Chapter 5

Problem I
1.
A, B, C and D Partnership
Statement of Liquidation
January 1, 20x4 to May 31, 20x4
Non- A, B, C, D,
Cash Liabilitie A, capital capital capital capital
Cash Assets s loan D, loan (40%) (20%) (20%) (20%)
Balances before 181,80
Liquidation 0 84,000 6,000 3,000 26,400 25,800 20,400 16,200

January (3,600 (3,600

- Realization 72,000 (90,00 ) )
- Payment of 0) (7,200) (3,600)
expenses (1,200) ( 240 ( 240
- Payment ( 480) ( 240) ) )
of (66,00 (66,000
liabilities 0) ______ ) _____ _____ ______ ______ ______ ______
Balances after Jan 4,800 91,800 18,000 6,000 3,000 18,720 21,960 16,560 12,360

February (1,680 (1,680

- Realization 21,600 (30,00 ) )
- Payment of 0) (3,360) (1,680)
expenses (1,320)
- Payment ( 528) ( 264) ( 264 ( 264
of (18,00 (18,00 ) )
liabilities 0) _______ 0) ______ ______ ______ _______ ______ ______
Balances before
payment to
partners 7,080 61,800 6,000 3,000 14,832 20,016 14,616 10,416
Payment to
Partners (Sch. ( 5,280 ______ _____
1) ) ______ ______ _____ ______ (5,280)
Balances after
February 1,800 61,800 6,000 3,000 14,832 14,736 14,616 10,416

March 19,200 (24,00 ( 960) ( 960)

- Realization 0) (1,920) ( 960)
- Payment of ( 1,440 ( 288 ( 288
expenses ) ______ ______ _____ ( 576) ( 288) ) )
Balances before
payment to
partners 19,560 31,500 6,000 3,000 12,336 13,488 13,368 9,168
Payment to
Partners (Sch. (18,36 (2,73 (5,568 (1,368
2) 0) ______ 6) (3,000) (5,688) ) )
Balances after
March 1,200 37,800 3,264 12,336 7,800 7,800 7,800

April (19,80 (2, (2,760 (2,760

- Realization 6,000 0) (5,520) 760) ) )
- Payment of
expenses (4,800) ______ (1,920) ( 960) ( 960) ( 960)
Balances before
payment to
partners 2,000 15,000 3,264 4,896 4,080 4,080 4,080
Payment to
Partners (Note ( 360) ( 360)
1) (1,500) ______ ( 720) ( 360)
Balances after
April 500 18,000 2,554 4,896 3,720 3,720 3,720
May _____
- Realization 2,400 (18,00 (6,240) (3,120) (3,120 (3,120
- Payment of 0) ) )
expenses ( 960) ( 384) ( 192)
 ( 192 ( 192
) )
Balances before ( 1,728
Offsetting 1,440 2,554 ) 408 408 408
Offset deficit vs. (1,72
Loan ______ 8) 1,728 _____ ______ _____
Balances before
payment 2,040 816 408 408 408
Payment to
Partners (Note (408) (408)
2) (2,040) (816) (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, B, C, D,
capital capital capital capital
(40%) (20%) (20%) (20%)
Balances before payment to partners:
Loans 6,000 3,000
Capital 14,832 20,016 14,616 10,416
Total Interest 20,832 20,016 14,616 13,416
Restricted interest for possible losses:
Unrealized non-cash assets P
61,800
Cash withheld
1,800
(25,44 (12,72 (12,72 (12,72
P 63,600 0) 0) 0) 0)
( 4,60 1,896 696
8) 7,296
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) 840
5,340 ( 60)
Restricted for possible insolvency of C ( 60) 60
Payment 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, B, C, D,
capital capital capital capital
(40%) (20%) (20%) (20%)
Balances before payment to partners:
Loans 6,000 3,000
Capital 12,336 13,488 13,488 9,168
Total Interest 18,336 13,488 13,488 12,168
Restricted interest for possible losses:
Unrealized non-cash assets P
37,800
Cash withheld
1,200
(15,60 ( 7,800 ( 7,800 ( 7,800
P 39,000 0) ) ) )
2,736 5,688 5,568 4,368

Applied to:
Loans 2,736 -0- -0- 3,000
 Capital ___-0- 5,688 5,568 1,368
2,736 5,688 5,568 4,368

3.
T, U, V and W Partnership
Cash Payment Priority Program*
January 31, 20x4
Interests Payments
V, W, V, W,
T, U, T, U,
capital capital capital capital
capital capital capital capital
(20%) (20%) (20%) (20%)
(40%) (20%) (40%) (20%) Total
Balances before
liquidation:
Loans 6,000 3,000
Capital 26,400 25,800 20,400 16,200
Total Interests 32,400 25,800 20,400 19,200
Divided by: P & L
% __40% ___20% __20% __20%
Loss Absorption 129,00
Abilities 81,000 0 102,000 96,000
(27,00 5,400
Priority I ______ 0) _______ _______ 5,400
102,00
81,000 0 102,000 96,000
( 6,000 2,400
Priority II ______ ) ( 6,000) _______ 1,200 1,200
81,000 96,000 96,000 96,000
(15,00 (15,000 (15,000 3,000 9,000
Priority III ______ 0) ) ) _______ 3,000 3,000
81,000 81,000 81,000 81,000 ____-0- 9,600 4,200 3,000 16,800
*also known as Schedule of Cash Distribution Plan / Pre-distribution Plan.

4.
T, capital U, capital V, capital W, capital
(40%) (20%) (20%) (20%)
Total Interests P 32,400 P 25,800 P 20,400 P 19,200
Divided by: P & L % ____40% ____20% ____20% ____20%
Loss Absorption P
Abilities P 81,000 P129,000 102,000 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 Creditor

Distribution s 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 II
ABC Partnership
Statement of Partnership Realization and Liquidation
For the period from January 1, 20x4, through March 31, 20x4
Capital
Balances
Other Accounts AA BB CC
Cash Assets Payable 30% 20%
50%
Balances before Liquidation, 18,000 307,000 (53,000) (88,000) (110,000 (74,000)
January 1,20x4 )
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 38,000 (52,000) 7,000 4,200 2,800
loss of P14,000
3. Liquidation expenses (2,000) 1,000 600 400
paid
4. Share of credit memorandum 3,000 (1,500) (900) (600)
5. Payments to creditors (50,000 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 1,200 800
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 146,000 (189,000 21,500 12,900 8,600
of P43,000 )
9. Liquidation expenses
paid (5,000 1,500 1,000
) 2,500
147,000 -0- -0- (48,000) (59,400) (39,600)
10. Payments to partners (147,000 59,400 39,600
) 48,000

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

ABC Partnership
Schedules 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, 20x4

Capital 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 Partnership
Cash 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 TT
Payable 50% 30% 20%
Cash available P106,000
First (17,000) P17,000
Next (9,000) P 9,000
Next (5,000) 3,000 P 2,000
Additional paid
in P&L ratio (75,000) ______ P37,500 22,500 15,000
P -0- P17,000 P37,500 P34,500 P17,000

Problem IV
PET Partnership
Statement of Partnership Liquidation and Realization
From July 1, 20x4, through September 30, 20x4
Capital

Noncash Accounts PP EE TT
Cash Assets Payable 20%
50% 30%
Preliquidation balances 6,000 135,000 (17,000) (55,00 (45,000) (24,000)
0)

July:
Assets Realized 26,500 (36,000) 4,750 2,850 1,900
 Paid liquidation costs (1,000) 500 300 200
Paid creditors (17,000 17,000
)
14,500 99,000 -0- (49,75 (41,850) (21,900)
0)
Safe Payments (Sch. 1) 6,500
(6,500)

8,000 99,000 -0- (49,75 (35,350) (21,900)

0)

August:
Equipment withdrawn (4,000) (3,000) (1,800) 8,800
(allocate P6,000 gain)
Paid liquidation costs 450 300
(1,500) 750
6,500 95,000 -0- (52,00 (36,700) (12,800)
0)
Safe Payments (Sch. 2) 4,000
(4,000)
2,500 95,000 -0- (52,00 (32,700) (12,800)
0)

September:
Assets Realized 75,000 (95.000) 10,000 6,000 4,000
Paid liquidation costs 300 200
(1,000) 500
76,500 -0- -0- (41,50 (26,400) (8.600)
0)
Payments to partners (76,500 41,500 26,400 8,600
)
Postliquidation balances -0- -0- -0- - -0- -0-
0-

PET Partnership
Schedules of Safe Payments to Partners
PP EE TT
Schedule 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, 20x4

Capital 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 V
DSV Partnership
Statement of Partnership Realization and Liquidation — Installment Liquidation
From July 1, 20x4, through September 30, 20x4
Capital
Balances
Noncash D S V
Cash Assets Liabilitie 50% 30% 20%
s
Preliquidation balances, 6/30 50,000 670,000 (405,000 (100,00 (140,00 (75,000)
) 0) 0)

July, 20x4: Sale of assets and

distribution of P120,000 (510,000 36,000 24,000
loss 390,000 ) 60,000
440,000 160,000 (405,000 (40,000) (104,00 (51,000)
) 0)
Liquidation expenses 750 500
(2,500) 1,250
437,500 160,000 (405,000 (38,750) (103,25 (50,500)
) 0)
Payment to creditors (405,00 405,000
0)
32,500 160,000 -0- (38,750) (103,25 (50,500)
0)
Payments to partners (Sch. 22,500
1) (22,500)
10,000 160,000 -0- (38,750) (80,750) (50,500)
August, 20x4: Sale of assets
&
distribution of P13,000 loss (35,000 3,900 2,600
22,000 ) 6,500
32,000 125,000 -0- (32,250) (76,850) (47,900)
Liquidation expenses 750 500
(2,500) 1,250
29,500 125,000 -0- (31,000) (76,100) (47,400)
Payments to partners (Sch. (19,500 13,700 5,800
2) )
10,000 125,000 -0- (31,000) (62,400) (41,600)

September, 20x4: Sale of

assets
distribution of P70,000 loss (125,000 21,000 14,000
55,000 ) 35,000
65,000 -0- -0- 4,000 (41,400) (27,600)
Allocate D's deficit to S and 2,400 1,600
V (4,000)
65,000 -0- -0- -0- (39,000) (26,000)
Liquidation expenses 1,000
(2,500) 1,500
 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 Partnership
Schedule 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 Partnership
Cash 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 (466,66 (375,00
 0) 7) 0)

Decrease highest LAP to next

highest LAP:
Decrease S by P91,667 91,667
(Cash distribution: P91,667 x . 27,500
30)
(200,00 (375,00 (375,00 (100,000) (112,500) (75,000
0) 0) 0) )

Decrease LAP to next highest

level:
Decrease S by P175,000 175,000
Cash distribution: P175,000 x . 52,500
30)
Decrease V by P175,000 175,000
Cash distribution: P175,000 x . 35,000
20)

(200,00 (200,00 (200,00 (100,000) (60,000) (40,000

0) 0) 0) )
Decrease LAPs by distributing
cash in the P/L sharing ratio 50% 30% 20%

Summary of Cash Distribution Plan

(Estimated on June 30, 20x4)
Liquidatio
n
Creditors D S V
Expenses
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 Partnership
Capital Account Balances
June 30, 20x4, through September 30, 20x4
D 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 VII
Cash distribution program:
Creditors Ames Beard Craig
First 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
P92,000
Income-sharing ratio 4 4 2

Capital per unit of income sharing P15,000 P40,000

P23,000
Reduce Beard's capital to next highest capital for Craig ______ (17,000)______
Capital per unit of income sharing P15,000 P23,000
P23,000
Reduce 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 60,000
Quanto, Capital 5,000
Rollo, Capital 3,000
Simms, Capital 2,000
Assets 70,000
To record realization of assets at a loss of $10,000, divided
amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively.

Liabilities 30,000
Cash 30,000
To record payment to creditors.

Loan Payable to Quanto 9,500

Rollo, Capital 10,500
Simms, Capital 5,000
Cash 25,000
To record payment to partners, computed as follows:

Quanto Rollo Simms

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

1. 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
Peter Paul Mary Total
Capital balances 300,000 350,000 400,000 1,050,000
Loss on sale of assets
(475,000 – 600,000) – 4:4:2 (50,000) (25,000) (125,000)
( 50,000
)
250,000 300,000 375,000 925,000
Possible loss for unrealized
assets
P1,000,000 – P600,000 = 160,000 160,000 80,000 400,000
400,000
(90,000 140,000 295,000 525,000

3. d

4. d AA BB CC
Capital balances 37,000 65,000
48,000
Divided by: Profit and loss ratio 40% 40%
20%
Loss absorption power 92,500 162,500
240,000
Loss to reduce CC to BB:
(77,500 x .20 = 15,500) 77,500
Balances 92,500 162,500
162,500
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 65,000
37,000 48,000 150,000
Loss on sale (2:2:1); [90 – 50] ( 8,000) (40,000)
(16,000) ( 16,000)
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized (18,000) 90,000
NCA (36,000) (36,000)
(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
Total
Capital before realization 65,000
37,000 48,000 150,000
Loss on sale (2:2:1); [90 – 50] ( 8,000) (40,000)
(16,000) ( 16,000)
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized
NCA (37,200) (18,600) 93,000
plus P3,000 = P93,000 (37,200)
(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. c
11. d
12. d
13. c

14. a
CC DD EE Total
Profit and loss ratio 5/10 3/10 2/10 10/10
Beginning 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% 20%
30%
Loss absorption abilities 260,000 260,000 500,000

16. a
The 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 20%
ratio 40% 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
Capital balances
20,000 22,000 (10,000) 32,000
Potential loss from Sandy (4,118) 10,000 0
deficit (5,882)
17,882 0
14,118 32,000
Loss to reduce H and J:
(50:35) (8,011) (5,607) (13,618)
Balances 12,275
6,107 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 Program

H J S
Capital balances
20,000 22,000 (10,000)
Additional contribution 0 10,000
0
 Capital balances 22,000
20,000
Divided by: Profit and loss ratio 50/85 35/85
Loss absorption power 53,429
34,000
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. c
20. b

21. c
A B C
Total
Capital before realization 30,000
70,000 50,000 150,000
Loan 20,000 ______ ______
20,000
Total interests 90,000 30,000 50,000 170,000
Loss on sale (240,000 – 195,000) (15,000) (45,000)
(15,000) ( 15,000)
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 50,000
Total interests………... P 90,000 P 30,000 P 50,000
Divided by: P&L ratio………… 1/3 1/3 1/3
Loss absorption ability……….. P270,000 P 90,000 P150,000
Priority I…………………………. 120,000 - _______ P40,000
P40,000
P150,000 P90,000 P150,000
Priority 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
Total
Capital before realization 30,000
70,000 50,000 150,000
 Loan 20,000 ______ ______
20,000
Total interests 90,000 30,000 50,000 170,000
Loss on sale (240,000 – 195,000) (15,000) (45,000)
(15,000) ( 15,000)
75,000 15,000 35,000 125,000
Payment 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
55,000 30,000
Divided by: Profit and loss 1/3 1/3 1/3
ratio
Loss absorption power
120,000 165,000 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. c
K M B J
Capital balances
59,000 39,000 34,000 34,000
Divided by: Profit and loss 30%
ratio 40% 10% 20%
Loss absorption power
147,500 130,000 340,000 170,000
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
Capital balances
60,000 27,000 43,000 20,000
Divided by: Profit and loss 30%
ratio 40% 20% 10%
Loss absorption power 90,000
150,000 215,000 200,000
 Loss to reduce CC to BB:
(15,000 x .20 = 3,000) 15,000 ____0

Balances 90,000
150,000 200,000 200,000

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 7,000
(2,000) (5,000) 13,000
Loan ______ 3,000 _______ __
Total interests (2,000) (2,000) 13,000 7,000
Potential insolvency loss (3:2) 2,000 2,000
( 2,400) (1,600)
10,600 5,400

28. b
A B C Total
Capital balances 18,000
(5,000) 6,000 19,000
Potential loss from A deficit (5:3) 5,000 (3,125) 0
(1,875)
14,875 4,125
19,000
Loss to reduce H and J:
(5:3) (8,750) (14,000)
(5,250)
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 realization
Totall interests………... P 70,000 P 50,000 P100,000
Divided by: P&L ratio………… 20% 40% 40%
Loss absorption abilities……….. P350,000 P125,000 P250,000
Priority I…………………………. (100,000) 0 P20,000 P20,000
P250,000 P125,000 P250,000
Priority 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
Capital balances
23,000 22,000 (14,000) 31,000
Potential loss from Douglass (6,533) 14,000 0
(40:35) (7,467)
0
15,533 15,467 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)

J Z D
Capital balances
23,000 22,000 (14,000)
Additional contribution 0 14,000
0
Capital balances 22,000
23,000
Divided by: Profit and loss ratio 40/75 35/75
Loss absorption power 47,143
43,125
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………………... 170,000 170,000 100,000
Total interests………... P170,000 P180,000 P 80,000
Divided by: P&L ratio………… 50% 30% 20%
Loss absorption abilities……….. P340,000 P600,000 P400,000
Priority I…………………………. - (200,000) 0 P60,000 P60,000
P340,000 P400,000 P400,000
Priority 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 250,000
Expenses paid 5,000
Contingency 10,000
Cash, beginning (120,000)
Proceeds from sale of other assets P205,000

32. b
INTERESTS PAYMENTS ___
T N D T N D Total
Balances before realization
Loans………………….. P 0 P 0 P 0
Capital………………... 22,000 15,500 14,000
Total interests………... P 22,000 P15,500 P 14,000
Divided by: P&L ratio………… 2/4 1/4 1/4
Loss absorption abilities……….. P 44,000 P62,000 P 56,000
Priority I…………………………. - ( 6,000) 0 P 1,500 P1,500
P 44,000 P56,000 P56,000
Priority 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 32,000
Liquidation expenses paid ( 1,000)
Payment of liabilities ( 5,400)
Payment to partners (refer to No. 30) ( 20,000)
Cash withheld P 17,600

34. d
Priority
Creditors Mattews Norell Reams Total
First P300,000………. P300,000 P300,000
Next P80,000 (7:3)… P56,000 P24,000 80,000
Next P70,000 (3:4)… 30,000 P40,000 70,000
Remainder*……….. 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 realization
Loans………………….. P 6,000 P(10,000)
Capital………………... 24,000 P36,000 60,000
Total interests………... P30,000 P36,000 P50,000
Divided by: P&L ratio………… 3/10 3/10 4/10
Loss absorption abilities…….. P100,000 P120,000 P125,000
Priority I…………………………. - - (5,000) P 2,000 P
2,000
P100,000 P120,000 P120,000
Priority 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

Priority
Creditors Mattews Norell Reams Total
First P300,000………. P300,000 P300,000
Next P80,000 (7:3)… P56,000 P24,000 80,000
Next P70,000 (3:4)… 30,000 P40,000 70,000
Remainder*……….. 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 - V
1. M= 0, K= 25,000, C= 0 - this problem is more on installment liquidation principles.
M K C Total
Capital before realization 100,000 175,000 75,000 350,000
Loss on sale (162,500) *(325,00
(50%:30%:20%) (97,500) (65,000) 0)
10,000 **25,000
( 62,500) 77,500
Additional loss (3:2) 62,500 ______-
(37,500) (25,000)
40,000 25,000
(15,000)
Additional loss 15,000 -0-
(15,000)
25,000
*balancing figure – total reduction in capital
Payment 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)/.35

6. P1,040,000 = (P260,000 / .25)
7. P675,000 = (P285,000 - P15,000)/.40
8. a
9. Perry: P15,000; Quincy: P51,000; Eddy: P44,000
10.
11. b
12. 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
44,000
Third 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
44,000
Third allocation, share based on profit and loss ratios 10,000

Sheldon: (P10,000 x .25)

14. P24,500
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
44,000
Third allocation, share based on profit and loss ratios 10,000

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

15. P147,000
Losses 40% 30% 30%
Hara Ives Jack
Equities 135,000 216,000 49,000
Possible 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)
46,800 96,800
68,400
Divided by: 20% 40%
 40%
Loss absorption abilities 242,000
342,000 117,000

Selling Price 183,000

Book value 300,000
Loss (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. P2,000
Warle Xin Yates Total
Equities,Jun 30 8,000 15,000 6,000 29,000
Inventory 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 ) 7,500
Subtotals ( 400 ) 2,400 0 2,000

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

THEORIES
True 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 Choice
18 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
. . . . .