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Chapter 4
Partnership Liquidation
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. FALSE
3. TRUE (4 cash from sale – 1 payment for liability) = 3
remaining cash for distribution to partners
4. FALSE (4 net proceeds – 5 carrying amount) = -1 loss
5. FALSE (2 capital – (-1 loss x 50%)) = 1.5 final share
6. FALSE - ₱2 net proceeds (squeeze) - ₱5 carrying amount
= (₱3 loss)
7. TRUE
8. FALSE
⮚ X – 1 liability = 2
⮚ X = ₱3

9. FALSE
⮚ 2 capital balance – 0.75 cash distribution = 1.25 A’s
share in loss;
⮚ 1.25 share in loss ÷ 50% A’s P/L ratio = 2.50 loss

10. FALSE = ₱2 equal to carrying amount of B’s capital

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. E
2. D
3. D
4. D
5. B

PROBLEM 3: EXERCISES
1. Solutions:

Case 1: Lump-sum liquidation

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The total loss on the sale is computed as follows:

Collection on accounts receivable 100,000

Sale of inventory 140,000

Sale of equipment 500,000

Liquidation expenses (4,000)

Net cash proceeds 736,000

Carrying amount of non-cash assets
(120K + 60K + 180K + 600K) (960,000)

Total loss (224,000)

The final settlement to partners is computed as follows:

A B C
(20%) (30%) (50%) Totals
Capital balances before 200,00 300,00
liquidation 0 0 400,000 900,000
Payable to B 40,000 40,000
200,00 340,00
Total 0 0 400,000 940,000
Allocation of loss
[224K x (20%; 30% & (44,80 (67,20 (112,00
50%)] 0) 0) 0) (224,000)
Amounts received by 155,2 272,8 288,00
the partners 00 00 0 716,000

Case 2: Installment liquidation

The total loss on the sale is computed as follows:
Collection on account receivable 60,000
Sale of inventory 80,000
Sale of equipment 240,000
Actual liquidation expenses (4,000)
Estimated liquidation expenses (2,000)
Cash retained for future expenses (18,000)
Net cash proceeds – (net of all costs) 356,000
Carrying amount of all non-cash assets (960,00
(120K + 60K + 180K +600K) 0)
(604,00
Total loss 0)
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The partial settlement to partners is computed as follows:

A B C Totals
Capital balances before
200,000 300,000 400,000 900,000
liquidation
Payable to B 40,000 40,000
Total 200,000 340,000 400,000 940,000
Allocation of loss
[604K x (20%; 30% & (120,80 (181,20 (302,00 (604,00
50%)] 0) 0) 0) 0)
Amounts received by 158,80
the partners 79,200 0 98,000 316,000

Case 3:
Net proceeds from sale of assets and liabilities 960,000
Carrying amount of net assets sold (900,00
(120K A/R + 240K Invty. + 600K Equipt. - 60K A/P) 0)
Gain on sale 60,000

A B C
(20%) (30%) (50%) Totals
200,00 300,00 400,00
Capital balances 0 0 0 900,000
Payable to B 40,000 40,000
200,00 340,00 400,00
Total 0 0 0 940,000
Allocation of gain
[60K x (20%; 30% &
50%)] 12,000 18,000 30,000 60,000
Amounts received by 212,0 358,0 430,0 1,000,0
the partners 00 00 00 00

Case 4:
A B C
Personal assets 600,000 520,000 400,000
Personal liabilities (440,000) (440,000) (640,000)
Free assets 160,000 80,000 -

A B C
(20%) (30%) (50%) Totals
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300,00
Capital balance 200,000 0 400,000 900,000
Payable to B 40,000 40,000
340,00
Total 200,000 0 400,000 940,000
Allocation of loss
-860K* x 20%; 30% & (172,00 (258,00 (430,00
50% 0) 0) 0) (860,000)
Total 28,000 82,000 (30,000) 80,000
Allocation of deficiency (18,00
-30K x (2/5) & (3/5) (12,000) 0) 30,000 -
64,00
Cash distribution 16,000 0 - 80,000
* 100K net proceeds – 960K carrying amount of non-cash assets = -860K
loss

Case 5:

Requirement (a):
First, the actual loss on realization of assets is determined
as follows:
Loss on collection of accounts receivable
[60K - (120K x 75%)] (30,000)

Loss on sale of inventory [80K - (240K x 50%)] (40,000)

Loss on sale of equipment (240K - 400K) (160,000)

Actual liquidation expenses (4,000)

Actual loss on realization - Jan. 20x1 (234,000)

Next, the maximum loss possible is computed as follows:

Carrying amount of unsold non-cash asset
(120K x 25%) + (240K x 50%) + (600K - 400K) (350,000)

Estimated future liquidation costs (2,000)

Cash set aside for potential unrecorded
liabilities (18,000)

Maximum loss possible (370,000)

Finally, the safe payment schedule is prepared as follows:

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ABC Co.
Safe payment schedule
January 31, 20x1

A B C
(20%) (30%) (50%) Total
Payable to B - 40,000 - 40,000
Capital balances
before liquidation 200,000 300,000 400,000 900,000
Total interest - Jan. 1,
20x1 200,000 340,000 400,000 940,000
Allocation of loss on (46,800 (117,00 (234,00
realization - Jan. 20x1 ) (70,200) 0) 0)
Total 153,200 269,800 283,000 706,000
Allocation of maximum
loss possible - Jan. (74,000 (111,00 (185,00 (370,00
20x1 ) 0) 0) 0)
First installment
payment to partners 158,80
- Jan. 20x1 79,200 0 98,000 336,000

Requirement (b):
Loss on collection of accounts receivable (10,0
[20K - (120K x 25%)] 00)
(80,00
Loss on sale of inventory [40K - (240K x 50%)] 0)
(140,0
Loss on sale of equipment (60K - 200K) 00)
(20,00
Actual liquidation expenses 0)
(250,0
Actual loss on realization - Jan. 20x1 00)
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ABC Co.
Safe payment schedule
February 28, 20x1

A C
(20%) B (30%) (50%) Total
Payable to B - 40,000 - 40,000
Capital balances
before liquidation 200,000 300,000 400,000 900,000
Total interest - Jan.
1, 20x1 200,000 340,000 400,000 940,000
Allocation of loss
on realization - Jan. (117,00 (234,000
20x1 (46,800) (70,200) 0) )
First installment
payment to (336,000
partners - Jan. 20x1 (79,200) (158,800) (98,000) )
Total interest - Feb.
1, 20x1 74,000 111,000 185,000 370,000
Allocation of loss
on realization - Feb. (125,00 (250,000
20x1 (50,000) (75,000) 0) )
Final installment
payment to
partners 24,000 36,000 60,000 120,000

Case 6
A C
(20%) B (30%) (50%)
Payable to B - 40,000 -
400,00
Capital balance 200,000 300,000 0
Total interest in 400,00
partnership 200,000 340,000 0
Divide by: P/L ratio 20% 30% 50%
1,000,00 800,00
MLAC 0 1,133,333 0

Rank of payment 2nd 1st 3rd

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A B C
(20%) (30%) (50%)
Rank of payment 2nd 1st 3rd
Maximum loss absorption 1,000,00 1,133,33
capacity 0 3 800,000
(133,333
Difference of 1st and 2nd )
1,000,00 1,000,00
Balance 0 0 800,000
Difference between 1st, 2nd (200,000 (200,000
and 3rd ) )
800,00
Equal balance of MLAC 800,000 800,000 0

Cash priority program

A B C
(20%) (30%) (50%)
Rank of payment 2nd 1st 3rd
1st priority (133,333 x 30%) 40,000
2nd priority (200K x 20% &
30%) 40,000 60,000
100,00
Totals 40,000 0

Requirement (a):
Cash - Jan. 1, 20x1 40,000
Collection of accounts receivable 60,000
Sale of inventory 80,000
240,00
Sale of equipment 0
Payment for liquidation expenses (4,000)
(60,00
Payment to outside creditors 0)
(20,00
Cash set aside for future costs 0)
Cash available for distribution to loans and 336,00
capital of partners – Jan. 31, 20x1 0

A C
(20% B (50%
) (30%) ) Total
Cash available for
distribution - Jan. 31,
20x1 336,000
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Allocation:
1st priority 40,000 (40,000)
40,00 (100,00
2nd priority 0 60,000 0)
Balance 196,000
Payment after
priorities
196K x (20%; 30% & 39,20 98,00 (196,00
50%) 0 58,800 0 0)
First installment 79,20 158,80 98,0
payment - Jan. 20x1 0 0 00 -

Requirement (b):
Cash - Feb. 1, 20x1 20,000
Collection of accounts receivable 20,000
Sale of inventory 40,000
Sale of equipment 60,000

Payment for liquidation expenses (20,000)

Cash available for distribution to loans and
capital of partners – Feb. 28, 20x1 120,000

C
A B (50%
(20%) (30%) ) Total
Cash available for
distribution - Feb. 28, 20x1 120,000
Allocation:
Payment after
priorities
[60K x (20%; 30% & 24,00 60,00 (120,00
50%)] 0 36,000 0 0)
24,00 36,00 60,0
Final payment 0 0 00 -

2. Solution:
360,0
Sale of certain non-cash assets 00
(10,
Actual liquidation expenses 000)
Estimated future liquidation expenses (4,0
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00)
346,0
Net cash proceeds 00
(960,0
Carrying amount of all non-cash assets 00)
(614,
Total loss on sale 000)

A (3/4) B (1/4) Totals

Capital balances before
liquidation 500,000 400,000 900,000
Allocation of loss (460,500 (153,500 (614,000
[307K x (3/4 & 2/4)] ) ) )
Amounts received by the
partners 39,500 246,500 286,000

3. Solutions:

Case 1:
Liabiliti
Assets = es + Equity
Partners'
Cash = Payables + capital
112,000 = - 940,000
The loss is simply squeezed as follows:
Cash available for distribution to
partners 112,000

Total partners' equity (940,000)

Loss on sale (828,000)

The distribution to owners is computed as follows:

A B C
(20%) (30%) (50%) Totals
Capital balances
before
liquidation 200,000 300,000 400,000 900,000
Payable to B 40,000 40,000
Total 200,000 340,000 400,000 940,000
Allocation of loss (165,60 (248,40 (414,00 (828,000
[828K x (20%; 30% & 0) 0) 0) )
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50%)]
(14,000
Total 34,400 91,600 ) 112,000
Allocation of capital
deficiency to the other
partners
[14K x (20%/50%; and
30%/50%)] (5,600) (8,400) 14,000 -
Amounts received by
the partners 28,800 83,200 - 112,000

Case 2:
Liabiliti
Assets = es + Equity
Partners'
Cash = Payables + capital
112,000 = 60,000 + 940,000

The loss is squeezed as follows:

Total cash available for settlement of

claims 112,000
Less: Payment for liabilities (60,000)
Cash available for distribution to
partners 52,000
(940,000
Total partners' equity )
(888,00
Loss on sale 0)

The distribution to owners is computed as follows:

A B C
(20%) (30%) (50%) Totals
Capital balances
before
liquidation 200,000 300,000 400,000 900,000
Payable to B 40,000 40,000
Total 200,000 340,000 400,000 940,000
Allocation of loss
[888K x (20%; 30% & (177,60 (266,40 (444,00 (888,000
50%)] 0) 0) 0) )
(44,000
Total 22,400 73,600 ) 52,000
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Allocation of capital
deficiency to the other
partners
[44K x (20%/50%; and (17,600 (26,400
30%/50%)] ) ) 44,000 -
Amounts received by
the partners 4,800 47,200 - 52,000

4. Solutions:
Requirement (a):

= Liabilit
Assets ies + Equity
Other Partners'
Cash + s = Payables + capital
40,000 + ? = 60,000 + 600,000

Non-cash assets = (60K + 600K – 40K) = 620,000

Requirement (b):
(squee
Net proceeds 380,000 ze)
Carrying (620,000
amount )
(240,000
Loss on sale ) (start)

Requirement (c):
A B
(60%) (40%) Totals
Capital balances before 200,00 400,00 600,00
liquidation 0 0 0
Allocation of loss (144,0 (96,0 (240,0
[240K x (60% & 40%)] 00) 00) 00)
56,00 304,0 360,0
Amounts received by partners 0 00 00

5. Solutions:
A,
Capital
600,00
Capital balances before liquidation 0
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(216,00 (squeez
Allocation of loss: 0) e)
384,00
Amount received by partner A 0

Requirement (a):
(216,000
A's share in loss )
Divide by: A's profit or loss ratio 60%
(360,00
Total loss on sale 0)

Requirement (b):
B,
Capital
Capital balances before liquidation 300,000
(144,000
Allocation of loss: (360K x 40%) )
Amount received by partner B 156,000

Requirement (c):
= Liabiliti +
Assets es Equity
1,000,000 = ? + 900,000

Liabilities = (1,000,000 – 900,000) = 100,000

Requirement (d):
(squeez
Beginning balance of cash 40,000
e)
Net proceeds from sale of non-cash assets 600,000
(100,000
Payment to outside creditors
)
Cash available for distribution to the
540,000
partners (384K + 156K) (start)

6. Solutions:
Requirement (a):
200,00
A's capital before liquidation 0
Loss allocated to A (144,0
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(squee
00) ze)
56,00
Amount received by A 0

(144,0
Loss allocated to A 00)
Divide by: A's profit or loss ratio 60%
(240,00
Total loss on sale 0)

380,00
Net proceeds 0

Carrying amount of non-cash (620,00 (squee

assets 0) ze)
(240,00
Total loss on sale 0)

40,00 (squee
Cash 0 ze)
380,00
Proceeds 0
(60,00
Payment for liabilities 0)
360,00
Amount for distribution 0 (start)

40,00
Cash 0
620,00
Non-cash assets 0
660,0
Total assets 00

Requirement (b):
Liabiliti
Assets = + Equity
es
660,000 = 60,000 + ?
Total equity = 660,000 – 60,000 = 600,000

Total partners' equity before liquidation 600,000

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A's capital before liquidation (200,000)

B's capital before liquidation 400,000

Requirement (c):
B
(40%)

B's capital before liquidation 400,000

Allocation of loss (240K x 40%) (96,000)

Amount received by partner B 304,000

7. Solution:
A (2/5) B (3/5)

Cash receipts
200,000 240,000
Cash disbursements
(50,000) (300,000)
Receivable from (Payable
to) 50,000 (60,000)

A (2/5) B (3/5) Total

Unadjusted capital 200,000 300,000 500,000

Receivable from (Payable to) (50,000) 60,000 10,000

510,00
Adjusted capital 150,000 360,000 0

Liabiliti
Assets = + Equity
es
240,000 = - + 510,000

Loss to be closed to the partners’ equity = (240K –

510K) = (270,000)
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A (2/5) B (3/5) Total

Adjusted capital 150,000 360,000 510,000
Allocation of loss [270K x (2/5 & (108,000 (162,000 (270,00
3/5)] ) ) 0)
Amounts received by the
partners 42,000 198,000 240,000

8. Solution:
Liabilitie
Assets = + Equity
s
364,00
Cash 0 - 1,000,000
Agreed
settlement price 240,00
of equipment 0 -
604,0 1,000,00
Totals 00 = - + 0

Assets 604,000

(1,000,000
Equity )

(396,000
Total loss to be allocated )

A B C D
(40%) (30%) (20%) (10%) Totals
Capital
balances
before 1,000,00
liquidation 400,000 300,000 200,000 100,000 0

Allocation of
loss [396K x
(40%; 30%; (158,40 (118,80 (79,200 (396,000
20% & 10%)] 0) 0) ) (39,600) )
Adjusted
capital 120,80
balances 241,600 181,200 0 60,400 604,000
(240,00 (240,000
Payment in 0) )
equipment -
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at agreed
price
Total 241,600 (58,800) 120,800 60,400 364,000
Allocation of
capital
deficiency
[58.8K x (4/7; (16,800
2/7 & 1/7) (33,600) 58,800 ) (8,400) -
Payment in 104,00
cash 208,000 - 0 52,000 364,000

Answer: C received ₱104,000 in the settlement of his

capital balance.
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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. A
Solution:
The total loss on the sale is computed as follows:
120,00
Sale of other assets 0
(250,00
Carrying amount of all other assets 0)
(130,0
Total loss on sale 00)

The partial settlement to partners is computed as follows:

Cobb Davis Eddy Totals
Capital balances 80,000 90,000 70,000 240,000
Allocation of loss
[130K x (50%; 30% & (65,000 (39,000 (26,000 (130,000
20%)] ) ) ) )
Amounts received 15,000 51,000 44,000 110,000

2. B (equal to carrying amount of partner’s claim)

3. A
Solution:

A = L + E
Given not equal
200,00
information 500,000 to
0 + 490,000
Loss (190,000
(squeeze) )
Adjusted 200,00
balances 500,000 = 0 + 300,000

Jack Beans
Totals
(30%) (70%)
490,00
Capital balances – unadjusted 300,000 190,000
0
(190,00
Allocation of loss (57,000) (133,000)
0)
300,00
Total 243,000 57,000
0

4. D
Solution:
A = L E
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+
Given not equal

information 120,000 to
- + 490,000
Loss
(squeeze) (370,000)
Adjusted
balances 120,000 = - + 120,000

Jack Beans
Totals
(30%) (70%)
Capital balances –
300,000 190,000 490,000
unadjusted
(370,00
Allocation of loss (111,000) (259,000)
0)
Total 189,000 (69,000) 120,000

5. A
Solution:
Beans
(70%)
Capital balances –
190,000
unadjusted
(squeez
Allocation of loss (91,000)
e)
Total 99,000 (start)

Total loss = (91,000) ÷ 70% = (130,000)

Jack
(30%)
Capital balances – 300,0
unadjusted 00
Allocation of loss (-130K x (39,0
30%) 00)
261,
Total
000

6. A
Solution:
Jack
(30%)
Capital balances –
300,000
unadjusted
(squeez
Allocation of loss (39,000)
e)
Total 261,000 (start)
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Total loss = (39,000) ÷ 30% = (130,000)

Beans
(70%)
Capital balances – 190,0
unadjusted 00
Allocation of loss (-130K x (91,0
70%) 00)
99,00
Total
0

Amount received by Jack 261,000

Amount received by Beans 99,000

Settlement of liabilities 200,000

Net proceeds from sale 560,000

7. D
Solution:

Net cash proceeds (70,000 – 8,000) 62,000

(480,00
Less: Carrying amount of non-cash assets 0)
(418,0
Total loss on sale 00)

A B C
(20%) (30%) (50%) Totals
100,00 170,00 200,0 470,00
Capital balances 0 0 00 0
Allocation of loss
[418K x (20%; 30% & (83,60 (125,40 (209,00 (418,00
50%)] 0) 0) 0) 0)
Total 16,400 44,600 (9,000) 52,000
Allocation to solvent (3,600 9,00
partners* ) (5,400) 0 -
Amts. received by the 12,80 52,00
partners 0 39,200 - 0

* (9,000 x 2/5 = 3,600); (9,000 x 3/5 = 5,400)

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8. B
Solution:

The loss is determined as follows:

A = L + E
Given
information 0 = 30,000 + 570,000
Loss
(squeeze) (600,000)
Adjusted
balances 0 = 30,000 + (30,000)

A B C
Totals
(30%) (20%) (50%)
Cap. bal. -
210,000 150,000 210,000 570,000
unadjusted
Allocation of loss:
(180,000 (120,00 (300,000 (600,000
-600K x 30%; x 20%;
) 0) ) )
x 50%
Total 30,000 30,000 (90,000) (30,000)
Allocation of
deficiency
(-90K x 3/5); (-90K x
2/5) (54,000) (36,000) 90,000 -
Total (24,000) (6,000) - (30,000)
Additional
contributions 24,000 6,000 - 30,000
Total - - - -

(180,000
Allocation of loss )
(54,00
Allocation of deficiency 0)
(234,0
Decrease in A's capital balance 00)

9. A (Refer to solution above)

10. B
Solution:
 Page | 21

A C
(50%) B (30%) (20%)
100,00
Capital balance 250,000 150,000 0
Payable to (Receivable
from) (10,000) 20,000 -
Total interest in 100,00
partnership 240,000 170,000 0
Divide by: P/L ratio 50% 30% 20%
500,00
MLAC 480,000 566,667 0

Rank of payment 3rd 1st 2nd

A B C
(50%) (30%) (20%)
Rank of payment 3rd 1st 2nd
Maximum loss absorption
capacity 480,000 566,667 500,000
Difference of 1st and 2nd (66,667)
Balance 480,000 500,000 500,000
Difference between 1st, 2nd (20,000
and 3rd (20,000) )
480,00
Equal balance of MLAC 480,000 480,000 0

Cash priority program

A B C
(50%) (30%) (20%)
Rank of payment 3rd 1st 2nd
1st priority (66,667 x 30%) 20,000
2nd priority (20K x 30% &
20%) 6,000 4,000
Totals - 26,000 4,000

A B C
(50%) (30%) (20%) Total
Available Cash –
1st 12,000
Allocation:
1st priority 12,000 (12,000)
 Page | 22

2nd priority - - -
Balance -
Payment after
priorities - - - -
First distribution - 12,000 - -

A B C
(50%) (30%) (20%) Total
Available Cash –
2nd 30,000
Allocation:
1st priority 8,000* (8,000)
2nd priority - 6,000 4,000 (10,000)
Balance 12,000
Payment after
priorities
12K x 50%; 30% &
20% 6,000 3,600 2,400 (12,000)
Second 17,60
distribution 6,000 0 6,400 -
* 20K 1st priority – 12K from first distribution = 8,000

PROBLEM 5: CLASSROOM ACTIVITY

The answers will vary depending on the assumptions
made by the learners.
Page | 23
 Page | 24

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:

Case 1: Lump-sum liquidation

Collection from accounts receivable (60K x 42,0
70%) 00
20,0
Sale of inventory 00
310,0
Sale of equipment 00
(12,0
Liquidation expenses 00)
360,0
Net proceeds 00
Carrying amt. of all non-cash assets,
except Receivable from A (60K + 120K (470,0
+290K) 00)
(110,0
Loss 00)

A B
Totals
(60%) (40%)
250,00 200,00 450,00
Capital balance
0 0 0
Payable to (Receivable from) (10,000
partner
20,000 10,000
)
240,00 220,00 460,00
Total
0 0 0
Allocation of loss -110K x 60% & (66,000 (44,00 (110,00
40% ) 0) 0)
Amounts received by the 174,00 176,0 350,0
partners 0 00 00

Checking:

Cash (20K on hand + 360K from sale) 380,000

Outside creditors (30,000)

Cash available for distribution to partners 350,000

 Page | 25

Case 2: Installment liquidation

Collection from accounts receivable (60K x 1/2) 30,000
Sale of inventory (120K x 75% x 80%) 72,000
Sale of equipment 185,000
Liquidation expenses (12,000)
Estimated future liquidation costs (5,000)
Net proceeds 270,000
Carrying amt. of all non-cash assets, except
Receivable from A (470,000)
(200,000
Loss )

A B
Totals
(60%) (40%)
250,00 200,00 450,00
Capital balance
0 0 0
Payable to (Receivable from) (10,000
20,000 10,000
partner )
240,00 220,00 460,00
Total
0 0 0
Allocation of loss -200K x 60% & (120,00 (80,00 (200,00
40% 0) 0) 0)
Amount received by 120,00 140,0 260,0
partners 0 00 00

Checking:

Cash (20K on hand + 270K from sale, net) 290,000

Outside creditors (30,000)

Cash available for distribution to partners 260,000

Case 3: Gain on settlement of liability

Sale of non-cash assets 250,000
Carrying amt. of all non-cash assets, except Receivable (470,00
from A 0)
(220,00
Loss on sale of assets 0)
Gain on settlement of liability (24K payment – 30K
carrying amt.) 6,000
Net loss (214,00
 Page | 26

0)

A B
Totals
(60%) (40%)
250,00 200,00 450,00
Capital balance
0 0 0
Payable to (Receivable from) (10,000
partner
20,000 10,000
)
240,00 220,00 460,00
Total
0 0 0
Allocation of loss -214K x 60% & (128,40 (85,60 (214,00
40% 0) 0) 0)
Amount received by 111,60 134,4 246,0
partners 0 00 00

Checking:

Cash (20K on hand + 250K from sale) 270,000

Outside creditors (30K – 6K rebate) (24,000)

Cash available for distribution to partners 246,000

Case 4: Marshalling of assets

Sale of non-cash assets 65,000
Carrying amt. of all non-cash assets, except Receivable (470,00
from A 0)
(405,00
Loss 0)

A B
Personal assets 200,000 380,000
Personal liabilities (440,000) (240,000)
Free assets - 140,000

❖ A is insolvent.

A B
Totals
(60%) (40%)
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250,00 200,00 450,00

Capital balance
0 0 0
Payable to (Receivable from) (10,000
partner
20,000 10,000
)
240,00 220,00 460,00
Total
0 0 0
Allocation of loss -405K x 60% & (243,00 (162,00 (405,00
40% 0) 0) 0)
Total (3,000) 58,000 55,000
Allocation of deficiency 3,000 (3,000) -
Amount received by 55,00 55,00
partners - 0 0

Checking:

Cash (20K on hand + 65K from sale) 85,000

Outside creditors (30,000)

Cash available for distribution to partners 55,000

Case 5: Reconstruction of information

Step 1: Prepare pro-forma distribution table
A B Total
(60%) (40%) s
250,00 200,00 450,0
Capital balance
0 0 00
Payable to (Receivable from) (10,000 10,00
partner
20,000
) 0
240,00 220,00 460,0
Total
0 0 00
Allocation of loss ? ? ?
140,00
Amount received by partners ? 0 ?

Step 2: Squeeze
A B
Totals
(60%) (40%)
200,00
Capital balance 250,000 450,000
0
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Payable to (Receivable from) (10,000) 20,000 10,000

220,00
Total 240,000 460,000
0
(120,000 (80,000 (200,000
Allocation of loss
) (3) )(1) ) (2)
Amount received by 120,000( 140,00 260,000
4) (5)
partners 0

(1)
140K – 220K = -80,000 allocation of loss to B
(2)
80K allocation of loss to B ÷ 40% = -200,000 loss
(requirement ‘a’)
(3)
-200K loss x 60% = -120,000 allocation of loss to A
(4)
240K – 120K = 120,000 cash distribution to A
(requirement ‘b’)
(5)
260,000 cash available to the partners (requirement
‘c’)

Net proceeds (squeeze) – requirement ‘d’ 270,000

Carrying amt. of all non-cash assets, except
Receivable from A (470,000)
(200,000
Loss – see requirement ‘a’ )

Checking:

Cash (20K on hand + 270K from sale, net) 290,000

Outside creditors (30,000)

Cash available for distribution to partners 260,000

Case 6: Non-cash asset used as payment for claim

A B
Totals
(60%) (40%)
250,00 200,00 450,00
Capital balance
0 0 0
Payable to (Receivable from) (10,000
partner
20,000 10,000
)
240,00 220,00 460,00
Total
0 0 0
Allocation of loss -405K(a) x 60% (243,00 (162,00 (405,00
& 40% 0) 0) 0)
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Total (3,000) 58,000 55,000

(20,00 (20,000
Payment in equipment -
0) )
Total (3,000) 38,000 35,000
Allocation of deficiency 3,000 (3,000) -
35,00
Payment in cash - 0 35,000

(a)
The loss is computed as follows:
Asset Equit
= Liabilities +
s y
35,0 460,00
Cash (remaining) 00 - 0*
Equipment (@ settlement 20,0
price) 00 -
55,00 460,00
Totals 0 = - + 0
* Inclusive of the payable to, and receivable from, the partner.

Total loss (balancing figure) = 55,000 – 460,000 = -405,000

❖ Answer to requirement:
Payment in equipment 20,000
Payment in cash 35,000
Total payment to B 55,000

Case 7: Cash priority program

A B
(60%) (40%)
250,00 200,00
Capital balance
0 0
Payable to (Receivable from) (10,000
20,000
partner )
240,00 220,00
Total
0 0
Divide by: P/L ratio 60% 40%
400,00 550,00
MLAC 0 0

Rank of payment 2nd 1st

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A (60%) B (40%)
Rank of payment 2nd 1st
Maximum loss absorption capacity 400,000 550,000
Difference between 1st and 2nd (150,000)
Equal balance of MLAC 400,000 400,000

A B
Cash priority program: (20%) (30%)
Rank of payment 2nd 1st
1st priority (150,000 x 40%) 60,000

Cash 20,000
Collection from accounts receivable (60K x 1/2) 30,000
Sale of inventory (120K x 75% x 80%) 72,000
Sale of equipment 185,000
Liquidation expenses (12,000)
Estimated future liquidation costs (5,000)
Payment for accounts payable (30,000)
Cash available to the partners 260,000

A B
(60%) (40%) Total
Cash available to the 260,00
partners 0
Allocation:
(60,000
1st priority 60,000 )
200,00
Balance 0
Payment after priorities 120,00 (200,00
200K x 60%; & 40% 0 80,000 0)
120,0 140,0
First cash distribution 00 00 -