McCartney, Harris and Hussin are dissolving their partnership. Their partnership agreement allocates each partner 1/3 of all income and losses. The current period's ending capital account balances are McCartney, $13,000; Harris, $13,000; and Hussin, $(2,000). After all assets are sold and liabilities are paid, there is $24,000 in cash to be distributed. Hussin is unable to pay the deficiency. The journal entry to record the distribution should be:

Question

Quizplus · Accepted Answer

The distribution of cash would require the partners to receive their capital account balances along with a share of the remaining cash based on their profit and loss allocation in the partnership agreement. Since Hussin has a negative capital balance, he would not receive any of the distribution and the deficiency would be recorded as a loss by the partnership.

The journal entry to record the distribution would be:

Cash 24,000
Harris, Capital 4,000 (1/3 of remaining balance)
McCartney, Capital 4,000 (1/3 of remaining balance)
Hussin, Capital (2,000) (negative balance)
Loss on Dissolution 10,000 [=($13,000 + $13,000 - $2,000 - $24,000)]

Option B correctly reflects the above entry.

McCartney, Harris and Hussin Are Dissolving Their Partnership