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 capital capital capital capital
Cash Assets Liabilities A, loan D, loan (40%) (20%) (20%) (20%)
Balances before
Liquidation 181,800 84,000 6,000 3,000 26,400 25,800 20,400 16,200
January
- Realization 72,000 (90,000) (7,200) (3,600) (3,600) (3,600)
- Payment of
expenses (1,200) ( 480) ( 240) ( 240) ( 240)
- Payment
of liabilities (66,000) ______ (66,000) _____ _____ ______ ______ ______ ______
Balances after Jan 4,800 91,800 18,000 6,000 3,000 18,720 21,960 16,560 12,360
February
- Realization 21,600 (30,000) (3,360) (1,680) (1,680) (1,680)
- Payment of
expenses (1,320) ( 528) ( 264)
- Payment ( 264) ( 264)
of liabilities (18,000) _______ (18,000) ______ ______ ______ _______ ______ ______
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. 1) ( 5,280) ______ ______ _____ ______ (5,280) ______ _____
Balances after
February 1,800 61,800 6,000 3,000 14,832 14,736 14,616 10,416
March
- Realization 19,200 (24,000) (1,920) ( 960) ( 960) ( 960)
- Payment of
expenses ( 1,440) ______ ______ _____ ( 576) ( 288) ( 288) ( 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. 2) (18,360) ______ (2,736) (3,000) (5,688) (5,568) (1,368)
Balances after
March 1,200 37,800 3,264 12,336 7,800 7,800 7,800
April
- Realization 6,000 (19,800) (5,520) (2, 760) (2,760) (2,760)
- 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 1) (1,500) ______ ( 720) ( 360) ( 360) ( 360)
Balances after
April 500 18,000 2,554 4,896 3,720 3,720 3,720
May
- Realization 2,400 (18,000) (6,240) (3,120) (3,120) (3,120)
- Payment of
expenses ( 960) _____ ( 384) ( 192) ( 192) ( 192)
Balances before
Offsetting 1,440 2,554 ( 1,728) 408 408 408
Offset deficit vs.
Loan ______ (1,728) 1,728 _____ ______ _____
Balances before
payment 2,040 816 408 408 408
Payment to
Partners (Note 2) (2,040) (816) (408) (408) (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
P 63,600 (25,440) (12,720) (12,720) (12,720)
( 4,608) 7,296 1,896 696
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
P 39,000 (15,600) ( 7,800) ( 7,800) ( 7,800)
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, capital W, capital V, W,
U, U,
(20%) (20%) capital capital
T, capital capital T, capital capital
(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
Abilities 81,000 129,000 102,000 96,000
Priority I ______ (27,000) _______ _______ 5,400 5,400
81,000 102,000 102,000 96,000
Priority II ______ ( 6,000) ( 6,000) _______ 1,200 1,200 2,400
 81,000 96,000 96,000 96,000
Priority III ______ (15,000) (15,000) (15,000) _______ 3,000 3,000 3,000 9,000
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
Abilities P 81,000 P129,000 P 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 Distribution Creditors 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      50%       30%       20%   
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 loss of 38,000  (52,000) 7,000  4,200  2,800 
P14,000
3. Liquidation expenses paid (2,000) 1,000  600  400 
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 of 146,000  (189,000) 21,500  12,900  8,600 
P43,000
9. Liquidation expenses paid
   (5,000)                               2,500     1,500     1,000 
147,000  -0-  -0-  (48,000) (59,400) (39,600)
10. Payments to partners (147,000)                             48,000  59,400  39,600 

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      50%        30%       20%    
Preliquidation balances 6,000  135,000  (17,000) (55,000) (45,000) (24,000)

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-  (49,750) (41,850) (21,900)
Safe Payments (Sch. 1)   (6,500)                                              6,500               

8,000 99,000 -0- (49,750) (35,350) (21,900)

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

September:
Assets Realized 75,000  (95.000) 10,000  6,000  4,000 
Paid liquidation costs   (1,000)                                   500        300       200 
76,500  -0-  -0-  (41,500) (26,400) (8.600)
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    Liabilities      50%       30%       20%   
Preliquidation balances, 6/30 50,000  670,000  (405,000) (100,000) (140,000) (75,000)

July, 20x4: Sale of assets and

distribution of P120,000 loss   390,000  (510,000)                   60,000  36,000  24,000 
440,000  160,000  (405,000) (40,000) (104,000) (51,000)
Liquidation expenses     (2,500)                                     1,250        750       500 
437,500  160,000  (405,000) (38,750) (103,250) (50,500)
Payment to creditors (405,000)                 405,000                                            
32,500  160,000  -0-  (38,750) (103,250) (50,500)
Payments to partners (Sch. 1)   (22,500)                                                 22,500                
10,000  160,000  -0-  (38,750) (80,750) (50,500)
August, 20x4: Sale of assets &
distribution of P13,000 loss   22,000    (35,000)                     6,500     3,900     2,600 
32,000  125,000  -0-  (32,250) (76,850) (47,900)
Liquidation expenses   (2,500)                                     1,250        750      500 
29,500  125,000  -0-  (31,000) (76,100) (47,400)
Payments to partners (Sch. 2)  (19,500)                                                13,700  5,800 
10,000  125,000  -0-  (31,000) (62,400) (41,600)
September, 20x4: Sale of assets
distribution of P70,000 loss 55,000  (125,000)                 35,000  21,000  14,000 
65,000  -0-  -0-  4,000  (41,400) (27,600)
Allocate D's deficit to S and V                                                 (4,000)    2,400     1,600 
65,000  -0-  -0-  -0-  (39,000) (26,000)
Liquidation expenses     (2,500)                                                1,500  1,000 
62,500  -0-  -0-  -0-  (37,500) (25,000)
Payments to partners   (62,500)                                          -0-  37,500  25,000 
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 (200,000) (466,667) (375,000)

Decrease highest LAP to next

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

Decrease LAP to next highest level:

Decrease S by P175,000 175,000 
Cash distribution: P175,000 x .30) 52,500 
Decrease V by P175,000 175,000 
Cash distribution: P175,000 x .20) 35,000 
                                                                                           
(200,000) (200,000) (200,000) (100,000) (60,000) (40,000)
Decrease LAPs by distributing
cash in the P/L sharing ratio 50%  30%  20% 

Summary of Cash Distribution Plan

(Estimated on June 30, 20x4)
  Liquidation
Creditors Expenses   D      S      V   
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 P10,000, 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. d
    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  
Possible loss for unrealized assets
P360,000 – P200,000 = P160,000 ( 64,000) ( 80,000) (16,000) 160,000)
72,000 (65,000) 33,000 40,000
Possible insolvency (4:1) (52,000) 65,000 (13,000) ______
20,000 20,000 40,000

2. a
Capital balances
Loss on sale of assets
(475,000 – 600,000) – 4:4:2  
Possible loss for unrealized assets
P1,000,000 – P600,000 = 400,000
Peter Paul Mary Total
300,000   350,000   400,000   1,050,000  
( 50,000)    (50,000)    (25,000)   (125,000)   
250,000   300,000   375,000   925,000  
 160,000    160,000     80,000     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 37,000   65,000   48,000   150,000
Loss on sale (2:2:1); [90 – 50] (16,000) ( 16,000) ( 8,000) (40,000)
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized NCA (36,000) (36,000) (18,000) 90,000
(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 37,000   65,000   48,000   150,000
Loss on sale (2:2:1); [90 – 50] (16,000) ( 16,000) ( 8,000) (40,000)
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized NCA
plus P3,000 = P93,000 (37,200) (37,200) (18,600) 93,000
(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
Dennis Lily Total
Capital before realization 120,000   80,000   200,000  
Reduction in capital (3:2) ( 84,000) ( 56,000) (140,000)
Payment to partners 36,000 24,000 60,000*

*Payment to partners:
Cash, beginning………………………………………………………………………………P100,000
Proceeds……………………………………………………………………………………….. 60,000
Payment of liabilities – to be conservative – it should be in full……………………..( 100,000)
Payment to partners…………………………………………………………………………..P 60,000

12. d
Dennis Lily Total__
Capital before realization – refer to no. 11 84,000   56,000   140,000  
Reduction in capital (3:2) (78,000) ( 52,000) (130,000)
Payment to partners 6,000 4,000 10,000*

*since cash was fully distributed last month, only the proceeds of P10,000 for the second remains to be
distributed.
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% 30% 20%
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 ratio 40% 20% 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 deficit (5,882) (4,118) 10,000 0
14,118   17,882   0   32,000  
Loss to reduce H and J:
(50:35)  (8,011)   (5,607) (13,618)   
Balances 6,107   12,275   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 0 10,000
Capital balances 20,000 22,000
Divided by: Profit and loss ratio 50/85 35/85
Loss absorption power 34,000   53,429 
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 70,000   30,000   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) ( 15,000) (15,000) (45,000)
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 - _______ P 40,000 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 P 90,000 P 90,000 P 60,000 P 0 P20,000 P80,000

23. d
A B C Total
Capital before realization 70,000   30,000   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) ( 15,000) (15,000) (45,000)
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 ratio 1/3 1/3 1/3
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 ratio 40% 30% 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 ratio 40% 30% 20% 10%
Loss absorption power 150,000   90,000   215,000   200,000  
Loss to reduce CC to BB:
(15,000 x .20 = 3,000)                                    15,000     ____0   
Balances 150,000   90,000   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). F F 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 (2,000)   (5,000)   13,000   7,000  
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 (5,000)   18,000   6,000   19,000  
Potential loss from A deficit (5:3) 5,000 (3,125) (1,875) 0
14,875   4,125  19,000  
Loss to reduce H and J:
(5:3)    (8,750) (5,250) (14,000)   
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 (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)

J      Z 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
31. d
INTERESTS PAYMENTS ___
D K R D K R Total
Balances before realizatio
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 P 60,000
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 P 1,500
P 44,000 P 56,000 P 56,000
Priority II………………………… - (12,000) (12,000) __ 3,000 P 3,000 6,000
P 44,000 P44,000 P 44,000 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 P 3 00,000
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 P 58,000P84,000 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

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