Solution manual fundamentals of accounting by cabrera chapter 06 SM

J & E share a gains and losses on the sale of noncash assets based on their profit-and-loss ratio and b the final cash distribution based on their capital balances.. The right of offset

Accounting for Partnership Termination of Operations

Review Questions

1 The three steps in liquidating a partnership are (1) selling the assets of the entity, (2) paying its liabilities, and (3) disbursing any remaining cash to the partners

2 J & E share (a) gains and losses on the sale of noncash assets based on their profit-and-loss ratio and (b) the final cash distribution based on their capital balances

3 In addition to 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 liquidation, but it may not be liquidated without dissolution

6 A simple partnership liquidation is the liquidation of a solvent partnership in which all partners 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 his share 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 and partner 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 against partners with debit capital balances If the partners with debit balances are personally solvent, they should pay amounts equal to their partnership claims in full 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

Exercises

Exercise 1

Schedule of Capital Balances

60% Black 40% White

Cash distribution:

Exercise 2

Sale of inventory

To record sale of inventory items

Distribution of cash

To record payment to creditors

To record distribution of available cash to partners computed as follows:

Capital Balance

Possible Loss from Unsold Inventory Balance

Exercise 3

30% Teal 30% Violet 40% Magenta

Possible losses on asset disposal

Loss on Violet’s possible default

Exercise 4

Creditors Carnation 50% Orange 30% Mocha 20%

Beginning balances P60,000 P59,000 P29,000 P52,000

Loss on sale of assets (P180,000 –

Additional liability 5,000 (2,500) (1,500) (1,000)

65,000 26,500 (10,500) (1,000) Distribute Orange’s debit balance,

5/7, 2/7 (7,500) 10,500 (3,000)

Orange owes P7,500 to Carnation and P3,000 to Mocha

Exercise 5

Schedule to Correct Capital Accounts

Red Capital

Green Capital

Gray Capital

The capital balances are adjusted for the error in computing net income in the partners’ residual equity ratios

Exercise 6

Requirement (1)

Value of total investment = X 1/5 (P250,000 + X) = X P50,000 + 1/5X = X

P50,000 = 4/5 X P62,500 = X

Requirement (2)

(a) Investment recorded as bonus:

* (P88,000 – P62,500) x 1/5 = P5,100; P62,500 + P5,100 = P67,600

(b) Investment recorded as goodwill:

Requirement (3)

Lump sum liquidation schedule:

Cash Noncash Liabilities Lime Moss Neon

Beginning balances P 45,000 P297,000 P92,000 P160,000 P 65,000 P 25,000 Sale of assets 249,000 (297,000) (24,000) (18,000) (6,000) Balances P294,000 -0- P92,000 P136,000 P 47,000 P 19,000 Cash distributions (294,000) – (92,000) (136,000) (47,000) (19,000) Ending balances -0- -0- -0- -0- -0- -0-

Exercise 7

Predistribution Plan Capital Balances Maximum Loss Absorbable

Capital and loan

Allocation of

expected

liquidation

Maximum loss

absorbed (MLA) – – – P100,000 P100,000 P100,000 Amount needed to

reduce

highest-ranked MLA to

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

Estimated Liquidation Expenses Fuchsia Plum Aqua

I First P20,000 P20,000

Exercise 8

Part a Square gets P21,000, Circle gets P12,000, and Triangle gets P2,000

Square Circle Triangle

Reported balances P25,000 P15,000 P5,000 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 P2,000 Part b Square gets P16,429 and Circle gets P8,571

Square Circle Triangle

Reported balances P25,000 P15,000 P5,000 Loss on sale of land (P20,000) split on

a 4:3:3 basis (8,000) (6,000) (6,000) Adjusted balances P17,000 P 9,000 P(1,000) Potential loss from Triangle's deficit (split 4:3) (571) (429) 1,000 Cash distribution P16,429 P 8,571 P -0 - Part c Square gets P10,714 and Circle gets P4,286

Square Circle Triangle

Reported balances P25,000 P15,000 P5,000 Loss on sale of land (P30,000) split on

a 4:3:3 basis (12,000) (9,000) (9,000) Adjusted balances P13,000 P 6,000 P(4,000) Potential loss from Triangle's deficit (split 4:3) (2,286) (1,714) 4,000 Cash distribution P10,714 P 4,286 P -0 -

Exercise 9

The entire P20,000 goes to Faith

Capital contribution -0 - -0 - -0 - 20,000

Potential loss from Love

and Joy (P60,000) split

-0-Potential loss from Hope

Cash distribution P20,000 P -0 - P -0 - P -0 -

Multiple Choice Questions

1 C

2 A

3 D

4 B

5 B Sunshine, Capital Sunrise, Capital Sunset, Capital

Potential loss from

Sunset deficit

Loss on sale of assets (P110,000)

Potential loss from Dennard

7 C A predistribution plan should be created

Maximum Losses That Can Be Absorbed

The assumption is made that a P130,000 loss occurs

Reported balances P59,000 P39,000 P34,000 P34,000 Assumed loss (P130,000) split on

a 4:3:1:2 basis (52,000) (39,000) (13,000) (26,000) Adjusted balances P 7,000 P -0- P21,000 P 8,000

Maximum Losses That Can Now Be Absorbed

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)

Maximum Losses That Can Now Be Absorbed

The assumption is made that a P6,750 loss occurs

Tin Bers

Reported balances P19,250 P4,500

Assumed loss (P6,750) split on a 1:2 basis (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)

Beginning balances P60,000 P27,000 P43,000 P20,000 Assumed loss of P90,000 (see

Assumed loss of P42,000 (see

Schedule 2) (allocated on

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 - 0 - P P - 0 - P 3,000 P - 0 -

Schedule 1

Maximum Loss Capital Balance/ That Can Partner Loss Allocation Be Absorbed

Schedule 2

Maximum Loss Capital Balance/ That Can Partner Loss Allocation Be Absorbed

Schedule 3

Maximum Loss Capital Balance/ That Can Partner Loss Allocation Be Absorbed

9 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 Jack’ loan, the two deficits total P4,000 Hansel and Gretel, the two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of

a 60%:40% ratio) Hansel would absorb P2,400 of the potential loss with Gretel being allocated P1,600 The remaining capital balances (P10,600 and P5,400) are safe capital balances and those amounts can be immediately distributed

Test Materials

Test Material 6-1

1

2

3

4

Good, Better, and Best Sale of Noncash Assets (For P145,000) 5

6 Cash Noncash Assets Liabilities Capital Good Capital Better Capital Best

7

-

8 P 6,000 P126,000 P77,000 P12,000 P37,000 P6,000

9 145,000 (126,000) 4,750 10,450 3,800

10 - - - - -

-11 P151,000 P 0 P77,000 P16,750 P47,450 P9,800

12 ======= ====== ====== ====== ====== ===== 13

14

15

16

(For P95,000)

17

18 Cash Noncash Assets Liabilities Capital Good Capital Better Capital Best

19

-

20 P 6,000 P126,000 P77,000 P12,000 P37,000 P 6,000

21 95,000 (126,000) (7,750) (17,050) (6,200)

22 - - - - -

-23 P101,000 P 0 P77,000 P4,250 P19,950 P (200)

24 ======= ======= ====== ====== ====== ======

Two ways the partners can deal 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: Good, 25/80; Better, 55/80

Test Material 6-2

Requirement 1 (a)

Single, Double, and Triple Summary of Liquidation Transactions

Cash

Noncash Assets Liabilities

Single 10%

Double 30%

Triple 60%

Balances before sale of

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

sharing of gain 212,000 (202,000) 1,000* 3,000* 6,000* Balances 239,000 -0- 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 1,000

Double: P 10,000 x 0.30 = P 3,000

Triple: P 10,000 x 0.60 = P 6,000

Requirement 1 (b)

Single, Double, and Triple Summary of Liquidation Transactions

Cash Noncash Assets Liabilities Single 10% Double 30% Triple 60%

Balances before sale of

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

sharing of gain 182,000 (202,000) (2,000)* (6,000)* (12,000)* Balances 209,000 -0- 131,000 19,000 33,000 26,000 Payment of liabilities (131,000) (131,000)

Balances 78,000 -0- -0- 19,000 33,000 26,000 Disbursement of cash to

partners (78,000) (19,000) (33,000) 26,000 Balances P -0- P -0- P -0- P -0- P -0- P

-0-

* Allocation of gain to partners:

Gain: P182,000 – P202,000 = P10,000

Single: P 20,000 x 0.10 = P 3,000

Double: P 20,000 x 0.30 = P 6,000

Triple: P 20,000 x 0.60 = P12,000

Requirement 2

GENERAL JOURNAL

Date Accounts and Explanation Post Ref Debit Credit

To sell noncash assets in liquidation and distribute loss to partners.

To pay liabilities in liquidation.

To distribute cash to partners in liquidation.

Test Material 6-3

Assets Liab Assets Liab Assets Liab Assets Liab. Morales, Capital Modena, Capital Chariya, Capital

Beginning balances P 52,000 P 47,000 P 41,500 P 33,500 P 28,000 P 34,000 P 149,000 P 165,000 P 7,000 P 3,000 P(26,000) Pay liabilities (47,000) (47,000) (33,500) (33,500) (28,000) (28,000) (149,000) (149,000)

Balances P 5,000 -0- P 8,000 -0- -0- P 6,000 -0- P 16,000 P 7,000 P 3,000 P(26,000)

Balances -0- -0- -0- -0- -0- P 6,000 -0- P 3,000 P 12,000 P 11,000 P(26,000)

Balances -0- -0- -0- -0- -0- -0- P 7,000 -0- P 12,000 P 11,000 P(16,000) Absorption of Chariya’s balance (10,000) (6,000) 16,000 Balances -0- -0- -0- -0- -0- -0- P 7,000 -0- P 2,000 P 5,000

-0-* Claims against Chariya’s inheritance exist in the following priority:

Chariya’s personal creditors P 6,000

MMC partnership creditors 3,000

Due Morales 2,000

Due Modena 5,000

P16,000 Existing unsatisfied claims:

Due Morales P10,000

Due Modena 6,000

P16,000

Test Material 6-4

Joo and Yun Statement of Financial Position October 31, 2007 ASSETS

LIABILITIES

CAPITAL

Note: All 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 + P3,700 and accounts receivable (net) of P26,500 = P6,300 + P20,200

* Total assets – Total liabilities = Partner capital

Joo: P193,400 – (P23,600 + 2,200 – P75,000) = P92,600

Yun: P106,800 – (P9,100 + P1,400) = P96,300