Advance Accounting Dayag Chapter 5

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

72,000

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)

(7,200)

(1,200) (66,00 0) 4,800 21,600 (1,320)

______ 91,800

(66,000 ) 18,000

_____ 6,000

_____ 3,000

(3,600)

( 480)

( 240)

( 240 )

______ 18,720

______ 21,960

______ 16,560 (1,680 )

(30,00 0)

(3,360)

(1,680)

( 528)

( 264)

( 240) ______ 12,360 (1,680) ( 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

(18,00 0)

( 1,440 )

______

______

_____

( 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

(19,80 0)

(5,520)

(2, 760)

(2,760 )

(2,760)

6,000 (4,800)

______

(1,920)

( 960)

( 960)

2,000

15,000

3,264

4,896

4,080

4,080

4,080

( 360)

( 360)

(1,500)

______

( 720)

500

18,000

2,554 _____

2,400

(18,00 0)

April - Realization - Payment of expenses Balances before payment to partners Payment to Partners (Note 1) Balances after April May - Realization - Payment of expenses

NonCash Assets 181,80 0

( 960)

( 960)

( 360) 4,896

3,720

3,720

3,720

(6,240)

(3,120)

(3,120 )

(3,120)

( 384)

( 192)

( 192)

( 192 ) Balances before Offsetting Offset deficit vs. Loan Balances before payment Payment to Partners (Note 2)

1,440

( 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. 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

P

P 39,000

Applied to:

A, capital (40%)

Loans Capital

2,736 ___-02,736

-05,688 5,688

-05,568 5,568

3,000 1,368 4,368

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%)

V, capital (20%)

W, capital (20%)

6,000 26,400 32,400

25,800 25,800

20,400 20,400

3,000 16,200 19,200

T, capital (40%)

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.

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

Creditor s 100%

T

U 100%

V

W

3. Next P2,000 4. Next P7,500 5. Remainder

40%

50% 33 1/3% 20%

50% 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

Preliquidation balances July:

Cash

Noncash Assets

Accounts Payable

6,000

135,000

(17,000)

PP

EE

50% (55,00 0)

30% (45,000)

TT 20% (24,000)

Assets Realized Paid liquidation costs Paid creditors

26,500 (1,000) (17,000 ) 14,500

(36,000)

4,750 500

2,850 300

1,900 200

(49,75 0)

(41,850)

(21,900)

17,000 99,000

-0-

Safe Payments (Sch. 1)

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

1,000 (6,500)

(36,700) 28,500 750

1,500 1,000 (1,000) -0-

(12,800) 19,000 500

(3,250) Absorption of TTs’ potential deficit PP: P6,700 x .50/.80 EE: P6,700 x .30/.80

(7,450)

6,700 (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

(62,500)

(37,500) 37,500

(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-

(13,700)

14,600 (5,800)

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 Decrease highest LAP to next highest LAP:

D 50% (100,000)

(200,00 0)

(466,66 7)

(375,00 0)

S

V

30% (140,000)

20% (75,000 )

Decrease S by P91,667 (Cash distribution: P91,667 x . 30)

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

(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 (31,000)

4,650 (76,100)

3,100 (47,400)

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 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:

5,000

(40,000 )

60% to S 40% to V

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 Next Next All over

P 50,000 34,000 48,000 P132,000

Creditors 100%

Ames

40%

Beard 100% 33 1/3% 20%

Craig 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 Reduce Beard's Capital per unit Reduce Beard's Capital per unit

of income sharing P15,000 capital to next highest capital for Craig ______ of income sharing P15,000 and Craig's capital to Ames's capital ______ of income sharing P15,000

P40,000 P23,000 (17,000) ______ P23,000 P23,000 (8,000) (8,000) P15,000 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 1. c

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

JJ

CC

TT

Total

Profit ratio

40%

50%

10%

100%

Prior capital

(160,000 )

(45,000)

(55,000)

(260,000)

30,000

6,000

60,000

(15,000)

(49,000)

(200,000)

Loss on sale of inventory

24,000 (136,000 )

2. a

Peter

Paul

Mary

Total

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 3.

4.

300,000

( 50,000 ) 250,000

160,000 (90,000

d

d

Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce CC to BB: (77,500 x .20 = 15,500) Balances Loss to reduce BB & CC to AA: (B:70,000 x .40 = 28,000) (C:70,000 x .20 = 14,000) Balances

AA 37,000 40% 92,500

350,00 0

400,000

1,050,00 0

(50,000 )

(25,000 )

(125,000)

300,00 0

375,000

925,000

160,00 0 140,00 0

80,000

400,000

295,000

525,000

BB

CC

65,000 40%

48,000

162,500

240,000

20%

77,500 92,500

162,500

162,500

70,000 92,500

70,000

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

Total

Capital before realization Loss on sale (2:2:1); [90 – 50]

37,000

B

65,000

(16,000)

( 16,000)

21,000

49,000

48,000 ( 8,000) 40,000

C

150,00 0 (40,000 ) 110,00 0

Possible loss P90,000, unrealized NCA

(36,000)

(15,000)

20,000 Possible insolvency loss (2:1)

13,000

15,000

3,000

8.

90,000

22,000

(10,000)

0

( 5,000)

17,000

b A

Total

Capital before realization

B

65,000

37,000

Loss on sale (2:2:1); [90 – 50]

Possible loss P90,000, unrealized NCA plus P3,000 = P93,000

0

(18,000)

(36,000)

( 16,000)

21,000

49,000

(37,200)

(37,200)

17,000 Possible insolvency loss (2:1)

16,200

a

40,000 (18,600)

AE 40% (40,000) 40,000 -0-

BT 30% (180,000) 30,000 (150,000)

93,000

21,400

(10,800) 1,000

Profit and loss ratio Capital balances Loss of P100,000 Remaining equities

150,00 0 (40,000 ) 110,00 0

( 8,000)

11,800

17,000

9.

48,000

(16,000)

(16,200)

C

( 5,400)

16,000

KT 30% (30,000) 30,000 -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 Actual loss on assets (5:3:2)

Possible loss – unrealized NCA Safe payments

CC 5/10 80,000

DD 3/10 90,000

(15,000 )

(9,000)

65,000 ( 50,00 0) 15,000

81,000 (30,000) 51,000

EE 2/10 70,000 (6,000) 64,000 (20,000 ) 44,000

Total 10/10 240,00 0 ( 30,00 0) 210,00 0 ( 20,00 0) 190,00 0

15. c

Capital before realization

X 130,000

Divided by: Loss absorption abilities 16. a

50% 260,000

130,000

30% 260,000

Y

Z

100,000 20% 500,000

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

Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce N to D: (80,000 x .20 = 16,000)

D 72,000 40% 180,000

Potential loss from Sandy deficit

Loss to reduce H and J: (50:35) Balances

N

J

32,000 20%

52,000

24,000

20%

20%

160,000

260,000

120,000

80,000

18. d – Harding, P6,107; Jones, P12,275

Capital balances

R

H

20,000 (5,882) 14,118 (8,011) 6,107

J

____0

S

Total

22,000 (4,118)

(10,000)

32,000

10,000

0

17,882

0

32,000 (13,618)

(5,607) 12,275

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

Capital balances Additional contribution

H

J

20,000

22,000 0

S (10,000)

0

Capital balances

20,000

Divided by: Profit and loss ratio

35/85

50/85

Loss absorption power

53,429

34,000

Loss to reduce JJ to HH: (19,428 x 35/85 = 8,000)

10,000

22,000

19,428

Balances

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

34,000 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

70,000 20,000 90,000 (15,000) 75,000

B

30,000 ______ 30,000 ( 15,000) 15,000

50,000 ______ 50,000 (15,000) 35,000

C

150,00 0 20,000 170,00 0 (45,000 ) 125,00 0

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

B

Total

Capital before realization

30,000

70,000

Loan Total interests Loss on sale (240,000 – 195,000)

Payment of loans to partner

50,000

______

20,000 90,000

55,000 105,000 Asset received ______ (30,000) Payment to partners after payment of loan 55,000 75,000

20,000 170,00 0 (45,000 ) 125,00 0 (20,000 )

50,000 (15,000)

( 15,000) 15,000

(20,000)

150,00 0

______

30,000

(15,000) 75,000

C

35,000

______

_____

15,000 ______

35,000 (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

Capital balances Less: Machine, at fair value Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce E to D: (45,000 x 1/3 = 15,000) Balances 25. c

Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce CC to BB: (170,000 x .10 = 17,000)

D

E

F

40,000 ______

90,000 (35,000)

30,000 ______

40,000 1/3

55,000 1/3

30,000

120,000

165,000

90,000

(45,000)

____0

120,000

90,000

120,000

1/3

K

M

B

J

59,000

39,000 30%

34,000

34,000

10%

20%

130,000

340,000

170,000

40% 147,500

170,000

____0

Balances 26. c

Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce CC to BB: (15,000 x .20 = 3,000) Balances

147,500

130,000

C

P

60,000

27,000 30%

43,000

20,000

20%

10%

90,000

215,000

200,000

15,000

____0

200,000

200,000

40% 150,000

150,000

170,000 H

90,000

170,000 M

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:

Capital balances Loan Total interests Potential insolvency loss (3:2)

28. b

Capital balances Potential loss from A deficit (5:3)

Loss to reduce H and J: (5:3)

Possible insolvency loss 0

W (2,000) ______ (2,000) 2,000

A (5,000) 5,000

J

F

R

(5,000)

13,000

3,000

_______

(2,000) 2,000

13,000

7,000

( 2,400)

(1,600)

10,600

5,400

B

7,000

C

18,000 (3,125) 14,875

(8,750) 6,125

Total

6,000

19,000

(1,875) 4,125

0

(5,250) (1,125) (1,125)

__

19,000 (14,000) 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

P20,000 P50,000 P 4,500

Cash, beginning Add (deduct): Liquidation expenses paid Payment of liabilities Proceeds from sale of assets (?) Payment to partner before payment to Renquist (priority I only) 30. d – Justice P15,533

Capital balances Potential loss from Douglass (40:35) Note:

J

(7,467) 15,533

P50,000

P 90,000 ( 8,000) (170,000) 108,000 P 20,000

Z

23,000

PAYMENTS ___ R Total

D

Total

22,000 (6,533)

(14,000)

31,000

14,000

0

15,467

0

31,000

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)

Capital balances Additional contribution Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce Z to D: (4,018 x 35/55 = 1,875) Balances Cash available

J

Z

23,000

22,000 0

0 23,000 40/75 43,125

22,000 35/75 47,143 4,018

43,125 P31,000

43,125

D (14,000) 14,000

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

P60,000

T

Cash received by Tree Divided by: P & L ratio Amount in excess of P7,500 Total cash payments – refer to program Payment to partners 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

18,000 36,000 P18,000 P 96,000

P 60,000 250,000 5,000 10,000 (120,000) P205,000

INTERESTS N D

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

___

P60,000

18,000 P – P 78,000

Cash received by the partner Kemp Add (deduct): Liabilities paid Expenses paid Contingency Cash, beginning Proceeds from sale of other assets 32. b

PAYMENTS R Total

K

T

PAYMENTS N D

P 1,500 –

3,000 P 4,500

___ Total

P1,500

P 3,000 6,000 P 3,000 P 7,500

P

6,250 2/4 P 12,500 P 20,000

7,500

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

Balances before realization Loans………………….. Capital………………... Total interests………... Divided by: P&L ratio………… Loss absorption abilities…….. Priority I…………………………. 2,000 Priority II………………………… 14,000 (d) P16,000

P

INTERESTS Q R

P

PAYMENTS______ Q R Total

P 6,000 P(10,000) 24,000 P36,000 60,000 P30,000 P36,000 P50,000 3/10 3/10 4/10 P100,000 P120,000 P125,000 (5,000) P100,000 P120,000 P120,000 (20,000) (20,000) P100,000 P100,000 P100,000

P 2,000 P P6,000 P – P6,000

8,000 P10,000

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 principles. M K C Total

Capital before realization Loss on sale (50%:30%:20%)

Additional loss (3:2)

100,000

175,000

75,000

(162,500 )

(97,500)

( 62,500)

77,500

(65,000) 10,000

62,500

(37,500)

(25,000)

40,000

(15,000)

350,000 *(325,0 00) **25,00 0 ______25,000

Additional loss

(15,000)

*balancing figure – total reduction in capital

15,000

-0-

25,000

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 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

40% Hara 135,000

30% Ives 216,000

30% Jack 49,000

remaining assets Contingencies Subtotals

200,000 10,000

Eliminate Jack’s debit balance

( (

80,000 ) 4,000 ) 51,000

( (

60,000 ) 3,000 ) 153,000

(

8,000 )

(

6,000 )

Safe payments

43,000

( ( (

60,000 ) 3,000 ) 14,000 ) 14,000

147,000

0

16. P495,000 = (P162,000 + P36,000) / .40 17. c

P

Capital before realization Liquidation expenses

Divided by: Loss absorption abilities

Q

70,000

50,000

100,000

(1,600)

( 3,200)

( 3,200 )

68,400 20%

46,800

96,800 40%

342,000

117,000

40%

Selling Price Book value Loss

R

242,000

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 Equities,Jun 30 Inventory loss Contingency fund

( (

Warle 8,000 2,000 ) 400 )

( (

Xin 15,000 3,000 ) 600 )

( (

Yates 6,000 5,000 ) 1,000 )

( (

Total 29,000 10,000 ) 2,000 )

Subtotals

5,600

Possible losses on remaining assets Subtotals Eliminate Yates’s Deficit Subtotals

0 ( (

7,500 ) 7,500 )

17,000

(

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 Warle’s Deficit Cash distribution

(

15,000 ) 2,000

THEORIES

True or False

1 . 2 . 3 . 4 . 5 .

11,400

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

1 8. 1 9.

b b

23 . 24 .

a d

28 . 29 .

b e

33 . 34 .

b d

3 8. 3 9.

c d

43 . 44 .

d b

2 0. 2 1. 2 2.

a a d

25 . 26 . 27 .

d a d

30 . 31 . 32 .

a a c

35 . 36 . 37 .

b a b

4 0. 4 1. 4 2.

b a b

45 . 46 .

c d