Problem 2: Multiple Choice-Theory

1. Which of the following does not relate to the liquidation of a partnership?

-Conversion of the partners capital balances into ordinary shares

2. Which of the following has the least priority of payment in case of partnership
liquidation?
-The partners capital balances

3. A partner is considered insolvent if

-his/her personal liabilities exceed personal assets

4. A and B are partners of AB Co., which is undergoing liquidation. After AB Co.’s

assets were realized and its liabilities settled, A’s capital account has a negative
balance. Which of the following statements is correct?
-B shall absorb A’s capital deficiency if A is insolvent.

5. When making safe payments to the partners during installment liquidation of a

partnership, which of the following statements is correct?
-The carrying amount of unsold assets and any cash retention for future costs are
treated as loss.

Problem 3: Exercises
Use the following information for independent Cases 1 to 6:
1. The statement of financial position of ABC Co. Before liquidation is as
follows:
Cash 40,000 Accounts payable 60,000
Accounts receivable 120,000 Payable to B 40,000
Inventory 240,000 A, Capital (20%) 200,000
Equipment 800,000 B, Capital (30%) 300,000
Accum. depreciation (200,000) C, Capital (50%) 400,000
Total Assets 1,000,000 Total Liab. & Equity 1,000,000

CASE 1: The non-cash assets were realized as follows: A.Of the total
accounts receivable, only P100,000 were collected. B. The entire inventory
was sold for P140,000. C. The equipment was sold for P500,000. D. P4,000
liquidation expenses were paid. Requirements: Compute for the cash
distributions to the partners.

Step 1
Collection of accounts receivable 100,000
Sale of inventory 140,000
Sale of equipment 500,000
Liquidation expense (4,000)
Net: Cash proceeds 736,000
Less: ( 120,000 + 240,000 +800,000) (960,000)
Total loss (224,000)
Step 2
A(20%) B(30%) C(50%) Total
Capital balance 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 (44,800) (67,200) (112,000) (224,000)
Amounts received by 155,200 272,800 288,000 716,000
partners

Checking:
Beg. Balance of cash 40,000
Net proceeds from sale of NCA 736,000
Less: Payment to outside creditors (A/P) 60,000
Cash available for distribution to partners 716,000

Case 2: The partnership is liquidated on installment basis. In the first month of

the liquidation process:
a. 805 of the accounts receivable was collected for only P60,000.
b. Two-thirds of the inventory was sold for P80,000.
c. Equipment with carrying amount of P300,000 was sold for P240,000.
d. P4,000 liquidation expense were paid. An additional P2,000 is expected
to be incurred in the succeeding periods.
e. P18,000 cash is set aside for potential unrecorded liabilities.
Requirement: Compute for the cash distributions to the partners.
Step1: Compute for gain loss
a.) Collection on accounts receivable 60,000
b.) Sale inventory 80,000
c.) Sale of equipment 240,000
d.) Actual liquidation expenses (4,000)
e.) Estimated liquidation expenses (2,000)
f.) Cash retained for future expenses (18,000)
Net cash proceeds 356,000
Less: Carrying amount of all cash assets
(120K Accounts receivable+ 240K Inventory+800K Equipment (960,000)
-200K . Dep.)
Total loss (604,000)

Step2: Allocate the gain or loss to the partners capital balance (include their
right of offset)
A (20%) B (30%) C (50%) Totals
Capital balances 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 (120,800 (181,200 (302,000 (604,000
(604K x(20%;30%;50%) ) ) ) )
Amounts received by partners 79,200 158,800 98,000 336,000
Case 3: A third party offered to buy the non-cash assets and assume the
accounts payable of the partnership for P 960,000. However, certain assets
are to be revalued as follows: Accounts receivable, P 90,000; Inventory, P
150,000; and Equipment, P 640,000.

Requirement: compute for the cash distributions to the partners.

Net proceeds from sale of assets and liabilities P960,000

Carrying amount of net assets sold (860,000
(90K A/R + 150K Inv. + 640K Equip. -20K A/P) )
Gain on sale P100,000

A (20%) B (30%) C (50%) Total

Capital balances 200,000 300,000 400,000 900,000
Allocation of gain
20,000 30,000 50,000 100,000
[100K x (20%, 30%, & 50%)]
1,000,00
Amounts received by partners 220,000 330,000 450,000
0

Checking:

Beginning balance of cash 40,000

Net proceeds from sale of assets and liabilities 960,000
Cash available for distribution to partners 1,000,000

Case 4: The non-cash assets were sold for P 100,000. The financial
conditions of the partners are as follows:

A B C
Personal assets 600,000 520,000 40,000
(440,000 (440,000 (640,000
Personal liabilities
) ) )
Requirements:
Compute for the cash distributions to the partners

Net proceeds 100,000

Carrying amount of non-cash assets (960,000
(120K + 240K +600K) )
(860,000
Total loss
)

A B C
Personal assets 600,000 520,000 400,000
Personal liabilities (440,000) (440,000) (640,000)
Available to partnership creditors 160,000 80,000 -

A and B are solvent up to P 160,000 and P 80,000, respectively, while C is insolvent.

The capital balances of the partners are settled as follows:

A (20%) B (30%) C (50%) Total

Capital balances 200,000 300,000 400,000 900,000
Payable to B 40,000 40,000
Totals 200,000 340,000 400,000 940,000
Allocation of loss (172,000 (258,00 (430,000 (860,00
(860,000 x 20%, 30% & 50%) ) 0) ) 0)
Totals 28,000 82,000 300,000 80,000
(a) Allocation of C’s capital deficiency
(12,000) (18,000) 30,000 -
(30K x 2/5 & 3/5)
Payments to partners 16,000 64,000 - 80,000

Cash 40,000
Proceeds 100,000
Payment for liabilities 60,000
Cash distribution to partners 80,000

Case 5: The partnership will be liquidated on an installment basis.

Distributions to the owners will be made as cash becomes available.
 The following transactions occurred in January 20x1:
a. 75% of the accounts receivable will be collected for only P60,000.
b. Half of the inventory was sold for P80,000.
c. Equipment with carrying amount of P400,000 was sold for P240,000.
d. P4,000 liquidation expenses were paid. Estimated future liquidation
expenses totaled P2,000.
e. P18,000 cash was retained in the business for potential unrecorded
liabilities and anticipated expenses.
 The following transactions occurred in February 20x2:
a. P20,000 was collected on the remaining accounts receivable; the balance
was deemed uncollectible.
b. The other half of the inventory was sold for P40,000.
c. The remaining items included in the equipment account were sold for
P60,000.
d. P20,000 liquidation expenses and previously unrecorded liabilities were
paid.
e. The liquidation process ended on February 28, 20x1.
Requirement: Prepare the schedule of safe payments as of
a. January 31, 20x1; and
Loss on collection of accounts receivable (30,000)
[60K-(120K x 75%)]
Loss on sale of inventory (40,000)
[80K-(240K x 50%)]
Loss on sale of equipment (160,000
(240K-400K) )
Actual liquidation expenses (4,000)
 (234,000
Actual loss on realization- Jan. 20x1
)

Carrying amount of unsold non-cash assets (350,000)

(120K x 25%) + (240K x 50%) + (600K-400K)
Estimated future liquidation costs (2,000)
Cash set aside for potential unrecorded liabilities (18,000)
Maximum loss possible (370,000)

Safe payment Schedule

ABC CO.
Safe payment schedule
January 31, 20x1
A (20%) B (30%) C (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.
(46,800) (70,200) (117,000) (234,000)
20x1
Total interest- Jan. 1, 20x1 153,200 269,800 283,000 706,000
Allocation of maximum loss possible-
(74,000) (111,000) (185,000) (370,000)
Jan. 20x1
First installment payment to partners-
79,200 158,800 (98,000) 336,000
Jan. 20x1

b. February 28, 20x1.

Loss on collection of accounts receivable
(10,000)
[20K -(120K x 25%)]
Loss on sale of inventory
(80,000)
[40K -(240K x 50%)]
Loss on sale of equipment
(140,000)
(60K - 200K)
Actual liquidation expenses (20,000)
Actual loss on realization- Jan. 20x1 (250,000)

Safe payment Schedule

ABC CO.
Safe payment schedule
February 28, 20x1
A (20%) B (30%) C (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.
(46,800) (70,200) (117,000) (234,000)
20x1
First installment payment to partners
(79,200) (158,000) (98,000) (336,000)
-Jan.20x1
Total interest- Feb. 1, 20x1 74,000 111,000 185,000 370,000
Allocation of maximum loss possible-
(50,000) (75,000) (125,000) (250,000)
Feb. 20x1
First installment payment to partners-
24,000 36,000 60,000 120,000
Jan. 20x1
CASE 6: Use the pact pattern and the addition information in Case 5.
Requirements: Determine the cash distributions to the partners on the dates
below using a cash priority program. A.January 31, 20x1 B. February 28, 20x1
A(20%) B(30%) C(50%)
Payable to B - 40,000 -
Capital balances before 200,000 300,000 400,000
liquidation
Total interest in the 200,000 340,000 400,000
partnership 20% 30% 50%
Divide by: P/L percentage
Max loss absorption capacity 1,000,000 1,133,334 800,000

A(20%) B(30%) C(50%)

Rank of payment 2nd 1st 3rd
Maximum loss absorption 1,000,000 1,133,334 800,000
capacity - (133,334) -
Difference between 1st and
2nd
Balance 1,000,000 1,000,000 800,000
Difference between 1st, 2nd (200,000) (200,000) 800,000
and 3rd
Equal balance of MLAC 800,000 800,000 800,000

CASH PRIORITY PROGRAM

A(20%) B(30%) C(50%)
Rank of payment 2nd 1st 3rd
1ST priority (133,334 x 30%) 40,000
2nd priority (200,000 x 20% x 40,000 60,000
30%)
Totals 40,000 100,000

January 20x1:
A. Collection of accounts receivable 60,000
B. Sale of inventory 80,000
C. Sale of equipment 240,000
D. Payment for liquidation exp. (40,000)
Estimated future liquidation exp (2,000)
E. Cash retained for future costs (18,000)
Net Proceeds 356,000
Add: Cash balance, beg 40,000
Less: Accounts payable (60,000)
Cash available for distribution to partners 336,000

A(20%) B(30%) C(50%) Total

Available cash. Jan 31, 33,600
20x1
Allocation
1st priority 40,000 (40,000)
2nd priority 40,000 60,000 (100,000)
Balance 196,00
Payment after priorities
196,000 x(20%:30% and 39,200 58,800 98,000 (196,000)
50%)
1st installment payment 79,200 158,800 98,000 -

Feb 20x1:
A. Collection of accounts receivable 20,000
B. Sale of inventory 40,000
C. Sale of equipment 60,000
D. Payment for liquidation exp. (Estimated future (20,000)
liquidation exp.)
Net Proceeds 100,000
Add: Cash - Feb 1,20x1 ( 2,000 and 18,000) 20,000
Cash available for distribution to partners 120,000

A(20%) B(30%) C(50%) Total

Available cash. Feb 28, 120,000
20x1
Allocation
Payment after priorities
120,000 x(20%:30% and 24,000 36,000 60,000 (120,000)
50%)
Final installment payment 24,000 36,000 60,000 -

Problem 4: Multiple choice - Computational

1. On January 1, the partners of Cobb, Davis, and Eddy, who share profits and
losses in the ratio of 5:3:2, respectively, decided to liquidate their partnership.
On this date, the partnership condensed balance sheet was as follows:
Assets
Cash $50,000
Other assets 250,000
$300,000

Liabilities and Capital

Liabilities $60,000
Cobb, capital 80,000
Davis, capital 90,000
Eddy, capital 70,000
$300,000

On January 15, the first cash sale of other assets with a carrying amount of
$150,000 realized $120,000. Safe installment payments to the partners were made
the same date. How much cash should be distributed to each partner?

Cobb/Davis/Eddy
-$15,000/$51,000/$44,000
2. If all partnership assets and liabilities are realized and settled at their carrying
amounts, how much will beans received from the liquidation?
-190,000

3. The partnership has total liabilities of P200,000. If all partnership assets are
realized for P500,000, how much will Jack received from the liquidation?
-243,000

4. If all partnership assets are realized and all liabilities are settled. And the
partnership has remaining cash of P120,000, how much will Beans received from
the liquidation?
-0

5. If on the final settlement of the partners claims Beans received P990,000, how
much did jack received?
-261,000

6. Before realization of non-cash assets, the partnership has a zero balance in its
cash account and a P200,000 balance in its liabilities. If jack received P261,000 on
the final settlement of the partners claims, how much were the net proceeds from
the sale of the non-cash assets?
-560,000

7. Partners A, B and C decided to liquidate their partnership. A summary of the

partnership's statement of financial position is shown below:
Assets Liabilities Equity
Cash Noncash A(20%) B(30%) C(50%)
20,000 480,00 30,000 100,000 170,000 200,000
The partnership paid P8,000 liquidation expenses. Partner C is insolvent. How much
cash did A receive from the settlement of the partners' interests?
-12,800

A, B and C decided to liquidate their partnership business. The financial position of

the partnership shows:
A, Capital (30%) P210,000;
B, Capital (20%) P150,000;
C, Capital (50%) P210,000.

Upon liquidation, all of the partnership's assets are sold and sufficient cash is realized
to pay all liabilities except one for P30,000. All partners are solvent except C.

8. By what amount would the capital of A change?

-243,000 decrease

9. How much is the additional contribution required of B?

-6,000
10. ABC o. is undergoing liquidation. Information before the start of the liquidation
process is as follows:
Cash 10,000 Accounts payable 80,000
Accounts receivable 80,000 Payable to B 20,000
Receivable from A 10,000 A's Capital (50%) 250,000
Inventory 180,000 B's Capital (30%) 150,000
Equipment, net 320,000 C's Capital (20%) 100,000
Total 600,000 Total Liab. & Equity 600,000
The total cash distributed to the partners after the first and second sales of non
cash assets were P12,000 and P30,000, respectively. How much cash did B receive
in the second cash distribution?
-17,600