Problem 22 - Accounting

Question

Bianca Houston, Jana Alsup, and KeKe Cross arranged to import and sell orchid corsages for a university dance. They agreed to share equally the net income or net loss of the venture. Houston and Alsup advanced \(\$ 250\) and \(\$ 380\) of their own respective funds to pay for advertising and other expenses. After collecting for all sales and paying creditors, the partnership has \(\$ 1,020\) in cash. a. How should the money be distributed? b. Assuming that the partnership has only \(\$ 540\) instead of \(\$ 1,020\), do any of the three partners have a capital deficiency? If so, how much?

Step-by-Step Solution

Answer

a. Each person gets $130 profit after reimbursement. b. Yes, there's a $90 deficiency split between Houston and Alsup.

Step 1: Calculate Total Investment and Net Income

Houston contributed \(\\( 250\), Alsup \(\\) 380\), making a total investment of \(\\( 630\) (\(250 + 380\)). With \(\\) 1,020\) on hand, calculate net income: \(\\( 1,020 - \\) 630 = \$ 390\).

Step 2: Distribute Net Income Equally

Since they agreed to share equally, divide the net income of \(\\( 390\) by 3. Each partner receives \(\frac{\\) 390}{3} = \$ 130\).

Step 3: Allocate Reimbursement and Profit

First reimburse the investments: Houston gets \(\\( 250\), Alsup \(\\) 380\). The remaining \(\\( 390\) from \(\\) 1,020\) (after reimbursement) is profit. Each partner then gets their share \(\$ 130\).

Step 4: Distribution with $540 Cash

With \(\\( 540\), first reimburse the investments totaling \(\\) 630\), meaning a deficiency exists. Distribute the \(\\( 540\) as: Houston gets \(\frac{250}{630}\times 540 \approx \\) 214.29\) and Alsup \(\frac{380}{630}\times 540 \approx \\( 325.71\). There is \(\\) 90\) shortfall (\(\\( 630 - \\) 540 = \$ 90\)).

Step 5: Identify Capital Deficiency

The partnership cannot cover full reimbursements, leading to a capital deficiency of \(\$ 90\). Jana and Houston take proportional losses based on their investments.

Key Concepts

Capital Deficiency

Capital deficiency occurs when there is not enough cash to reimburse partners' investments fully. In partnerships, after all expenses have been settled, if the remaining cash is less than the capital contributions made by the partners, a capital deficiency arises. This situation requires careful calculation to determine how much each partner can reclaim from the available cash. In the given exercise, Bianca, Jana, and KeKe faced a situation where they initially had $1,020 in cash but considered a scenario with only $540. Their total investment was $630 (Bianca $250 and Jana $380). The $540 available was not sufficient to cover this, resulting in a deficiency of $90 ($630 total investment minus $540 available cash).

Profit Distribution

Profit distribution in a partnership is a crucial process where each partner receives a share of the net income based on pre-agreed terms. Partnerships often have different methods of distributing profits, but in this case, the partners agreed to share the profits equally. From the exercise, after deducting the initial investments of $630 from the $1,020 on hand, a net income of $390 was identified. Since the partners agreed to an equal share, each partner received $130 ($390 divided by 3). This equal distribution respects their initial agreement and ensures fairness in profit sharing, a key goal in partnership accounting.

• Total Net Income: $390
• Each Partner’s Share: $130

Investment Reimbursement

Investment reimbursement involves returning the initial funds invested by each partner before distributing any profits. This ensures that each partner retrieves their contribution, protecting their initial investment. For Bianca and Jana's venture, with a total investment of $630, all funds above this amount would be profit. From $1,020, the $630 was reimbursed to Bianca ($250) and Jana ($380), leaving $390 for profit, which was distributed equally. When only $540 was available, complete reimbursement wasn't possible, leading to a deficiency. In partial reimbursement with $540, Bianca and Jana received proportional amounts based on their contributions, illustrating a fair attempt to cover each person's initial investment as much as possible. This ultimately led to a personal loss proportionate to what was left unreimbursed.