Question

The GAP Partnership has decided to liquidate at December 31, 2019. The capital and loan balances...

The GAP Partnership has decided to liquidate at December 31, 2019. The capital and loan balances of the partners at December 31, 2019 are provided below:
Partner
Capital Balances
Loan Balances
Profit/Loss
Sharing %
George
$210,000
$40,000 account payable
50%
Andrew
140,000
20,000 account receivable
20%
Peter
90,000
30,000 account payable
30%
· Outside liabilities are $50,000.
Liquidation expenses are estimated to be $12,000.
The Loss Absorption Potential (LAP) for the partners are as follows:

Select one:
a. George $340,000, Andrew $800,000, Peter $200,000
b. George $420,000, Andrew $700,000, Peter $300,000
c. George $400,000, Andrew $600,000, Peter $300,000
d. George $500,000, Andrew $600,000, Peter $400,000
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Answer #1

In calculating partner's loss absorption, a partner's loan from partnership is subtracted from partner's capital balance.

In calculating partner's loss abosrption, a partner's loan to partnership is added to partner's capital account.

The formula for Partner's Loss Absorption is

Partner's captial/Profit sharing ratio

So George's capital balance = $210000 - $40000 = $170000

Andrew's capital balance = $140000 + $20000 = $160000

Peter's capital balance = $90000 - $30000 = $60000

So LAP of George = $170000/50% = $340000

LAP of Andrew = $160000/20% =$800000

And LAP of Peter = $60000/30% = $200000

So the answer is option A i.e. George $340000, Andrew $800000, Peter $200000.

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