Chapter 5
Problem I
1.
A, B, C and D Partnership
Statement of Liquidation
January 1, 20x4 to May 31, 20x4
Cash Non-CashAssets Liabilities A, loan D, loan
A, capital (40%) B, capital (20%) C, capital (20%) D, capital (20%) Balances before Liquidation 181,800 84,000 6,000 3,000 26,400 25,800 20,400 16,200 January - Realization - Payment of expenses - Payment of liabilities 72,000 (1,200) (66,000) (90,000) ______ (66,000) _____ _____ (7,200) ( 480) ______ (3,600) ( 240) ______ (3,600) ( 240) ______ (3,600) ( 240) ______ Balances after Jan 4,800 91,800 18,000 6,000 3,000 18,720 21,960 16,560 12,360 February - Realization - Payment of expenses - Payment of liabilities 21,600 (1,320) (18,000) (30,000) ______ _ (18,000) _____ _ ______ (3,360) ( 528) ______ (1,680) ( 264) ______ _ (1,680) ( 264) ______ (1,680) ( 264) ______ Balances before payment to partners 7,080 61,800 6,000 3,000 14,832 20,016 14,616 10,416 Payment to Partners (Sch. 1) ( 5,280) ______ _____ _ _____ ______ (5,280) ______ _____ Balances after February 1,800 61,800 6,000 3,000 14,832 14,736 14,616 10,416 March - Realization - Payment of expenses 19,200 ( 1,440) (24,000) ______ _____ _ _____ (1,920) ( 576) ( 960) ( 288) ( 960) ( 288) ( 960) ( 288) Balances before payment to partners 19,560 31,500 6,000 3,000 12,336 13,488 13,368 9,168 Payment to Partners (Sch. 2) (18,360) ______ (2,736) (3,000) (5,688) (5,568) (1,368) Balances after March 1,200 37,800 3,264 12,336 7,800 7,800 7,800 April - Realization - Payment of expenses 6,000 (4,800) (19,800) ______ (5,520) (1,920) (2, 760) ( 960) (2,760) ( 960) (2,760) ( 960) Balances before payment to partners 2,000 15,000 3,264 4,896 4,080 4,080 4,080 Payment to Partners (Note 1) (1,500) ______ ( 720) ( 360) ( 360) ( 360) Balances after April 500 18,000 2,554 4,896 3,720 3,720 3,720 May - Realization - Payment of expenses 2,400 ( 960) (18,000) _____ (6,240) ( 384) (3,120) ( 192) (3,120) ( 192) (3,120) ( 192) Balances before Offsetting 1,440 2,554 ( 1,728) 408 408 408 Offset deficit vs. Loan ______ (1,728) 1,728 _____ ______ _____ Balances before payment 2,040 816 408 408 408 Payment to Partners (Note 2) (2,040) (816) (408) (408) (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
A, capital (40%) B, capital (20%) C, capital (20%) D, capital (20%) Balances before payment to partners:
Loans 6,000 3,000
Capital 14,832 20,016 14,616 10,416
Total Interest 20,832 20,016 14,616 13,416
Restricted interest for possible losses:
Unrealized non-cash assets P 61,800 Cash withheld 1,800
P 63,600 (25,440) (12,720) (12,720) (12,720) ( 4,608) 7,296 1,896 696 Restricted for possible insolvency of A (2:2:2) 4,608 (1,536) (1,536) (1,536) 5,760 360 ( 840) Restricted for possible insolvency of D (2:2) ( 420) ( 420) 840
5,340 ( 60)
Restricted for possible insolvency of C ( 60) 60
Payment to partner (s) 5,280 Applied to: Loans Capital 5,280 5,280
Schedule 2 – March 31, 20x4
Computation of Distribution of Cash on March 31, 20x4
A, capital (40%) B, capital (20%) C, capital (20%) D, capital (20%) Balances before payment to partners:
Loans 6,000 3,000
Capital 12,336 13,488 13,488 9,168
Total Interest 18,336 13,488 13,488 12,168
Restricted interest for possible losses:
Unrealized non-cash assets P 37,800 Cash withheld 1,200 P 39,000 (15,600) ( 7,800) ( 7,800) ( 7,800) 2,736 5,688 5,568 4,368 Applied to: Loans 2,736 -0- -0- 3,000 Capital ___-0- 5,688 5,568 1,368 2,736 5,688 5,568 4,368
3.
T, U, V and W Partnership
Cash Payment Priority Program*
January 31, 20x4
Interests
Payments
T, capital (40%) U, capital (20%) V, capital (20%) W, capital (20%) T, capital (40%) U, capital (20%) V, capital (20%) W, capital (20%) Total Balances before liquidat ion: Loans 6,000 3,000 Capital 26,400 25,800 20,400 16,200 Total 32,400 25,800 20,400 19,2002
Interests Divided by: P & L % __40% ___20% __20% __20% Loss Absorptio n Abilitie s 81,000 129,000 102,000 96,000 Priority I ______ (27,000) _______ _______ 5,400 5,400 81,000 102,000 102,000 96,000 Priority II ______ ( 6,000) ( 6,000) _______ 1,200 1,200 2,400 81,000 96,000 96,000 96,000 Priority III ______ (15,000) (15,000) (15,000) _______ 3,000 3,000 3,000 9,000 81,000 81,000 81,000 81,000 ____-0- 9,600 4,200 3,000 16,800 *also known as Schedule of Cash Distribution Plan / Pre-distribution Plan.
4.
T, capital
(40%)
U, capital
(20%)
V, capital
(20%)
W, capital
(20%)
Total Interests
P 32,400
P 25,800
P 20,400
P 19,200
Divided by: P & L %
____40%
____20%
____20%
____20%
Loss Absorption
Abilities
P 81,000
P129,000
P 102,000
P 96,000
Order of Cash Distribution
(4)
(1)
(2)
(3)
Vulnerability Rankings (1
Is most vulnerable)
(1)
(4)
(3)
(2)
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
Creditors
T
U
V
W
1. First P70,000
100%
2. Next P 4,500
100%
3. Next P2,000
50%
50%
4. Next P7,500
33 1/3%
33 1/3%
33 1/3%
5. Remainder
40%
20%
20%
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
Capital Balances
Other Accounts AA BB CC
Cash Assets Payable 50% 30% 20% Balances before Liquidation,
January 1,20x4
18,000 307,000 (53,000) (88,000) (110,000) (74,000) January transactions:
1
. Collection of accounts receivable at a loss
of P15,000 51,000 (66,000) 7,500 4,500 3,000
2 .
Sale of inventory at a loss of P14,000
38,000 (52,000) 7,000 4,200 2,800
3 .
Liquidation expenses paid (2,000) 1,000 600 400
4 .
Share of credit memorandum 3,000 (1,500) (900) (600)
5 .
Payments to creditors (50,000 ) 50,000
55,000 189,000 -0- (74,000) (101,600) (68,400)
Safe payments to partners
(Schedule 1) (45,000) __ 26,600 18,400
10,000 189,000 -0- (74,000) (75,000) (50,000)
February transactions: 6
.
Liquidation expenses paid
(4,000 ) __ 2,000
1,200 800
6,000 189,000 -0- (72,000) (73,800) (49,200)
Safe payments to partners
(Schedule 2) -0- __ ___ -0- -0- -0-
6,000 189,000 -0- (72,000) (73,800) (49,200)
March transactions: 8
. Sale of M&Eq. at a loss of P43,000 146,000 (189,000) 21,500 12,900 8,600 9
. Liquidation expenses paid (5,000 ) 2,500 1,500 1,000
147,000 -0- -0- (48,000) (59,400) (39,600)
10. Payments to partners (147,000) 48,000 59,400 39,600 Balances at end of liquidation,
March 31, 20x4 -0- -0- -0- -0- -0- -0-
ABC Partnership
Schedules of Safe Payments to Partners
AA BB CC
4
Schedule 1: January 31, 20x4 50% 30% 20% Capital balances (74,000) (101,600) (68,400) Possible loss: Other assets (P189,000) and possible liquidatio n costs (P10,000) 99,500 59,700 39,800 25,500 (41,900) (28,600) Absorption of AA’s potential deficit balance (25,500) BB: (P25,500 x 3/5 = P15,300) 15,300 CC: (P25,500 x 2/5 = P10,200) 10,200 Safe payment, January 31, 20x4 -0- (26,600) (18,400) Schedule 2: February 27, 20x4 Capital balances (72,000) (73,800) (49,200) Possible loss: Other assets (P189,000) and possible liquidatio n costs (P6,000) 97,500 58,500 39,000 25,500 (15,300) (10,200) Absorption of AA’s potential deficit (25,500)
balance: BB: (P25,500 x 3/5 = P15,300) 15,300 CC: (P25,500 x 2/5 = P10,200) 10,200 Safe payment, February 27, 20x4 -0- -0- -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 Capital Accounts PP EE TT PP EE TT Profit and loss
percentages 50% 30% 20% Preliquidation capital balances (55,000) (45,000) (24,000) Loss absorption Power (Capital balances / Loss percent) (110,000) (150,000) (120,000) Decrease highest LAP
to next highest: EE (P30,000 x .30) 30,000 9,000 (110,000) (120,000) (120,000) (55,000) (36,000) (24,000) Decrease LAPs to next highest: EE (P10,000 x .30) 10,000 3,000 TT (P10,000 x .20) 10,000 2,000 (110,000) (110,000) (110,000) (55,000) (33,000) (22,000)
Summary of Cash Distribution (If Offer of P100,000 is Accepted)
Accounts PP EE TT
6
Payable 50% 30% 20% Cash available P106,000 First (17,000) P17,000 Next (9,000) P 9,000 Next (5,000) 3,000 P 2,000 Additional paid in P&L ratio (75,000 ) ______ P37,500 22,500 15,000 P -0- P17,000 P37,500 P34,500 P17,000
Problem IV
PET Partnership
Statement of Partnership Liquidation and Realization
From July 1, 20x4, through September 30, 20x4
Capital
Noncash Accounts PP EE TT
Cash Assets Payable 50%
30% 20% Preliquidation balances 6,000 135,000 (17,000) (55,000) (45,000) (24,000) July:
Assets Realized 26,500 (36,000) 4,750 2,850 1,900
Paid liquidation costs (1,000) 500 300 200
Paid creditors (17,000) 17,000 14,500 99,000 -0- (49,750) (41,850) (21,900) Safe Payments (Sch. 1) (6,500 ) 6,500 8,000 99,000 -0- (49,750) (35,350) (21,900) August: Equipment withdrawn (4,000) (3,000) (1,800) 8,800 (allocate P6,000 gain)
Paid liquidation costs (1,500 ) 750 450 300
6,500 95,000 -0- (52,000) (36,700) (12,800)
Safe Payments (Sch. 2) (4,000 ) 4,000
2,500 95,000 -0- (52,000) (32,700) (12,800)
September:
Assets Realized 75,000 (95.000) 10,000 6,000 4,000
Paid liquidation costs (1,000 ) 500 300 200
76,500 -0- -0- (41,500) (26,400) (8.600)
Payments to partners (76,500) 41,500 26,400 8,600 Postliquidation balances -0- -0- -0- -0- -0- -0-
PET Partnership
Schedules of Safe Payments to Partners
PP EE TT Schedule 1: July 31, 20x4 50% 30% 20%
Capital balances (49,750) (41,850) (21,900)
Possible loss on noncash assets (P99,000) 49,500 29,700 19,800
Cash retained (P8,000) 4,000 2,400 1,600
3,750 (9,750) (500)
Absorption of Pen's potential deficit (3,750)
EE: P3,750 x .30/.50 2,250
TT: P3,750 x .20/.50 1,500
Absorption of TT’s potential deficit (1,000) EE P1,000 x .30/.30 1,000 Safe payment -0- (6,500) -0- Schedule 2: August 31, 20x4
Capital balances (52,000) (36,700) (12,800)
Possible loss on noncash assets (P95,000) 47,500 28,500 19,000
Cash retained (P2,500) 1,250 750 500
(3,250) (7,450) 6,700
Absorption of TTs’ potential deficit (6,700)
PP: P6,700 x .50/.80 4,188
EE: P6,700 x .30/.80 2,512
938 (4,938) -0-
Absorption of PPs potential deficit (938)
EE: P938 x .30/.30 938 Safe payment -0- (4,000) -0-
Problem V
DSV Partnership
Statement of Partnership Realization and Liquidation — Installment Liquidation From July 1, 20x4, through September 30, 20x4
Capital Balances
Noncash D S V
Cash Assets Liabilities 50% 30% 20% Preliquidation balances, 6/30 50,000 670,000 (405,000) (100,000) (140,000) (75,000) July, 20x4: Sale of assets and
distribution of P120,000 loss 390,000 (510,000) 60,000 36,000 24,000 440,000 160,000 (405,000) (40,000) (104,000) (51,000) Liquidation expenses (2,500 ) 1,250 750 500 437,500 160,000 (405,000) (38,750) (103,250) (50,500) Payment to creditors (405,000) 405,000 32,500 160,000 -0- (38,750) (103,250) (50,500) Payments to partners (Sch. 1) (22,500 ) 22,500 10,000 160,000 -0- (38,750) (80,750) (50,500)
August, 20x4: Sale of assets &
distribution of P13,000 loss 22,000 (35,000 ) 6,500 3,900 2,600 32,000 125,000 -0- (32,250) (76,850) (47,900) Liquidation expenses (2,500 ) 1,250 750 500 29,500 125,000 -0- (31,000) (76,100) (47,400) Payments to partners (Sch. 2) (19,500 ) 13,700 5,800 10,000 125,000 -0- (31,000) (62,400) (41,600)
September, 20x4: Sale of assets
distribution of P70,000 loss 55,000 (125,000) 35,000 21,000 14,000
65,000 -0- -0- 4,000 (41,400) (27,600)
Allocate D's deficit to S and V (4,000) 2,400 1,600
65,000 -0- -0- -0- (39,000) (26,000) Liquidation expenses (2,500 ) 1,500 1,000 62,500 -0- -0- -0- (37,500) (25,000) Payments to partners (62,500 ) -0- 37,500 25,000 Postliquidation balances -0- -0- -0- -0- -0- -0- DSV Partnership
Schedule of Safe Payments to Partners
D S V Schedule 1, July 31, 20x4: 50% 30% 20%
8
Capital balances, July 31, Before cash distribution (38,750) (103,250) (50,500) Assume full loss of P160,000 on remaining noncash assets and P10,000 in possible future liquidation expenses 85,000 51,000 34,000 46,250 (52,250) (16,500) Assume D's potential deficit must be absorbed by S and V: (46,250) 30/50 x P46,250 27,750 20/50 x P46,250 18,500 -0- (24,500) 2,000 Assume V's potential deficit must be absorbed by S completely 2,000 (2,000 ) Safe payments to partners on July 31, 20x4 -0- (22,500 ) -0- Schedule 2, August 31, 20x4: Capital balances, August 31, before cash distribution (31,000) (76,100) (47,400) Assume full loss of P125,000 on remaining noncash assets and P10,000 in possible liquidation expenses 67,500 40,500 27,000 36,500 (35,600) (20,400) Assume D's potential deficit
must be absorbed by S and V: (36,500) 30/50 x P36,500 21,900 20/50 x P36,500 14,600 Safe payments to partners -0- (13,700 ) (5,800 )
Problem VI: Cash Distribution Plan (or better use the format presented in the discussion)
DSV PartnershipCash Distribution Plan June 30, 20x4
Loss Absorption Power Capital Accounts
D S V D S V
Profit and loss sharing ratio 50% 30% 20%
Preliquidation capital balances (100,000) (140,000) (75,000)
Loss absorption power (LAP) capital accounts /
loss sharing percentage (200,000) (466,667) (375,000) Decrease highest LAP to next
highest LAP:
Decrease S by P91,667 91,667
(Cash distribution: P91,667 x .30) 27,500 (200,000) (375,000) (375,000) (100,000) (112,500) (75,000) Decrease LAP to next highest level:
Decrease S by P175,000 175,000 Cash distribution: P175,000 x .30) 52,500 Decrease V by P175,000 175,000 Cash distribution: P175,000 x .20) 35,000 (200,000) (200,000) (200,000) (100,000) (60,000) (40,000) Decrease LAPs by distributing
cash in the P/L sharing ratio 50% 30% 20%
Summary of Cash Distribution Plan (Estimated on June 30, 20x4) Liquidation Creditors Expenses D S V 1. First P405,000 100% 2. Next P10,000 100% 3. Next P27,500 100% 4. Next P87,500 60% 40%
5. Any additional distributions in the partners' profit
and loss ratio 50% 30% 20%
b. Confirmation of cash distribution plan
DSV Partnership Capital Account Balances
June 30, 20x4, through September 30, 20x4
D S V Profit and loss ratio 50% 30% 20%
Preliquidation balances, June 30 (100,000) (140,000) (75,000)
10
July loss of P120,000 on disposal of assets
and P2,500 paid in liquidation costs 61,250 36,750 24,500 (38,750) (103,250) (50,500) July 31 distribution of P22,500 of
available cash to partners (Sch. 1) First P22,500 of P27,500 layer:
100% to S 22,500
(38,750) (80,750) (50,500)
August loss of P13,000 on disposal of assets and P2,500 paid in
liquidation costs 7,750 4,650 3,100
(31,000) (76,100) (47,400)
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 5,000
Next $14,500 of P87,500 layer:
60% to S 8,700
40% to V 5,800
(31,000) (62,400) (41,600)
September loss of P70,000 on disposal of assets and P2,500 paid in liquidation
costs 36,250 21,750 14,500
5,250 (40,650) (27,100)
Distribution of D's deficit (5,250 ) 3,150 2,100
-0- (37,500) (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 37,500
40% to V 25,000 Postliquidation balances -0- -0- -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 P10,000
Cash from sale of noncash assets 22,000
Less: Payment of actual liquidation expenses (2,500)
Less: Amount held for possible
future liquidation expenses (10,000)
Cash available to partners, August 31, 20x4 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 P10,000
Cash received from sale of noncash assets 55,000
Cash available to partners, September 30, 20x4 P62,500
Problem VII
Cash distribution program:
Creditors
Ames
Beard
Craig
First P 50,000100%
Next 34,000
100%
Next 48,000
33 1/3%
66 2/3%
All over
P132,000 40%
20%
40%
Working paper for cash distributions to partners during liquidation (not required):
Ames Beard
Craig
Capital balances before liquidation
P60,000
P80,000P92,000
Income-sharing ratio
4
4
2
Capital per unit of income sharing
P15,000
P40,000P23,000
Reduce Beard's capital to next highest capital for Craig ______(17,000)
______
Capital per unit of income sharing
P15,000
P23,000P23,000
Reduce Beard's and Craig's capital to Ames's capital
______ (8,000)
(8,000)
Capital per unit of income sharing
P15,000
P15,000P15,000
Problem VIII
Cash 60,000
Quanto, Capital 5,000
Rollo, Capital
3,000
Simms, Capital 2,000
Assets 70,000
To record realization of assets at a loss of $10,000, divided
amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively.
Liabilities
30,000
Cash 30,000
To record payment to creditors.
Loan Payable to Quanto
9,500
Rollo, Capital
10,500
Simms, Capital 5,000
Cash
25,000
To record payment to partners, computed as follows:
Quanto Rollo
Simms
Capital (including Quanto's
loan of P10,000)
before liquidation
P42,000
P30,000P18,000
Loss on realization of assets
(5,000)
(3,000) (2,000)
Balances
P37,000 P27,000
P16,000
Maximum potential
additional
loss (P5,000 +
P50,000 = P55,000)
divided in 5:3:2 ratio (27,500)
(16,500)(11,000)
Cash payments P 9,500
P10,500
P 5,000
Multiple Choice Problems
1. d
JJ
CC
TT
Total
12
Prior capital
(160,000)
(45,000)
(55,000)
(260,000)
Loss on sale
of inventory
24,000
30,000
6,000
60,000
(136,000)
(15,000)
(49,000)
(200,000)
Possible loss
of remaining
inventory
64,000
80,000
16,000
160,000
(72,000)
65,000
(33,000)
(40,000)
Allocate Charles'
potential
capital deficit:
52,000
(65,000)
13,000
(20,000
)
(20,000)
(40,000
)
2. a
Capital balances
300,000
Peter
350,000
Paul
400,000
Mary
1,050,000
Total
Loss on sale of assets
(475,000 – 600,000) – 4:4:2
( 50,000)
(50,000) (25,000)
(125,000)
250,000
300,000
375,000
925,000
Possible loss for unrealized
assets
P1,000,000 – P600,000 =
400,000
160,000
160,000
80,000
400,000
(90,000
140,000
295,000
525,000
3.
a
The loan payable to AA has the same legal status as the
partnership’s other liabilities. After payment of the loan, then any
available cash can be distributed to the partners using the safe
payments computations.
4.
a
CC
DD
EE
Total
Profit and loss ratio
5/10
3/10
2/10
10/10
Beginning capital
80,000
90,000
70,000
240,000
Actual loss on assets (5:3:2)
(15,000)
(9,000)
(6,000)
( 30,000
)
65,000
81,000
64,000
210,000
Possible loss – unrealized NCA
( 50,000
)
(30,000)
(20,000)
( 20,000
)
Safe payments
15,000
51,000
44,000
190,000
5.
b
6.
d
AA
BB
CC
Capital balances
37,000
65,000
48,00
0
Divided by: Profit and loss ratio
40%
40%
20
%
Loss absorption power
92,500
162,500
240,00
0
Loss to reduce CC to BB:
(77,500 x .20 = 15,500)
77,500
Balances
92,500
162,500
162,500
Loss to reduce BB & CC to AA:
(B:70,000 x .40 = 28,000)
70,000
(C:70,000 x .20 = 14,000)
70,000
Balances
92,500
92,500
92,500
Cash of P20,000 after settlement of liabilities: CC receives first P15,500;
remaining P4,500 split 2/3 to BB and 1/3 to CC
7.
d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB
and 1/3 to CC.
8.
a If all partners received cash after the second sale, then the remaining 12,000 is
distributed in the loss ratio.
9.
a
AE
BT
KT
Profit and loss ratio
40%
30%
30%
Capital balances
(40,000)
(180,000)
(30,000)
Loss of P100,000
40,000
30,000
30,000
Remaining equities
-0-
(150,000)
-0-
AE will receive nothing; the entire P150,000 will be paid to BT.
10. b
Ding Laurel Ezzard Tillman Total
Capital before realization
60,00
0
67,000
17,000
96,000
240,000
Loss on sale (4:2:2:2)
(52,800)
( 26,400
)
(26,400
)
(26,400)
(132,000
)
7,200
40,600
( 9,400
)
69,600
108,000
Possible insolvency loss (4:2:2) ( 4,700) ( 2,350) ( 9,400) ( 2,350)
Safe payments
2,500 38,250 295,000 67,250 108,000
11. a
D
R
N
J
Capital balances
72,00
0
32,00
0
52,00
0
24,00
0
Divided by: Profit and loss ratio
40
%
20%
20
%
20
%
Loss absorption power
180,00
0
160,00
0
260,00
0
120,00
0
Loss to reduce CC to BB:
(80,000 x .20 = 16,000)
80,000
____0
Balances
180,00
0
160,00
0
180,000
120,00
0
12. No answer available – Harding, P6,107; Jones, P12,275
H
J
S
Total
Capital balances
20,00
0
22,00
0
(10,000
)
32,00
0
Potential loss from Sandy deficit
(5,882
)
(4,118)
10,000
0
14,118
17,882
0
32,000
Loss to reduce H and J:
14
(50:35)
(8,011)
(5,607)
(13,618)
Balances
6,107
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
H
J
S
Capital balances
20,00
0
22,00
0
(10,000
)
Additional contribution
0
0
10,000
Capital balances
20,000
22,000
Divided by: Profit and loss ratio
50/85
35/85
Loss absorption power
34,00
0
53,429
Loss to reduce JJ to HH:
(19,428 x 35/85 = 8,000)
19,428
Balances
34,00
0
34,000
Cash available
P18,382
Less: Priority I to Jones (P19,428 x 35/85) 8,000 P 8,000
P10,382
Less: P& L (50:35)
(10,382) P 6,107 4,275
P6,107
P 12,275
13. b
Gonda
Herron
Morse Total
Capital before realization
60,00
0
70,000
40,000
170,00
0
Loss on sale (30:45:25); [200 – 150]
(15,000)
( 22,500
)
(12,500)
(50,000)
45,000
47,500
27,500
120,000
14. 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
50,00
0
100,000
200,000
350,00
0
Loss on sale (30:20:50); [350 – 150]
(60,000)
( 40,000
)
(100,000
)
(200,000
)
(10,000)
60,000
100,000
150,000
Possible insolvency (2:5)
10,000
(2,857)
(7,143)
0
Safe payments
57,143 92,857 150,000
15. a
D
E
F
Capital balances
40,000
90,00
0
30,00
0
Less: Machine, at fair value
______
(35,000)
______
Capital balances
40,000
55,00
0
30,00
0
Divided by: Profit and loss ratio
1/3
1/3
1/3
Loss absorption power
120,00
0
165,00
0
90,000
Loss to reduce E to D:
(45,000 x 1/3 = 15,000)
(45,000)
____0
Balances
120,00
0
120,00
0
90,000
16. c
S D F Total
Capital
40,00
0
15,000
5,000
60,000
Loan
_______
_
_______
5,000
5,000
Total interests
40,000
15,000
10,000
65,000
Loss on sale (5:3:2) - [90,000 –
26,000]
(32,000)
( 19,200
)
(12,800
)
(64,000)
8,000
( 4,200)
( 2,800)
1,000
Possible insolvency (5:3)
(1,750)
( 1,050)
2,800
0
6,250 ( 5,250)
1,000
Additional investment
_______
5,250
5,250
6,250
6,250
17. d – [(P240,000 – P96,000) /30% = P480,000]
18. b - (P13,000 – P1,000 share of gain = P12,000, refer to entries below)
Revaluation entry: Accumulated depreciation 3,000 Gym, capital 1,000 Hob, capital 1,000 Ing, capital 1,000 Withdrawal of equipment: Accumulated depreciation (8,000 – 3,000) 5,000 Hob, capital 13,000 Equipment 18,00019. b
A B C Total
Capital before realization
37,00
0
65,000
48,00
0
150,000
Loss on sale (2:2:1); [90 – 50]
(16,000)
( 16,000
( 8,000)
(40,000)
16
)
21,000
49,000
40,000
110,000
Possible loss P90,000, unrealized
NCA
(36,000)
(36,000
)
(18,000)
90,000
(15,000) 13,000 22,000 20,000
Possible insolvency loss (2:1) 15,000 (10,000) ( 5,000) 0
3,000 17,000
20. b
A B C Total
Capital before realization
37,00
0
65,000
48,00
0
150,000
Loss on sale (2:2:1); [90 – 50]
(16,000)
( 16,000
)
( 8,000)
(40,000)
21,000
49,000
40,000
110,000
Possible loss P90,000, unrealized
NCA
plus P3,000 = P93,000
(37,200)
(37,200
)
(18,600)
93,000
(16,200) 11,800 21,400 17,000
Possible insolvency loss (2:1) 16,200 (10,800) ( 5,400) 0
1,000 16,000 17,000
21. d - Since the partnership currently has total capital of P400,000, the P30,000 that is available would
indicate maximum potential losses of P370,000.
A
B
C
Reported balances
P100,000
P120,000
P180,000
Anticipated loss (P370,000) split on
a 2:3:5 basis
(74,000)
(111,000)
(185,000)
Potential balances
P 26,000
P 9,000
P (5,000)
Potential loss from C's deficit (split 2:3)
( 2,000)
(3,000)
5,000
Current cash distribution
P 24,000
P 6,000
P
-0-22. c
K
M
B
J
Capital balances
59,00
0
39,00
0
34,00
0
34,00
0
Divided by: Profit and loss ratio
40
%
30%
10
%
20
%
Loss absorption power
147,50
0
130,00
0
340,00
0
170,00
0
Loss to reduce CC to BB:
(170,000 x .10 = 17,000)
170,000
____0
Balances
147,50
0
130,00
0
170,000
170,00
0
23. c
C
P
H
M
Capital balances
60,00
0
27,00
0
43,00
0
20,00
0
Divided by: Profit and loss ratio
40
30%
20
10
%
%
%
Loss absorption power
150,00
0
90,000
215,00
0
200,00
0
Loss to reduce CC to BB:
(15,000 x .20 = 3,000)
15,000
____0
Balances
150,00
0
90,000
200,000
200,00
0
24. c - the P16,000 available cash can be distributed but should be done under the assumption that all
deficit balances will be total losses. After offsetting JJ loan, the two deficits total P4,000. FF and RR, the
two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a
60%:40% ratio). FF would absorb P2,400 of the potential loss with RR being allocated P1,600. The
remaining capital balances (P10,600 and P5,400) are safe capital balances and those amounts can be
immediately distributed.
or, alternatively:
W
J
F
R
Capital balances
(2,000
)
(5,000
)
13,00
0
7,000
Loan
______
3,000
______
_
__
Total interests
(2,000)
(2,000)
13,000
7,000
Potential insolvency loss (3:2)
2,000
2,000
( 2,400
)
(1,600)
10,600
5,400
25. b
A
B
C
Total
Capital balances
(5,000
)
18,000
6,000
19,00
0
Potential loss from A deficit (5:3)
5,000
(3,125)
(1,875)
0
14,875
4,125
19,000
Loss to reduce H and J:
(5:3)
(8,750)
(5,250)
(14,000)
6,125
(1,125)
5,000
Possible insolvency loss (1,125) 1,125 0
5,000
26. c
A B C Total
Capital before realization
70,00
0
30,000
50,00
0
150,000
Loan
20,000
______
______
20,000
Total interests
90,000
30,000
50,000
170,000
Loss on sale (240,000 – 195,000)
(15,000)
( 15,000
)
(15,000)
(45,000)
75,000
15,000
35,000
125,000
27. 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
18
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
28. d
A B C Total
Capital before realization
70,00
0
30,000
50,00
0
150,000
Loan
20,000
______
______
20,000
Total interests
90,000
30,000
50,000
170,000
Loss on sale (240,000 – 195,000)
(15,000)
( 15,000
)
(15,000)
(45,000)
75,000
15,000
35,000
125,000
Payment of loans to partner
(20,000)
______
_____
(20,000)
55,000 15,000 35,000 105,000
Asset received
______
______
(30,000) (30,000)
Payment to partners after payment of loan 55,000 15,000 5,000 75,000
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.
29. d
INTERESTS PAYMENTS ___ D K R D K R Total
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 P60,000 P60,000 P340,000 P400,000 P400,000
Priority II……… - (60,000) (60,000) 18,000 18,000 36,000 P340,000 P340,000 P340,000 P – P 78,000 P18,000 P 96,000
Cash received by the partner Kemp
P 60,000
Add (deduct):
Liabilities paid
250,000
Expenses paid
5,000
Contingency
10,000
Cash, beginning
(120,000)
Proceeds from sale of other assets
P205,000
30. b
INTERESTS PAYMENTS ___ T N D T N D Total
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
P 44,000 P56,000 P56,000
Priority II……… - (12,000) (12,000) __ 3,000 P 3,000 6,000 P 44,000 P44,000 P44,000 P – P 4,500 P 3,000 P 7,500
