Chapter 03, Modern Advanced accounting-review Q & exr

CHAPTER 3 PARTNERSHIP ARTNERSHI P LIQUIDA LIQU IDATION TION AND INCORPORATION; INCORPORATION; JOINT VENTURES V ENTURES The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers. Pr. 3–1 Doris, 3–1 Doris, Elsie & Frances Partnership (20 minutes, easy)

Pr. 3–2

Pr. 3–3 Pr. 3–4

Pr. 3–5

Pr. 3–6

Pr. 3–7

Pr. Pr. 3–8 3–8

Pr. 3–9

Pr. 3–10

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114

Journal entries for liquidation of an insolvent general partnership having a partner who is unable to pay entire capital deficit to the partnership. Olmo, Perez & Quinto LLP (20 LLP (20 minutes, easy) Journal entries for liquidation of a solvent limited liability partnership having an almost insolvent partner who cannot pay entire loan from partnership or capital deficit. Hal, Ian, Jay & Kay LLP (20 LLP (20 minutes, easy) Preparation of cash distribution program for a liquidating limited liability partnership. Carson & Worden LLP (20 minutes, easy) Cash distribution program for liquidation of a limited liability partnership, and journal entries for realization of assets and distributions of cash to creditors and partners. Luke, Mayo & Nomura LLP (20 LLP (20 minutes, easy) Given the statement of realization and liquidation for a limited liability partnership, prepare journal entries for the liquidation. Luna, Nava & Ruby LLP (30 minutes, easy) Compute total loss from liquidation of a limited liability partnership, prepare a statement of realization and liquidation, and prepare journal entries for the liquidation. Haye & Lee LLP (20 LLP (20 minutes, easy) Partners accept bonds in exchange for certain limited liability partnership assets and withdraw noncash assets during liquidation. Journal entries for transactions completed in carrying out liquidation of the partnership. Adam Adams, s, Barna Barna & Col Colem eman an LLP (30 minut inutes es,, easy easy)) A limited liability partnership is insolvent, as is one of the three partners. Given a balance sheet of the partnership and a summary of the financial status of partners, prepare a statement of realization and liquidation and determine the amount of cash that would have to be generated from the realization of partnership assets to enable the insolvent partner to pay personal creditors in full. Prepare journal entries for the liquidation. Smith, Jones & Webb LLP (30 LLP (30 minutes, easy) Installment liquidation of a limited liability partnership over a period of three months. Statement of realization and liquidation with supporting analysis. Denson, Eastin & Feller LLP (45 LLP (45 minutes, medium) Priorities among limited liability partners as to eligibility to receive cash payments in an installment liquidation. Consists of a series of independent questions as to the circumstances under which a partner would be entitled to receive a specified amount of cash.

McGraw-Hill Companies, Inc., 2006 Modern Advanced Accounting, 10/e

Pr. 3–11

Lord & Lee LLP; Lord-Lee Corporation (50 minutes, minutes, medium) medium)

Incorporation of a limited liability partnership. Journal entries for the partnership and the corporation. Preparation of beginning balance sheet for the corporation.

ANSWERS TO REVIEW QUESTIONS 1.

2.

3.

4.

5.

6.

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Because Because of the the right right of offse offset, t, Alo Alo probably probably will will not have have any any prior priority ity or advan advantag tagee sole solely ly because because a portion of Alo’s investment in the partnership is recognized as a loan rather than as an increase in Alo’s capital account balance. The right of offset means that a partner's loan account may be offset against a debit balance (or potential debit balance) in that partner's capital account during the liquidation of the LLP. Assum Assumin ing g that that the the partne partnerr with with a debi debitt balan balance ce has has no no loa loan n accou account nt or or that that the the balan balance ce of the the partner’s loan account is insufficient to eliminate the debit balance of the partner’s capital account when the right of offset is exercised, the partner is obligated to pay sufficient cash to the LLP to eliminate the capital deficit. If the partner is unable to do so, the capital deficit must be absorbed by the other partners as an additional loss to be shared in the same proportion as they previously have shared net income and loss among a mong themselves. themselves. The The cash cash of of $32,5 $32,500 00 may may b bee dist distrib ribute uted d wit witho hout ut del delay ay to to Cor Cor and to Don. Don. The The cash cash paym paymen entt should be divided between Cor and Don to leave a sufficient credit balance in the capital account of each to absorb any additional loss if Ell fails to pay the $5,000 capital deficit to the LLP. The appropriate payments are $21,875 to Cor and $10,625 to Don. The possible additional loss of $5,000 is divided between Cor and Don in a 5:3 ratio. Fin's Fin's positi position on cannot cannot be supporte supported; d; Fin is responsi responsibl blee for for all all unpaid unpaid liabil liabiliti ities es of the gener general al partnership. Partnership creditors may demand payment in full from any partner and are not concerned with the status of a partner's capital account or with the terms of the partnership contract for sharing net income or losses. The capital account of Han has a debit balance balance of $30,000 ($16,000 + $2,000 $2, 000 + $12,000 = $30,000). If Fin pays the partnership creditors all or part of their claims, the journal entry of the partnership will be to debit Trade Accounts Payable and credit Fin's capital account for the amount of the payment. The The salary salary auth authori orize zed d for for Ile Ile as gen genera erall manag manager er is rec record orded ed by by a deb debit it to to Partne Partner's r's Salary Salary Expen Expense se and a credit to Ile, Capital. Thus, the "unpaid salary" is not a liability. The salary provision in the partnership contract was a form of remuneration to Ile that increases Ile’s equity in net assets of the partnership. The The inco incom me-sha e-shari ring ng ratio ratio sho shoul uld d gove govern. rn. The The con contrac tractt with with resp respect ect to to shari sharing ng of of net net inco incom me and losses is an unqualified agreement. Because the contract is not expressly limited to operating income or losses, application of any such limitation would not be in accord with the contract. The LLP is not dissolved by the decision to discontinue operations, and the agreement concerning the division of net income and losses is still in effect. All losses represent a loss of capital invested in a limited liability partnership. The net income or losses from operations that previously have been divided are periodic estimates. The ultimate (lifetime) income or loss of the partnership is not determinable until the partnership is liquidated. The loss or gain on realization of assets is a correction of all previous periodic income estimates, and it also should be divided in the income-sharing ratio.


7.

8.

9.

10.

11. 11.

12.

13.

If cash cash is dis distri tribut buted ed to to partne partners rs as it bec becom omes es avai availab lable le duri during ng a prol prolon onge ged d limi limite ted d liabi liabili lity ty partnership liquidation, each payment should be made as if no more cash would be forthcoming from either realization of assets or collection of capital deficits from partners. Under these assumptions, the liquidator will authorize a payment to a partner only to the extent that the credit balance of the partner's capital account (or in the capital and loan accounts combined) is in excess of the partner's share of the maximum possible loss that may be incurred. A partner's share of the maximum possible loss reflects the possibility that all remaining noncash assets may prove worthless and that the partner may be charged with additional losses if the other partners are unable to pay to the partnership any deficit that may occur in their capital accounts. No jou journa rnall entri entries es are ent enter ered ed in in the the LLP’ LLP’s accou account ntin ing g recor records ds for for possib possible le los losse sess from from futur futuree realization of partnership assets. The computation of the estimated loss and its division among the partners is a working paper item; journal entries are prepared for actual transactions or events only. The total total amoun amountt of of cash cash rece receiv ived ed by each partner partner in in an an insta installm llment ent liqui liquidati dation on should should be the the same same as if the liquidator had retained all cash until all noncash assets were realized and liabilities paid and then had made a single cash payment to the partners. One exception might be that if the liquidator were able to earn interest on the cash retained during the course of the liquidation, the interest would increase the amount of cash to be distributed to partners. Cash recei receive ved d from from realiza realizatio tion n of lim limite ited d liabil liability ity partne partnersh rship ip noncas noncash h assets assets durin during g an insta installm llment ent liquidation may be distributed in the income-sharing ratio if the balances of the partners' equities in the partnership are in the income-sharing ratio. The $7,000 $7,000 note note receiv receivabl ablee from from San San shoul should d be be ded deducte ucted d from from San's capital capital accou account nt balanc balancee to compute San's capacity to absorb losses. The possible loss if all other noncash assets should prove to be worthless worthless would would be $54,000 ($30,000 + $25,000 + $21,000 – $7,000 – $15,000 = $54,000), to be charged against the partners' capital account balances in the amount of $18,000 to each. The cash of $18,000 now available should be divided $13,000 to Rab, $1,000 to San, and $4,000 to Tay. This will leave each partner with a capital account balance of $18,000, which is sufficient to absorb each partner's share of the maximum possible additional loss. Partner Partner Urb may have have recei receive ved d less less cash than than the other other partners partners who who had had smal smaller ler capital capital accou account nt balances for one or more of the following reasons: (1) Urb's share of net incom incomee or loss was the largest, largest, and substantial losses losses were incurred incurred in the realization of partnership noncash assets; or Urb's share was the smallest, and substantial gains were realized from the partnership noncash assets. (2) The assets of the partnership partnership may have inclu included ded a loan receivable receivable from from Urb that was offset against Urb's capital account balance. (3) Van and Woo Woo may have had loan accounts that, when combined combined with their their capital accounts, ac counts, gave them larger partnership equities than Urb's. (4) Urb may have withdrawn withdrawn noncash noncash assets from the partnership during during the liquidati liquidation. on. The carrying carrying amounts amounts of of the the LLP’ LLP’s assets assets shoul should d be be increa increased sed to curren currentt fair fair value value on the date date of incorporation because Yang-Zee Corporation is a new legal entity and accounting entity separate from its owners. Even though all the capital stock of Yang-Zee has been issued in equal amounts to the former partners, the corporation may later obtain authorization for additional capital stock to be issued to outsiders. In this event, Yang and Zee will suffer if the partnership asset values are not revised upward on the date of incorporation because of the understatement of their investments in Yang-Zee Corporation as compared with the investments of other shareholders. Also, in obtaining credit or bank financing, Yang-Zee Corporation may be handicapped by the understatement of assets and understatement of stockholders' equity.

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McGraw-Hill Companies, Inc., 2006 116

14.

15.

16.

A joint venture differs from a partnership in that it is a temporary association of individuals or business enterprises that combine resources for the purpose of carrying out a specific project, such as exploration for petroleum in a foreign country. A joint venture has many of the characteristics of a partnership, but it terminates on the completion of the specific project for which it was formed. The life of a joint venture is more likely to be measured in months than in years. Corporate joint ventures are corporations owned and operated by a small group of joint venturers for the benefit of all the venturers. The ownership of a corporate joint venture seldom changes, and its common stock generally is not traded publicly. The APB, in Opinion No. 18, 18, "The Equity Method of Accounting for Investments in Common Stock," concluded that the equity method of accounting should be used by venturers (investors) to account for investments in common stock of corporate joint ventures. Under the equity method, the Investment in Corporate Joint Venture ledger account is debited in the accounting records of each venturer for amounts invested and for the pro rata share of net income reported by the venture; the account is credited for dividends received from the corporate joint venture and for the pro rata share of net losses incurred by the venture. Under Under the the equ equity ity meth method od of of accounti accounting ng for for an inves investm tment ent in in an uninc unincorpo orporate rated d joint joint vent venture, ure, each each investor records its share of the venture's net income or losses in the investment ledger account and reduces the balance of the investment account by the amount of cash or other assets received from the venture. In the investor's balance sheet the investment in the joint venture is displayed as one amount, and in the investor's income statement the investor's share of net income or net loss of the venture is displayed as a single amount. In contrast, under the proportionate share method of accounting for an investment in an unincorporated joint venture, each investor recognizes in its accounting records its share of each asset, liability, revenue, gain, expense, and loss of the venture. Thus the assets, liabilities, revenue, and expenses of the investor in its financial statements include the investor's share of the related items of the joint venture.

SOLUTIONS TO EXERCISES Ex. 3–1

1. 2. 3. 4. 5. 6. 7.

Ex. 3–2

Journal entry for Pon, Quan & Ron LLP, Jan. 31, 2005:

d c b a [($21, 1,00 000 0 + $39,0 $39,000 00)) – $30,0 $30,000 00 sha share re of of los losss = $30,0 $30,000 00]] c [($2 a a

Quan, Capital Ron, Capital Cash To record payment of cash to partners, as follows:

Capital account balances prior to cash payment Potential loss from f rom uncollectible uncollectible capital deficit of Pon ($9,000 shared equally) Cash payment Ex. 3–3

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117

8. b 9. b 10. b 11. c 12. 12. b 13. b

3,500 11,500 15,000

Quan

Ron

$8,000

$16,000

(4,500) $3,500

(4,500) $11,500

Computation of amount of cash to be distributed to partners Archer and Bender: Archer Capital account balances after payment of liabilities $40,000

Bender $22,000


Less: Less: Maximum Maximum possib possible le loss loss on realizati realization on of noncas noncash h assets assets ($42,000), divided in 60:40 ratio Distribution of $20,000 cash to partners Ex. 3–4

Ex. 3–5

25,20 0 $14,800

a. Computation of total loss incurred on liquidation of Carlo & Dodge LLP:

Capital account balances before liquidation ($23,000 + $13,500) Add: Unpaid liabilities ($33,000 – $18,000) Total loss on liquidation b. Journal entry for Carlo & Dodge LLP: Liabilities ($33,000 – $18,000) Carlo, Capital [$23,000 – ($51,500 x 0.55)] Dodge, Capital [$13,500 – ($51,500 x 0.45)] To record Carlo’s payment to partnership creditors and to close partners’ capital accounts. Journal entries for Rich, Stowe & Thorpe LLP, Sept. 24, 2005: Cash Rich, Capital ($60,000 x 0.40) Stowe, Capital ($60,000 x 0.40) Thorpe, Capital ($60,000 x 0.20) Other Assets To record realization of assets and division of $60,000 loss among partners in 40%:40%:20% 40%:40%:20% ratio.

$36,500 15,000 $51,500 15,000 5,325 9,675

300,000 24,000 24,000 12,000 360,000

Liabilities Rich, Capital Stowe, Capital Thorpe, Capital Cash To record payment to creditors, and first installment to partners, as follows:

Capital per balance sheet Realization loss Potential loss on $120,000 other assets Payments Ex. 3–6

240,000 8,000 48,000 24,000 320,000

Rich $80,000 (24,000)

Stowe $120,000 (24,000)

Thorpe $60,000 (12,000)

(48,000) $ 8,000

(48,000) $ 48,000

(24,000) $24,000

Journal entry for Ace, Bay & Cap LLP, June 3, 2005: Liabilities Ace, Capital Cash To record payment to creditors, and first installment to partner. Ace receives $30,000 available cash because, assuming no cash to be realized on other assets of $100,000, allocation of the resultant potential loss $37,500 to Bay and $50,000 to Cap, and $15,000 of Cap's resultant capital deficit of $20,000 to Bay, would cause a capital deficit of $12,500 to Bay.

Ex. 3–7

16,800 $ 5,200

50,000 30,000 80,000

Computation of amount of cash to be distributed to partners Ed, Flo, and Gus: Ed

Capital account balances before payment of liabilities

$33,000 The © The

Solutions Manual, Chapter 3

Flo

Gus

$40,000

$42,000


Less: Maximum possible loss on realization of noncash assets ($78, 000), divided in 5:3:2 ratio Balances Allocation of potential capital deficit of Ed in 3:2 ratio Distribution of $37,000 cash to partners after payment of $5,000 of creditors’ claims ($42,000 – $5,000 = $37,000) Ex. 3–8

39,000 $ (6,000) 6,000

$

(3,600)

0

$13,000

15,600 $26,400 (2,400)

$24,000

Computation of amount of cash to be distributed to partners Hale and Ian: Capital balances before payment of liabilities and liquidation costs Less: Maximum possible loss on realization of noncash assets ($1 ($110,0 0,000) and liquidation costs ($1 ($10,00 ,000), divided in 4:6 rat ratio Balances Allocation of potential deficit of Ian Distribution of $5,000 cash to Hale after payment of $20,000 liabilities and withholding of $10,000 cash for liquidation costs ($35,000 – $20,000 – $10,000 = $5,000)

Ex. 3–9

23,400 $16,600

a.

Hale

Ian

$71,000

$ 54,000

$48, $48,00 000 0 $23,000 (18,000)

72,0 2,000 $(18,000) 18,000

$ 5,000

$

0

JONES, KELL & LAMB LLP Computation of Cash to Be Paid to Partners in First Installment March 31, 2005

Balances of capital accounts before liquidation Realization of assets at loss of $40,000 Maximum potential loss on realization of remaining assets of $90,000 Balances Eliminate potential capital deficit of Jones Cash payable  first first installment ($25,000+ $50,000 – $52,000= $23,000)

Jones (40%)

Kell (40%)

Lamb (20%)

$ 40,000 (16,000)

$65,000 (16,000)

$48,000 (8,000)

(36,000) $(12,000) 12,000

(36,000) $13,000 (8,000)

(18,000) $22,000 (4,000)

$

$ 5,000

$18,000

0

Note to Instructor: A cash distribution program may be prepared that would show that Lamb would receive the first $15,500 and that Kell and Lamb would receive any amount over $15,500, but not in excess of $37,500, in a 2:1 ratio. Because $23,000 is available,

Lamb receives receives $15,500 plus $2,500 ($7,500 x $5,000 ($7,500 x

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119

2 3

1 3

= $2,500), or $18,000, and Kell receives

= $5,000).


b. The $3,000 cash withheld represents an additional possible loss that would be absorbed by Kell and Lamb in a 2:1 ratio. Thus, using the result in a, Kell would receive $3,000 and Lamb would would receive receive $17,000, or a total of $20,000 ($23,000 – $3,000 = $20,000).

Because each partner received some cash in the second distribution, additional payments may be made to the partners in the income-sharing ratio of 2:2:1. Thus, the $14,000 would be paid as follows: Jones and Kell, $5,600 each; Lamb, $2,800. a. MAY, NONA & OLIVE LLP Cash Distribution Program November 10, 2005

c.

Ex. 3–10

First Next (2 x 3,500) Next (2 x 4,000) + (1 x 4,000) All over

$20,000 7,000

Creditors 100%

May

Nona

Olive

100% 2

1

4

3 2

3 1

7

7

7

12,00 ,000 $39,000

MAY, NONA & OLIVE LLP Working Working Paper for Cash Distributions Dist ributions to Partners during Liquidation November 10, 2005 May $20,000 4 $ 5, 5,000

Nona $25,000 2 $12,500 (3,500)

Olive $9,000 1 $9,000

Capital account balances before liquidation Income-sharing ratio Capital per unit of income (loss) sharing Reduce Nona’s balance to equal Olive’s balance Reduce balances of Nona and Olive to equal May’s balance (4,000) (4,000) Capital per unit of income (loss) sharing $ 5,000 $ 5,000 $5,000 b. $26,000 $26,000 If May receiv received ed $4,000, $4,000, Nona Nona receiv received ed $2,000 $2,000 and Olive Olive receiv received ed $1,000 (fourth step in a), a total of $7,000. Before May received any cash, however, Nona and Olive would have received $19,000, as shown in the second and third distributions in the program developed in a. 7,250 If May recei receive ved d $13,0 $13,000, 00, Oli Olive ve recei receive ved d $3,25 $3,250 0 (fou (fourth rth ste step p in a); however, c. $ 7,250 Olive previously would have received $4,000 (third step in a); therefore, Olive received $3,250 + $4,000 = $7,250. Alternatively, when May received $13,000, May's Ma y's loss from realization realization of assets was $7,000 ($20,000 – $13,000 = $7,000) and Olive's Olive's loss was $1,750 ($7,000 x d. $41 $41,00 ,000 0

4

= $1,750);

therefore, therefore, $9,000 – $1,750 = $7,250. Accor Accordi ding ng to to the cash cash dist distrib ributi ution on prog program ram dev devel elop oped ed in in a, Nona received $11,000, Olive received $2,000, and May received nothing. Thus, May lost $20,000, Nona lost $14,000 ($25,000 – $11,000 = $14,000), $14, 000), and Olive lost lost $7,000 ($9,000 – $2,000 = $7,000), or a total loss of $41,000, on the realization of assets. Alternatively, because the partners received only $13,000 for their equities of $54,000, they must have sustained a loss of $41,000 on the realization realization of assets ($54,000 – $13,000 = $41,000).


1


Ex. 3–11

PAUL & QUINN LLP Cash Payments in Liquidation. June through August, August, 2005 Paul

June July August

$ 7,200 13,500

Quinn $2,000 5,300 9,000

Total $ 2,000 12,500 22,500

Quinn receives $2,500 before Paul receives any cash; any amount paid to partners in excess of $2,500 is divided in the income-sharing ratio, 60% to Paul and 40% to Quinn. Ex. 3–12

ORVILLE, PAULA & QUINCY LLP Cash Distribution Program September September 26, 2005

First Next (3 x 8,000) + (2 x 8,000) All over

$ 80,000

Creditors 100%

40,000 $120,000

Orville

Paula

60% 30%

50%

Quincy

40% 20%

ORVILLE, PAULA & QUINCY LLP Working Working Paper for Cash Distributions Dist ributions to Partners during Liquidation September September 26, 2005

Capital account balances before liquidation Income-sharing ratio Capital per unit of income (loss) sharing Reduce Orville’s and Quincy’s balances to equal Paula’s balance Cap Capital per unit of income (loss) sharing Ex. 3–13

Orville $120,000 3 $ 40,000

(8,000) $32,000

Loan Payable to Ang ($7,000 x

$ 32,00 ,000

(8,000) $32,000

20,000 5 7

Cap, Capital $6,000 + ($7,000 x

) 2 7

5,000 )

8,000

Cash To record payment to creditors, and first installment to partners.

121

Quincy $80,000 2 $40,000

Journal entry for Ang, Bel & Capp LLP, Jan. 21, 2005: Trade Accounts Payable

The © The

Paula $160,000 5 $ 32,000

33,000


Ex. 3–14

RUIZ, SALVO, THOMAS & URWIG LLP Cash Distribution Program May 5, 2005 Creditors

First Next (3 x 3,900) Next (3 x 4,100) + (4 x 4,100) Next (3 + 4 + 2 ) x 4,100

$15,000

All over

Ruiz

Salvo

Thomas

Urwig

100%

11,700

100% 3

4

28,700

7

7

3

4

2

36,900

9 3

9 4

9 2

1

$92,300

10

10

10

10

RUIZ, SALVO, THOMAS & URWIG LLP Working Working Paper for Cash Distributions Dist ributions to Partners during Liquidation May 5, 2005

Capital account balances before liquidation Income-sharing ratio Capital per unit of income (loss) sharing Reduce Ruiz’s balance to next highest balance of Salvo Capital per unit of income (loss) sharing Reduce balances of Ruiz and Salvo to next next high ighest est bala balanc ncee of Thom Thomas as Capital per unit of income (loss) sharing Reduce balances of Ruiz, Salvo, and Thomas to lowest balance of Urwig Capital per unit of income (loss) sharing

Ruiz

Salvo

Thomas

Urwig

$36,000 3

$32,400 4

$8,000 2

$(100) 1

$12,000

$ 8,100

$4,000

$(100)

$ 8,100

$4,000

$(100)

$4,000

$(100)

(3,900) $ 8,100 (4,10 (4,100 0) $ 4,000

(4,100) $ 4,000

(4,100)

(4,100)

(4,100)

$ (100)

$ (100)

$ (100)


$(100)


Ex. 3–15

ALLEN, BROWN & COX LLP Cash Distribution Program September September 30, 2005

First Next (2 x 333) Next (3 + 2) x 19,067 All over

$ 53,000 666 95,335 $149,001

Creditors 100%

Allen

Brown

50%

60% 30%

Cox

100% 40% 20%

ALLEN, BROWN & COX LLP Working Working Paper for Cash Distributions Dist ributions to Partners during Liquidation September September 30, 2005

Capital account balances before liquidation Income-sharing ratio Capital per unit of income (loss) sharing Reduce Cox’s balance to next highest balance of Brown Capital per unit of income (loss) sharing Reduce Brown’s and Cox’s balances to lowest balance of Allen Cap Capital per unit of income (loss) sharing

Ex. 3–16

Allen $88,000 5 $17,600

Brown $110,000 3 $ 36 36,667

Cox $74,000 2 $37,000

$17,600

$ 36 36,667

(333) $36,667

$17,600

(19,067 ) $ 17,600

(19,067) $17,600

Journal entries for Davis, Evans & Fagin LLP, Sept. 30, 2005: Cash Davis, Capital Evans, Capital Fagin, Capital Other Assets To record realization of assets and division of $40,000 loss among partners in 4:2:4 ratio. Liabilities Cash To record payment to creditors. Evans, Capital [$34,000 + ($36,000 x Fagin, Capital ($36,000 x

2 3

123

140,000

50,000 50,000

1 3

46,000

)]

24,000

)

Cash To record payments to partners in accordance with cash distribution program.

The © The

100,000 16,000 8,000 16,000

70,000


Ex. 3–17

VENWIG CORPORATION Balance Sheet October 1, 2005 Assets

Current Assets: Cash Trade accounts receivable Less: Allowance for doubtful accounts Inventories, at current fair value Short-term prepayments Total current assets Equipment, at current fair value Total assets Liabilities & Stockholders’ Equity Current liabilities: Trade accounts payable Accrued liabilities Total current liabilities Stockholders’ equity: Common stock, $5 par, authorized 50,000 shares, issued and outstanding 10,000 shares Additional paid-in capital Total liabilities & stockholders’ equity Ex. 3–18

$ 10,500 $15,900 1,200

14,700 48,000 800 $ 74,000 72,000 $146,000

$ 16,400 750 $ 17,150

$50,000 78,850

128,850 $146,000

Journal entries for Yale Corporation: a. 2005 Jan. 2

Dec. 31

b. 2005 Dec. 31

Investment in Y-Z Company (Joint Venture) Cash To record investment in joint venture.

500,000

Investment in Y-Z Company (Joint Venture) Investment Income To record record share share of Y-Z Compan Company y net net inco income me [($800,000 – $600,000) x 0.50 = $100,000].

100,000

Current Assets ($600,000 x 0.50) Plant Assets ($1,500,000 x 0.50) Costs and Expenses ($600,000 x 0.50) Investment Income Current Liabilities ($300,000 x 0.50) Long-Term Debt ($600,000 x 0.50) Revenue ($800,000 x 0.50) Investment in Y-Z Company (Joint Venture) To record record proporti proportiona onate te share share of joint joint ventur venture's e's assets, liabilities, revenue, and expenses.

300,000 750,000 300,000 100,000


500,000

100,000

150,000 300,000 400,000 600,000


CASES Case 3–1

Those who believe that the limited liability partnership (LLP) form does damage the mutual agency characteristic of a general partnership might point out that an LLP provides a type of screen between and among partners. Knowing that he or she is responsible only for his or her acts and the acts of employees being supervised, a partner of an LLP might be somewhat oblivious to the conduct and acts of other partners. The feeling of "all for one and one for all" might be lost. Conversely, those who argue to the contrary might allege that, knowing he or she is not liable for the acts of another partner, a partner of an LLP might be less inclined to "look over the shoulders" of fellow partners and thus less apprehensive about the possibility of misconduct by other partners. Thus, the partner may have a more collegial relationship  one one contributory to mutual agency  with with other partners.

In order to prepare a cash distribution program for the liquidating Nance, Olson, & Peale LLP, Nancy Lane must estimate the amount of the partnership's unrecorded trade accounts payable and other unrecorded liabilities. Methods for such estimating include reviewing unpaid invoices and statements from vendors and other suppliers of goods and services; requesting current statements from vendors and suppliers for whom such documents are not available at the partnership; controlling incoming mail and screening it for invoices and statements from vendors and suppliers; determining if all required payroll taxes and sales taxes, as well as other taxes, have been paid; and inquiring of the partners, after they review lists of unpaid liabilities developed through the foregoing procedures, if they know of any other unpaid liabilities. After developing an estimate of total unrecorded liabilities by means of the foregoing procedures, Lane may withhold cash in that amount during the installment liquidation of the partnership. Case 3–3 a. The creditors of the partnership have total claims of $46,000 ($21,000 + $55,000 – $30,000 = $46,000, the net debit balance of the three capital accounts). They may collect their claims in full from Berg, who has net assets of $65,000 ($110,000 – $45,000 = $65,000), or they may collect in part from Loomis, who has $10,000 ($55,000 – $45,000 = $10,000) of net assets, and collect the remainder from Berg. b. The creditors of Berg and Loomis may collect in full, because both are solvent; the creditors of Hancock may collect only $20,000, the amount of her assets. This represents only 50% of their claims. They can collect nothing from the partnership, because the partnership has no cash and Hancock has no equity in the partnership. c. Because Hancock Hancock is insolv insolvent, ent, her her $21,000 capital deficit deficit represent representss an additional additional loss to be divided equally between Berg and Loomis. After allocation of this loss, Berg will have an equity of $19,500 ($30,000 – $10,500 = $19,500), and Loomis's debit balance will increase to $65,500 ($55,000 + $10,500 $10, 500 = $65,500). $65, 500). If the creditors of the partnership have collected their total claims from Berg, his equity will have risen to $65,500 ($19,500 + $46,000 = $65,500), but he will be able to collect from Loomis only $10,000, the excess of Loomis's personal resources over the claims of his personal creditors. Berg's ultimate loss would have been the same, that is, $66,000 ($30,000 + $46,000 – $10,000 = $66,000) if Loomis had used some of his resources to pay partnership creditors, because this act would have reduced the need for such payments by Berg and would have reduced the amount Berg collected from Loomis. Case 3–2

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125


Case 3–4

a. The liquidation procedures followed by Lois Allen were not entirely appropriate. The partners had agreed to share net income and losses equally, and this 50:50 ratio was applicable not only during the operation of the partnership but also to gains and losses from liquidation. By dividing the gains and losses from realization of noncash assets in a 40:60 ratio, Allen caused Barbara Brett to bear an inappropriate portion of the loss (or to receive an inappropriate portion of the gain). Allen also erred in treating Brett's loan as payable in full, regardless of the amount of loss to be deducted from the partners' capital accounts. Because of the right of offset, no priority attaches to a partner's loan account in liquidation. b. Brett's capital account balance prior to liquidation was $60,000. If she received $24,000 in settlement of her capital account in addition to full payment of her loan account, she incurred a loss of $36,000 ($60,000 – $24,000 = $36,000) in the liquidation. Under the procedure followed by Allen in the liquidation, the $36,000 loss to Brett was 60% of the total loss of $60,000 ($36,000 ÷ 0.60 = $60,000).

If the liquidation had been handled properly, the total loss of $60,000 would have been divided equally between the partners. Allen would have received $10,000 ($40,000 – $30,000 = $10,000) cash in settlement of her equity, and Brett would have received $40,000 including her loan account ($70,000 – $30,000 = $40,000). The improper methods used by Allen resulted in an overpayment to her and an underpayment to Brett of $6,000. A question also might be raised as to whether Allen exceeded her authority by realizing the assets without approval by Brett of the amounts to be accepted. Case 3–5 Because many of the questions raised by the partners of the Wells, Conner & Zola Partnership involve provisions of the Uniform Partnership Act, in effect in most states, and the U.S. Bankruptcy Code, it is advisable for the partnership's accountant to request that the partners retain an independent attorney, other than their personal attorneys, to provide counsel on legal issues. Apart from that, the partnership's accountant may respond to accounting-type questions as follows: (1) Because the goodwill goodwill was recognized when when Zola was admitted to the partnership, it most likely is impaired and thus should be written off. However, the write-off should be absorbed by the partners in their income-sharing ratio because the events causing the goodwill to become worthless occurred after the formation of the present partnership. In any event, in view of Zola's personal bankruptcy and capital deficit in the partnership, it would make no sense to charge the entire goodwill write-off to Zola's capital. (2) Pending legal legal advice to the the contrary, the note and interest payable to partner Wells may not be paid prior to determination of the amounts to be realized from the partnership's office equipment and library, because if losses on realization caused Wells's capital account to have a debit balance, he would have to repay the partnership part or all of the amount he had received for the note and interest. Because both Wells and Conner intend to continue the practice of public accounting, the accountant for the dissolving and liquidating Wells, Conner & Zola Partnership might advise Wells and Conner to consider reestablishing the previous Wells & Conner Partnership and merely transfer their interests in the liquidating partnership to it. Alternatively, if Wells and Conner decide to go their separate ways, they might consider receiving the noncash assets in some appropriate split, and any cash remaining after trade accounts payable of $140,000 have been paid, as their residual equity in the liquidating partnership. This course of action would avoid the necessity of incurring possible substantial losses on the realization of the noncash assets. Case 3–6 If Anne Sanchez is not satisfied that a change to the equity method of accounting from the proportionate share method is justified in terms of being preferable for accounting for the Kane & Grant Partnership's investment in KG/WM Company, she should refuse the request of Jane Kane and Lloyd Grant to make the change. It appears that Kane is interested in "window dressing" the prospective corporation's opening balance sheet; that objective does not constitute The © The Solutions Manual, Chapter 3


justification for the change. However, given that the Financial Accounting Standards Board has not yet established accounting standards for investments in unincorporated joint ventures, and that presently two methods of accounting for such investments are used in practice, Sanchez should consider other possible reasons for justification of the accounting change. One reason might be that other venturers in ventures such as KG/WM Company are using the equity method of accounting for their investments; consistency among venturers might then provide justification for a change in the Kane & Grant Partnership's accounting for its investment in KG/WM Company. Case 3–7 An argument in favor of a single accounting method for investments in both corporate and unincorporated joint ventures is the desire for consistency in accounting practices for all business enterprises, regardless of their legal form. Typically, the difference between a corporate joint venture and an unincorporated joint venture is one of legal form; therefore, no justification exists for different accounting methods for investments in joint ventures, whether incorporated or unincorporated. Accompanying the argument for consistency is the argument for comparability; users of financial statements issued by investors in joint ventures should not have to deal with more than one method of accounting for such investments. The choice of a single accounting method for investments in joint ventures is a difficult one. Presumably, because investors in corporate joint ventures do not have unlimited liability for debts of the venture (unless they have guaranteed payment of such debts), the proportionate share method of accounting is inappropriate. However, the opposing argument in favor of the proportionate share method of accounting for investments in unincorporated joint ventures emphasizes that "off-balance-sheet financing" is avoided by use of the method, and that the Financial Accounting Standards Board in recent years has attempted to eliminate that abuse wherever possible. A rebuttal to that argument is that recognition of parts of an unincorporated joint venture's nonmonetary assets in the balance sheet of a venturer is difficult to justify from a theoretical or a practical point of view. Perhaps, because of the different legal statuses of corporate and unincorporated joint ventures, one method of accounting should be established for investments in corporate joint ventures and another method for investments in unincorporated joint ventures. This would be a compromise that would accord recognition to the different obligations for unpaid liabilities of the ventures by investors therein; however, it would place undue emphasis on the legal form of the two types of joint ventures. To sanction more than one type of accounting for investments in both corporate and unincorporated joint ventures is difficult to justify. Accounting standards setters have for decades attempted to narrow differences in accounting treatments for like transactions and events; allowing more than the presently required equity method of accounting for investments in corporate joint ventures would be contradictory to that effort.

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127


20 minutes, Easy Doris, Elsie & Frances Partnership

Pr. 3–1 Doris, Elsie & Frances Partnership Journal Entries

20 05 Jan 17 Cash

9 0 0 0 0

Elsie lsie,, Capit apita al ($28 ($280, 0,00 000 0 – $20 $200,00 0,000) 0) Frances, Capital ($250,000 – $240,000) To record additional investments by Elsie and by Frances

8 0 0 0 0 1 0 0 0 0

Frances in partial settlement of their capital deficits. 17 Tr Trade Accounts Payable Doris, Capital

6 0 0 0 0 3 0 0 0 0

Cash To record payment of liabilities, with remaining cash to

9 0 0 0 0

Doris in partial settlement of equity in partnership. 17 Doris, Capital ($120,000 – $30,000) Elsie, Capital ($160,000 – $80,000) Frances, Capital ($20,000 – $10,000)

9 0 0 0 0 8 0 0 0 0 1 0 0 0 0

To write off capital deficits of Elsie and Frances against equity of Doris, and to complete liquidation liquidation of partnership.



20 Minutes, Easy Ol mo, Perez & Quinto LLP

Pr. 3–2 Olmo, Perez & Quinto LLP Journal Entries

20 05 Feb 1 Cash

1 4 0 0 0 0

Olmo, Capital ($40,000 x 0.40) Perez, Capital ($40,000 x 0.40) Quinto, Capital ($40,000 x 0.20) Other Assets To record realization of assets at a loss of $40,000

1 6 0 0 0 1 6 0 0 0 8 0 0 0 1 8 0 0 0 0

($180,000 – $140,000 = $40,000). 1 Tr Trade Accounts Payable Loan Payable to Olmo [$40,000 + ($20,000 x 2/3)] Quinto, Capital ($20,000 x 1/3) Cash ($10,000 + $140,000) To record payment of liabilities and distribution of cash

9 0 0 0 0 5 3 3 3 3 6 6 6 7 1 5 0 0 0 0

to partners (see Exhibit 1 on page 130). 4 Cash Olmo, Capital ($10,000 x 0.40) Perez, Capital ($10,000 x 0.40) Quinto, Capital ($10,000 x 0.20) Other Assets

5 0 0 0 0 4 0 0 0 4 0 0 0 2 0 0 0 6 0 0 0 0

To record realization of remaining assets at a loss of $10,000 ($60,000 – $50,000 = $10,000). 4 Loan Payable to Olmo ($60,000 – $53,333) Olmo, Capital [($50,000 x 2/3) – $6,667] Quinto, Capital ($50,000 x 1/3) Cash

6 6 6 7 2 6 6 6 6 1 6 6 6 7 5 0 0 0 0

To record distribution of cash to partners (see Exhibit 1 on page 130). 5 Cash

3 0 0 0 0

Loan Receivable from Perez To record partial payment of loan to Perez. 5 Olmo, Capital ($110,000 x 2/3) Quinto, Capital (S110,000 x 1/3)

3 0 0 0 0

7 3 3 3 3 3 6 6 6 7

Loan Receivable Receivable from Perez ($50,000 – $30,000)

2 0 0 0 0

Perez, Capital ($70,000 + $16,000 + $4,000) To write off uncollectible amounts receivable from Perez.

9 0 0 0 0

5 Olmo, Capital Capital ($140,00 ($140,000 0 – $16,000 $16,000 – $4,000 – $26,666 – $73,333) Quinto, Capital ($80,000 – $8,000 – $6,667 – $2,000 – $16,667 – $36,667) Cash

2 0 0 0 1 9 9 9 9 3 0 0 0 0

To record distribution of cash to partners and completion of liquidation of partnership.

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129


Olmo, Perez & Quinto LLP (concluded) Exhibit 1

Pr. 3–2 Ol mo, Perez & Quinto LLP Cash Distribution Program January 31, 2005

Creditors

First

$ 90,000

Olmo

Quinto

1 0 0 %

Next 40,000 (1 x 40,000) Next

Perez

1 0 0 %

420,000 (4+2) x (70,000)

2 / 3

All over $550,000

1 / 3

4 0 %

4 0 %

2 0 %

Olmo, Perez & Quinto LLP Working Paper for Cash Distributions to Partners during Liquidation January 31, 2005 Olmo

Capital account balances before liquidation Income–sharing ratio Capital per unit of income (loss) sharing

$ 2 0 0 0 0 0 4 $ 5 0 0 0 0

Reduce Olmo’s balance to Quinto’s balance Capital per unit of income (loss) sharing Reduce balances of Olmo and Quinto Qu into to Perez’s balance Capital per unit of income (loss) sharing

Perez

Quinto

$( 1 2 0 0 0 0 ) 4 $ ( 3 0 0 0 0 )

$ $

8 0 0 0 0 2 4 0 0 0 0

$ ( 3 0 0 0 0 )

$

4 0 0 0 0

( 1 0 0 0 0 ) $

4 0 0 0 0 ( 7 0 0 0 0 )

$ ( 3 0 0 0 0 )

( 7 0 0 0 0 ) $ ( 3 0 0 0 0 )

$ ( 3 0 0 0 0 )

payable to Olmo is not paid in full in the second journal entry on February 1, 2005, because of the Note to Instructor: The loan payable right of offset.



20 minutes, Easy Hal, Ian, Jay & Kay LLP

Pr. 3–3 Hal, Ian, Jay & Kay LLP Cash Distribution Program September 25, 2005 Creditors

Hal

First

$80,000

Next

30,000

(20 x 1,500)

1 0 0%

Next

75,000

(75 x 1,000)

4 / 1 5

All over

Ian

Jay

Kay

6 / 1 5

5 / 1 5

3 0 %

2 5 %

1 0 0 %

$185,000

2 0 %

2 5 %

Hal, Ian, Jay & Kay LLP Working Paper for Cash Distributions to Partners during Liquidation September 25, 2005 Capital account balance before liquidation

Hal

Ian

Jay

Kay

$ 7 0 0 0 0

$ 2 5 0 0 0

$ 6 0 0 0 0

$ 5 0 0 0 0

2 0

2 5

3 0

2 5

Income-sharing ratio Capital per unit of income (loss) sharing Reduce Hal’s balance to balances of Jay and Kay Capital per unit of income (loss) sharing

$

The © The

131

$

1 0 0 0

$

2 0 0 0

$

2 0 0 0

$

1 0 0 0

$

2 0 0 0

$

2 0 0 0

( 1 5 0 0 ) $

Reduce balances of Hal, Jay, and Kay to balance of Ian Capital per unit of income (loss) sharing

3 5 0 0

2 0 0 0 ( 1 0 0 0 )

$

1 0 0 0

( 1 0 0 0 ) $

1 0 0 0

$

1 0 0 0

( 1 0 0 0 ) $

1 0 0 0


20 Minutes, Easy Carson & Worden LLP

Pr. 3–4 Carson & Worden LLP Cash Distribution Program September 23, 2005

a.

Creditors

First Next All over

$15,000 40,000 $55,000

Carson

Worden

1 0 0 % 1 0 0 % 4 0 %

6 0 %

Carson & Worden LLP Working Paper for Cash Distribution to Partners during Liquidation September 23, 2005 Capital account balances before liquidation (including $10,000 loan payable to Worden)

$

6 0 0 0 0

$ 3 0 0 0 0

Income-sharing ratio Capital per unit of income (loss) sharing

$

2 3 0 0 0 0

3 $ 1 0 0 0 0

Reduce Carson’s balance to W orden’s balance; Carson receives $40,000 ($20,000 x 2) Capital per unit of income (loss) sharing

( 2 0 0 0 0 ) $

1 0 0 0 0


$ 1 0 0 0 0


Carson & Worden LLP (concluded)

Pr. 3–4 Carson & Worden LLP

b.

Journal Entries 20 05 Sept 23 Cash

6 0 0 0 0

Carson, Capital ($10,000 x 0.40) Worden, Capital ($10,000 x 0.60)

4 0 0 0 6 0 0 0

Other Assets To record realization of other assets at a loss of

7 0 0 0 0

$10,000, divided between Carson and Worden in 2:3 ratio. 23 Tr Trade Accounts Payable Loan Payable to Worden

1 5 0 0 0 5 4 0 0

Carson, Capital Cash

4 3 6 0 0 6 4 0 0 0

To record distribution of cash to creditors, and to partners as below: Cars arson

First $4 $40,000 to to Ca Carson

Worden

$40,000

Balance of $9,000 to Carson and Worden in 2:3 ratio Totals Oct

3,600

$5,400

$43,600

$5,400

1 Cash Carson, Capital ($12,000 x 0.40) Worden, Capital ($12,000 x 0.60)

1 8 0 0 0 4 8 0 0 7 2 0 0

Other Assets To record realization of remaining other assets at a

3 0 0 0 0

loss of $12,000, divided between Carson and Worden in 2:3 ratio. 1 Loan Payable to Worden ($10,000 – $5,400) Carson, Capital (balance of capital account)

4 6 0 0 7 6 0 0

Worden, Capital (balance of capital account) Cash

6 8 0 0 1 9 0 0 0

To record distribution of cash to partners.

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133


20 minutes, Easy Luke, Mayo & Nomura LLP

Pr. 3–5 Luke, Mayo & Nomura LLP Journal Entries

20 05 May 9 Cash

8 0 0 0 0

Luke, Capital Mayo, Capital

4 0 0 0 0 4 0 0 0 0

Nomura, Capital Other Assets

4 0 0 0 0 2 0 0 0 0 0

To record realization of assets and division of $120,000 loss equally among among partners. 12 Liabilities

1 0 0 0 0 0 Cash

1 0 0 0 0 0

To record payment to creditors. 18 Liabilities

2 0 0 0 0

Luke, Capital To record Luke’s payment to creditors. 25 Cash

2 0 0 0 0

2 0 0 0 0 Luke, Capital Mayo, Capital

1 0 0 0 0 1 0 0 0 0

To record partners’ investments. June

1 Nomura, Capital

2 0 0 0 0

Cash To record payment to Nomura and completion of

2 0 0 0 0

liquidation.



30 Minutes, Easy Luna, Nava & Ruby LLP

Pr. 3–6 Luna, Nava & Ruby LLP

a.

Computation of Loss from Liquidation December 31, 2005 Net capital balance of Ruby ($108,000 – $9,000) Less: Amount received by Ruby on liquidation of partnership

$ 9 9 0 0 0 8 3 2 5 0

Ruby’s share of loss on realization of assets (20%) Total Total loss from liquidation ($15,750 ÷ 0.20)

$ 1 5 7 5 0 $ 7 8 7 5 0

Luna, Nava & Ruby LLP

b.

Statement of Realization and Liquidation December 31, 2005 Assets Cash

Balances before liquidation (net) Realization of assets and distribution of loss

$

5 2 5 0 0

Partners’ Capital (net of drawings) Other

$ 4 2 6 0 0 0

Liabilities

$ 1 5 0 0 0 0

Luna (50%)

$

9 9 0 0 0

Nava (30%)

$ 1 3 0 5 0 0

Ruby (20%)

$

9 9 0 0 0

30 Minutes, Easy Luna, Nava & Ruby LLP


a.

Computation of Loss from Liquidation December 31, 2005 Net capital balance of Ruby ($108,000 – $9,000) Less: Amount received by Ruby on liquidation of partnership

$ 9 9 0 0 0 8 3 2 5 0

Ruby’s share of loss on realization of assets (20%) Total Total loss from liquidation ($15,750 ÷ 0.20)

$ 1 5 7 5 0 $ 7 8 7 5 0

Luna, Nava & Ruby LLP

b.

Statement of Realization and Liquidation December 31, 2005 Assets Cash

Balances before liquidation (net) Realization of assets and distribution of loss of $78,750 (see a)

$

5 2 5 0 0

Balances Payment to creditors

$ 3 9 9 7 5 0 ( 1 5 0 0 0 0 )

Balances Payment to partners

$ 2 4 9 7 5 0 ( 2 4 9 7 5 0 )

3 4 7 2 5 0

Partners’ Capital (net of drawings) Other

$ 4 2 6 0 0 0

Liabilities

Luna (50%)

$ 1 5 0 0 0 0

$

$ 1 5 0 0 0 0 ( 1 5 0 0 0 0 )

$

5 9 6 2 5

$

5 9 6 2 5 ( 5 9 6 2 5 )

( 4 2 6 0 0 0 )

9 9 0 0 0 ( 3 9 3 7 5 )

Nava (30%)

$ 1 3 0 5 0 0

Ruby (20%)

$

( 2 3 6 2 5 )

9 9 0 0 0 ( 1 5 7 5 0 )

$ 1 0 6 8 7 5

$

8 3 2 5 0

$ 1 0 6 8 7 5 ( 1 0 6 8 7 5 )

$

8 3 2 5 0 ( 8 3 2 5 0 )

The © The

McGraw-Hill Companies, Inc., 2006

135


Luna, Nava & Ruby LLP (concluded)


c.

Journal Entries 20 05 Dec. 31 31 Cash Luna, Capital ($78,750 x 0.50)

3 4 7 2 5 0 3 9 3 7 5

Nava, Capital ($78,750 x 0.30) Ruby, Capital ($78,750 x 0.20)

2 3 6 2 5 1 5 7 5 0

Other Assets To record realization of other assets at a loss of $78,750. 31 Liabilities

4 2 6 0 0 0

1 5 0 0 0 0

Cash To record payment to creditors. 31 Luna, Capital Ruby, Capital Luna, Drawing Ruby, Drawing

1 5 0 0 0 0

2 4 0 0 0 9 0 0 0 2 4 0 0 0 9 0 0 0

Luna, Nava & Ruby LLP (concluded)


c.

Journal Entries 20 05 Dec. 31 31 Cash Luna, Capital ($78,750 x 0.50)

3 4 7 2 5 0 3 9 3 7 5

Nava, Capital ($78,750 x 0.30) Ruby, Capital ($78,750 x 0.20)

2 3 6 2 5 1 5 7 5 0

Other Assets To record realization of other assets at a loss of $78,750. 31 Liabilities

4 2 6 0 0 0

1 5 0 0 0 0

Cash To record payment to creditors. 31 Luna, Capital Ruby, Capital

1 5 0 0 0 0

2 4 0 0 0 9 0 0 0

Luna, Drawing Ruby, Drawing

2 4 0 0 0 9 0 0 0

To close partners’ drawing accounts to capital accounts. 31 Luna, Capital Loan payable to Nava Nava, Capital Ruby, Capital Cash To record payments to partners and to complete

5 9 6 2 5 3 0 0 0 0 7 6 8 7 5 8 3 2 5 0 2 4 9 7 5 0

liquidation.

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136


20 Minutes, Easy Haye & Lee LLP

Pr. 3–7 Haye & Lee LLP Journal Entries

20 05 Apr 1 Haye, Capital Accumulated Other Comprehensive Income Investments in Marketable Equity Securities

4 4 0 0 0 2 4 0 0 0 4 4 0 0 0

Haye, Capital ($24,000 x 0.75) Lee, Capital ($24,000 x 0.25) To record withdrawal of investments in common stock

1 8 0 0 0 6 0 0 0

by Haye at current fair value of $44,000. The investment gain of $24,000 is divided between Haye and Lee in 3:1 ratio. 3 Investment in Wong Products 12% bonds Other Assets Haye, Capital ($80,000 x 0.75)

1 8 0 0 0 0 1 0 0 0 0 0 6 0 0 0 0

Lee, Capital ($80,000 x 0.25) To record realization of other assets and trade name,

2 0 0 0 0

with investment gain of $80,000 divided in 3:1 ratio between Haye and Lee. 7 Cash Haye, Capital ($400 x 0.75)

3 5 6 0 0 3 0 0

Lee, Capital ($400 x 0.25) Investment in Wong Products 12% bonds

1 0 0

($40,000 x 0.90) To record realization of $40,000 face amount 12%

3 6 0 0 0

bonds, with investment loss of $400 divided in 3:1 ratio between Haye and Lee. 8 Liabilities

2 7 0 0 0 Cash

2 7 0 0 0

To record payment of liabilities. 10 Haye, Capital ($100,000 x 0.90) Lee, Capital ($60,000 x 0.90)

9 0 0 0 0 5 4 0 0 0

Investment in Wong Products 12% bonds ($160,000 x 0.90) To record distribution of Wong Products 12% bonds at

1 4 4 0 0 0

carrying amount, equal to 90% of face amount. 15 Haye, Capital Lee, Capital

1 5 7 0 0 (1) 2 9 0 0 (2)

Cash To record payment of cash to Haye and to Lee, based on balances of their respective capital amounts, amounts, to

1 8 6 0 0 (3)

complete the liquidation of the partnership. (1) $72,000 – $44,000 + $18,000 + $60,000 – $300 – $90,000 = $15,700 (2) $31,000 + $6,000 + $20,000 – $100 – $54,000 = $2,900 (3) $10,000 + $35,600 – $27,000 = $18,600



30 Minutes, Easy

Adams, Barna & Coleman LLP

Pr. 3–8 Adams, Barna & Coleman LLP

a.

Statement of Realization and Liquidation June 4, 2005 Assets Cash

Balances before before liquidation (including loan payable to Barna, $4,000) Realization of assets at loss of $63,300

$

6 0 0 0 3 0 7 0 0

Balances Unrecorded trade account payable

$

3 6 7 0 0

Balances Payment to creditors Balances Eliminate Coleman’s capital deficit

$


$

Partners’ Capital Other

$

9 4 0 0 0 ( 9 4 0 0 0 )

3 6 7 0 0 ( 2 0 5 0 0 ) $ 1 6 2 0 0

Liabilities

Barna (40%)

Coleman (20%)

$

2 0 0 0 0

$

2 7 0 0 0 ( 2 5 3 2 0 )

$

4 3 0 0 0 ( 2 5 3 2 0 )

$

1 0 0 0 0 ( 1 2 6 6 0 )

$

2 0 0 0 0 5 0 0

$

1 6 8 0 ( 2 0 0 )

$

1 7 6 8 0 ( 2 0 0 )

$

( 2 6 6 0 ) ( 1 0 0 )

$

2 0 5 0 0 ( 2 0 5 0 0 )

$

1 4 8 0

$

1 7 4 8 0

$

( 2 7 6 0 )

$

1 4 8 0 ( 1 3 8 0 )

$

1 7 4 8 0 ( 1 3 8 0 )

$

( 2 7 6 0 ) 2 7 6 0

$

1 0 0 ( 1 0 0 )

1 6 2 0 0 ( 1 6 2 0 0 )

The McGraw-Hill Companies, Inc., 2006 © The 138

Adams (40%)

1 6 1 0 0 ( 1 6 1 0 0 )

Modern Advanced Accounting, 10/e

Ada ms, Barna & Coleman LLP (concluded)

Pr. 3–8


b.

Journal Entries 20 05 June 4

Cash Adams, Capital ($63,300 x 0.40)

3 0 7 0 0 2 5 3 2 0

Barna, Capital ($63,300 x 0.40) Coleman, Capital ($63,300 x 0.20)

2 5 3 2 0 1 2 6 6 0

Other Assets To record realization of other assets at a loss of $63,300. 4 Ad A dams, Capital ($500 x 0.40) Barna, Capital ($500 x 0.40) Coleman, Capital ($500 x 0.20)

9 4 0 0 0

2 0 0 2 0 0 1 0 0

Liabilities To record trade account payable. 4 Liabilities

5 0 0

2 0 5 0 0 Cash

2 0 5 0 0

Ada ms, Barna & Coleman LLP (concluded)

Pr. 3–8


b.

Journal Entries 20 05 June 4

Cash Adams, Capital ($63,300 x 0.40)

3 0 7 0 0 2 5 3 2 0

Barna, Capital ($63,300 x 0.40) Coleman, Capital ($63,300 x 0.20)

2 5 3 2 0 1 2 6 6 0

Other Assets To record realization of other assets at a loss of $63,300.

9 4 0 0 0

4 Ad A dams, Capital ($500 x 0.40)

2 0 0

Barna, Capital ($500 x 0.40) Coleman, Capital ($500 x 0.20)

2 0 0 1 0 0

Liabilities To record trade account payable. 4 Liabilities

5 0 0

2 0 5 0 0 Cash

2 0 5 0 0

To record payment to creditors. 4 Adams, Capital Barna, Capital Coleman, Capital

1 3 8 0 1 3 8 0 2 7 6 0

To eliminate Coleman’s capital deficit. 4 Adams, Capital Loan Payable to Barna Barna, Capital Cash

1 0 0 4 0 0 0 1 2 1 0 0 1 6 2 0 0

To record payments to partners and to complete liquidation.

c.

Coleman’s Coleman’s loss must be limited to $5,000, or $25,000 for the partnership ($5,000 ÷ 0.20 = $25,000). Because the liquidation of liabilities results in a loss of $500, only $24,500 may be lost on the realization of other assets. This requires that other assets realize $69,500 ($94,000 – $24,500 = $69,500) to enable Coleman to receive $5,000 from the partnership to pay personal creditors in full.



30 Minutes, Easy

Smith, Jones & Webb LLP

Pr. 3–9 Smith, Jones & Webb LLP Statement of Realization and Liquidation May through July, 2005 Assets

Partners’ Capital

Cash

Other

Balances before liquidation May—Realization of assets at loss of $30,000

$

2 0 0 0 0 7 5 0 0 0

Balances Payment to creditors

$

Balances Payment to Webb ( Exhibit 1, p. 141)

Liabilities

Smith (1/3)

Jones (1/3)

Webb (1/3)

$ 2 8 0 0 0 0 ( 1 0 5 00 0 )

$

8 0 0 0 0

$

6 0 0 0 0 ( 1 0 0 0 0)

$

7 0 0 0 0 ( 1 0 00 0 )

$

9 0 0 0 0 ( 1 0 00 0 )

9 5 0 0 0 ( 8 0 0 0 0 )

$ 1 7 5 0 0 0

$

8 0 0 0 0 ( 8 0 0 0 0 )

$

5 0 0 0 0

$

6 0 0 0 0

$

8 0 0 0 0

$

1 5 0 0 0 ( 1 5 0 0 0 )

$ 1 7 5 0 0 0

$

5 0 0 0 0

$

6 0 0 0 0

$

8 0 0 0 0 ( 1 5 0 0 0 )

Balances June—Realization of assets at loss of $36,000 Balances Payments Payments to partners ( Exhibit 1, p. 141)

$

0 0 0 )

$ 1 7 5 0 0 0 ( 6 1 0 0 0 ) $ 1 1 4 0 0 0

$

5 0 0 0 0 ( 1 2 0 0 0) $ 3 8 0 0 0

6 ( 1 $ 4 ( 1

Balances July—Realization of remaining assets at loss of $30,000

$

$ 1 1 4 0 0 0

$

$


$

- 0 2 5 0 0 $ 2 5 0 0 ( 2 5 0 0

- 0 8 4 0 0 0

( 1 1 4 0 0 0 )

( 1 0 0 0 0 )

8 4 0 0 0 ( 8 4 0 0 0 )

$

The McGraw-Hill Companies, Inc., 2006 © The 140

3 8 0 0 0

$

2 8 0 0 0 ( 2 8 0 0 0 )

0 2 8 0

0 0 0 0

0 0 ) 0 0 )

3 8 0 0 0

$

6 ( 1 $ 5 ( 1 $

( 1 0 0 0 0 ) $

2 8 0 0 0 ( 2 8 0 0 0 )

5 2 3 5

0 0 0 0

( 1 0 0 0 0 ) $

2 8 0 0 0 ( 2 8 0 0 0

Pr. 3–9 Cash Distribution Program April 30, 2005

Creditors

$80,000

Next

20,000

Next

20,000

All over

Smith

Jones

Webb

1 0 0 % 1 0 0 %

$120,000

1 / 3

5 0 %

5 0 %

1 / 3

1 / 3

Smith, Jones & Webb Working Paper for Cash Distributions to Partners during Liquidation April 30, 2005 Smith

Capital account balances before liquidation

$ 6 0 0 0 0

Jones

$

7 0 0 0 0

Webb

$

0 0 ) 0 0 )

3 8 0 0 0

Smith, Jones & Webb LLP

First

0 0 0 0

Modern Advanced Accounting, 10/e

Smith, Jones & Webb LLP (concluded) Exhibit 1

0 0 0 0

9 0 0 0 0

Smith, Jones & Webb LLP (concluded) Exhibit 1

Pr. 3–9 Smith, Jones & Webb LLP Cash Distribution Program April 30, 2005

Creditors

First

$80,000

Next

20,000

Next

20,000

All over

Smith

Jones

Webb

1 0 0 % 1 0 0 %

$120,000

1 / 3

5 0 %

5 0 %

1 / 3

1 / 3

Smith, Jones & Webb Working Paper for Cash Distributions to Partners during Liquidation April 30, 2005 Smith

Jones

Webb

Capital account balances before liquidation Income-sharing ratio Divide capital account balances by income-

$ 6 0 0 0 0 1

$

7 0 0 0 0 1

$

9 0 0 0 0 1

sharing ratio Required reduction to bring capital balance of Webb to equal the next highest balance of

$ 6 0 0 0 0

$

7 0 0 0 0

$

9 0 0 0 0

Jones Capital per unit of income (loss) sharing Required reduction to bring the capital balances of Jones and Webb to equal the capital balance

( 2 0 0 0 0 ) $ 6 0 0 0 0

$

of Smith Capital per unit of income (loss) sharing

7 0 0 0 0

( 1 0 0 0 0 ) $ 6 0 0 0 0

$

6 0 0 0 0


$

7 0 0 0 0

( 1 0 0 0 0 ) $

6 0 0 0 0


45 Minutes, Medium Densen, Eastin & Feller LLP

Pr. 3–10 Densen, Eastin & Feller LLP Cash Distribution Program December 31, 2005 Creditors

First Next

$20,000 2,400 (3 x 800)

Next All over

5,500 (2 + 3) x (1,100) $27,900

Denson

Eastin

Feller

1 0 0 % 1 0 0 % 6 0 % 3 0 %

5 0 %

4 0 % 2 0 %

Densen, Eastin & Feller LLP Working Paper for Cash Distributions to Partners during Liquidation December 31, 2005 Capital account balances before liquidation (including $10,000 loan payable to Denson)

Denson

Eastin

Feller

$ 3 2 0 0 0

$ 2 4 9 0 0

$ 1 5 0 0 0

Income-sharing ratio Divide capital account balances by incomesharing ratio Required reduction to bring capital per unit of

5

3

$

6 4 0 0

$

8 3 0 0

$

6 4 0 0

$

7 5 0 0

$

( 1 1 0 0 ) 6 4 0 0

income sharing for Eastin down to equal the next highest balance for Feller Capital per unit of income (loss) sharing Required reduction to bring capital per unit of income sharing for Eastin and Feller to equal the

a.

2 $

7 5 0 0

$

7 5 0 0

( 8 0 0 )

balance for Denson Capital per unit of income (loss) sharing

$

6 4 0 0

( 1 1 0 0 ) $

6 4 0 0

Denson and Feller would receive nothing if Eastin received only $2,000 on the first distribution because Eastin is entitled to 100% of the first $2,400 of any cash distributed after creditors are paid.

The © The

142


Denson, Eastin & Feller LLP (concluded) b.

Pr. 3–10

If Denson received $20,000 as a result of the liquidation, the total cash distributed must have been $67,900, consisting of $6,000 of cash on hand and $61,900 realized from noncash assets. In reaching this conclusion, one may use the priorities indicated in a on page 142 and prepare the following program of cash payments:

First $20,000 to creditors Next $2,400 to Eastin Next $5,500 to Eastin and Feller in 3:2 ratio

Cash

Liabilities

$ 2 0 0 0 0 2 4 0 0 5 5 0 0

$ 2 0 0 0 0

Any amount over $27,900 in 5:3:2 ratio

$ 6 7 9 0 0

Partners’ Capital Eastin (3) $

4 0 0 0 0

Totals

Denson (5)

$ 2 0 0 0 0

2 4 0 0 3 3 0 0

Feller (2)

$

2 2 0 0

$ 2 0 0 0 0

1 2 0 0 0

8 0 0 0

$ 2 0 0 0 0

$ 1 7 7 0 0

$ 1 0 2 0 0

A short-cut approach to the answer is based on the following: If Denson received $20,000, Denson incurred a loss of $12,000 on a total equity of $32,000. Because Denson’s income-sharing ratio is 50%, the total loss must be $24,000 ($12,000 ÷ 0.50 = $24,000). A loss of $24,000 would mean that the noncash assets, which have a carrying amou amount nt of $85,900 ($91,900 – $6,000 cash = $85,900), must have realized $61,900 ($85,900 – $24,000 = $61,900). c.

If Feller received $6,200 in the first distribution of cash, Denson must have received $10,000. The reason, as shown in a on page 142, is that Feller is entitled to receive $2,200 ($5,500 x 0.40 = $2,200) before Denson gets anything. Feller then received the additional $4,000 as a 20% share of the next $20,000 and Denson received 50% of $20,000, or $10,000.

The © The

McGraw-Hill Companies, Inc., 2006

143


50 Minutes, Medium Lord & Lee Partnership; Lord-Lee Corporation

Pr. 3–11

Lord & Lee Partnership Journal Entries

a.

20 05 Dec 31 Sh Short-Term Prepayments Land ($45,000 – $28,000) Inventories ($75,000 – $56,000) Accrued Liabilities Allowance for Doubtful Accounts

1 5 0 0 1 7 0 0 0 1 9 0 0 0 7 5 0 1 2 0 0 0

Lord, Capital ($24,750 x 0.40) Lee, Capital ($24,750 x 0.60)

9 9 0 0 1 4 8 5 0

To adjust assets and liabilities and to divide net gain of $24,750 in the income-sharing ratio of 40:60 between Lord and Lee. 31 Lord, Capital Lee, Capital Cash To record withdrawal of cash by partners to avoid need

9 0 0 1 0 5 0 1 9 5 0

50 Minutes, Medium Lord & Lee Partnership; Lord-Lee Corporation

Pr. 3–11

Lord & Lee Partnership Journal Entries

a.

20 05 Dec 31 Sh Short-Term Prepayments Land ($45,000 – $28,000)

1 5 0 0 1 7 0 0 0

Inventories ($75,000 – $56,000) Accrued Liabilities Allowance for Doubtful Accounts

1 9 0 0 0 7 5 0 1 2 0 0 0

Lord, Capital ($24,750 x 0.40) Lee, Capital ($24,750 x 0.60)

9 9 0 0 1 4 8 5 0

To adjust assets and liabilities and to divide net gain of $24,750 in the income-sharing ratio of 40:60 between Lord and Lee. 31 Lord, Capital

9 0 0

Lee, Capital Cash

1 0 5 0 1 9 5 0

To record withdrawal of cash by partners to avoid need for issuance of fractional shares of common stock. (See (See Jan 2, 2006, journal entry below.) 31 Receivable fro from Lord-Lee Corporati ation

1 9 6 8 0 0

Accumulated Depreciation of Buildings Allowance for Doubtful Accounts

1 7 0 0 0 1 2 0 0 0

Accrued Liabilities Trade Accounts Payable

7 5 0 1 0 0 0 0

Cash Trade Accounts Receivable Inventories

3 5 0 5 0 3 0 0 0 0 7 5 0 0 0

Short-Term Prepayments Land

1 5 0 0 4 5 0 0 0

Buildings To record transfer of assets and liabilities to Lord-Lee

5 0 0 0 0

Corporation. 31 Common Stock of Lord-Lee Corporation (12,300 x $16) Receivable from Lord-Lee Corporation To record receipt of 12, 12,300 300 shares of $10 par common

1 9 6 8 0 0 1 9 6 8 0 0

stock issued at $16 a share in payment for net assets transferred to Lord-Lee Corporation. Corporation. 20 06 Jan 2 Lord, Capital (4,500 x $16)

7 2 0 0 0

Lee, Capital (7,800 x $16) Common Stock of Lord-Lee Corporation To record distribution dist ribution of common stock of Lord-Lee

1 2 4 8 0 0 1 9 6 8 0 0

Corporation to partners: 4,500 shares to Lord and 7,800 shares to Lee. Shares allocated as follows: Lord [($63,000 + $9,900 – $900) ÷ $16] Lee [($111,000 [($111,000 + $14,850 – $1,050) ÷ $16] Total

The © The

144

4,500 7,800 12,300


Lord & Lee Partnership; Lord-Lee Corporation (continued)

Pr. 3–11



Lord-Lee Corporation

b.

Journal Entries 20 06 Jan Jan 2 Mem Memoran orandu dum m entr entry: y: Rece Receiived ved autho uthori riz zatio ation n to issu issue e 150,000 shares of $10 par common stock. 2 Cash

3 2 0 0 0 0

Common Stock, $10 par (20,000 x $10) Paid-In Capital in Excess of Par To record issuance of 20,000 shares of common stock

2 0 0 0 0 0 1 2 0 0 0 0

at $16 a share to public investors. 2

Cash

3 5 0 5 0

Trade Accounts Receivable Inventories Short-Term Prepayments

3 0 0 0 0 7 5 0 0 0 1 5 0 0

Land Buildings ($50,000 – $17,000)

4 5 0 0 0 3 3 0 0 0

Allowance for Doubtful Accounts Accrued Liabilities

1 2 0 0 0 7 5 0

Trade Accounts Payable Payable to Lord & Lee Partnership

1 0 0 0 0 1 9 6 8 0 0

To record acquisition of net assets of Lord & Lee Partnership. 2 Payable to Lord & Lee Partnership Common Stock, $10 par (12,300 x $10) Paid-In Capital in Excess of Par To record issuance of 12,300 shares of $10 par

1 9 6 8 0 0 1 2 3 0 0 0 7 3 8 0 0

common stock at $16 a share in payment for net assets acquired from Lord & Lee Partnership.

Lord & Lee Partnership; Lord-Lee Corporation (concluded)

The © The

146

Pr. 3–11


Lord-Lee Corporation Balance Sheet January 2, 2006 Assets

Current assets: Cash Trade accounts receivable

$ 3 5 5 0 5 0 $

Less: Allowance for doubtful accounts

3 0 0 0 0 1 2 0 0 0

1 8 0 0 0

Inventories, at replacement cost Short-term prepayments

7 5 0 0 0 1 5 0 0

Total current assets Plant assets: Land, at current fair value Buildings (net)

$ 4 4 9 5 5 0

$

4 5 0 0 0 3 3 0 0 0

Total assets

7 8 0 0 0 $ 5 2 7 5 5 0

Liabilities & Stockholders’ Equity

Current liabilities: Trade accounts payable

$

Accrued liabilities

1 0 0 0 0 7 5 0

Total current liabilities

$

1 0 7 5 0

Stockholders’ equity: Common stock, $10 par, authorized 150,000 shares, i ssued and outstanding 32,300 shares Additional paid-in capital

$ 3 2 3 0 0 0 1 9 3 8 0 0

Total liabilities & stockholders’ equity

$ 5 2 7 5 5 0


5 1 6 8 0 0


Chapter 03, Modern Advanced accounting-review Q & exr

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