advance accounting dayag chapter 5

Chapter 5Problem I1.

A, B, C and D Partnership Statement of Liquidation

January 1, 20x4 to May 31, 20x4

Cash

Non-Cash

AssetsLiabilities

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 10,416Payment 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 9,168Payment 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 4,080Payment to Partners (Note 1) (1,500) ______ ( 720) ( 360)

( 360) ( 360)

Balances after April 500 18,000 2,554 4,896 3,720 3,720 3,720May - Realization - Payment of expenses

2,400

( 960)

(18,000)

_____(6,240)

( 384)

(3,120)

( 192)

(3,120)

(3,120)

( 192)

( 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 408Payment 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 10,416Total Interest 20,832 20,016 14,616 13,416Restricted interest for possible losses: Unrealized non-cash assets P 61,800 Cash withheld 1,800

P 63,600(25,44

0)(12,72

0)(12,72

0)(12,72

0)( 4,60

8) 7,2961,896 696

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) 8405,340 ( 60)

Restricted for possible insolvency of C ( 60) 60Payment to partner (s) 5,280

Applied to: Loans -0- 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 9,168Total Interest 18,336 13,488 13,488 12,168Restricted interest for possible losses: Unrealized non-cash assets P 37,800 Cash withheld 1,200

P 39,000(15,60

0)( 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 1,3682,736 5,688 5,568 4,368

3. T, U, V and W Partnership

Cash Payment Priority Program*January 31, 20x4

Interests PaymentsT,

capital (40%)

U, capital (20%)

V, capital (20%)

W, capital (20%)

T, capital (40%)

U, capital (20%)

V, capital (20%)

W, capital (20%)

TotalBalances before liquidation: Loans 6,000 3,000 Capital 26,400 25,800 20,400 16,200Total Interests 32,400 25,800 20,400 19,200Divided by: P & L % __40% ___20% __20% __20%Loss Absorption Abilities 81,000

129,000 102,000 96,000

Priority I ______(27,00

0) _______ _______ 5,4005,400

81,000102,00

0 102,000 96,000

Priority II ______( 6,000

) ( 6,000) _______ 1,200 1,2002,400

81,000 96,000 96,000 96,000

Priority III ______(15,00

0)(15,000

)(15,000

) _______ 3,000 3,0003,000 9,000

81,00081,000 81,000 81,000

____-0- 9,600 4,2003,000 16,80

0*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 19,200Divided 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 IIABC Partnership

Statement of Partnership Realization and LiquidationFor 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 (50,00

0) 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

800

1,200 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 P43,000146,000 (189,000

)21,500 12,900 8,600

9. Liquidation expenses paid (5,00

0)

2,500 1,500 1,000

147,000 -0- -0- (48,000) (59,400) (39,600)10. Payments to partners (147,00

0) 48,00

0 59,400 39,600

Balances at end of liquidation, March 31, 20x4 -0- -0- -0-

-

0- -0-

-0-

ABC PartnershipSchedules of Safe Payments to Partners

AA BB CC Schedule 1: January 31, 20x4 50% 30% 20% Capital balances (74,000) (101,600) (68,400)Possible loss: Other assets (P189,000) and possible liquidation 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, 20x4Capital balances (72,000) (73,800) (49,200)Possible loss: Other assets (P189,000) and possible liquidation costs (P6,000) 97,500 58,500 39,000

25,500 (15,300) (10,200)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, 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 PartnershipCash 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 TTPayable 50% 30% 20%

Cash available P106,000First (17,000) P17,000Next (9,000) P 9,000Next (5,000) 3,000 P 2,000Additional paid in P&L ratio (75,000 ) ______ P37,500 22,500 15,000

P -0- P17,000 P37,500 P34,500 P17,000

Problem IVPET Partnership

Statement of Partnership Liquidation and RealizationFrom 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 (17,00

0) 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 PartnershipSchedules of Safe Payments to Partners

PP EE TTSchedule 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

-0- (7,500) 1,000 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, 20x4Capital 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 VDSV Partnership

Statement of Partnership Realization and Liquidation — Installment LiquidationFrom July 1, 20x4, through September 30, 20x4

Capital Balances

Noncash D S V Cash Assets Liabilitie

s 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 (35,00

0)

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)

(19,50 0)

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 55,00

0 (125,00

0) 35,00

0 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 - 37,500 25,000

(62,500) 0- Postliquidation balances -

0- -0- -0- -

0- -0- -0-

DSV PartnershipSchedule of Safe Payments to Partners

D S V Schedule 1, July 31, 20x4: 50% 30% 20% 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 (200,00

0)(466,66

7)(375,00

0)

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

(200,00

0)(200,00

0)(200,00

0)(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 PartnershipCapital Account Balances

June 30, 20x4, through September 30, 20x4D S V

Profit and loss ratio 50% 30% 20% Preliquidation balances, June 30 (100,000) (140,000) (75,000)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 Less: Payment of actual liquidation expenses (2,500 ) Cash available to partners, September 30, 20x4 P62,500

Problem VIICash distribution program:

Creditors Ames Beard CraigFirst P 50,000 100%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 P80,000 P92,000Income-sharing ratio 4 4 2

Capital per unit of income sharing P15,000 P40,000 P23,000Reduce Beard's capital to next highest capital for Craig ______ (17,000) ______Capital per unit of income sharing P15,000 P23,000 P23,000Reduce Beard's and Craig's capital to Ames's capital ______ (8,000) (8,000)Capital per unit of income sharing P15,000 P15,000 P15,000 Problem VIII

Cash 60,000Quanto, Capital 5,000Rollo, Capital 3,000Simms, Capital 2,000

Assets 70,000To record realization of assets at a loss of $10,000, divided amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively.

Liabilities 30,000Cash 30,000

To record payment to creditors.

Loan Payable to Quanto 9,500Rollo, Capital 10,500Simms, Capital 5,000

Cash 25,000To record payment to partners, computed as follows:

Quanto Rollo SimmsCapital (including Quanto's loan of P10,000) before liquidation P42,000 P30,000 P18,000Loss on realization of assets (5,000) (3,000) (2,000)Balances P37,000 P27,000 P16,000Maximum 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 Problems1. c

JJ CC TT Total

Profit ratio 40% 50% 10% 100%

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)

2. a

Capital balancesPeter

300,000 Paul

350,000 Mary

400,000 Total

1,050,000 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. d

4. d AA BB CCCapital 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 92,500 162,500 162,50

0 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

5. d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB and 1/3 to CC.

6. a If all partners received cash after the second sale, then the remaining 12,000 is distributed in the loss ratio.

7. b A B C

Total Capital before realization 37,00

0 65,000 48,00

0 150,00

0Loss on sale (2:2:1); [90 – 50]

(16,000)

( 16,000)( 8,000) (40,000)

21,000 49,000 40,000 110,000Possible 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

8. b A B C


0 65,000 48,00

0 150,00

0Loss on sale (2:2:1); [90 – 50]

(16,000)

( 16,000)( 8,000) (40,000)

21,000 49,000 40,000 110,000Possible 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

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. c11. d12. d13. c

14. aCC DD EE Total

Profit and loss ratio 5/10 3/10 2/10 10/10Beginning 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

15. c X Y Z

Capital before realization 130,000 130,000 100,000

Divided by: 50% 30%

20%

Loss absorption abilities 260,000 260,000 500,000

16. aThe loan payable to AA has the same legal status as the partnership’s other liabilities. After payment of the loan, then any available cash can be distributed to the partners using the safe payments computations.

17. a D R N J

Capital balances 72,000

32,000

52,000

24,000

Divided by: Profit and loss ratio

40%

20% 20%

20%

Loss absorption power 180,000

160,000

260,000

120,000

Loss to reduce N to D: (80,000 x .20 = 16,000) 80,000 ____0

18. d – Harding, P6,107; Jones, P12,275 H J S Total


22,000

(10,000)

32,000

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: (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 ProgramH J S


22,000

(10,000)

Additional contribution 0

0 10,000


22,000

Divided by: Profit and loss ratio 50/85 35/85Loss absorption power 34,00

0 53,429

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

34,000 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

19. c20. b

21. c A B C


0 30,000 50,00

0 150,00

0Loan 20,000 ______ ______ 20,00

0Total interests 90,000 30,000 50,000 170,000Loss on sale (240,000 – 195,000)

(15,000)

( 15,000)(15,000) (45,000)

75,000 15,000 35,000 125,000

22. b –liabilities should be paid first, then the balance of P30,000 should be given to Able since he is the one entitled to the first priority.

INTERESTS PAYMENTS______

A B C A B C Total Balances before realization

Loans………………….. P 20,000 Capital………………... 70,000 P 30,000 P 50,000Total interests………... P 90,000 P 30,000 P 50,000

Divided by: P&L ratio………… 1/3 1/3 1/3Loss absorption ability……….. P270,000 P 90,000 P150,000Priority I…………………………. 120,000 - _______ P40,000 P40,000

P150,000 P90,000 P150,000Priority 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 C


0 30,000 50,00

0 150,00

0Loan 20,000 ______ ______ 20,00

0Total interests 90,000 30,000 50,000 170,000Loss on sale (240,000 – 195,000)

(15,000)

( 15,000)(15,000) (45,000)

75,000 15,000 35,000 125,000Payment 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.

24. a D E F

Capital balances 40,000 90,000

30,000

Less: Machine, at fair value ______ (35,000) ______Capital balances 40,000 55,00

0 30,000


1/3 1/3 1/3


165,000

90,000

Loss to reduce E to D: (45,000 x 1/3 = 15,000) (45,000) ____0 Balances

120,000

120,000

90,000

25. cK M B J


39,000

34,000

34,000


40%

30% 10%

20%


130,000

340,000

170,000

Loss to reduce CC to BB: (170,000 x .10 = 17,000) 170,000 ____0 Balances

147,500

130,000

170,000

170,000

26. c C P H M


27,000

43,000

20,000


40%

30% 20%

10%


90,000 215,000

200,000

Loss to reduce CC to BB: (15,000 x .20 = 3,000) 15,000 ____0 Balances

150,000 90,000

200,000 2

00,000

27. c - the P16,000 available cash can be distributed but should be done under the assumption that all deficit balances will be total losses. After offsetting JJ loan, the two deficits total P4,000. FF and RR, the two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a 60%:40% ratio). FF would absorb P2,400 of the potential loss with RR being allocated P1,600. The remaining capital balances

(P10,600 and P5,400) are safe capital balances and those amounts can be immediately distributed.

or, alternatively: W J F R

Capital balances (2,000)

(5,000)

13,000

7,000

Loan ______ 3,000 _______ __Total interests (2,000) (2,000) 13,000 7,000Potential insolvency loss (3:2) 2,000 2,000

( 2,400) (1,600)

10,600 5,400

28. b A B C Total

Capital balances (5,000)

18,000 6,000

19,000

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

29. a – installment liquidation (refer for more problems in Chapter 5) INTERESTS PAYMENTS ___ P Q R P Q R Total

Balances before realizationTotall interests………... P 70,000 P 50,000 P100,000

Divided by: P&L ratio………… 20% 40% 40%Loss absorption abilities……….. P350,000 P125,000 P250,000Priority I…………………………. (100,000) 0 P20,000 P20,000

P250,000 P125,000 P250,000Priority II………………………… (125,000) (125,000) 25,000 P50,000 75,000

P125,000 P125,000 P125,000 P75,000 P 4,500 P50,000 P95,000

Cash, beginning P 90,000 Add (deduct):

Liquidation expenses paid ( 8,000)Payment of liabilities (170,000)

Proceeds from sale of assets(?) 108,000 Payment to partner before payment to Renquist (priority I only) P 20,000

30. d – Justice P15,533 J Z D Total


22,000

(14,000)

31,000

Potential loss from Douglass (6,533) 14,000 0

(40:35) (7,467) 15,53

3 15,46

7 0 31,00

0 Note: 1. Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000

deficit may not be recovered for purposes of distribution of cash. 2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital

balances of Justice and Zobart is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)

or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5)J Z D


22,000

(14,000)

Additional contribution 0

0 14,000


22,000

Divided by: Profit and loss ratio 40/75 35/75Loss absorption power 43,12

5 47,143

Loss to reduce Z to D: (4,018 x 35/55 = 1,875) 4,018 Balances

43,125 43,125

Cash available P31,000 Less: Priority I to Douglass (P4,018 x 35/75) 1,875 P 1,875

P29,125 Less: P& L (40:35) (29,125) P15,533 13,592

P15,533 P15,467

31. d INTERESTS PAYMENTS ___

D K R D K R Total Balances before realization

Loans………………….. P 0 P 10,000 P(20,000)Capital………………... 170,000 170,000 100,000Total interests………... P170,000 P180,000 P 80,000

Divided by: P&L ratio………… 50% 30% 20%Loss absorption abilities……….. P340,000 P600,000 P400,000Priority I…………………………. - (200,000) 0 P60,000 P60,000

P340,000 P400,000 P400,000Priority 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 250,000Expenses paid 5,000Contingency 10,000Cash, beginning (120,000)

Proceedsfrom sale of other assets P205,000

32. b INTERESTS PAYMENTS ___

T N D T N D Total

Balances before realizationLoans………………….. P 0 P 0 P 0Capital………………... 22,000 15,500 14,000Total interests………... P 22,000 P15,500 P 14,000

Divided by: P&L ratio………… 2/4 1/4 1/4Loss absorption abilities……….. P 44,000 P62,000 P 56,000Priority I…………………………. - ( 6,000) 0 P 1,500 P1,500

P 44,000 P56,000 P56,000Priority 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

Cash received by Tree P 6,250 Divided by: P & L ratio 2/4 Amount in excess of P7,500 P 12,500 Total cash payments – refer to program 7,500 Payment to partners P 20,000

33. d Cash, beginning P 12,000 Add (deduct):

Proceeds from sale of certain assets 32,000Liquidation expenses paid ( 1,000)Payment of liabilities ( 5,400)Payment to partners (refer to No. 30) ( 20,000)

Cash withheld P 17,600

34. dPriorityCreditors Mattews Norell Reams Total

First P300,000………. P300,000 P300,000Next P80,000 (7:3)… P56,000 P24,000 80,000Next P70,000 (3:4)… 30,000 P40,000 70,000Remainder*……….. 22,000 34,000 44,000 100,000

P300,000 P108,000 P58,000 P84,000 P550,000 (d)

*P550,000 – P300,000 – P80,000 – P70,000 = P100,000

INTERESTS PAYMENTS______ P Q R P Q R Total

Balances before realizationLoans………………….. P 6,000 P(10,000)Capital………………... 24,000 P36,000 60,000Total interests………... P30,000 P36,000 P50,000

Divided by: P&L ratio………… 3/10 3/10 4/10Loss absorption abilities…….. P100,000 P120,000 P125,000Priority I…………………………. - - (5,000) P 2,000 P 2,000

P100,000 P120,000 P120,000Priority II………………………… - (20,000) (20,000) P6,000 8,000 14,000 (d)

P100,000 P100,000 P100,000 P – P6,000 P10,000 P16,000

35. d

PriorityCreditors Mattews Norell Reams Total

First P300,000………. P300,000 P300,000Next P80,000 (7:3)… P56,000 P24,000 80,000Next P70,000 (3:4)… 30,000 P40,000 70,000Remainder*……….. 22,000 34,000 44,000 100,000

P300,000 P108,000 P58,000 P84,000 P550,000 (d)

*P550,000 – P300,000 – P80,000 – P70,000 = P100,000

Quiz - V1. M= 0, K= 25,000, C= 0 - this problem is more on installment liquidation principles.

M K C TotalCapital before realization 100,000 175,000 75,000 350,000Loss on sale (50%:30%:20%)

(162,500) (97,500)

(65,000)

*(325,000)

( 62,500)

77,500

10,000 **25,000

Additional loss (3:2) 62,500 (37,500)

(25,000)

______-

40,000 (15,000)

25,000

Additional loss (15,000)

15,000 -0-

25,000*balancing figure – total reduction in capitalPayment 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)/.356. P1,040,000 = (P260,000 / .25)7. P675,000 = (P285,000 - P15,000)/.408. a9. Perry: P15,000; Quincy: P51,000; Eddy: P44,00010. 11. b12. P33,000

First allocation (H) (P400,000 - P380,000) (.30) P 6,000

Second allocation (H) (P380,000 - P300,000) (.30) P24,000(F) (P380,000 - P300,000) (.25) 20,000 44,000Third allocation, share based on profit and loss ratios 10,000

Harold: P6,000 + P24,000 + (P10,000 x .30)

13. P2,500

First allocation (H) (P400,000 - P380,000) (.30) P 6,000

Second allocation (H) (P380,000 - P300,000) (.30) P24,000(F) (P380,000 - P300,000) (.25) 20,000 44,000Third allocation, share based on profit and loss ratios 10,000

Sheldon: (P10,000 x .25)

14. P24,500First allocation (H) (P400,000 - P380,000) (.30) P

6,000Second allocation (H) (P380,000 - P300,000) (.30) P24,000(F) (P380,000 - P300,000) (.25) 20,000 44,000Third allocation, share based on profit and loss ratios 10,000

Fred: P20,000 + (P10,000 x .45)

15. P147,000Losses 40%

Hara30%Ives

30%Jack

Equities 135,000 216,000 49,000Possible loss on remaining assets 200,000 ( 80,000 ) ( 60,000 ) ( 60,000 )Contingencies 10,000 ( 4,000 ) ( 3,000 ) ( 3,000 )Subtotals 51,000 153,000 ( 14,000 )

Eliminate Jack’s debit balance ( 8,000 ) ( 6,000 ) 14,000

Safe payments 43,000 147,000 0

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

17. c P Q R

Capital before realization 70,000 50,000 100,000 Liquidation expenses

(1,600) ( 3,200

) ( 3,200

) 68,40

0 46,800 96,800

Divided by: 20% 40%

40%

Loss absorption abilities 342,000

117,000

242,000

Selling Price 183,000Book value 300,000Loss (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. P2,000Warle Xin Yates Total

Equities,Jun 30 8,000 15,000 6,000 29,000Inventory loss ( 2,000 ) ( 3,000 ) ( 5,000 ) ( 10,000 )Contingency fund ( 400 ) ( 600 ) ( 1,000 ) ( 2,000 )Subtotals 5,600 11,400 0 17,000

Possible losses on remaining assets ( 3,000 ) ( 4,500 ) ( 7,500 ) ( 15,000 )Subtotals 2,600 6,900 ( 7,500 ) 2,000

Eliminate Yates’s Deficit ( 3,000 ) ( 4,500 ) 7,500Subtotals ( 400 ) 2,400 0 2,000

Eliminate Warle’s Deficit 400 ( 400 )Cash distribution 0 2,000 0 2,000

THEORIESTrue or False

1.

False 6. True 11. False 16. False

2.

True 7. True 12. True 17. True

3.

False 8. False 13. False

4.

False 9. True 14. True

5.

True 10.

True 15, 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 Choice18.

b 23.

a 28. b 33. b 38.

c 43. d

19.

b 24.

d 29. e 34. d 39.

d 44. b

20.

a 25.

d 30. a 35. b 40.

b 45. c

21.

a 26.

a 31. a 36. a 41.

a 46. d

22.

d 27.

d 32. c 37. b 42.

b

advance accounting dayag chapter 5

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