Jane, Castle, and Sean 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 Jane, $54,000; Castle, $42,000; and Sean, $(6,000). After all assets are sold and liabilities are paid, there is $90,000 in cash to be distributed. Sean is unable to pay the deficiency. The journal entry to record the distribution should be:
A) Debit Jane, Capital $54,000; debit Castle, Capital $36,000; credit Cash $90,000.
B) Debit Jane, Capital $54,000; debit Castle, Capital $42,000; credit Cash $96,000.
C) Debit Jane, Capital $51,000; debit Castle, Capital $39,000; credit Cash $90,000.
D) Debit Cash $90,000, debit Sean, Capital $6,000, credit Jane, Capital $54,000, credit Castle, Capital $42,000.
E) Debit Cash $90,000; credit Jane, Capital $30,000; credit Castle, Capital $30,000; credit Sean, Capital $30,000.

Question

Quizplus · Accepted Answer

Since the partnership agreement allocates each partner an equal share of all income and losses, the total capital to be distributed is $90,000 / 3 = $30,000 per partner. Jane has a capital account balance of $54,000, so she will be credited with only $30,000 - ($54,000 - $30,000) = $6,000. Castle has a capital account balance of $42,000, so he will be credited with $30,000 - ($42,000 - $30,000) = $18,000. Sean has a negative capital account balance of $6,000, so he will not receive any of the distribution and will instead owe the partnership $6,000. Therefore, the journal entry should be: Debit Jane, Capital $51,000; debit Castle, Capital $39,000; credit Cash $90,000.

Jane, Castle, and Sean Are Dissolving Their Partnership