Chapter 5
Problem I 1.
A, B, C and D Partnership Statement of Liquidation January 1, 20x4 to May 31, 20x4 Cash
Balances before Liquidation January - Realization - Payment of expenses - Payment of liabilities Balances after Jan February - Realization - Payment of expenses - Payment of liabilities Balances before payment to partners Payment to Partners (Sch. 1) Balances after February March - Realization - Payment of expenses Balances before payment to partners Payment to Partners (Sch. 2) Balances after March April
- Realization - Payment of expenses Balances before payment to partners Payment to Partners (Note 1) Balances after April May - Realization - Payment of expenses
72,000 (1,200) (66,00 0) 4,800 21,600 (1,320)
NonCash Assets 181,80 0
Liabilitie s 84,000
A, loan 6,000
D, loan
A, capital (40%)
B, capital (20%)
C, capital (20%)
D, capital (20%)
3,000
26,400
25,800
20,400
16,200
(3,600 )
(3,600 )
(90,00 0)
______ 91,800
(66,000 ) 18,000
_____ 6,000
_____ 3,000
(30,00 0)
(7,200)
(3,600)
( 480)
( 240)
( 240 )
( 240 )
______ 18,720
______ 21,960
______ 16,560
______ 12,360
(1,680 )
(1,680 ) ( 264 ) ______
(3,360)
(1,680)
( 528)
( 264)
______
______
______
_______
( 264 ) ______
61,800
6,000
3,000
14,832
20,016
14,616
10,416
( 5,280 )
______
______
_____
______
(5,280)
______
_____
1,800
61,800
6,000
3,000
14,832
14,736
14,616
10,416
19,200
(24,00 0)
(1,920)
( 960)
( 960)
( 960)
(18,00 0)
_______
7,080
( 1,440 )
(18,00 0)
______
______
_____
( 576)
( 288)
( 288 )
( 288 )
19,560
31,500
6,000
3,000
12,336
13,488
13,368
9,168
(18,36 0)
______
(2,73 6)
(3,000)
(5,688)
(5,568 )
(1,368 )
1,200
37,800
3,264
12,336
7,800
7,800
7,800
6,000
(19,80 0)
(5,520)
(2, 760)
(2,760 )
(2,760 )
(4,800)
______
(1,920)
( 960)
( 960)
( 960)
2,000
15,000
3,264
4,896
4,080
4,080
4,080
(1,500)
______
( 720)
( 360)
( 360)
500
18,000
2,400
(18,00 0)
2,554 _____
( 960)
( 360) 4,896
3,720
3,720
3,720
(6,240)
(3,120)
( 384)
( 192)
(3,120 )
(3,120 )
Balances before Offsetting Offset deficit vs. Loan Balances before payment Payment to Partners (Note 2)
1,440
( 192 )
( 1,728 )
408
408
408
1,728
_____
______
_____
408
408
(408)
(408)
______
2,554 (1,72 8)
2,040
816
408
(2,040)
(816)
(408)
2.
( 192 )
A, B, C and D Partnership Schedule of Safe Payments
Schedule 1 – February 28, 20x4 Computation of Distribution of Cash on February 28, 20x4
Balances before payment to partners: Loans Capital Total Interest Restricted interest for possible losses: Unrealized non-cash assets 61,800 Cash withheld 1,800
A, capital (40%)
B, capital (20%)
C, capital (20%)
D, capital (20%)
6,000 14,832 20,832
20,016 20,016
14,616 14,616
3,000 10,416 13,416
(12,72 0)
(12,72 0) 1,896
(12,72 0) 696
(1,536) 360 ( 420) ( 60) 60
(1,536) ( 840) 840
P
P 63,600 Restricted for possible insolvency of A (2:2:2)
(25,44 0) ( 4,60 8) 4,608
Restricted for possible insolvency of D (2:2) Restricted for possible insolvency of C Payment to partner (s) Applied to: Loans Capital
7,296 (1,536) 5,760 ( 420) 5,340 ( 60) 5,280
-05,280 5,280
Schedule 2 – March 31, 20x4 Computation of Distribution of Cash on March 31, 20x4
Balances before payment to partners: Loans Capital Total Interest Restricted interest for possible losses: Unrealized non-cash assets 37,800 Cash withheld 1,200
B, capital (20%)
C, capital (20%)
D, capital (20%)
6,000 12,336 18,336
13,488 13,488
13,488 13,488
3,000 9,168 12,168
(15,60 0) 2,736
( 7,800 ) 5,688
( 7,800 ) 5,568
( 7,800 ) 4,368
2,736
-0-
-0-
3,000
P
P 39,000
Applied to: Loans
A, capital (40%)
Capital
___-02,736
3.
T, U, V and W Partnership Cash Payment Priority Program* January 31, 20x4 Interests
Balances before liquidation: Loans Capital Total Interests Divided by: P & L % Loss Absorption Abilities
T, capital (40%)
U, capital (20%)
6,000 26,400 32,400
25,800 25,800
V, capital (20%)
W, capital (20%)
20,400 20,400
3,000 16,200 19,200
T, capital (40%)
5,688 5,688
1,368 4,368
Payments
U, capital (20%)
___20% __20% __20% 129,00 81,000 0 102,000 96,000 (27,00 Priority I ______ 0) _______ _______ 102,00 81,000 0 102,000 96,000 ( 6,000 Priority II ______ ) ( 6,000) _______ 81,000 96,000 96,000 96,000 (15,00 (15,000 (15,000 Priority III ______ 0) ) ) _______ 81,000 81,000 81,000 81,000 ____-0*also known as Schedule of Cash Distribution Plan / Pre-distribution Plan.
5,568 5,568
V, capital (20%)
W, capital (20%)
Total
__40%
5,400
5,400
1,200
1,200
3,000 9,600
3,000 4,200
2,400 3,000
9,000
3,000
16,800
4. Total Interests Divided by: P & L % Loss Absorption Abilities Order of Cash Distribution Vulnerability Rankings (1 Is most vulnerable)
T, capital (40%) P 32,400 ____40%
U, capital (20%) P 25,800 ____20%
W, capital (20%) P 19,200 ____20%
P129,000
V, capital (20%) P 20,400 ____20% P 102,000
P 81,000 (4)
(1)
(2)
(3)
(1)
(4)
(3)
(2)
P 96,000
The vulnerability ranks indicate that partner T is most vulnerable to losses because his equity were reduced to zero with a partnership liquidation loss of P81,000. Partner U is least vulnerable because his equity is sufficient to absorb his share of liquidation losses up to P129,000. This interpretation helps explain why partner U received all the cash distributed to partner on the first installment distribution (August 20x4). Incidentally, the cash priority program developed will yield the same cash payment as the process of computing safe payments each time cash is available. The cash distribution under the cash priority program is as follows: Order of Cash Distribution 1. First P70,000 2. Next P 4,500 3. Next P2,000
Creditor s 100%
T
U 100% 50%
V 50%
W
4. Next P7,500 5. Remainder
40%
33 1/3% 20%
33 1/3% 20%
33 1/3% 20%
The first P84,000 available is, of course paid to the creditors. Cash may be held back from distribution if it is anticipated that additional expenses will be incurred and unrecorded liabilities will be discovered. The distribution of cash in excess of the reserve amount proceeds as determined. Partner U will receive all of an additional ash up to P5,400. Additional cash in excess of P5,400 and up to P7,800 is distributed 50:50 to partners U and V. Any amount in excess of P7,800up to P16,800 is distributed 1: 1: 1 to partners U, V, and W, respectively. After P16,800 (P5,400 + P2,400 + P9,000) has been distributed to the partners, the capital accounts are in the desired profit and loss ratio of 4:2:2:2. Any further distributions to the partners are made in accordance with the profit and loss ratio. Even though both methods produce the same results, the cash payment priority program is more informative to both personal and partnership creditors, and to the partners. Interested parties now know the order in which the individual partners will receive cash and the amounts that each may receive at each period of the distribution process. One requirement that must be satisfied in the development of the advance plan is that the partners must share income in the same ratio that they share losses. If this were not the case the potential amount of a new loss would need to be computed after every allocation to the partners’ capital accounts. This occurs because the allocation of liquidation gain alters the order of cash distribution computed in the priority program. Problem II
ABC Partnership Statement of Partnership Realization and Liquidation For the period from January 1, 20x4, through March 31, 20x4
Cash Balances before Liquidation, 18,000 January 1,20x4 January transactions: 1. Collection of accounts receivable at a loss of P15,000 51,000 2. Sale of inventory at a 38,000 loss of P14,000 3. Liquidation expenses (2,000) paid 4. Share of credit memorandum 5. Payments to creditors (50,000 ) 55,000 Safe payments to partners (Schedule 1) February transactions: 6. Liquidation expenses paid
Other Assets
Accounts Payable
307,000
(53,000)
(66,000) (52,000)
Capital Balances AA BB 30% 50% (88,000) (110,000 )
CC 20% (74,000)
7,500 7,000
4,500 4,200
3,000 2,800
1,000
600
400
3,000 50,000
(1,500)
(900)
(600)
189,000
-0-
(74,000)
(101,600 )
(68,400)
(45,000) 10,000
189,000
__ -0-
(74,000)
26,600 (75,000)
18,400 (50,000)
(4,000) 6,000
__ 189,000
-0-
2,000 (72,000)
1,200 (73,800)
800 (49,200)
Safe payments to partners (Schedule 2) March transactions: 8. Sale of M&Eq. at a loss of P43,000 9. Liquidation expenses paid 10. Payments to partners
Balances at end of liquidation, March 31, 20x4
-06,000 146,000 (5,000 ) 147,000 (147,000 )
__ 189,000
-0-
(189,000 )
-0-
-0-
___ -0(72,000)
-0(73,800)
-0(49,200)
21,500
12,900
8,600
2,500 (48,000)
-0-
1,500
1,000
(59,400) 59,400
(39,600) 39,600
48,000 -0-
-0-
-
-0-
-0-
0-
ABC Partnership Schedules of Safe Payments to Partners
Schedule 1: January 31, 20x4 Capital balances Possible loss: Other assets (P189,000) and possible liquidation costs (P10,000) Absorption of AA’s potential deficit balance BB: (P25,500 x 3/5 = P15,300) CC: (P25,500 x 2/5 = P10,200) Safe payment, January 31, 20x4 Schedule 2: February 27, 20x4 Capital balances Possible loss: Other assets (P189,000) and possible liquidation costs (P6,000) Absorption of AA’s potential deficit balance: BB: (P25,500 x 3/5 = P15,300) CC: (P25,500 x 2/5 = P10,200) Safe payment, February 27, 20x4
AA 50% (74,000)
BB 30% (101,600)
CC 20% (68,400)
99,500 25,500 (25,500)
59,700 (41,900)
39,800 (28,600)
15,300 -0-
(26,600)
10,200 (18,400)
(72,000)
(73,800)
(49,200)
97,500 25,500 (25,500)
58,500 (15,300)
39,000 (10,200)
15,300 -0-
-0-
10,200 -0-
Note that the computation of safe payments on February 27, 20x4, resulted in no payments to partners. This is due to the large book value of Other Assets still unrealized and the reservation of the $6,000 cash on hand for possible future liquidation expenses.
Problem III: Cash Distribution Plan PET Partnership Cash Distribution Plan June 30, 20x4
Loss Absorption Power PP
EE
Capital Accounts TT
PP
EE
TT
Profit and loss percentages
50%
30%
20%
Preliquidation capital balances
(55,000)
(45,000)
(24,000)
(55,000)
9,000 (36,000)
(24,000)
Loss absorption Power (Capital balances / Loss percent)
(110,000)
(150,000)
(120,000)
(110,000)
30,000 (120,000)
(120,000)
Decrease highest LAP to next highest: EE (P30,000 x .30)
Decrease LAPs to next highest: EE (P10,000 x .30) TT (P10,000 x .20)
10,000
(110,000)
3,000
(110,000)
10,000 (110,000)
(55,000)
2,000 (22,000)
(33,000)
Summary of Cash Distribution (If Offer of P100,000 is Accepted) Accounts Payable Cash available First Next Next Additional paid in P&L ratio
P106,000 (17,000) (9,000) (5,000)
PP 50%
EE 30%
TT 20%
P 9,000 3,000
P 2,000
22,500 P34,500
15,000 P17,000
P17,000
(75,000) P -0-
______ P17,000
P37,500 P37,500
Problem IV PET Partnership Statement of Partnership Liquidation and Realization From July 1, 20x4, through September 30, 20x4 Capital
Cash
Noncash Assets
Accounts Payable
Preliquidation balances
6,000
135,000
(17,000)
July: Assets Realized
26,500
(36,000)
PP
EE
TT 20%
50% (55,00 0)
30% (45,000)
(24,000)
4,750
2,850
1,900
Paid liquidation costs Paid creditors
(1,000) (17,000 ) 14,500
500
300
200
17,000 99,000
-0-
(49,75 0)
(41,850)
Safe Payments (Sch. 1)
(21,900)
6,500 (6,500) 8,000
August: Equipment withdrawn (allocate P6,000 gain) Paid liquidation costs
99,000
-0-
(49,75 0)
(35,350)
(21,900)
(4,000)
(3,000)
(1,800)
8,800
95,000
750 (52,00 0)
450 (1,500) 6,500
-0-
(36,700)
Safe Payments (Sch. 2)
September: Assets Realized Paid liquidation costs
Payments to partners Postliquidation balances
300 (12,800)
4,000 (4,000) 2,500
95,000
75,000
(95.000)
(1,000) 76,500
-0-
(76,500 ) -0-
-0-
(32,700)
(12,800)
10,000
6,000 300
4,000 200
(26,400)
(8.600)
26,400
8,600
-0-
-0-
500 (41,50 0) 41,500
-0-
-0-
(52,00 0)
-0-
0-
PET Partnership Schedules of Safe Payments to Partners Schedule 1: July 31, 20x4 Capital balances Possible loss on noncash assets (P99,000) Cash retained (P8,000) Absorption of Pen's potential deficit EE: P3,750 x .30/.50 TT: P3,750 x .20/.50
PP 50% (49,750) 49,500 4,000 3,750 (3,750)
Schedule 2: August 31, 20x4 Capital balances Possible loss on noncash assets (P95,000) Cash retained (P2,500)
TT 20% (21,900) 19,800 1,600 (500)
2,250 -0-
Absorption of TT’s potential deficit EE P1,000 x .30/.30 Safe payment
EE 30% (41,850) 29,700 2,400 (9,750)
(7,500)
-0-
(52,000) 47,500 1,250 (3,250)
1,000 (6,500)
(36,700) 28,500 750 (7,450)
1,500 1,000 (1,000) -0-
(12,800) 19,000 500 6,700
Absorption of TTs’ potential deficit PP: P6,700 x .50/.80 EE: P6,700 x .30/.80
(6,700) 4,188 938 (938)
Absorption of PPs potential deficit EE: P938 x .30/.30 Safe payment
-0-
2,512 (4,938)
-0-
938 (4,000)
-0-
Problem V DSV Partnership Statement of Partnership Realization and Liquidation — Installment Liquidation From July 1, 20x4, through September 30, 20x4 Capital
Preliquidation balances, 6/30 July, 20x4: Sale of assets and distribution of P120,000 loss
Cash
Noncash Assets
50,000
670,000
390,000 440,000
(510,000 ) 160,000
Liabilitie s (405,000 )
(405,000 )
Balances D 50%
S 30%
20%
(100,00 0)
(140,00 0)
(75,000)
36,000
24,000
(104,00 0) 750
(51,000)
(103,25 0)
(50,500)
60,000 (40,000)
Liquidation expenses
Payment to creditors
Payments to partners (Sch. 1)
160,000
(405,00 0) 32,500
(405,000 ) 405,000
160,000
-0-
(38,750)
(103,25 0) 22,500
(50,500)
(22,500) 10,000
160,000
-0-
(38,750)
(80,750)
(50,500)
(35,000 ) 125,000
3,900
2,600
22,000 32,000
-0-
6,500 (32,250)
(76,850) 750
(47,900) 500
125,000
-0-
1,250 (31,000)
(76,100) 13,700
(47,400) 5,800
125,000
-0-
(31,000)
(62,400)
(41,600)
21,000
14,000
(41,400) 2,400
(27,600) 1,600
(39,000)
(26,000) 1,000
Liquidation expenses Payments to partners (Sch. 2)
500
(2,500) 437,500
August, 20x4: Sale of assets & distribution of P13,000 loss
1,250 (38,750)
V
(2,500) 29,500 (19,500 ) 10,000
September, 20x4: Sale of assets distribution of P70,000 loss 55,000 65,000
(125,000 ) -0-
-0-
35,000 4,000
65,000
-0-
-0-
(4,000) -0-
Allocate D's deficit to S and V Liquidation expenses (2,500)
1,500
62,500
-0-
-0-
-0-
Payments to partners
(37,500) 37,500
(62,500)
(25,000) 25,000
0-
Postliquidation balances
-0-
-0-
-0-
-
-0-
-0-
0-
DSV Partnership Schedule of Safe Payments to Partners Schedule 1, July 31, 20x4: Capital balances, July 31, Before cash distribution Assume full loss of P160,000 on remaining noncash assets and P10,000 in possible future liquidation expenses Assume D's potential deficit must be absorbed by S and V: 30/50 x P46,250 20/50 x P46,250
D 50%
S 30%
V 20%
(38,750)
(103,250)
(50,500)
85,000 46,250
51,000 (52,250)
34,000 (16,500)
(46,250) 27,750 -0-
Assume V's potential deficit must be absorbed by S completely Safe payments to partners on July 31, 20x4
-0-
Schedule 2, August 31, 20x4: Capital balances, August 31, before cash distribution Assume full loss of P125,000 on remaining noncash assets and P10,000 in possible liquidation Expenses Assume D's potential deficit must be absorbed by S and V: 30/50 x P36,500 20/50 x P36,500 Safe payments to partners
(24,500)
18,500 2,000
2,000
(2,000)
(22,500)
-0-
(31,000)
(76,100)
(47,400)
67,500 36,500
40,500 (35,600)
27,000 (20,400)
(36,500) 21,900 -0-
14,600 (5,800)
(13,700)
Problem VI: Cash Distribution Plan (or better use the format presented in the discussion)
DSV Partnership Cash Distribution Plan June 30, 20x4
Loss Absorption Power D
S
Capital Accounts V
Profit and loss sharing ratio Preliquidation capital balances Loss absorption power (LAP) capital accounts / loss sharing percentage
D 50% (100,000)
(200,00
(466,66
(375,00
S
V
30% (140,000)
20% (75,000 )
0) Decrease highest LAP to next highest LAP: Decrease S by P91,667 (Cash distribution: P91,667 x . 30)
0)
91,667 27,500 (200,00 0)
Decrease LAP to next highest level: Decrease S by P175,000 Cash distribution: P175,000 x . 30) Decrease V by P175,000 Cash distribution: P175,000 x . 20)
Decrease LAPs by distributing cash in the P/L sharing ratio
7)
(375,00 0)
(375,00 0)
(100,000)
(112,500)
175,000 52,500 175,000 35,000
(200,00 0)
(200,00 0)
(200,00 0)
50%
30%
20%
(100,000)
(60,000)
Summary of Cash Distribution Plan (Estimated on June 30, 20x4) Liquidatio n Creditors
D
S
V
100% 60%
40%
30%
20%
Expenses 1. 2. 3. 4. 5.
(75,000 )
First P405,000 100% Next P10,000 Next P27,500 Next P87,500 Any additional distributions in the partners' profit and loss ratio
100%
50%
b. Confirmation of cash distribution plan DSV Partnership Capital Account Balances June 30, 20x4, through September 30, 20x4 Profit and loss ratio Preliquidation balances, June 30 July loss of P120,000 on disposal of assets and P2,500 paid in liquidation costs
D
S
V
50% (100,000)
30% (140,000)
20% (75,000)
61,250 (38,750)
36,750 (103,250)
24,500 (50,500)
(38,750)
22,500 (80,750)
(50,500)
7,750
4,650
July 31 distribution of P22,500 of available cash to partners (Sch. 1) First P22,500 of P27,500 layer: 100% to S August loss of P13,000 on disposal of assets and P2,500 paid in liquidation costs
3,100
(40,000 )
(31,000) August 31 distribution of P19,500 of available cash to partners (Sch. 2) Remaining P5,000 of P27,500 layer of which P22,500 paid on July 31: 100% to S Next $14,500 of P87,500 layer: 60% to S 40% to V
(76,100)
(47,400)
5,000 8,700
September loss of P70,000 on disposal of assets and P2,500 paid in liquidation Costs Distribution of D's deficit
(31,000)
(62,400)
5,800 (41,600)
36,250 5,250 (5,250) -0-
21,750 (40,650) 3,150 (37,500)
14,500 (27,100) 2,100 (25,000)
September 30 distribution of P62,500 of available cash to partners (Sch. 3) Next P62,500 of P87,500 layer of which P14,500 paid on August 31: 60% to S 40% to V Postliquidation balances
37,500 -0-
-0-
25,000 -0-
Schedule 1, July 31, 20x4: Computation of P22,500 of cash available to be distributed to partners on July 31, 20x4: Cash balance, July 1, 20x4 P 50,000 Cash from sale of noncash assets 390,000 Less: Payment of actual liquidation expenses (2,500) Less: Payments to creditors (405,000) Less: Amount held for possible future liquidation expenses (10,000) Cash available to partners, July 31, 20x4 P 22,500 Schedule 2, August 31, 20x4: Computation of P19,500 of cash available to be distributed to partners on August 31, 20x4: Cash balance, August 1, 20x4 Cash from sale of noncash assets Less: Payment of actual liquidation expenses Less: Amount held for possible future liquidation expenses Cash available to partners, August 31, 20x4
P10,000 22,000 (2,500) (10,000) P 19,500
Schedule 3, September 30, 20x4: Computation of P62,500 of cash available to be distributed to partners on September 30, 20x4: Cash balance, September 1, 20x4 Cash received from sale of noncash assets Less: Payment of actual liquidation expenses Cash available to partners, September 30, 20x4
P10,000 55,000 (2,500) P62,500
Problem VII
Cash distribution program: First
P 50,000
Creditors 100%
Ames
Beard
Craig
Next Next All over
34,000 48,000 P132,000
40%
100% 33 1/3% 20%
66 2/3% 40%
Working paper for cash distributions to partners during liquidation (not required): Ames Beard Craig Capital balances before liquidation P60,000 P80,000 P92,000 Income-sharing ratio 4 4 2 Capital per unit of income sharing P15,000 P23,000 Reduce Beard's capital to next highest capital for Craig ______ Capital per unit of income sharing P15,000 P23,000 Reduce Beard's and Craig's capital to Ames's capital ______ (8,000) Capital per unit of income sharing P15,000 P15,000
P40,000 (17,000)______ P23,000 (8,000) P15,000
Problem VIII Cash 60,000 Quanto, Capital 5,000 Rollo, Capital 3,000 Simms, Capital 2,000 Assets To record realization of assets at a loss of $10,000, divided amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively. Liabilities Cash To record payment to creditors.
30,000
Loan Payable to Quanto Rollo, Capital Simms, Capital Cash To record payment to partners, computed as follows:
9,500 10,500 5,000
30,000
Quanto Capital (including Quanto's loan of P10,000) before liquidation Loss on realization of assets Balances Maximum potential additional loss (P5,000 + P50,000 = P55,000) divided in 5:3:2 ratio Cash payments Multiple Choice Problems
70,000
Rollo
25,000
Simms
P42,000 (5,000) P37,000
P30,000 (3,000) P27,000
P18,000 (2,000) P16,000
(27,500) P 9,500
(16,500) P10,500
(11,000) P 5,000
1. c JJ
CC
TT
Total
Profit ratio
40%
50%
10%
100%
Prior capital Loss on sale of inventory
(160,000)
(45,000)
(55,000)
(260,000)
24,000 (136,000)
30,000 (15,000)
6,000 (49,000)
60,000 (200,000)
2. a Capital balances Loss on sale of assets (475,000 – 600,000) – 4:4:2
Possible loss for unrealized assets P1,000,000 – P600,000 = 400,000
Peter 300,000
4.
Mary 400,000
Total 1,050,000
(50,000)
(25,000)
(125,000)
( 50,000 ) 250,000
300,000
375,000
160,000
160,000
80,000
400,000
140,000
295,000
525,000
(90,000 3.
Paul 350,000
925,000
d d Capital balances
AA 37,000
BB
CC 65,000 48,000
Divided by: Profit and loss ratio
40%
40% 20%
Loss absorption power
92,500
162,500 240,000
Loss to reduce CC to BB: (77,500 x .20 = 15,500) Balances
77,500 92,500
162,500 162,500
Loss to reduce BB & CC to AA: (B:70,000 x .40 = 28,000) (C:70,000 x .20 = 14,000) Balances
70,000 70,000 92,500
92,500 92,500
Cash of P20,000 after settlement of liabilities: CC receives first P15,500; remaining P4,500 split 2/3 to BB and 1/3 to CC 5.
d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB and 1/3 to CC.
6.
a If all partners received cash after the second sale, then the remaining 12,000 is distributed in the loss ratio.
7.
b A
B
C
Total Capital before realization
65,000 37,000
Loss on sale (2:2:1); [90 – 50] Possible loss P90,000, unrealized NCA
0
20,000 Possible insolvency loss (2:1)
(16,000) 21,000
( 16,000) 49,000
(36,000) (15,000)
(36,000) 13,000
15,000
48,000 ( 8,000)
150,000 (40,000)
40,000 (18,000)
110,000 90,000
22,000
(10,000) 3,000
8.
b
( 5,000)
17,000
A
B
Total Capital before realization
C
65,000 37,000
Loss on sale (2:2:1); [90 – 50] (16,000) 21,000 Possible loss P90,000, unrealized NCA plus P3,000 = P93,000
( 16,000) 49,000
(37,200) (16,200)
17,000 Possible insolvency loss (2:1)
48,000 ( 8,000)
150,000 (40,000)
40,000
110,000
(18,600) (37,200) 11,800
16,200
0
93,000
21,400
(10,800)
( 5,400)
1,000
16,000
BT 30% (180,000) 30,000 (150,000)
KT 30% (30,000) 30,000 -0-
17,000 9.
a Profit and loss ratio Capital balances Loss of P100,000 Remaining equities
AE 40% (40,000) 40,000 -0-
AE will receive nothing; the entire P150,000 will be paid to BT. 10. 11. 12. 13.
c d d c
14. a Profit and loss ratio Beginning capital
CC 5/10 80,000
DD 3/10 90,000
Actual loss on assets (5:3:2)
(15,000)
(9,000)
Possible loss – unrealized NCA
65,000 ( 50,000
81,000 (30,000)
EE 2/10 70,000 (6,000) 64,000 (20,000)
Total 10/10 240,000 ( 30,000 ) 210,000 ( 20,000
Safe payments
) 15,000
51,000
) 190,000
44,000
15. c
X Capital before realization Divided by: Loss absorption abilities
130,000
Y 100,000 20%
50% 260,000
Z
130,000 30% 260,000
500,000
16. a The loan payable to AA has the same legal status as the partnership’s other liabilities. After payment of the loan, then any available cash can be distributed to the partners using the safe payments computations. 17. a D
R
N
J
32,000 20%
52,000
24,000
20%
20%
260,000
120,000
Capital balances 72,000 Divided by: Profit and loss ratio Loss absorption power
40% 180,000
160,000
Loss to reduce N to D: (80,000 x .20 = 16,000)
80,000
____0
18. d – Harding, P6,107; Jones, P12,275 H
J
S
Total
Capital balances 20,000 Potential loss from Sandy deficit
22,000 (4,118)
(10,000) 10,000
0
(5,882) 17,882
0
14,118 Loss to reduce H and J: (50:35) Balances
32,000
(8,011)
32,000 (5,607) 12,275
(13,618)
6,107
13,382
Note: 1. Regardless there is a forthcoming contribution to be made by Sandy, it is assumed that the P10,000 deficit may not be recovered for purposes of distribution of cash. 2. The P13,382 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Harding and Jones is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program H Capital balances 20,000 Additional contribution 0
J 22,000 0
S (10,000) 10,000
Capital balances
22,000 20,000 50/85
Divided by: Profit and loss ratio Loss absorption power
35/85 53,429
34,000 Loss to reduce JJ to HH: (19,428 x 35/85 = 8,000) Balances
19,428 34,000 34,000
Cash available P18,382 Less: Priority I to Jones (P19,428 x 35/85) 8,000 P10,382 Less: P& L (50:35) (10,382) P6,107
P 8,000 P 6,107
4,275 P 12,275
19. c 20. b 21. c Total Capital before realization Loan Total interests Loss on sale (240,000 – 195,000)
A
B
30,000 70,000 20,000 ______ 90,000 (15,000) 75,000
30,000 ( 15,000) 15,000
50,000 ______
C 150,000
50,000 (15,000)
20,000 170,000 (45,000)
35,000
125,000
22. b –liabilities should be paid first, then the balance of P30,000 should be given to Able since he is the one entitled to the first priority. INTERESTS PAYMENTS______ A B C A B C Total Balances before realization Loans………………….. P 20,000 Capital………………... 70,000 P 30,000 P 50,000 Total interests………... P 90,000 P 30,000 P 50,000 Divided by: P&L ratio………… 1/3 1/3 1/3 Loss absorption ability……….. P270,000 P 90,000 P150,000 Priority I…………………………. 120,000 _______ P40,000 P40,000 P150,000 P90,000 P150,000 Priority II………………………… 60,000 0 60,000 20,000 0 P20,000 40,000 P 90,000 P90,000 P 90,000 P60,000 P 0 P20,000 P80,000 23. d
A
Total Capital before realization
B
C
30,000 70,000
50,000
150,000
Loan
20,000 ______
______
Total interests Loss on sale (240,000 – 195,000)
90,000
50,000 (15,000)
(15,000) 75,000 (20,000) 55,000
Payment of loans to partner
30,000
20,000 170,000 (45,000)
( 15,000) 15,000 35,000 125,000 ______ _____ (20,000) 15,000 35,000
105,000 Asset received ______ (30,000) Payment to partners after payment of loan 55,000 75,000
______
(30,000)
15,000
5,000
Note: The requirement is payment to partners after outside creditors and loans to partners had been paid, therefore, the payment to partners is in so far as capital is concerned.
24. a D Capital balances Less: Machine, at fair value Capital balances
E
F
90,000 (35,000)
30,000 ______
55,000 1/3
30,000
165,000
90,000
(45,000)
____0
120,000
90,000
40,000 ______ 40,000
Divided by: Profit and loss ratio Loss absorption power
1/3 120,000
Loss to reduce E to D: (45,000 x 1/3 = 15,000) Balances 120,000
1/3
25. c K
M
B
J
59,000
39,000 30%
34,000
34,000
10%
20%
340,000
170,000
Capital balances Divided by: Profit and loss ratio Loss absorption power
40% 147,500
130,000
Loss to reduce CC to BB: (170,000 x .10 = 17,000)
170,000
____0
Balances 147,500
130,000
C
P
60,000
27,000 30%
170,000
170,000
26. c H
M
Capital balances Divided by: Profit and loss ratio Loss absorption power
40%
43,000
20,000
20%
10%
215,000
200,000
90,000 150,000
Loss to reduce CC to BB: (15,000 x .20 = 3,000) Balances
15,000
____0
200,000
200,000
90,000 150,000
27. c - the P16,000 available cash can be distributed but should be done under the assumption that all deficit balances will be total losses. After offsetting JJ loan, the two deficits total P4,000. FF and RR, the two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a 60%:40% ratio). FF would absorb P2,400 of the potential loss with RR being allocated P1,600. The remaining capital balances (P10,600 and P5,400) are safe capital balances and those amounts can be immediately distributed. or, alternatively: W
J
F
R
Capital balances
7,000 (2,000) ______ (2,000) 2,000
Loan Total interests Potential insolvency loss (3:2)
(5,000) 3,000 (2,000) 2,000
13,000 _______ 13,000
__ 7,000
( 2,400) 10,600
(1,600) 5,400
28. b A Capital balances
B
C
Total
18,000
Potential loss from A deficit (5:3)
(5,000) 5,000
6,000
19,000
(3,125)
0 (1,875) 4,125
14,875
19,000 Loss to reduce H and J: (5:3)
(8,750)
(14,000) (5,250) (1,125) (1,125)
6,125 Possible insolvency loss 0
5,000 1,125
5,000
29. a – installment liquidation (refer for more problems in Chapter 5) P
INTERESTS Q R
P
Q
Balances before realization Totall interests………... P 70,000 P 50,000 P100,000 Divided by: P&L ratio………… 20% 40% 40% Loss absorption abilities……….. P350,000 P125,000 P250,000 Priority I…………………………. (100,000) 0 P20,000 P250,000 P125,000 P250,000 Priority II………………………… (125,000) (125,000) 25,000 75,000 P125,000 P125,000 P125,000 P75,000 P95,000
Cash, beginning Add (deduct):
PAYMENTS ___ R Total
P20,000 P50,000 P 4,500
P50,000
P 90,000
Liquidation expenses paid Payment of liabilities Proceeds from sale of assets (?) Payment to partner before payment to Renquist (priority I only)
( 8,000) (170,000) 108,000 P 20,000
30. d – Justice P15,533 J
Z
D
Total
Capital balances 23,000 Potential loss from Douglass (40:35)
22,000 (6,533)
(14,000) 14,000
31,000 0
(7,467) 0 15,533
15,467
31,000
Note: 1. Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000 deficit may not be recovered for purposes of distribution of cash. 2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Justice and Zobart is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5) J Z Capital balances 23,000 22,000 Additional contribution 0 0 Capital balances 22,000 23,000 Divided by: Profit and loss ratio 40/75 35/75 Loss absorption power 47,143 43,125 Loss to reduce Z to D: (4,018 x 35/55 = 1,875) 4,018 Balances 43,125 43,125
D (14,000) 14,000
Cash available P31,000 Less: Priority I to Douglass (P4,018 x 35/75) 1,875 P 1,875 P29,125 Less: P& L (40:35) (29,125) P15,533 13,592 P15,533 P15,467 31. d D
INTERESTS K R
D
Balances before realization Loans………………….. P 0 P 10,000 P(20,000) Capital………………... 170,000 170,000 100,000 Total interests………... P170,000 P180,000 P 80,000 Divided by: P&L ratio………… 50% 30% 20% Loss absorption abilities……….. P340,000 P600,000 P400,000 Priority I…………………………. (200,000) 0 P340,000 P400,000 P400,000 Priority II………………………… (60,000) (60,000) P340,000 P340,000 P340,000
K
PAYMENTS R Total
P60,000 18,000 P – P 78,000
___
P60,000 18,000 36,000 P18,000 P 96,000
Cash received by the partner Kemp Add (deduct): Liabilities paid Expenses paid Contingency Cash, beginning Proceeds from sale of other assets 32. b
P 60,000 250,000 5,000 10,000 (120,000) P205,000
INTERESTS N D
T
Balances before realization Loans………………….. P 0 P 0 P 0 Capital………………... 22,000 15,500 14,000 Total interests………... P 22,000 P15,500 P 14,000 Divided by: P&L ratio………… 2/4 1/4 1/4 Loss absorption abilities……….. P 44,000 P62,000 P 56,000 Priority I…………………………. ( 6,000) 0 P 44,000 P56,000 P56,000 Priority II………………………… (12,000) (12,000) __ P 44,000 P44,000 P44,000 P
T
PAYMENTS N D
P 1,500 –
3,000 P 4,500
Cash received by Tree Divided by: P & L ratio Amount in excess of P7,500 Total cash payments – refer to program Payment to partners
___ Total
P1,500
P 3,000 6,000 P 3,000 P 7,500
P
6,250 2/4 P 12,500
7,500
P 20,000
33. d Cash, beginning Add (deduct): Proceeds from sale of certain assets Liquidation expenses paid Payment of liabilities Payment to partners (refer to No. 30) Cash withheld
P 12,000 32,000 1,000) 5,400) ( 20,000) P 17,600 ( (
34. d Priority Creditors First P300,000………. P300,000 Next P80,000 (7:3)… Next P70,000 (3:4)… Remainder*……….. P300,000 (d)
Mattews
Norell
Reams
Total
P300,000 P56,000 P24,000 80,000 30,000 P40,000 70,000 22,000 34,000 44,000 100,000 P108,000 P58,000 P84,000 P550,000
*P550,000 – P300,000 – P80,000 – P70,000 = P100,000 P
INTERESTS Q R
P
Balances before realization Loans………………….. P 6,000 P(10,000) Capital………………... 24,000 P36,000 60,000 Total interests………... P30,000 P36,000 P50,000
PAYMENTS______ Q R Total
Divided by: P&L ratio………… 3/10 3/10 4/10 Loss absorption abilities…….. P100,000 P120,000 P125,000 Priority I…………………………. (5,000) P 2,000 P 2,000 P100,000 P120,000 P120,000 Priority II………………………… (20,000) (20,000) P6,000 8,000 14,000 (d) P100,000 P100,000 P100,000 P – P6,000 P10,000 P16,000 35. d Priority Creditors First P300,000………. P300,000 Next P80,000 (7:3)… Next P70,000 (3:4)… Remainder*……….. P300,000 (d)
Mattews
Norell
Reams
Total
P300,000 P56,000 P24,000 80,000 30,000 P40,000 70,000 22,000 34,000 44,000 100,000 P108,000 P58,000 P84,000 P550,000
*P550,000 – P300,000 – P80,000 – P70,000 = P100,000
Quiz - V 1. M= 0, K= 25,000, C= 0 - this problem is more on installment liquidation M K C Capital before realization 100,000 175,000 75,000 Loss on sale (162,500) (50%:30%:20%) (97,500) (65,000) 10,000 ( 62,500) 77,500 Additional loss (3:2) 62,500 (37,500) (25,000) 40,000 (15,000) Additional loss 15,000 (15,000) 25,000 *balancing figure – total reduction in capital
Payment to partners: P200,000 – P25,000 – P150,000 = P25,000** 2. Homer, P54,000; Marge, P84,000; Bart, P177,000. 3. P150,000 4. Stan, P0; Kenney, P10,000; Cartman, P0 5. P500,000 = (P147,000 + P28,000)/.35 6. P1,040,000 = (P260,000 / .25) 7. P675,000 = (P285,000 - P15,000)/.40 8. a 9. Perry: P15,000; Quincy: P51,000; Eddy: P44,000 10. 11. b
principles. Total 350,000 *(325,00 0) **25,000 ______25,000 -0-
12. P33,000 First allocation (H) (P400,000 - P380,000) (.30) 6,000 Second allocation (H) (P380,000 - P300,000) (.30) (F) (P380,000 - P300,000) (.25) 44,000 Third allocation, share based on profit and loss ratios
P P24,000
20,000 10,000
Harold: P6,000 + P24,000 + (P10,000 x .30) 13. P2,500 First allocation (H) (P400,000 - P380,000) (.30) 6,000 Second allocation (H) (P380,000 - P300,000) (.30) (F) (P380,000 - P300,000) (.25) 44,000 Third allocation, share based on profit and loss ratios
P P24,000
20,000 10,000
Sheldon: (P10,000 x .25) 14. P24,500 First allocation (H) (P400,000 - P380,000) (.30) 6,000 Second allocation (H) (P380,000 - P300,000) (.30) (F) (P380,000 - P300,000) (.25) 44,000 Third allocation, share based on profit and loss ratios
P P24,000
20,000 10,000
Fred: P20,000 + (P10,000 x .45) 15. P147,000 Losses Equities Possible loss on remaining assets Contingencies Subtotals
200,000 10,000
Eliminate Jack’s debit balance Safe payments
40% Hara 135,000
30% Ives 216,000
( (
80,000 ) 4,000 ) 51,000
( (
60,000 ) 3,000 ) 153,000
(
8,000 )
(
6,000 )
43,000
30% Jack 49,000 ( ( (
60,000 ) 3,000 ) 14,000 ) 14,000
147,000
0
16. P495,000 = (P162,000 + P36,000) / .40 17. c Capital before realization Liquidation expenses
P 70,000 (1,600)
Divided by:
68,400 20%
50,000
Q 100,000
( 3,200) 46,800
( 3,200) 96,800 40%
R
40% Loss absorption abilities
242,000 342,000
117,000
Selling Price Book value Loss
183,000 300,000 (117,000)
or, Quincy capital before liquidation………………………………………………..P 50,000 Less: Share in liquidation expenses (P8,000 x 40%)………………………….… 3,200 Quincy capital before realization of non-cash assets……………………….P 46,800 Less: Cash received by Quincy (minimum)……………………………………. 0 Share in the loss on realization……………………………………………………P 46,800 Divided by: Profit and loss ratio………………………………………………….. 40% Loss on realization…………………………………………………………………..P117,000 Less; Non-cash assets………………………………………………...................... 300,000 Proceeds from sale…………………………………………………………………P183,000 18. P29,000 (P14,000 Warle capital + P10,000 Xin capital + P6,000 Yates capital + P5,000 Loan from Xin P6,000 Loan to Warle) 19. P2,000 (P4,000 beginning balance + P3,000 cash collected + P4,000 for inventory sold - P7,000 of accounts payable - P2,000 for expenses) 20. P2,000
Warle 8,000 2,000 ) 400 ) 5,600
Xin 15,000 3,000 ) 600 ) 11,400
Yates 6,000 5,000 ) 1,000 ) 0
Total 29,000 10,000 ) 2,000 ) 17,000
Equities,Jun 30 Inventory loss Contingency fund Subtotals
( (
Possible losses on remaining assets Subtotals
(
3,000 ) 2,600
(
4,500 ) 6,900
( (
3,000 ) 400 )
(
4,500 ) 2,400
7,500 0
2,000
400 0
(
400 ) 2,000
0
2,000
Eliminate Yates’s Deficit Subtotals Eliminate Warle’s Deficit Cash distribution
True or False
( (
THEORIES
( (
( (
7,500 ) 7,500 )
( (
(
15,000 ) 2,000
1 . 2 . 3 . 4 . 5 .
False
6.
True
True
7.
True
False
8.
False
False
9.
True
True
10 .
True
11 . 12 . 13 . 14 . 15 ,
False True
16 . 17 .
False True
False True True
Note for the following numbers: 1. An installment liquidation occurs over an extended period of time and partners generally receive interim (installment) distributions. 3. The accountant must ensure that the partnership will have sufficient cash to pay current and prospective creditors before distributions are made to partners. 4. It may not be prudent for the accountant to pay creditors as quickly as possible. However, funds should be set aside so that creditors can be paid in a timely manner. 8. The size of the capital account must be evaluated in conjunction with the residual profit and loss ratio to determine which partner is least likely to have a deficit occur during the partnership liquidation. 11. The cash distribution plan indicates how a distribution will be allocated among the partners but it does not guarantee that a distribution will be made. 13. The loss absorption power indicates the amount of loss the partnership would have to occur before that partner’s capital account balance is reduced to zero. 16. The schedule of safe payments can be used for any partnership liquidation but it provides the same distribution as the cash distribution plan under most circumstances.
Multiple Choice 18 b 23 . . 19 b 24 . . 20 a 25 . . 21 a 26 . . 22 d 27 . .
a d d a d
28 . 29 . 30 . 31 . 32 .
b e a a c
33 . 34 . 35 . 36 . 37 .
b d b a b
38 . 39 . 40 . 41 . 42 .
c
43.
d
d
44.
b
b
45.
c
a
46.
d
b
