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.Assume instead that the remaining inventory was sold for $20,000 in the second month.What payments will be made to David and Goliath 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.Assume instead that the remaining inventory was sold for $20,000 in the second month.What payments will be made to David and Goliath at the end of the second month?

Quizplus · Accepted Answer

To determine the payments made to David and Goliath, we need to calculate the total cash inflows and outflows during liquidation.

In the first month:
Cash inflow from sale of inventory = $70,000
Cash outflow from payment of accounts payable = $50,000

Net cash inflow in the first month = $20,000 (70,000 - 50,000)

In the second month:
Cash inflow from sale of remaining inventory = $20,000
Cash outflow from payment of remaining accounts payable = $25,000 (75,000 - 50,000)

Net cash outflow in the second month = $5,000 (20,000 - 25,000)

Total net cash inflows from liquidation = $15,000 (20,000 - 5,000)

David and Goliath share profits and losses in a 3:1 ratio, respectively. Therefore, David will receive 75% (3/4) and Goliath will receive 25% (1/4) of the total net cash inflow.

David's payment = $11,250 (75% of 15,000)
Goliath's payment = $3,750 (25% of 15,000)

The correct option is C, which shows the payments made to David and Goliath at the end of the second month as $11,250 and $3,750, respectively.

Partners David and Goliath Have Decided to Liquidate Their Business