Dayag Chapter 4

Chapter 4 Problem I 1: Gain on Realization Fully Allocated to Partner’s Capital Balances. QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Realization and distribution of gain Balances after realization Payment of liabilities Balances after payment of liabilities Payment to partners loan Balances after payment of partners’ loans Payment to partners capital

Cash

NonCash Assets

24,000

84,000

Liabilitie s

Q, Loan

Q, Capital 30%)

R, Capital (50%)

S, Capital (20%)

12,000

2,400

9,600

48,000

36,000

_____ 12,000 (12,000 )

______ 2,400

3,600 13,200

6,000 54,000

2,400 38,400

108,000

2,400

13,200

54,000

38,400

(2,400)

(2,400)

______

______

96,000 120,000

(84,000 )

(12,000)

105,600 (105,600 )

13,200 (13,200 )

54,000 (54,000 )

_______ 38,400 (38,40 0)

2: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from Partner’s Loan Account (Right of Offset Exercised). QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4 Cash Balances before liquidation Realization and distribution of loss Balances after realization

24,000 48,000 72,000

NonCash Assets

Liabilitie s

84,000

12,000

(84,000 )

____ _ 12,000 (12,000 )

Q, Loan

Q, capital (30%)

R, Capital (50%)

S, Capital (20%)

2,400

9,600

48,000

36,000

______ 2,400

(10,800 ) (1,200)

(18,000 ) 30,000

(7,200) 28,800

Payment of liabilities Balances after payment of liabilities

(12,000) 60,000

2,400

(1,200)

30,000

28,800

Offset deficit versus loans

_______

1,200

_______

_______

Balances after offsetting Payment to partners – loan Balances after payment of partners’ loans Payment to partners capital

60,000

(1,200) 1,20 0 (1,20 0)

30,000

28,800

_______

______

30,000 (30,000 )

28,800 (28,80 0)

(1,200) 58,800 (58,800)

3: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from Partner’s Loan Account (Right of Offset Exercised and Additional Capital Investment is Required and Made). QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Cas

NonCash Assets

Liabilitie s

24,000

84,000

12,000

2,400

36,000

(84,000 )

_____ ___

________

h Balances before liquidation Realization and distribution of loss

Q, Loan

R, Capital (50%)

S, Capital (20%)

9,600

48,000

36,000

(24,000 )

(9,600)

2,400

(14,400 ) ( 4,800 )

24,000

26,400

________

_______

_______

_______

( 4,800) 2,40 0

24,000

26,400

_______

_______

48,000

(2,400)

24,000

26,400

__2,400

2,400

_______

_______

24,000 (24,000 )

26,40 0 (26,40 0)

Balances after realization

60,000

Payment of liabilities Balances after payment of liabilities

(12,000) 48,000

2,400

Offset loan versus deficit – Balances after offsetting partner’s loan Additional investment by Q

_______

(2,400)

Balances after additional Investment Payment to partners capital

Q, capital (30%)

12,000 (12,000 )

50,400 (50,400)

4: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made (Personally Insolvent). QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Realization and distribution of gain

Cash

NonCash Assets

24,000

84,000

12,000

2,400

42,000

(84,000 )

_______

________

12,000 (12,000 )

Balances after realization

66,000

Payment of liabilities Balances after payment of liabilities Offset loan versus deficit Balances after offsetting Additional loss due to insolvency of Q Balances after additional , Loss Payment to partners capital

(12,000)

Liabilitie s

54,000 _______ 54,000

Q, Loan

Q, capital (30%)

R, Capital (50%)

S, Capital (20%)

9,600

48,000

36,000

(21,000 )

(8,400)

2,400

(12,600 ) ( 3,000 )

27,000

27,600

_______

_______

_______

_______

2,400 (2,400)

(3,000) 2,400 ( 600)

27,000 ______ 27,000

27,600 ______ 27,600

600

( 429)

( 171)

26,571 (26,571 )

27,429 (27,42 9)

_______ 54,000 (54,000)

5: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made (Personally Insolvent). QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4 Cash

Non-

Liabilitie

Q, Loan

Q,

R,

S,

Cash Assets Balances before liquidation Realization and distribution of gain

capital (30%)

s

24,000

84,000

12,000

2,400

24,000

(84,000 )

_______

_______

12,000 (12,000 )

Balances after realization

48,000

Payment of liabilities Balances after payment of liabilities

(12,000) 36,000

Offset loan versus deficit

______

Balances after offsetting Additional investment by Q Balances after additional investment Additional loss due to insolvency of Q Balances after additional Loss Payment to partners capital

36,000

Capital (50%)

Capital (20%)

9,600

48,000

36,000

(30,00 0)

(12,00 0)

2,400

(18,000 ) ( 8,400 )

18,000

24,000

_______

_______

_______

2,400 (2,400 )

( 8,400)

18,000

24,000

2,400 (6,000) ,

______

_______

18,000

24,000

_3,600

_______

______

_______

39,600

_ 3,600 (2,400 )

18,000

24,000

______

2,400

(1,714)

( 686)

16,286 (16,286 )

23,314 (23,31 4)

39,600 (39,600)

6: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent. QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Payment of liquidation expenses Balances after payment of liquidation expenses Write-off goodwill and prepaid expenses Balances after write-offs Realization and distribution of loss Balances after realization Payment of liabilities Balances after payment of Liabilities

Cash

NonCash Assets

24,000

84,000

12,000

(14,400)

______

________

________

(4,320)

(7,200)

(2,880)

12,000

2,400

_______

84,000 (72,000 )

5,280 (21,600 )

40,800 (36,000 )

33,120 (14,40 0)

9,60 0

12,000

12,000

(16,320 )

4,80 0

18,720

1,200

(12,000 )

( 3,240 ) ( 19,560 )

( 5,400 ) ( 600 )

( 2,160 )

________

_______

________

_______

2,400

(19,560 )

(2,400)

9,60 0

10,800 (10,800) -0-

Offset loan versus deficit

______

Balances after offsetting Additional investment by Q and R

-017,76 0

Liabilitie s

Q, Loan

Q, capital (30%)

2,400

9,600

48,000

36,000

_______

________ 2,400

_______

________

12,000 (10,800 )

2,400

1,200 _______ 1,200 _______

R, Capital (50%)

(

S, Capital (20%)

16,560

600)

16,560

2,400

_______

_______

(17,160 )

( 600)

16,560

17,160

600

______

Balances after additional Investment Payment of liabilities Balances after payment of Liabilities Payment to partners Capital

17,76 0 (1,200) 16,56 0

1,200

16,560

(1,200)

_______ 16,560 (16,56 0)

(16,560)

7: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s Loan Account (Right of Offset Is Exercised) with Revaluation of Assets. QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Increase in equipment Decrease in furniture Balances after revaluation Refund of prepaid expenses Balances after refunds

NonCash Assets

Cash 24,000 ______ 24,000 _6,960 30,960

Liabilitie s

Q, Loan

84,000 1,200 (600) 84,600

12,000

2,400

_______ 12,000

Received noncash assets

______

(8,400) 76,200 (10,200 )

Balances after receipt of noncash assets Realization and distribution of loss

30,96 0

66,000

32,400

(66,000 )

Balances after realization

63,360

Payment of liabilities Balances after payment of liabilities

(12,000)

Q, capital (30%)

R, Capital (50%)

S, Capital (20%)

______ 2,400

9,600 360 _(180) 9,780

48,000 600 (300) 48,300

36,000 240 (120) 36,120

_______ 12,000

______ 2,400

_(432) 9,348

(720) 47,580

(288) 35,832

_______

______

_____

(7,200)

(3,000)

9,34 8

40,380

32,832

( 10,08 0) ( 732 )

( 16,800 )

( 8,064 )

23,580

26,112

_______

12,000

2,400

_______

______

12,000 (12,000 )

2,400

51,360

2,400

_______ ( 732 )

Offset loan versus deficit

_______

( 732)

732

Balances after offsetting

51,360

1,668

Payment to partners loan

(1,668)

Balances after payment of loans

49,692

23,580

26,112

(49,692)

(23,580 )

(26,11 2)

Payment to partnerscapitals

Problem II

_______

(1,668)

23,580

_______ 26,112

______

______

23,580

26,112

______

_______

DISCOUNT PARTNERSHIP Schedule of Partnership Liquidation January 14, 20x4 Capital Balances

Explanation Balances before realization

Cash

Other Liabilities Assets P120,000 P(40,000

P25,000

Dawso n P(31,000

Feeney

Hardin P(9,000)

P(65,000 Sales of noncash assets Balances Payment of liabilities Balances Allocation of Hardin's debit balance Balances

Distribution of cash to partners Balances

60,000

_____ (120,000) 0

85,000

______ __________ 45,000 0 __________ P 0

18,000

40,000 ________ ________ 0 (13,000) (41,000)

________ 9,000

(40,000)

(40,000) __________ 45,000 0

(45,000) P 0

24,000 18,000 (13,000) (41,000)

9,000

______ 3,857 5,143(9,000) 0 (9,143) (35,857) 0

P

______ 0

P

9,143 0

P

35,857 0

________ P 0

Problem III 1.

CDG Partnership Statement of Realization and Liquidation Lump-sum Liquidation on December 10, 20X6

Preliquidation balances Sale of assets and distribution of P215,000 loss

Cash

Noncash Assets

25,000

475,000

260,000 285,000

Cash contributed by Gail to extent of positive net worth

(475,000 ) -0-

Liabilitie s (270,00 0)

(270,00 0)

(120,00 0)

43,000 (77,000)

Capital Balances Dan Gail 40% 40% (50,000)

(60,000)

86,000

86,000

36,000

25,000 310,000

26,000 (25,000)

-0-

(270,00 0)

Distribution of deficit of insolvent partner: 20/60(P1,000) 40/60(P1,000)

(77,000)

36,000

1,000 (1,000)

333 667 310,000

Contribution by Dan to remedy deficit

Carlos 20%

-0-

(270,00 0)

(76,667)

36,667 346,667

36,667

-0-

(36,667) -0-

(270,00 0)

(76,667)

-0-

-0-

Payment to creditors

(270,000 ) 76,667

Payment to partner

270,000 -0-

-0-

(76,667)

-0-

-0-

(76,667 )

Post-liquidation balances

76,667 -0-

-0-

-

-0-

-0-

-0-

02. CDG Partnership Net Worth of Partners December 10, 20X6 Personal assets, excluding partnership capital interests Personal liabilities Personal net worth, excluding partnership capital interests, Dec. 1, 20X6 Contribution to partnership Liquidating distribution from partnership Net worth, December 10, 20X6

Carlos

Dan

250,000 (230,000)

300,000 (240,000)

350,000 (325,000)

20,000

60,000 (36,667) -023,333

25,000 (25,000) -0-0-

76,667 96,667

Gail

This computation assumes that no other events occurred in the 10-day period that changed any of the partners’ personal assets and personal liabilities. In practice, the accountant must be sure that a computation of net worth is current and timely. The table shows the effects of the transactions between the partnership and each partner. A presumption of this table is that the personal creditors of Dan or Gail would not seek court action to block the settlement transactions with the partnership. Upon winding up and liquidation, the partnership does not have any priority to the partner’s personal assets. Thus, the personal creditors may seek to block the transactions with the partnership in order to provide more resources from which they can be paid. A partner who fails to remedy his or her deficit can be sued by the other partners who had to make additional contributions or even by a partnership creditor if the failed partner is liable to the partnership creditor. But those claims are not superior to the other claims to the partner’s individual assets. When accountants provide professional services to partnerships and to its partners, the accountant should expect, at some time, legal suits involving the partnership and/or individual partners. A strong and thorough understanding of the legal and accounting foundations of partnerships will be very important to that accountant. Problem IV Cash Beginning balances Liquidation expense Sale of non-cash assets Payment of liabilities Contribution by Flowers Allocation of Flower's deficit Distribution to partners Ending balances Problem V

P 25,000 (20,000) 160,000 (165,00 0) 10,00 0 (10,000) 0

Noncash Assets Liabilitie P200,00 0 (200,00 0)

0

P165,00 0 (165,00 0)

0

Capital and Loan Balances Merz Dechter Flowers P P30,000 40,000 (8,000) (8,000) (16,000 (16,000 ) ) (6,000) (10,000 0)

(6,000) 0 0

P(10,00 0) (4,000) (8,000) 10,000 12,000 0 0

Cash

Liabilities

Able

Bower

Cramer

Beginning: Payment of liabilities Cramer/Bower pay in from personal worth to cover deficit balances: Payment of liabilities Allocation of deficit balances: Able paid:

P20,000 (20,000) P 0

P(30,000) 20,000 P(10,000)

P(10,000)

P5,000

P15,000

P(10,000)

P5,000

P15,000

12,000 P12,000 (10,000) P 2,000

________ P(10,000) 10,000 P 0

________ P(10,000)

(2,000) P3,000

(10,000) P 5,000

P(10,000)

P3,000

P 5,000

________ 0

8,000 P (2,000) 2,000 P 0

(3,000) P 0

P

P

P

______ P 2,000 (2,000) P 0

P P

0

Problem VI Answer: Cash 70,000 Arthur, Capital 6,000 Baker, Capital 15,000 Casey, Capital 9,000 Other Assets To record realization of assets at a loss of $30,000, divided among Arthur, Baker, and Casey in 2:5:3 ratio, respectively. Trade Accounts Payable Cash To record payment of liabilities.

65,000

Arthur, Capital Loan Receivable from Arthur To offset Arthur's loan account against Arthur's capital account.

20,000

Arthur, Capital Loan Payable to Baker Casey, Capital Cash To record payments to partners, computed as follows:

14,000 20,000 1,000

Capital account balances Add: Loan payable to Baker Less: Loan receivable from Arthur Loss on realization of assets, P30,000 Balances Maximum potential additional loss of P150,000 (P250,000 – P100,000 = P150,000) divided in 2:5:3 ratio Cash payments Multiple Choice Problems

Arthur P70,000

Baker P80,000 30,000

0

(5,000) 0

100,000

65,000

20,000

35,000

Casey P55,000

(20,000) (6,000) P44,000

(15,000) (9,000) P95,000 P46,000

(30,000) P14,000

(75,000) (45,000) P20,000 P 1,000

0

1. b - (P40,000 + P10,000 – P2,000 – P4,000 = P44,000) 2. d – P80,000 – (P150,000 – P50,00) x 50% = P30,000 3. c 4. a - Phil (P35,000 + P10,000); Harry P28,000; Bill (P27,000 - P5,000) 5. c - Rick P46,000; Mary (P39,000 - P15,000); Fran (P29,000 + P10,000) 6. d - P50,000 - (P15,000 - P9,500)(.25) 7. b - P45,000 - (P15,000 - P9,500)(.30) 8. a - P108,000 + [P10,000 - (P25,000 - P18,000)](.55) 9. c - P62,000 + [P10,000 - (P25,000 - P18,000)](.20) 10. b 11. c 12. d 13. c Vulnerability ranks: Lang equity (P70,000 - P40,000)/.25 = P120,000 = 1 Maas equity (P80,000 + P50,0000/.25 = P520,000 = 3 Neal equity (P150,000/.5) = P300,000 = 2 Assumed loss absorption: Equities Loss to eliminate Lang

25% Lang 30,000

25% Maas P 130,000

P

( 30,000 0

) ( 30,000 P 100,000

) ( P

( 45,000 P 55,000

) ( P

P

Loss to eliminate Neal

14 .

c

JJ

a

P

Total 310,000

60,000 90,000

) ( P

120,000 190,000

)

90,000 0

) ( P

135,000 55,000

)

CC

TT

Total

Profit ratio

40%

50%

10%

100%

Prior capital

(160,000)

(45,000)

(55,000)

(260,000)

24,000 (136,000)

30,000 (15,000)

6,000 (49,000)

60,000 (200,000)

Loss on sale of inventory

15.

50% Neal 150,000

Prior capital Loss on sale of inventory Allocate Charles' capital deficit: JJ = .40/.50 TT = .10/.50

(160,000)

(45,000)

(55,000)

(260,000)

72,000 (88,000)

90,000 45,000

18,000 (37,000)

180,000 (80,000)

36,000 (52,000)

(45,000)

-0-

9,000 (28,000)

(80,000)

16. c – (P234,000 – P434,000) x 20% = P40,000 17. b T

Capital before realization

40,000

Loss on sale (85,000 – 33,000)

(26,000)

Additional loss (5:2)

D

14,000

H

10,000

15,000

(15,600) ( 5,600)

(10,400) 4,600

(4,000) 10,000

5,600

( 1,600) 3,000

18. a T

Capital before realization

40,000

Loss on sale (85,000 – 21,100)

(31,950)

Additional loss (5:2)

8,050

D

10,000

15,000

(19,170) ( 9,170)

(12,780) 2,220

(6,550) 1,500 ( 400) 1,100

Additional loss

H

9,170 (2,620) ( 400) 400

19. b K

L

M

Capital before realization Liquidation expenses

60,000

40,000

80,000

(2,000)

( 4,000)

Loss on sale (300 - 180)

(24,000)

( 4,000 )

(48,000)

( 48,000 ) 28,000

Additional loss (2:4) 20. d

Capital before realization Loss on sale (2:4:4)

Additional loss (2:4)

34,000

( 4,000) 30,000 H

80,000

(61,000)

19,000

( 4,000) 15,000

21. d – [(P240,000 – P96,000) /30% = P480,000]

(12,000)

12,000

I

( 8,000) 20,000 J

110,000

140,000

(122,000)

(122,00 0)

(12,000)

18,000

12,000

( 8,000) 10,000

Total

330,00 0 (305,00 0) 25,000

22. a

Capital before realization – C

130,000

Liquidation expenses (12,000 x 50%)

(6,000) (132,00 0) ( 8,00 0)

Share on loss on realization Capital balance after realization Total loss on realization: P132,000/50% Non-cash assets Proceeds

(264,000) 434,000 170,000

23. b Ding

Total

Capital before realization Loss on sale (4:2:2:2)

-0-

Laurel

67,000

60,000 (52,800) 7,200

Possible insolvency loss (4:2:2)

Safe payments 108,000

( 26,400) 40,600

( 4,700)

Ezzard

17,000

96,000

(26,400)

(26,400 )

( 9,400)

69,600

( 2,350)

2,500

( 9,400)

38,250

0

Tillman

240,00 0 (132,00 0) 108,00 0

( 2,350) 67,250

24. e – refer to No. 23 25. b

Capital before realization Loss on sale (30:45:25); [200 – 150]

26. c

Gonda

60,000 (15,000) 45,000

Loan Total interests Loss on sale (5:3:2) - [90,000 – 26,000]

( 22,500) 47,500

S

Total

Capital

Herron

70,000

40,000 ________ 40,000 (32,000)

Morse

40,000 (12,500) 27,500

D

15,000 _______ 15,000 ( 19,200)

5,000

Total

170,00 0 (50,000 ) 120,00 0 F

60,000

5,000

5,000

10,000

65,000 (64,000 )

(12,800)

8,000 Possible insolvency (5:3)

(1,750)

6,250 _______ 6,250

Additional investment

( 4,200)

( 2,800) 2,800

( 1,050)

( 5,250) 5,250

1,000 0

1,000 5,250 6,250

27. b 28. a – Since the partnership currently has total capital of P350,000, the P150,000 that is available would indicate maximum potential losses of P200,000 that is hypothetically split among the partners. White Sands Luke Total

Capital before realization

50,000

Loss on sale (30:20:50); [350 – 150]

(60,000)

Possible insolvency (2:5)

(10,000) 10,000

Safe payments 150,000

100,000

200,000

( 40,000) 60,000 (2,857)

57,143

(100,00 0) 100,000 (7,143)

92,857

350,00 0 (200,00 0) 150,00 0 0

29. b - (P13,000 – P1,000 share of gain = P12,000, refer to entries below) Revaluation entry: Accumulated depreciation Gym, capital Hob, capital Ing, capital

3,000 1,000 1,000 1,000

Withdrawal of equipment: Accumulated depreciation (8,000 – 3,000) Hob, capital Equipment

30. b –

5,000 13,000 18,000

Accumulated depreciation 70,000 K, capital (P150,000 + P10,000 + P10,000 – P70,000) 100,000 Machinery, at cost 150,000 Rice [P110,000 – (P150,000 – P70,000)] x 1/3 10,000 Long [P110,000 – (P150,000 – P70,000)] x 1/3 10,000

31. c

Capital before realization Loss on sale (35%:35%:30%)

90,000

X

(42,000) 48,000

*balancing figure – total reduction in capital

Y

Z

Total

60,000

30,000

180,000

(42,000)

(36,000)

18,000)

( 6,000)

*(120,0 00) 60,000

Quiz - IV 1. Zero/nil

Capital before realization Loss on sale (3:2:1:4))

B

P

L

110,000

65,000

(15,000)

(60,000 ) 5,000

25,000 (45,000) ( 30,000) (20,000)

Additional loss (2:1:4) (11,429)

80,000 (20,000)

85,000 ( 5,714)

74,286 ( 4,286) 70,000

Additional loss (2:1) 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

S

100,000

( 2,857)

82,143 ( 2,143) 80,000

Zero/nil – refer to No. 1 Page, P70,000 and Larry, P80,000 – refer to No. 1 P39,525 = P42,000 - (P15,000 - P9,500)(.45) P56,750 = P56,000 + [P10,000 - (P25,000 - P18,000)](.25) P(1,000) = P20,000 - [P30,000 + (P50,000 - P90,000)](.30) P(1,500) = P30,000 - [P30,000 + (P50,000 - P90,000)](.45) P(2,500) = P15,000 - [P30,000 + (P50,000 - P90,000)](.25) P340,000 = (P147,000 + P28,000)/.35 P1,040,000 = (P260,000 / .25) Abrams and Creighton

Capital before realization Liquidation expenses Loss on sale (134 - 434)

A 80,000 (3,600) (90,000) (13,600)

90,000 (2,400) (60,000) 27,600

12. Tom, P30,000; Dick, P4,000 and harry, P11,000 T

Capital before realization

40,000

Loss on sale (85,000 – 65,000)

(10,000) 30,000

D

B C 130,000 (6,000) (300,000 ) (176,00 0) H

10,000 (6,000)

15,000 (4,000)

4,000

11,000

13. P34,000

Capital before realization Liquidation expenses Loss on sale (300 - 180)

K

L

M

60,000

40,000

80,000

(2,000)

( 4,000)

( 4,000 )

(48,000)

( 48,000 )

(24,000)

( 6,429) 6,429

28,000 34,000

(12,000)

Additional investment

_____

12,000 ______ 28,000

34,000 14. P25,000 Cash, beginning Payment of liquidation expenses Payment of liabilities Payment to partners 15. P15,000

Capital before realization Loss on sale (4:2:1:3)

Additional loss (2:1:3) (17,500)

P90,000 ( 5,000) ( 60,000) P25,000 B

P

25,000 (60,000) (35,000)

L

S

110,000

100,000

65,000

( 30,000)

(15,000)

(45,000 )

85,000

20,000

80,000

(35,000)

(11,667)

( 5,833)

15,000 68,333 79,167 2,500 16. P2,500 - refer to No. 15 17. Page, P68,3333 and Larry, P79,167 – refer to No.15 18. Bond: P225,000; Hamm: P115,000; Zell: P –0– Bond’s capital balance................................................... P300,000 Less: Bond’s share of P140,000 loss in liquidation (P140,000 × 50%) .......................................................... (70,000) _____ P230,000 Less: Bond’s share of Zell’s capital deficiency of P8,000 (5/8 of P8,000).................................................... ( 5,000) P225,000 19. Alexa: P25,000; Bell: P75,000; Graham: P–0– 20. Jody, P5,200; Kane, P64,800; Lark, P10,000 Balance, May 1 Plant sold Inventory sold Balances before distribution Offset loans Pay creditors Partner equity Possible loss: Plant assets Distribution

Assets 250,000 10,000 6,000)

(

254,000 26,000) 88,000) ( 140,000

( (

(

60,000) 80,000

(

30% Jody 32,000 3,000 1,800 )

(

33,200 10,000 )

Debts 88,000

88,000

(

(

25% Lark 40,000 2,500 1,500 )

(

41,000 16,000 )

91,800

88,000 ) 23,200 (

18,000 ) 5,200

(Cash Distribution: P54,000 + P54,000 + P60,000 - P88,000 = P80,000) May 1 Inventory Plant Creditors May 30

21. Oak, P0; Nebe, P0; and Pang, P11,000

45% Kane 90,000 4,500 2,700 )

91,800 (

27,000 ) 64,800

25,000 (

15,000 ) 10,000

Cash Jan 1 Balance

3,000

NonCash Assets 33,000

First Rank Debt 9,00 0

30% Oak Equity 2,000

20% Nebe Equity 4,000

50% Pang Equity 21,000

Sale of assets Subtotal

17,000 20,000

( 15,000 ) 18,000

600 2,600

9,00 0

400 4,400

1,000 22,000

Safe Payments Schedule Oak Equity 2,600 ( 5,400 ( 2,800 2,800 0

Partners’ pre-distribution balances Possible losses on non-cash assets Write off Oak 2/7 and 5/7 Cash distribution to partners

Nebe Equity 4,400 ) ( 3,600 ) 800 ( 800 0

Pang Equity 22,000 ) ( 9,000 13,000 ) ( 2,000 11,000

) )

Cash distribution plan on October 31: First P9,000 goes to priority creditors, and then Pang receives P11,000. 22. Ide, P0; Hanly, P0; Jen, P92,000 Balance, Aug. 1 Ide’s personal contribution

Ide Capital ( 60,000

Cash 50,000 40,000 90,000 90,000 2,000 92,000

(

92,000 ( 92,000 0

4,000 7,500 3,500

Jen Capital 106,000

Total 50,000

106,000 ) ( 12,500 ) ) 93,500

2,000

Write-off Hanly Distribute cash

)

40,000 ( 20,000 ) 20,000 ( 0 (

Write-off Ide Hanly’s personal contribution

Hanly Capital 4,000

1,500 1,500 0

)

Theories Completion Statements 1. a. partnership creditors other than partners b. partners’ loans—if subordinated c. partners’ capital 2. statement of realization and liquidation 3. schedule of safe payments 4. marshalling of assets 5. rule of setoff 6. legal recourse against 7. bringing the capital balances into the profit and loss ratio

40,000 90,000 90,000 2,000

) ( (

93,500 1,500 92,000

)

92,000

92,000 0

) ( 92,000 ) 0

92,000

True or False

8.

True

9.

False

10 . 11 . 12 .

False False True

13 . 14 . 15 . 16 . 17 .

True False False True True

18 . 19 . 20 . 21 . 22 .

False True True False True

23 . 24 . 25 . 26 . 27 .

False True False True True

28 . 29 . 30 . 31 . 32 .

True False False

33 . 34 . 35 .

True True False

False False

Note for the following numbers: 9. The accountant is liable if he/she fails to meet the fiduciary responsibility of protecting the creditors’ interest during the liquidation process. 10. The amount of cash distributed to each partner is a function of the capital balances and the profit and loss ratios. It is unlikely that partners will receive the same amount of cash. 11. Partnership creditors have priority claims against partnership assets and partner creditors have priority claims against partner assets. 14. Partner creditors have claims first against partner assets. They can also have a claim against partnership assets to the extent of the partner’s equity in the partnership. 15. The accountant has a fiduciary responsibility to the partnership’s creditors to ensure that sufficient assets exist to pay the creditors. It does not mean that creditors must be fully paid before any partner distributions occur. 18. Gains and losses realized during the liquidation process are generally allocated using the residual profit and loss ratio. Other profit and loss allocation components are not considered because these items are generally relevant to the partnership’s operation and the current issue is the partnership’s liquidation. 21. This is called an installment liquidation 23. This document is called a Statement of Realization and Liquidation. 25. The Statement of Realization and Liquidation does not include income statement accounts. All income statement amounts are allocated directly to partnership equity.

Multiple Choice Theories

36 . 37 . 38 . 39 . 40 .

A A C D C

41 . 42 . 43 . 44 . 45 .

b d b d b

4 6. 4 7. 4 8. 4 9. 5 0.

c a c d b

51 . 52 .

b a