Solution Chapter 4

Chapter 4

Problem I1: Gain on Realization Fully Allocated to Partners Capital Balances. QRS PartnershipStatement of Realization and LiquidationNovember 1 30, 20x4 Cash Non- Cash AssetsLiabilitiesQ, LoanQ, Capital 30%)R, Capital (50%)S, Capital (20%)

Balances before liquidation24,00084,00012,0002,4009,60048,00036,000

Realization and distribution of gain96,000(84,000) _____ ______3,6006,0002,400

Balances after realization120,00012,0002,40013,20054,00038,400

Payment of liabilities(12,000)(12,000)

Balances after payment of liabilities108,0002,40013,20054,00038,400

Payment to partners - loan(2,400)(2,400) ______ _____________

Balances after payment of partners loans105,60013,20054,00038,400

Payment to partners - capital(105,600)(13,200)(54,000)(38,400)

2: Loss on Realization Creates a Deficit Balance in Partners Capital Account Requiring Transfer from Partners Loan Account (Right of Offset Exercised). QRS PartnershipStatement of Realization and LiquidationNovember 1 30, 20x4 CashNon-Cash AssetsLiabilitiesQ, LoanQ, capital (30%)R, Capital (50%)S, Capital (20%)

Balances before liquidation24,00084,00012,000 2,4009,60048,00036,000

Realization and distribution of loss48,000(84,000) _____ ______(10,800)(18,000)(7,200)

Balances after realization72,00012,000 2,400(1,200)30,00028,800


Balances after payment of liabilities60,000 2,400(1,200)30,00028,800

Offset deficit versus loans_______ (1,200) 1,200______________

Balances after offsetting60,000 1,20030,00028,800

Payment to partners loan (1,200) (1,200)_____________

Balances after payment of partners loans58,80030,00028,800

Payment to partners - capital(58,800)(30,000)(28,800)

3: Loss on Realization Creates a Deficit Balance in Partners Capital Account Requiring Transfer from Partners Loan Account (Right of Offset Exercised and Additional Capital Investment is Required and Made). QRS PartnershipStatement of Realization and LiquidationNovember 1 30, 20x4

CashNon-Cash AssetsLiabilitiesQ, LoanQ, capital (30%)R, Capital (50%)S, Capital (20%)


Realization and distribution of loss36,000(84,000) ________________(14,400)(24,000)(9,600)

Balances after realization60,00012,0002,400( 4,800)24,00026,400

Payment of liabilities(12,000)(12,000)_____________________________

Balances after payment of liabilities48,0002,400( 4,800)24,00026,400

Offset loan versus deficit _______(2,400) 2,400______________

Balances after offsetting partners loan48,000(2,400)24,00026,400

Additional investment by Q __2,400 2,400______________

Balances after additional Investment 50,400 24,000 26,400


4: Loss on Realization Creates a Deficit Balance in One Partners Capital Account Requiring Transfer Partners Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made (Personally Insolvent). QRS PartnershipStatement of Realization and LiquidationNovember 1 30, 20x4



Realization and distribution of gain42,000(84,000)_______________(12,600)(21,000)(8,400)


Payment of liabilities(12,000)(12,000)____________________________

Balances after payment of liabilities54,0002,400(3,000)27,00027,600

Offset loan versus deficit_______(2,400) 2,400____________

Balances after offsetting54,000( 600)27,00027,600

Additional loss due to insolvency of Q_______ 600( 429)( 171)

Balances after additional , Loss54,00026,57127,429


5: Loss on Realization Creates a Deficit Balance in One Partners Capital Account Requiring Transfer Partners Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made (Personally Insolvent). QRS PartnershipStatement of Realization and LiquidationNovember 1 30, 20x4



Realization and distribution of gain24,000(84,000)______________(18,000) (30,000)(12,000)



Balances after payment of liabilities36,0002,400( 8,400)18,00024,000

Offset loan versus deficit______ (2,400) 2,400_____________

Balances after offsetting 36,000 (6,000),18,00024,000

Additional investment by Q_3,600_ 3,600_____________

Balances after additional investment39,600 (2,400)18,00024,000

Additional loss due to insolvency of Q______ 2,400(1,714)( 686)

Balances after additional Loss39,60016,28623,314


6: Loss on Realization Creates a Deficit Balance in Partners Capital Account Requiring Transfer Partners Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent. QRS PartnershipStatement of Realization and LiquidationNovember 1 30, 20x4



Payment of liquidation expenses(14,400)______________________(4,320)(7,200)(2,880)

Balances after payment of liquidation expenses 9,60084,000 12,000 2,400 5,28040,80033,120

Write-off goodwill and prepaid expenses_______(72,000)_______________(21,600)(36,000)(14,400)

Balances after write-offs 9,600 12,000 12,000 2,400 (16,320) 4,80018,720

Realization and distribution of loss1,200(12,000)_______________( 3,240)( 5,400)( 2,160)

Balances after realization10,80012,0002,400( 19,560)( 600)16,560

Payment of liabilities(10,800) (10,800)______________________________

Balances after payment of Liabilities-0- 1,2002,400(19,560)( 600)16,560

Offset loan versus deficit_____________(2,400) 2,400______________

Balances after offsetting-0- 1,200(17,160)( 600)16,560

Additional investment by Q and R 17,760_______17,160 600______

Balances after additional Investment 17,760 1,20016,560

Payment of liabilities(1,200) (1,200)_______

Balances after payment of Liabilities 16,560 16,560

Payment to partners - Capital(16,560)(16,560)

7: Loss on Realization Creates a Deficit Balance in Partners Capital Account Requiring Transfer Partners Loan Account (Right of Offset Is Exercised) with Revaluation of Assets. QRS PartnershipStatement of Realization and LiquidationNovember 1 30, 20x4



Increase in equipment1,200360600240

Decrease in furniture______(600)______________(180)(300)(120)

Balances after revaluation24,00084,60012,0002,4009,78048,30036,120

Refund of prepaid expenses_6,960(8,400)______________(432)(720)(288)

Balances after refunds30,960 76,20012,0002,4009,34847,58035,832

Received noncash assets______(10,200)__________________(7,200)(3,000)

Balances after receipt of noncash assets 30,96066,000 12,000 2,400 9,34840,38032,832

Realization and distribution of loss32,400(66,000)_____________( 10,080)( 16,800)( 8,064)

Balances after realization63,36012,0002,400( 732)23,58026,112


Balances after payment of liabilities51,360 2,400( 732)23,58026,112

Offset loan versus deficit_______( 732) 732____________

Balances after offsetting51,360 1,66823,58026,112

Payment to partners - loan(1,668) (1,668) _____________

Balances after payment of loans49,69223,580 26,112

Payment to partners- capitals(49,692)(23,580) (26,112)

Problem IIDISCOUNT PARTNERSHIPSchedule of Partnership Liquidation January 14, 20x4

Capital Balances

Explanation Cash Other AssetsLiabilities Dawson Feeney Hardin

Balances before realizationP25,000P120,000P(40,000)P(31,000) P(65,000)P(9,000)

Sales of noncash assets 60,000 (120,000)______ 18,000 24,000 18,000

Balances85,000 0(40,000)(13,000) (41,000)9,000

Payment of liabilities(40,000)__________ 40,000________________________

Balances45,000 0 0(13,000)(41,000)9,000

Allocation of Hardin's debit balance

______________________ 3,857 5,143(9,000)

Balances45,000 0 0(9,143)(35,857) 0

Distribution of cash to partners(45,000)________________ 9,143 35,857________

Balances P 0 P 0 P 0 P 0 P 0 P 0

Problem III1.CDG Partnership

Statement of Realization and Liquidation

Lump-sum Liquidation on December 10, 20X6

Capital Balances

NoncashCarlosDanGail

CashAssetsLiabilities20%40%40%

Preliquidation balances25,000475,000(270,000)(120,000)(50,000)(60,000)

Sale of assets and distribution

of P215,000 loss 260,000(475,000) 43,000 86,000 86,000

285,000-0-(270,000)(77,000)36,00026,000

Cash contributed by Gail to

extent of positive net worth 25,000 (25,000)

310,000-0-(270,000)(77,000)36,0001,000

Distribution of deficit of

insolvent partner:(1,000)

20/60(P1,000)333

40/60(P1,000) 667

310,000-0-(270,000)(76,667)36,667-0-

Contribution by Dan to remedy deficit36,667 (36,667)

346,667-0-(270,000)(76,667)-0--0-

Payment to creditors(270,000) 270,000

76,667-0--0-(76,667)-0--0-

Payment to partner(76,667) 76,667

Post-liquidation balances-0- -0- -0--0- -0- -0-

2.

CDG PartnershipNet Worth of PartnersDecember 10, 20X6

Carlos Dan Gail

Personal assets, excluding

partnership capital interests250,000300,000350,000

Personal liabilities(230,000)(240,000)(325,000)

Personal net worth, excluding

partnership capital interests, Dec. 1, 20X620,00060,00025,000

Contribution to partnership(36,667)(25,000)

Liquidating distribution from partnership 76,667 -0- -0-

Net worth, December 10, 20X6 96,667 23,333 -0-

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 partners 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 partners 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 IVNoncashCapital and Loan Balances

CashAssetsLiabilitiesMerzDechterFlowers

Beginning balancesP 25,000 P200,000 P165,000 P 40,000 P30,000 P(10,000)

Liquidation expense(20,000)(8,000)(8,000)(4,000)

Sale of non-cash assets160,000 (200,000)(16,000)(16,000)(8,000)


Contribution by Flowers 10,000 10,000

Allocation of Flower's deficit(6,000)(6,000)12,000

Distribution to partners(10,000)(10,000)0 0

Ending balances0 0 0 0 0 0

Problem VCash Liabilities Able Bower Cramer

Beginning:P20,000 P(30,000)P(10,000)P5,000 P15,000

Payment of liabilities (20,000) 20,000

P 0 P(10,000)P(10,000)P5,000 P15,000

Cramer/Bower pay in

from personal worth

to cover

deficit balances: 12,000 ________ ________ (2,000) (10,000)

P12,000 P(10,000)P(10,000)P3,000 P 5,000

Payment of liabilities (10,000) 10,000

P 2,000 P 0 P(10,000)P3,000 P 5,000

Allocation of

deficit balances:______ ________ 8,000 (3,000) (5,000)

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

Able paid: (2,000) 2,000

P 0 P 0 P 0 P 0 P 0

Problem VIAnswer: Cash70,000Arthur, Capital6,000Baker, Capital15,000Casey, Capital9,000Other Assets100,000To record realization of assets at a loss of $30,000, dividedamong Arthur, Baker, and Casey in 2:5:3 ratio, respectively.Trade Accounts Payable65,000Cash65,000To record payment of liabilities.

Arthur, Capital20,000Loan Receivable from Arthur20,000To offset Arthur's loan account against Arthur's capitalaccount.Arthur, Capital14,000Loan Payable to Baker20,000Casey, Capital1,000Cash35,000To record payments to partners, computed as follows:ArthurBakerCaseyCapital account balancesP70,000P80,000P55,000Add: Loan payable to Baker30,000Less:Loan receivable from Arthur(20,000)Loss on realization of assets, P30,000 (6,000) (15,000) (9,000)BalancesP44,000P95,000P46,000Maximum potential additional loss of P150,000 (P250,000 P100,000 = P150,000) divided in 2:5:3 ratio (30,000) (75,000)(45,000)Cash paymentsP14,000P20,000P 1,000

Multiple Choice Problems1.cJJCCTTTotal

Profit ratio40%50%10%100%

Prior capital(160,000)(45,000)(55,000)(260,000)

Loss on sale

of inventory24,00030,0006,00060,000

(136,000)(15,000)(49,000)(200,000)

2.aPrior capital(160,000)(45,000)(55,000)(260,000)

Loss on sale

of inventory72,00090,00018,000180,000

(88,000)45,000(37,000)(80,000)

Allocate Charles'

capital deficit:(45,000)

JJ = .40/.5036,000

TT = .10/.50 9,000

(52,000) -0-(28,000)(80,000)

3. c (P234,000 P434,000) x 20% = P40,000

4. d A B CCapital before realization80,00090,000130,000

Liquidation expenses (3,600) (2,400) (6,000)

Loss on sale (134 - 434)(90,000) (60,000)(300,000)

(13,600) 27,600(176,000)

5. aCapital before realization - C130,000

Liquidation expenses (12,000 x 50%) (6,000)

Share on loss on realization (132,000)

Capital balance after realization( 8,000)

Total loss on realization: P132,000/50% (264,000) Non-cash assets 434,000 Proceeds 170,000

6. c X Y ZCapital before realization130,000130,000 100,000

Divided by: 50% 30% 20%

Loss absorption abilities 260,000 260,000500,000

7. d P80,000 (P150,000 P50,00) x 50% = P30,000

8. b T D HCapital before realization40,000 10,000 15,000

Loss on sale (85,000 33,000)(26,000) (15,600) (10,400)

14,000 ( 5,600) 4,600

Additional loss (5:2) (4,000) 5,600 ( 1,600) 10,000 3,0009. c T D HCapital before realization40,000 10,000 15,000

Loss on sale (85,000 65,000)(10,000) (6,000) (4,000)

30,000 4,00011,000

10. a T D HCapital before realization40,000 10,000 15,000

Loss on sale (85,000 21,100)(31,950) (19,170) (12,780)

8,050 ( 9,170) 2,220

Additional loss (5:2) (6,550) 9,170 (2,620)1,500 ( 400) Additional loss( 400) 4001,10011. b K L MCapital before realization60,00040,00080,000

Liquidation expenses (2,000) ( 4,000) ( 4,000)

Loss on sale (300 - 180)(24,000) (48,000) ( 48,000)

34,000 (12,000) 28,000

Additional loss (2:4) ( 4,000) 12,000( 8,000) 30,000 20,000

12. d K L MCapital before realization60,00040,00080,000


Loss on sale (300 - 180)(24,000) (48,000) ( 48,000)

34,000 (12,000) 28,000

Additional investment _____ 12,000______ 34,000 28,000

13. aCash, beginningP90,000Payment of liquidation expenses( 5,000)Payment of liabilities( 60,000)Payment to partnersP25,000

14. d H I J TotalCapital before realization80,000110,000140,000330,000

Loss on sale (2:4:4)(61,000) (122,000) (122,000)(305,000)

19,000 (12,000) 18,00025,000

Additional loss (2:4) ( 4,000) 12,000 ( 8,000) 15,000 10,000

15. c P Q RCapital before realization70,00050,000100,000


68,400 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 realizationP 46,800 Divided by: Profit and loss ratio.. 40% Loss on realization..P117,000 Less; Non-cash assets...................... 300,000 Proceeds from saleP183,000

16. a installment liquidation (refer for more problems in Chapter 5) INTERESTS PAYMENTS ___ P Q R P Q R TotalBalances before realizationTotall interests... P 70,000 P 50,000 P100,000Divided 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, beginningP 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

17. No answer available Justice P15,533 JZ D Total

Capital balances 23,000 22,000 (14,000) 31,000

Potential loss from Douglass (40:35) (7,467) (6,533) 14,000 0

15,533 15,467 0 31,000

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)JZ D

Capital balances 23,000 22,000 (14,000)

Additional contribution 0 0 14,000

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 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

18. a - (P100,000 P72,000 P3,000 = P25,000)

19. b - (P40,000 + P10,000 P2,000 P4,000 = P44,000)

20. a B P L SCapital before realization 25,000110,000100,000 65,000

Loss on sale (4:2:1:3)(60,000) ( 30,000) (15,000)(45,000)

(35,000) 80,000 85,000 20,000

Additional loss (2:1:3) (35,000) (11,667) ( 5,833) (17,500) 15,000 68,333 79,167 2,50021. b- refer to No. 2022. c refer to No. 2023. a B P L SCapital before realization 25,000110,000100,000 65,000

Loss on sale (3:2:1:4))(45,000) ( 30,000) (15,000)(60,000)

(20,000) 80,000 85,000 5,000

Additional loss (2:1:4) (20,000) ( 5,714) ( 2,857) (11,429) 74,286 82,143 ( 6,429) Additional loss (2:1) ( 4,286) ( 2,143) 6,429 70,000 80,00024. a refer to No. 2325. d refer to No. 2326. bAssets:Fair Value

CashP 25,000

Accounts receivable (net) 26,000

Inventory 46,000

Equipment 84,000P181,000

Liabilities:

Accounts payable 50,000

Net Assets equivalent to InvestmentP131,000

27. c Net Assets, at book value (P100,000 + P50,000)P150,000

Net assets at fair value 131,000

Net adjustments P 19,000

For Wilfred: P19,000 x 70% P 13,300

For Mike: P19,000 x 30% P 5,700

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 70,000K, capital (P150,000 + P10,000 + P10,000 P70,000)100,000Machinery, at cost150,000Rice [P110,000 (P150,000 P70,000)] x 1/3 10,000Long [P110,000 (P150,000 P70,000)] x 1/3 10,000

31. c X Y Z TotalCapital before realization90,00060,00030,000180,000

Loss on sale (35%:35%:30%)(42,000) (42,000) (36,000)*(120,000)

48,000 18,000) ( 6,000)60,000

*balancing figure total reduction in capital

32. c this problem is more on installment liquidation principles. M K C TotalCapital before realization100,000175,00075,000350,000

Loss 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 capital

Payment to partners: P200,000 P25,000 P150,000 = P25,000**

Theories

True or False1.True6.True

2.False7.True

3.False8.True

4.False9.False

5.False10,True

Multiple Choice Theories1.c6.b11.b16.d

2.b7.c12.a17.b

3.d8.a13.d18.a

4.b9.c14.b

5.d10,d15,c

Solution Chapter 4

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Transcript of Solution Chapter 4