Chapter 4 Problem I 1: Gain on Realization Fully Allocated to Partner’s Capital Balances. QRS Partnership Partnership Statement of Realization Realization and Liquidation Liquidation November 1 – 30, 30, 20x4
Balances before liquidation Realization and distribution of gain Balances after realization Payment of liabilities Balances after payment of liabilities liabilities Payment to partners - loan Balances after payment of partners’ loans Payment to partners capital
Cash 24,000
NonCash Assets 84,000
Q, Capital 30%) 9,600
R, Capital (50%) 48,000
S, Capital (20%) 36,000
Liabilities 12,000
Q, Loan 2,400
_____ 12,000 (12,000)
______ 2,400
3,600 13,200
6,000 54,000
2,400 38,400
2,400 (2,400)
13,200 ______
54,000 ______
38,400 _______
105,600
13,200
54,000
38,400
(105,600)
(13,200)
(54,000)
(38,400)
96,000 120,000 (12,000)
(84,000)
108,000 (2,400)
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 Partnership Statement of Realization Realization and Liquidation Liquidation November 1 – 30, 30, 20x4
Balances before liquidation Realization and distribution of loss Balances after realization Payment of liabilities Balances after payment of liabilities liabilities Offset deficit versus loans Balances Balances after offsetting offsetting Payment to partners – loan Balances after payment of partners’ loans Payment to partners capital
Liabilities 12,000
Q, Loan 2,400
Q, capital (30%) 9,600
_____ 12,000 (12,000)
______ 2,400
(10,800) (1,200)
(18,000) 30,000
(7,200) 28,800
2,400 (1,200) 1,200 (1,200)
(1,200) 1,200
30,000 _______ 30,000 _______
28,800 _______ 28,800 ______
58,800
30,000
28,800
(58,800)
(30,000)
(28,800)
Cash 24,000 48,000 72,000 (12,000)
NonCash Assets 84,000 (84,000)
60,000 _______ 60,000 (1,200)
R, Capital (50%) 48,000
S, Capital (20%) 36,000
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 Partnership Statement of Realization Realization and Liquidation November 1 – 30, 30, 20x4
Balances before liquidation Realization and distribution of loss
Cash 24,000
NonCash Assets 84,000
36,000
(84,000)
Liabilities 12,000
Q, Loan 2,400
Q, capital (30%) 9,600
________
________
(14,400)
R, Capital (50%) 48,000
S, Capital (20%) 36,000
(24,000)
(9,600)
Balances after realization Payment of liabilities Balances after payment of liabilities Offset loan versus deficit – Balances after offsetting partner’s loan Additional investment by Q Balances after additional Investment Payment to partners capital
60,000 (12,000)
12,000 (12,000)
2,400 ________
( 4,800) _______
24,000 _______
26,400 _______
2,400 (2,400)
( 4,800) 2,400
24,000 _______
26,400 _______
(2,400) 2,400
24,000 _______
26,400 _______
50,400
24,000
26,400
(50,400)
(24,000)
(26,400)
48,000 _______ 48,000 __2,400
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 Balances after realization 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
Liabilities 12,000
Q, Loan 2,400
Q, capital (30%) 9,600
_______ 12,000 (12,000)
________ 2,400 _______
(12,600) ( 3,000) _______
(21,000) 27,000 _______
(8,400) 27,600 _______
2,400 (2,400)
(3,000) 2,400 ( 600)
27,000 ______ 27,000
27,600 ______ 27,600
( 429)
( 171)
54,000
26,571
27,429
(54,000)
(26,571)
(27,429)
Cash 24,000 42,000 66,000 (12,000)
NonCash Assets 84,000 (84,000)
54,000 _______ 54,000 _______
600
R, Capital (50%) 48,000
S, Capital (20%) 36,000
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
Balances before liquidation Realization and distribution of gain Balances after realization Payment of liabilities Balances after payment of liabilities Offset loan versus deficit Balances after offsetting Additional investment by Q Balances after additional investment Additional loss due to
Cash 24,000 24,000 48,000 (12,000) 36,000 ______ 36,000 _3,600 39,600 ______
NonCash Assets 84,000 (84,000)
Q, capital (30%) 9,600
R, Capital (50%) 48,000
S, Capital (20%) 36,000
Liabilities 12,000
Q, Loan 2,400
_______ 12,000 (12,000)
_______ 2,400 _______
(18,000) ( 8,400) _______
(30,000) 18,000 _______
(12,000) 24,000 _______
2,400 (2,400)
( 8,400) 2,400 (6,000), _ 3,600
18,000 ______ 18,000 ______
24,000 _______ 24,000 _______
(2,400)
18,000 (1,714)
24,000 ( 686)
insolvency of Q Balances after additional Loss Payment to partners capital
2,400 39,600
16,286
23,314
(39,600)
(16,286)
(23,314)
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 Offset loan versus deficit Balances after offsetting Additional investment by Q and R Balances after additional Investment Payment of liabilities Balances after payment of Liabilities Payment to partners Capital
Cash 24,000
NonCash Assets 84,000
Liabilities 12,000
(14,400)
______
________
9,600
84,000
_______ 9,600 1,200 10,800 (10,800)
Q, Loan 2,400
Q, capital (30%) 9,600
R, Capital (50%) 48,000
S, Capital (20%) 36,000
________
(4,320)
(7,200)
(2,880)
12,000
2,400
5,280
40,800
33,120
(72,000) 12,000
_______ 12,000
______ __ 2,400
(21,600) (16,320)
(36,000) 4,800
(14,400) 18,720
(12,000)
_______ 12,000 (10,800)
________ 2,400 ________
( 3,240) ( 19,560) _______
( 5,400) ( 600) ________
( 2,160) 16,560 _______
-0______ -0-
1,200 _______ 1,200
2,400 (2,400)
(19,560) 2,400 (17,160)
( 600) _______ ( 600)
16,560 _______ 16,560
17,760
_______
17,760 (1,200)
1,200 (1,200)
17,160
600
______ 16,560 _______
16,560
16,560
(16,560)
(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 Received noncash assets Balances after receipt of noncash assets Realization and distribution of loss
______ 24,000
NonCash Assets 84,000 1,200 (600) 84,600
_6,960 30,960 ______
(8,400) 76,200 (10,200)
_______ 12,000 _______
______ 2,400 ______
_(432) 9,348 _____
(720) 47,580 (7,200)
(288) 35,832 (3,000)
30,960
66,000
12,000
2,400
40,380
32,832
32,400
(66,000)
_______
______
9,348 ( 10,080)
( 16,800)
( 8,064)
Cash 24,000
Liabilities 12,000
Q, Loan 2,400
_______ 12,000
______ 2,400
Q, capital (30%) 9,600 360 _(180) 9,780
R, Capital (50%) 48,000 600 (300) 48,300
S, Capital (20%) 36,000 240 (120) 36,120
Balances after realization Payment of liabilities Balances after payment of liabilities Offset loan versus deficit Balances after offsetting Payment to partners loan Balances after payment of loans Payment to partnerscapitals
63,360 (12,000)
12,000 (12,000)
2,400 _______
23,580 _______
26,112 _______
23,580 ______ 23,580
26,112 ______ 26,112
______
_______
49,692
23,580
26,112
(49,692)
(23,580)
(26,112)
51,360 _______ 51,360
2,400 ( 732) 1,668
(1,668)
(1,668)
( 732) _______ (
732) 732
Problem II DISCOUNT PARTNERSHIP Schedule of Partnership Liquidation January 14, 20x4
Explanation
Cash
Balances before realization Sales of noncash assets Balances Payment of liabilities Balances Allocation of Hardin's balance
Liabilities
Capital Balances Dawson Feeney
P25,000
Other Assets P120,000
Hardin
P(40,000)
P(31,000)
P(65,000)
P(9,000)
60,000 85,000
(120,000) 0
______ (40,000)
18,000 (13,000)
24,000 (41,000)
18,000 9,000
(40,000) 45,000
__________ 0
40,000 0
________ (13,000)
________ (41,000)
________ 9,000
______ 45,000
__________ 0
______ 0
3,857 (9,143)
5,143 (35,857)
(9,000) 0
(45,000) 0
__________ P 0
______ P 0
9,143 P 0
35,857 P 0
________ P 0
debit
Balances Distribution of cash to partners Balances
P
Problem III 1. CDG Partnership Statement of Realization and Liquidation Lump-sum Liquidation on December 10, 20X6
Liabilities
25,000
475,000
(270,000)
(120,000)
(50,000)
(60,000)
260,000 285,000
(475,000) -0-
(270,000)
43,000 (77,000)
86,000 36,000
86,000 26,000
(270,000)
(77,000)
36,000
(25,000) 1,000
Cash Preliquidation balances Sale of assets and distribution of P215,000 loss Cash contributed by Gail to extent of positive net worth
25,000 310,000
-0-
Distribution of deficit of insolvent partner: 20/60(P1,000) 40/60(P1,000)
Carlos 20%
Capital Balances Dan Gail 40% 40%
Noncash Assets
(1,000) 333 310,000
-0-
(270,000)
(76,667)
667 36,667
-0-
Contribution by Dan to remedy deficit
Payment to creditors
Payment to partner
36,667
(36,667)
346,667
-0-
(270,000)
(76,667)
-0-
-0-
(270,000) 76,667
-0-
270,000 -0-
(76,667)
-0-
-0-
-0-
-0-
(76,667)
Post-liquidation balances
-0-
76,667 -0-
-0-
-0-
2. CDG Partnership Net Worth of Partners December 10, 20X6 Carlos 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
Dan
Gail
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
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
Noncash Assets
Liabilities
P 25,000 P200,000 P165,000 (20,000) 160,000 (200,000) (165,000) (165,000) 10,000
Capital and Loan Balances Merz Dechter Flowers P 40,000 (8,000) (16,000)
P30,000 P(10,000) (8,000) (4,000) (16,000) (8,000) 10,000
Allocation of Flower's Distribution to partners Ending balances
(10,000) 0
0
0
(6,000) (10,000) 0
(6,000) 0 0
12,000 0 0
Problem V
Beginning: Payment of liabilities Cramer/Bower pay in from personal worth to cover deficit balances: Payment of liabilities Allocation of deficit balances: Able paid:
Cash P20,000 (20,000) P 0
Liabilities P(30,000) 20,000 P(10,000)
Able P(10,000)
Bower P5,000
Cramer 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
______ P 2,000 (2,000) P 0
________ P 0
8,000 P (2,000) 2,000 P 0
(3,000) P 0
(5,000) P 0
P
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,
0
100,000
65,000
Arthur P70,000
(20,000)
20,000
35,000
Baker P80,000 30,000
Casey P55,000
0
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 1. c
Profit ratio Prior capital Loss on sale of inventory
2.
a
Prior capital Loss on sale of inventory
(6,000) P44,000
(15,000) P95,000
(9,000) P46,000
(30,000) P14,000
(75,000) P20,000
(45,000) P 1,000
JJ
CC
TT
Total
40%
50%
10%
100%
(160,000)
(45,000)
(55,000)
(260,000)
24,000 (136,000)
30,000 (15,000)
6,000 (49,000)
60,000 (200,000)
(160,000)
(45,000)
(55,000)
(260,000)
72,000 (88,000)
90,000 45,000
18,000 (37,000)
180,000 (80,000)
9,000 (28,000)
(80,000)
Allocate Charles' capital deficit: JJ = .40/.50 TT = .10/.50
(45,000) 36,000 (52,000)
-0-
3. c – (P234,000 – P434,000) x 20% = P40,000
4. d A Capital before realization Liquidation expenses Loss on sale (134 - 434)
80,000 (3,600) (90,000) (13,600)
B 90,000 (2,400) (60,000) 27,600
C 130,000 (6,000) (300,000) (176,000)
5. a Capital before realization - C Liquidation expenses (12,000 x 50%) Share on loss on realization Capital balance after realization
130,000 (6,000) (132,000) ( 8,000)
Total loss on realization: P132,000/50% Non-cash assets Proceeds
(264,000) 434,000 170,000
6. c X Capital before realization Divided by: Loss absorption abilities
130,000 50% 260,000
Y 130,000 30% 260,000
Z 100,000 20% 500,000
7. d – P80,000 – (P150,000 – P50,00) x 50% = P30,000 8. b Capital before realization Loss on sale (85,000 – 33,000) Additional loss (5:2)
T 40,000 (26,000) 14,000 (4,000) 10,000
D 10,000 (15,600) ( 5,600) 5,600
H 15,000 (10,400) 4,600 ( 1,600) 3,000
T 40,000 (10,000) 30,000
D 10,000 (6,000) 4,000
H 15,000 (4,000) 11,000
T 40,000 (31,950) 8,050 (6,550) 1,500 ( 400) 1,100
D 10,000 (19,170) ( 9,170) 9,170
H 15,000 (12,780) 2,220 (2,620) ( 400) 400
9. c Capital before realization Loss on sale (85,000 – 65,000)
10. a Capital before realization Loss on sale (85,000 – 21,100) Additional loss (5:2) Additional loss 11. b Capital before realization Liquidation expenses Loss on sale (300 - 180) Additional loss (2:4)
K 60,000 (2,000) (24,000) 34,000 ( 4,000) 30,000
L 40,000 ( 4,000) (48,000) (12,000) 12,000
M 80,000 ( 4,000) ( 48,000) 28,000 ( 8,000) 20,000
K 60,000 (2,000) (24,000) 34,000 _____ 34,000
L 40,000 ( 4,000) (48,000) (12,000) 12,000
M 80,000 ( 4,000) ( 48,000) 28,000 ______ 28,000
12. d Capital before realization Liquidation expenses Loss on sale (300 - 180) Additional investment
13. a Cash, beginning Payment of liquidation expenses Payment of liabilities Payment to partners
P90,000 ( 5,000) ( 60,000) P25,000
14. d Capital before realization
H 80,000
I 110,000
J 140,000
Total 330,000
Loss on sale (2:4:4) Additional loss (2:4)
(61,000) 19,000 ( 4,000) 15,000
(122,000) (12,000) 12,000
P 70,000 (1,600) 68,400 20% 342,000
Q 50,000 ( 3,200) 46,800 40% 117,000
(122,000) 18,000 ( 8,000) 10,000
(305,000) 25,000
15. c Capital before realization Liquidation expenses Divided by: Loss absorption abilities Selling Price Book value Loss
R 100,000 ( 3,200) 96,800 40% 242,000
183,000 300,000 (117,000)
or, Quincy capital before liquidation………………………………………………..P 50,000 Less: Share in liquidation expenses (P8,000 x 40%)………………………….… 3,200 Quincy capital before realization of non- cash assets……………………….P 46,800 0 Less: Cash received by Quincy (minimum)…………………………………… . 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 16. a – installment liquidation (refer for more problems in Chapter 5) INTERESTS Q
P R P Balances before realization Total l interests………... P 70,000 P 50,000 P100,000 20% 40% 40% Divided by: P&L ratio………… Loss absorption abilities……….. P350,000 P125,000 P250,000 0 P20,000 Priority I…………………………. (100,000) P250,000 P125,000 P250,000 (125,000) 25,000 Priority II………………………… (125,000) P125,000 P125,000 P125,000 P75,000
PAYMENTS Q R
___ Total
P20,000 P50,000 75,000 P 4,500 P50,000 P95,000
Cash, beginning Add (deduct): Liquidation expenses paid Payment of liabilities Proceeds from sale of assets (?) Payment to partner before payment to Renquist (priority I only)
P 90,000 ( 8,000) (170,000) 108,000 P 20,000
17. No answer available – Justice P15,533 Capital balances Potential loss from Douglass (40:35) Note:
J 23,000 (7,467) 15,533
Z 22,000 (6,533) 15,467
D (14,000) 14,000 0
Total 31,000 0 31,000
1. Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000 deficit may not be recovered for purposes of distribution of cash. 2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Justice and Zobart is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5) J Z Capital balances 23,000 22,000 Additional contribution 0 0 Capital balances 23,000 22,000 Divided by: Profit and loss ratio 40/75 35/75 Loss absorption power 43,125 47,143 Loss to reduce Z to D: (4,018 x 35/55 = 1,875) 4,018 Balances 43,125 43,125 Cash available Less: Priority I to Douglass (P4,018 x 35/75) Less: P& L (40:35)
P31,000 1,875 P29,125 (29,125)
P 1,875 P15,533 P15,533
13,592 P15,467
18. a - (P100,000 – P72,000 – P3,000 = P25,000) 19. b - (P40,000 + P10,000 – P2,000 – P4,000 = P44,000) 20. a – Capital before realization Loss on sale (4:2:1:3) Additional loss (2:1:3)
B 25,000 (60,000) (35,000) (35,000) 15,000
P 110,000 ( 30,000) 80,000 (11,667) 68,333
L 100,000 (15,000) 85,000 ( 5,833) 79,167
S 65,000 (45,000) 20,000 (17,500) 2,500
B 25,000 (45,000) (20,000) (20,000)
P 110,000 ( 30,000) 80,000 ( 5,714) 74,286 ( 4,286) 70,000
L 100,000 (15,000) 85,000 ( 2,857) 82,143 ( 2,143) 80,000
S 65,000 (60,000) 5,000 (11,429) ( 6,429) 6,429
21. b- refer to No. 20 22. c – refer to No. 20 23. a Capital before realization Loss on sale (3:2:1:4)) Additional loss (2:1:4) Additional loss (2:1) 24. a – refer to No. 23 25. d – refer to No. 23 26. b Assets: Cash Accounts receivable (net) Inventory Equipment Liabilities: Accounts payable
Fair Value P 25,000 26,000 46,000 84,000
P181,000 50,000
D (14,000) 14,000
Net Assets equivalent to Investment
P131,000
Net Assets, at book value (P100,000 + P50,000) Net assets at fair value Net adjustments For Wilfred: P19,000 x 70% For Mike: P19,000 x 30%
P150,000 131,000 P 19,000 P 13,300 P 5,700
27. c
Wilfred: P100,000 – P13,300 (refer to No. 27)= P86,700 28. d – Mike: P50,000 – P5,700 (refer to No. 27) = P44,300 29. c – [P131,000 – (10,000 shares x P10 par)] = P31,000 30. b – 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 X 90,000 (42,000) 48,000
Y 60,000 (42,000) 18,000)
Z 30,000 (36,000) ( 6,000)
Total 180,000 *(120,000) 60,000
32. c – this problem is more on installment liquidation principles. M K Capital before realization 100,000 175,000 Loss on sale (50%:30%:20%) (162,500) (97,500) ( 62,500) 77,500 Additional loss (3:2) 62,500 (37,500) 40,000 Additional loss (15,000) 25,000
C 75,000 (65,000) 10,000 (25,000) (15,000) 15,000
Total 350,000 *(325,000) **25,000 ______25,000 -0-
Capital before realization Loss on sale (35%:35%:30%)
*balancing figure – total reduction in capital
*balancing figure – total reduction in capital
Payment to partners: P200,000 – P25,000 – P150,000 = P25,000** Theories True or False 1. True 2. False 3. False 4. False 5. False Multiple Choice Theories 1. c 6. b
6. 7. 8. 9. 10,
True True True False True
11.
b
16.
d
2. 3. 4. 5.
b d b d
7. 8. 9. 10,
c a c d
12. 13. 14. 15,
a d b c
17. 18.
b a
