is sold for $55,000,and the remaining accounts payable are paid.Cash is distributed at the end of each month,and the liquidation is completed at the end of the second month.
-Refer to the information provided above.How much cash will be distributed to David at the end of the second month?

Quizplus · Accepted Answer

To find the amount that each partner is entitled to, we need to first calculate the total amount of cash available for distribution.

In the first month, the cash inflows are:

- $70,000 from the sale of half of the inventory
- $50,000 from the payment of accounts payable

This gives a total cash inflow of $120,000.

In the second month, the cash inflows are:

- $55,000 from the sale of the remaining inventory
- The payment of the remaining accounts payable (no additional cash inflow)

This gives a total cash inflow of $55,000.

The total cash inflow for the liquidation is therefore $175,000.

We need to allocate this cash according to the profit-sharing ratio of 3:1 between David and Goliath.

David's share is 3/4 of the total, or:

(3/4) x $175,000 = $131,250

However, this is the total amount that David is entitled to for the entire liquidation period.

We need to deduct the amount of cash already distributed in the first month:

$131,250 - $60,000 = $71,250

This is the amount of cash that David is entitled to at the end of the second month.

Partners David and Goliath Have Decided to Liquidate Their Business