Solution manual fundamentals of accounting by cabrera chapter 06 SM

considering remaining assets worthless, the schedule of safe payments further must reduce capital balances by any additional estimated disposition costs.4.The right of offset allows part

considering remaining assets worthless, the schedule of safe payments further must reduce capital balances by any additional estimated disposition costs.4.

The right of offset allows partners to treat any loan to the partnership

as a contribution to capital if the partner s capital account becomes deficient.�The significance of this right is that the two amounts are summed to determine the amount of interim distributions that are allocable to the partner during liquidation Payments are first applied, however, against the loan balance.5

Dissolution of a partnership terminates the partnership as a legal entity,but the partnership business may continue under a new agreement When a

partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity Thus, a partnership may be dissolved without partnership liquidation is the liquidation of a solvent partnership in which allpartners have equity capital and all gains and losses are realized and

recognized before any distributions are made to the partners In simple

partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances.7 The distribution of assets for capital interests prior

to the payment of loan balances to the partners is not in accordance with

Partnership Act But the partners may agree to distribute cash or other assets for capital interests before all losses on liquidation are known With

agreement among all partners, distributions to the partners would be based on each partner s equity (combined capital and loan balances) in relation to his �share of possible future losses A partner with sufficient equity to absorb hisshare of possible future losses would be included in distributions, but a

partner with loans to the partnership would not be included in distributions until his equity is sufficient to absorb his share of possible future losses.8

A statement of partnership liquidation is a summary of transactions and balances for a partnership during its liquidation stage Such statements

provide continuous records of liquidation events Interim liquidation

statements are particularly helpful in showing the progress that has been made toward liquidation to date and in identifying remaining assets to be liquidated and liabilities to be paid Interim liquidation statements are helpful to partners and creditors in providing a basis for current decisions as well as future planning Liquidation statements are important legal documents for partnership liquidations that come under the jurisdiction of a court.9

Available cash may be distributed to partners according to their profit and loss sharing ratios only when nonpartner liabilities have been satisfied andpartner equities (capital and loan balances combined) are aligned with the

relative profit and loss sharing ratios of the partners In the absence of loans or advances payable to or receivables from individual partners, cash can

be distributed to partners in their profit and loss sharing ratios when capital balances are in the relative profit and loss sharing ratios of the partners and all nonpartner liabilities have been paid.10 Partnership insolvency occurs when partnership liabilities exceed partnership assets In this case, all available cash is distributed to partnership creditors Individual partners will be called upon to use their personal assets to satisfy the remaining claims

of the partnership creditors.11 Partners with credit capital balances after all partnership assets have been distributed in liquidation have a claim againstpartners with debit capital balances If the partners with debit balances are personally solvent, they should pay amounts equal to their partnership claims infull If partners with debit capital balances are insolvent, the partners with credit balances will absorb the losses of the insolvent partners with debit capital balances in relation to their relative profit and loss sharing ratios.balances January 1, 2007#P40,000#P20,000##January losses: Lumber

Cash distribution:####Accounts payable#P15,000### White# 12,400### Total

Carnation#30% Orange#20% Mocha##Beginning

�

on sale of assets (P180,000 P120,000)##(30,000)#(18,000)#(12,000)##Additional �liability#

Orange s debit balance, � 5/7, 2/7# # (7,500)# 10,500#

Carnation and P3,000 to Mocha.Exercise 5Schedule to Correct Capital Accounts#RedCapital#Green Capital#Gray Capital##December 31,

= XRequirement (2)(a) Investment recorded as bonus:

Investment recorded as goodwill: Cash 88,000

Green, Capital 88,000 Requirement (3)Lump sum liquidation schedule:#Assets##Partners Capital �

Accounts###Cash#Noncash#Liabilities#Lime#Moss#Neon##Beginning balances#P

�

-0-#Plum#Aqua#Fuchsia #Plum#Aqua##Beginning balances#30%#30%#40%# # # ##Capital and� � �loan balance#P33,000#P33,000#P24,000# # # ##Allocation of expected liquidation � � �expenses#(3,000)#(3,000)#(4,000)# # # ##Balances#P30,000#P30,000#P24,000# # # ##� � � � � �Maximum loss absorbed (MLA)# # # #P100,000#P100,000#P100,000##Amount needed to � � �reduce highest-ranked MLA to next higher MLA# # # #(50,000)#(50,000)#� � � �

##New MLA# # # #P 50,000#P 50,000#P 50,000##Reduction in capital needed� � �

to achieve reduction in MLA#(15,000)#(15,000)# � #####New

capital balances#P15,000#P15,000#P20,000#####All above transactions should be profit and loss ratios ##Payable to##Level#Amount#Liabilities#Estimated

Liquidation Expenses#Fuchsia#Plum#Aqua##I#First P20,000#P20,000######II#Next P10,000##P10,000#####III#Next P30,000###50%#50%###IV#Any additional

payments###30%#30%#40%##Exercise 8Part a Square gets P21,000, Circle gets

Circle Triangle Reported balances P25,000 P15,000P5,000 Loss on sale of land (P10,000) split on a 4:3:3 basis (4,000) (3,000) (3,000) Cash distribution

P21,000 P12,000 P2,000Part b

Reported balances P25,000 P15,000 P5,000 Loss on sale of land (P20,000) split on a 4:3:3 basis (8,000)

Adjusted balances P17,000 P 9,000P(1,000) Potential loss from Triangle's deficit (split 4:3) (571) (429) 1,000 Cash distribution P 8,571

-0-Exercise 9 The entire P20,000 goes to Faith

Faith Hope Love Joy Reported balances

P20,000 P(30,000) P(50,000) Capital contribution -0- -0- -0- 20,000 Adjusted balances

P20,000 P(30,000) P(30,000) Potential loss from Love

on a 4:3 basis (25,714) 30,000 30,000 Adjusted balances P25,714P(5,714) P -0- P -0- Potential loss from Hope

(P5,714) (5,714) 5,714 -0- -0- Cash distribution P20,000 P -0- P -0- P -0-Multiple Choice Questions1 C2 A3 D4 B5 B

Sunshine, Capital Sunrise, Capital Sunset, Capital Reported balancesP19,000 P18,000 P(12,000) Potential loss from Sunset deficit (split 5/8:3/8) (7,500) (4,500) 12,000 Cash

Snowie Jovie Reported balances P50,000

P14,000 P80,000 Loss on sale of assets (P110,000)

plan should be created.Maximum Losses That Can Be AbsorbedJC P59,000/40%

P147,500PJ P39,000/30% 130,000 (most vulnerable to losses)TinP34,000/10% 340,000Bers P34,000/20% 170,000The assumption is

Tin Bers Reported balances P59,000 P39,000 P34,000 P34,000

Assumed loss (P130,000) split on a 4:3:1:2 basis (52,000)

-0- P21,000 P 8,000Maximum Losses That Can Now Be AbsorbedJC

P7,000/4/7 P12,250 (most vulnerable to losses)Tin P21,000/1/7

Tin Bers Reported balances P7,000 P21,000 P8,000

Assumed loss (P12,250) split on a 4:1:2 basis (7,000)

(1,750) (3,500) Adjusted balances P -0- P19,250

P4,500 Maximum Losses That Can Now Be AbsorbedTin P19,250/1/3

(most vulnerable to losses) The Tin Bers Reported balances P19,250 P4,500 Assumed loss

(2,250) (4,500) Adjusted balances P17,000 P -0-8 C To work this problem, a

predistribution schedule is necessary That schedule, which is computed below,

is as follows: First P3,000 goes to Ayen Next P15,000 goes to Ayen (2/3) and Det� �(1/3) Next P42,000 goes to Tins (4/7), Ayen (2/7), and Det (1/7) All remaining � �cash goes to Tins (4/10), Bert (3/10), Ayen (2/10), and Det (1/10)

Tins Bert Ayen Det Beginning balances P27,000 P43,000 P20,000 Assumed loss of P90,000 (see

Step one balances P24,000 P #0# P25,000 P11,000

Assumed loss of P42,000 (see Schedule 2) (allocated on a 4:0:2:1 basis) (24,000) P #0# (12,000) Step two

balances P #0# P #0# P13,000 P 5,000 Assumed loss of P15,000 (see Schedule 3) (allocated on a 0:0:2:1 basis) #0#

#0# (10,000) (5,000) Step three balances P #0# P

Balance/ That Can Partner Loss Allocation Be Absorbed Tins

Bert P27,000/30% P 90,000 (most vulnerable) Ayen P43,000/20% P215,000 Det P20,000/10%

Balance/ That Can Partner Loss Allocation Be Absorbed Tins

P24,000/(4/7) P 42,000 (most vulnerable) Ayen P25,000/(2/7)

P5,400) are safe capital balances and those amounts can be immediately

Assets#Liabilities#GoodCapital#BetterCapital#Best

-##8#P

Capital##7# -

#3,800##10# -# -# -# -# -# -##11#P151,000#P

Capital#BetterCapital#Best

-##20#P

Capital##19# -# -# -# -# -# -##23#P101,000#P 0#P77,000#P4,250#P19,950#P

(200)##24#=======#=======#======#======#======#======##Two ways the partners candeal with Best s capital deficiency include:1.� Best may contribute assets of P200 to the partnership to erase the deficiency.2 Good and Better can absorb Best s deficiency in proportion to their remaining profit-sharing percentages: �TripleSummary of Liquidation Transactions###########Cash#Noncash

#131,000#22,000#42,000#44,000##Payment of

liabilities#(131,000)##(131,000)#####Balances#108,000#-0-#-0-#22,000#42,000#(44,000)##Disbursement of cash to

partners#(108,000)###(22,000)#(42,000)#(44,000)##Balances#P -0-#P -0-#P -0-#P -0-#P -0-#P -0-## *

Allocation of gain to partners:Gain: P212,000 P202,000 � =

P10,000 Single: P 10,000 x 0.10 = P 1,000Double: P

Transactions###########Cash#Noncash Assets#Liabilities#Single 10%#Double

27,000#P202,000#P131,000#P21,000#P39,000#P38,000##Sales of assets and sharing of

liabilities#(131,000)##(131,000)#####Balances#78,000#-0-#-0-#P -0-liabilities#(131,000)##(131,000)#####Balances#78,000#-0-#-0-#P -0-liabilities#(131,000)##(131,000)#####Balances#78,000#-0-#-0-#P -0-liabilities#(131,000)##(131,000)#####Balances#78,000#-0-#-0-#P -0-## * Allocation

of gain to partners:Gain: P182,000 P202,000 � = P10,000 Single:

P 20,000 x 0.10 = P 3,000Double: P 20,000 x 0.30 =

Accounts and Explanation#PostRef#Debit#Credit##Dec 31#Cash##182,000####Single,

Noncash Assets###202,000### To sell noncash assets in liquidation and distribute loss to partners.########### 31#Liabilities##131,000####

Cash###131,000### To pay liabilities in liquidation.###########

31#Single, Capital##19,000####Double, Capital##33,000####Triple,

Cash###78,000### To distribute cash to partners inliquidation.#####

7,000#P 3,000#P(5,000)######P 5,000## 5,000####Modena contribution###

(2,000)####Payment to Modena####### (5,000)###

(5,000)###Balances#-0-#-0-#-0-#-0-#-0-#-0-#-0-#-0-#-0-#-0-#-0-##* Claims against Chariya s inheritance �exist in the following priority:Chariya s personal creditors�

partnership creditors 3,000Due Morales 2,000Due Modena 5,000

Existing unsatisfied claims:Due Morales

assets#P300,200#####LIABILITIES#####Accounts payable#P 32,700##Accrued expensesliabilities#P111,300#####CAPITAL#####Joo, Capital# *##Yun,

amounts are the sum of the current market value of the assets, liabilities, and capital of the two proprietorships For example, Cash of P11,700 = P8,000 + Total assets � Total liabilities = Partner capitalJoo: P193,400 �

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