4-acct-2ab-p.-liquidation.docx

ACCT 2A&B: Accounting for Partnership & Corporation BCSV

ACCT 2A&B: Accounting for Partnership & Corporation I Accounting for Partnership Liquidation I.

CONCEPTUAL SKILLS.

A. TRUE OR FALSE

Write A if the statement is true otherwise, write B. 1. Partnership dissolution is always followed by liquidation. 2. In a statement of liquidation, there are only two classes of assets – cash and other assets. 3. If the deficient partner is insolvent, his deficiency will be absorbed by the other partners distributed according to their profit and loss ratio. 4. Non-cash assets that are not sold should be written off as a loss and such loss is divided to the partners equally. 5. The amount of offset in exercising the right of offset shall be the amount of a partner’s loan to the partnership or the amount of his deficiency, whichever is lower. 6. A deficient but solvent partner has to still share on the deficiency of an insolvent partner in case of final liquidation. 7. A partner’s claim from the partnership, upon liquidation, increases the amount available for the partner’s personal debts. 8. In a statement of liquidation, the accounting equation is observed throughout the liquidation process. 9. Personal creditors of individual partners have priority over partnership creditors in the order of claims against the personal assets of a partner. 10. Liquidation expenses which are incurred to facilitate the immediate realization of non-cash assets affect cash but not capital. 11. A deficient partner is automatically an insolvent partner. 12. A partner with the lowest loss absorption balance has the first priority on cash distributions. 13. Priority of claims is the order of creditors’ rights against the partnership’s assets and the personal assets of each partner. 14. Cash priority program represents cash payments to partners which are computed on the assumption that nothing will be realized on the remaining non-cash assets. 15. Partner’s loss absorption capacity is computed by multiplying the sum of a partner’s capital and loan balances by that partner’s profit and loss sharing ratio.

B. MULTIPLE CHOICES Choose the letter of the best answer. 16. In accounting for the liquidation of a partnership, cash payments to partners after all outside creditors’ claims have been satisfied, but before the final cash distribution, should be made according to A. Safe payments computation B. The partners’ profit and loss sharing ratio C. The final balances in partners’ capital accounts D. Partners’ share of the gain or loss on liquidation 17. In a partnership liquidation, a gain on sale of non cash assets is A. Allocated to the partners based on their capital balances B. Allocated to the partners based on their profit and loss sharing ratio C. Allocated to the partner with the lowest capital balance D. Allocated to partnership liabilities 18. Liquidation of a partnership includes all of the following steps, except 1|Page

ACCT 2A&B: Accounting for Partnership & Corporation BCSV A. B. C. D.

Obtaining court approval Selling the partnership’s noncash assets Paying the partnership liabilities Distributing the remaining cash to partners

19. Settlement of a partner’s personal liabilities may come from A. Personal assets B. Partner’s claim on partnership assets C. Claims of co-partners D. A and B only 20. Liquidation losses would include A. Loss on realization of non cash assets B. Liquidation expenses C. Share on the deficiency of an insolvent partner D. All of the above 21. A capital deficiency can be eliminated by the following except A. Offsetting against a partner’s loan B. Additional investment C. Selling non cash assets at a gain D. Loss to the other partners 22. A partner’s interest includes A. Capital balance B. Partner’s loan to the partnership C. A only D. A and B 23. A capital deficiency in a partner’s capital that is uncollectible is A. The result of a sale of non cash asset at a profit B. The result of a loss in operations C. A loss to the other partners D. A gain to the other partners 24. The other partners must absorb the deficiency in a partner’s capital account in liquidation because of A. Limited life and mutual agency B. Mutual agency and unlimited liability C. Limited life and co-ownership of property D. Mutual agency and partnership’s taxability 25. When a partnership is liquidated, all of the following may occur, except A. A partner erases his deficiency by declaring bankruptcy B. The other partners absorb a partner’s deficiency C. A partner erases his deficiency by contributing property D. A partner erases his deficiency by contributing cash 26. The order of partnership liquidation process is A. Sell assets, disburse cash to partners, pay liabilities B. Disburse cash to partners, pay liabilities, sell assets 2|Page

ACCT 2A&B: Accounting for Partnership & Corporation BCSV C. Pay liabilities, sell assets, disburse cash to partners D. Sell assets, pay liabilities, disburse cash to partners 27. In a partnership liquidation, a loss from sale of non cash assets is A. Allocated to the partner with the highest capital balance B. Allocated to the partnership liabilities C. Allocated to the partners based on their capital balances D. Allocated to the partners based on their profit and loss sharing ratio 28. Which of the following statement is incorrect? A. Partnership creditors are preferred as to partnership assets B. Partnership creditors are preferred as to each partner’s separate assets C. A partner’s separate creditors are preferred as to the partner’s separate assets D. A partner’s separate creditors may attach a partner’s share in the partnership assets 29. The process of converting non cash assets into cash is called A. Winding up of assets B. Disposal of property C. Realization D. Dissolution 30. The partner with the _____ loss absorption capacity is the least priority on cash distributions. A. Highest B. Lowest C. A and B D. Neither A nor B

II.

COMPUTATIONAL AND ANALYTICAL SKILLS

Problem 1: Nico, Ricardo, Jack, & Esperanta are partners, sharing earnings in the ratio of 3:4:6:7, respectively. The balance of their capital accounts on December 31, 2012 are as follows: Jack – P 23,500 ; Nico – P 6,000 ; Esperanta – P 9,250 ; Ricardo - P 22,250. The partners decided to liquidate and they accordingly convert the noncash assets into P 25,000 cash. After paying the liabilities amounting to P 6,900, they have P 23,100 to divide. Assume that a debit balance in any partner’s capital is uncollectible. Determine the following: 1. The book value of the non cash assets. 2. The gain (loss) on realization. 3. The share of Ricardo in the gain (loss) upon conversion of the non cash assets into cash. 4. The amount of cash received by Jack. Problem 2: Pudge, Nessaj, Omni, & Slark share profits in the ratio of 1:1:2:1, respectively. The partnership cannot meet its obligations to creditors and dissolution is authorized on Sept. 30, 2013. A statement of financial position for the partnership on this date shows balances as follows: Cash Other assets 3|Page

Assets

P 65,000 875,000

Liabilities Pudge, Capital

Liabilities and Equity

P 280,000 174,000

ACCT 2A&B: Accounting for Partnership & Corporation BCSV Nessaj, Capital Omni, Capital Slark, Capital Total Liabilities & Equity Total assets:

181,000 165,000 140,000 P 940,000

P 940,000

The liabilities include a P 40,000 loan from Omni. The personal status of partners on this date is determined to be as follows: Partners Pudge Nessaj Omni Slark

Cash and cash value of personal assets P 290,000 100,000 150,000 210,000

Personal liabilities P 150,000 160,000 120,000 275,000

The other assets of the partnership are sold and realized P 450,000. Determine the following: 5. Share of Pudge in the gain (loss) on realization 6. Share of Omni in the gain (loss) on realization 7. The amount that will be paid to the personal creditors of Slark 8. The amount that will be received by Nessaj from the distribution of cash 9. the amount that will be paid to the personal creditors of Pudge 10. the amount that will be paid to the personal creditors of Omni Problem 3: The partnership accounts of Kevin, Rosi, and Pia who share earnings in a 4:3:3 ratio are as follows on Dec. 31, 2010 Kevin, drawing (debit) P 30,000 Rosi, drawing (credit) 10,000 Pia, Loan 50,000 Kevin, Capital 160,000 Rosi, Capital 130,000 Pia, Capital 140,000 Total assets amounted to P 700,000 including P 80,000 cash and liabilities total P 240,000. The partnership was liquidated in January 2011 and Rosi received 110,000 cash payment in the liquidation. Determine the following: 11. The loss on realization. 12. The amount of cash received by Pia. Problem 4: The statement of financial position shown below was prepared just prior to the liquidation of the Ibasco Partnership. The partners shared in the profits and losses in the ratio of 4:2:1:1.

Cash 4|Page

Assets P 50,000

Ibasco Partnership Statement of Financial Position September 30, 2013 Liabilities

Liabilities and Equity P 450,000

ACCT 2A&B: Accounting for Partnership & Corporation BCSV Other Assets Receivable from Khinne

TOTAL ASSETS:

950,000 62,500

JR, Loan Khinne, Capital Miz, Capital JR, Capital Annie, Capital TOTAL LIABS & EQUITY

P 1,062,500

37,500 381,250 93,750 50,000 50,000 P 1,062,500

Other assets are sold for P 1,150,000 and available cash is distributed to the proper parties. Cash is distributed in final settlement. Questions to answer: 13. How much is the share of Annie in the gain? 14. How much cash did Khinne received? 15. Who among the partners received the smallest amount of cash? Problem 5: The Chen Partnership has just completed a very unprofitable year. The partners agree to liquidate. The financial statements of the partnership have been prepared for the fiscal year ending July 31, 2012. And the yearend statement of financial position is shown below: Cash Accounts Receivable Less: Allow. for bad debts M. Inventory Machinery & Equipment Less: Accum. Depreciation TOTAL ASSETS: Accounts payable Notes payable (Due 2013) AA, Capital BV, Capital TOTAL LIABS & EQUITY

P 80,000 20,000 100,000 60,000

Assets P 1,000 60,000 52,000 40,000 P 153,000

Liabilities and Equity P 20,000 86,000 30,000 17,000 P 153,000

The partners desired to complete the liquidation process as quickly as possible. Information concerning the liquidation follows: 1. Accounts receivable equal to the net carrying value plus 20% of the estimated doubtful accounts were collected. 2. M. Inventory were realized for P 25,000. 3. Machinery and Equipment were realized equal to 60% of their book value. 4. Unrecorded expense vouchers totaling P 2,000 were discovered. this was not yet paid. 5. The bank charged the partnership P 1,000 for paying the note earlier than the due date; the amount is added to the note. AA is personally insolvent. However, BV’s personal assets exceed his personal liabilities by P 4,000. AA and BV share on earnings in the ratio of 4:6, respectively. Questions to answer: 5|Page

ACCT 2A&B: Accounting for Partnership & Corporation BCSV 16. How much is the gain (loss) on realization? 17. How much cash did AA received? Problem 6: A and B share earnings in a 60:40 ratio. They have decided to liquidate their partnership. A portion of the assets has been sold but other assets with a carrying amount of P 84,000 still must be realized. All liabilities have been paid, and cash of P 50,000 is available for distribution to partners. The capital accounts show balances of P 90,000 for A and P 44,000 for B. Questions to answer: 18. How much cash did A received from the first distribution? Problem 7: When Zee and Dee, partners who share earnings equally, were incapacitated in an airplane accident, a liquidator was appointed to wind up their business. The accounts showed cash, P 70,000; other assets, P 220,000; liabilities, P 40,000; Zee’s capital, P 142,000; and Dee’s capital, P 108,000. Because of the highly specialized nature of the non cash assets, the liquidator anticipated that considerable time would be required to dispose them. The expenses of liquidating the business are estimated at P 20,000. Questions to answer: 19. If Zee’s guardian, since Zee is incapacitated, received Zee’s share of P 39,625 from the first distribution of cash, How much cash was realized from the initial sale of assets? 20. Using the information in # 19, What is the balance of Dee’s capital after the first distribution of cash? Problem 8: The assets and equities of the Dobby Partnership at the end of its fiscal year on Oct. 31, 2013 are as follows: Assets Cash P 75,000 Receivables – net 100,000 Inventory 200,000 Plant assets – net 350,000 Loan to F 25,000 P 750,000

Liabilities Loan from G E, Capital (30%) F, Capital (50%) G, Capital (20%)

Liabilities and Equity P 250,000 50,000 225,000 150,000 75,000 P 750,000

The partners decide to liquidate the partnership. They estimate that the non cash assets other than the loan to F can be converted into P 500,000 cash over the two-month period ending December 31, 2013. Cash is to be distributed to the appropriate parties as it becomes available during the liquidation process. Questions to answer: 21. Who among the partners is the most vulnerable to partnership losses on liquidation? 22. Assuming that P 325,000 was realized from the initial sale of assets, How much did G received? 23. Assuming that a total amount of P 37,500 is available for distribution to partners after all non partner liabilities are paid, How much did E received? 24. Assuming that E received a total of P 180,000, how much must have been received by G? 25. Assuming that F received a total of P 180,000, how much must have been received by E? 26. Using the information in # 25, How much is the total cash distributed? 27. Using the information in # 22, and the final sale of assets realized P 220,000, How much cash did F received?

6|Page

ACCT 2A&B: Accounting for Partnership & Corporation BCSV 28. Using the information in # 22 & 27, Compute for the total cash received by E throughout the liquidation. Problem 9: AL, AC, GF, & EM are partners engaged in the business of selling product XY. They agreed to dissolve their partnership as of January 31, 2012. The partners agreed that distribution of cash to the partners were to be made on the last day of each month during liquidation staring Feb. 29, 2012. Provided sufficient cash was withheld. EM was designated as the partner in charge of liquidation. The partnership agreement provided that profits and losses were to be divided on the following basis: AL, 20%; AC, 30%; GF, 30%; and EM, 20%. The following was the condensed statement of financial position of the firm as of Jan. 31, 2012: Cash Other assets

Assets

TOTAL ASSETS:

P 100,320 193,530

P 293,850

Liabilities and Capital Accounts payable P 21,360 AL, loan 15,000 AL, Capital 24,120 AC, Capital 96,480 GF, Capital 109,020 EM, Capital 27,870 TOTAL LIABS & EQUITY P 293,850

Transactions during liquidation other than cash distribution to partners are summarized as follows: February March April Liquidation of assets with a book value of: P 52,010 P 39,210 P 78,880 P 90,520 --remainder-P 73,100 Paid to creditors on account P 10,250 11,110 --Paid liquidation expense P 9,250 10,220 8,690 Questions to answer: 29. How much cash did AC received from the February distribution? 30. How much cash did EM received from the February distribution? 31. What is the cash balance after the initial distribution? 32. What is the balance of AL’s interest in the partnership after the initial distribution? 33. How much cash did EM received from the March distribution? 34. How much cash did AL received from the March distribution? 35. What is the balance of GF’s capital after the 2nd distribution? 36. What is the balance of EM’s capital just before the final distribution of cash? 37. Compute the total cash received by GF throughout the liquidation. Problem 10: G, H, and I share profits in the ratio of 5:3:2, respectively. Capital and loan balances from the partnership just prior to liquidation are: 7|Page

ACCT 2A&B: Accounting for Partnership & Corporation BCSV Capital balances Loan balances

H P 120,000 45,000

G 90,000 30,000

I 40,000 13,000

Assets totaled P 702,000 including P 4,000 cash and liabilities (excluding loans above) totaled P 364,000. Questions to answer: 38. Assuming G received P 12,500 from the first distribution of cash, How much cash is available for distribution? 39. Using the information in # 38, How much cash was realized from the initial sale of assets? 40. Assuming I received P 3,900 from the first distribution of cash, How much must have been received by H? Problem 11: Q, O, and P decided to dissolve the partnership on November 30, 2012. Their capital balance balances and profit ratio on this date, follow: Q (40%) – P 50,000 O (30%) – P 60,000 P (30%) – P 20,000 The net income from Jan. 1 – Nov. 30, 2012 is P 44,000. Also, on this date, cash and liabilities are P 40,000 and P 90,000, respectively. Question to answer: 41. For Q to receive P 55,200 in full settlement of his interest in the firm, how much must be realized from the sale of the firm’s non cash assets? Problem 12: A local partnership was considering the possibility of liquidation since one of the partners (Z) is solvent and others are insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively. W, capital – P 60,000 X, capital – 67,000 Y, capital – 17,000 Z, capital – 96,000 W’s creditors filed a P 30,000 claim against the partnership’s assets. At that time, the partnership held assets reported at P 360,000 and liabilities of P 120,000. Question to answer: 42. If the assets could be sold for P 228,000, what is the minimum amount that W’s creditors would have received? Problem 13: The partnership of A, B, and C was dissolved on July 31, 2012 and account balances after non cash assets were converted into cash on October 30, 2012 are: Assets: Cash – P 50,000 Liabilities and Equity: Accounts payable – P 120,000 A, Capital (30%) – P 90,000 8|Page

ACCT 2A&B: Accounting for Partnership & Corporation BCSV B, Capital (30%) – (60,000) C, Capital (40%) – (100,000) Personal assets and liabilities of the partners at October 30, 2012 are: Personal assets: Personal debts: A P 80,000 P 90,000 B 100,000 61,000 C 192,000 80,000 Question to answer: 43. If C contributes P 70,000 to the partnership to provide cash to pay the creditors, what amount of A’s P 90,000 partnership equity would appear to be recoverable? ***Problem 14:*** On Jan. 1, 2009, X and Y agreed to combine their talents and capital and form XY Partnership. X contributed P 60,000 cash, merchandise with a book value of P 120,000; a current market value of P 145,000; and an average value of P 132,000 and equipment (net) with a book value of P 171,000; a discounted value of P 173,500; fair value of P 185,000 and a dissolution value of P 140,000. Y gave P 90,000 cash and Land with a book value of P 300,000; an assessed value for tax purposes of P 286,000; an appraised value of P 330,000; and original value of P 290,000. The partners agreed to invest or withdraw cash in order their capital to be at par with each other. On Dec. 31, 2009, before the books are closed, the drawing account of X shows a debit balance of P 6,636; and for Y, debit balance, P 1,604. The partnership agreement with regards to division of profits and losses provides that X and Y is to be allowed of 7% and 6% interest on capital balance (at the inception of the partnership) in excess of P 300,000; each partner is to be allowed of an annual salary of P 30,000; X is to receive bonus of 15% and Y, 25% of the income after allowance for interests, salaries, and bonuses; and the remainder is to be divided to X and Y in the ratio of 65:35, respectively. The income summary account on Dec. 31, has a credit balance of P 88,150 before any entry for the allowance of interests, salaries, and bonuses, and this balance is closed into the partners’ capital account. The balances of the drawing accounts are also closed into the capital accounts. On Jan. 3, 2010, Z is admitted as a partner upon investment of P 360,000 in the firm. X and Y sharing in the ratio 65:35 give a bonus to Z so that Z may have a 30% interest in the firm. The new agreement provides that profits and losses are to be distributed as follows: X, 35%; Y, 25%; Z, 40%. Interests, salaries, and bonuses are not allowed. On Dec. 31, 2010, the partners’ drawing accounts have debit balance as follows: X, P 4,118; Y, P 3,509; Z, P 4,173. The income summary account has a P 115,000 debit balance. Accounts are closed. In Jan. 2011, the partners decide to liquidate. The assets are realized on a piece-meal basis and the partners decided to distribute cash as it becomes available. In Feb., after creditors are fully paid, cash of P 142,000 remains available for partners. This is distributed to the proper parties. In Apr., cash realized from sale of non cash assets is P 135,600 and this is distributed to the partners. In May, cash realized from the sale of non cash assets is P 169,500. The remaining non cash assets were unrealizable and were written off as a complete loss. Questions to answer: 44. What is the balance of X, capital upon formation? 45. How much is the share of X in the 2009 net income? 46. How much is the bonus of Y in the net income? 47. What is the capital balance of X immediately after the admission of Z? 48. How much is the share of Z in the 2010 loss? 49. What is the capital balance of Y prior to liquidation? 50. Who among the partners is the most invulnerable to losses? 51. How much cash did Y received from the February distribution? 52. What is the capital balance of X after the first distribution? 53. How much cash did Z received from the April distribution? 9|Page

ACCT 2A&B: Accounting for Partnership & Corporation BCSV 54. 55. 56. 57. 58.

How much cash did X received from the April distribution? How much cash did Y received from the final distribution? How much cash did Z received from the final distribution? How much was left in X’s capital after the final distribution? How much must have been the total loss on realization? ~~~~

“Don’t lose hope. When the sun goes down, the stars come out.”

10 | P a g e

ACCT 2A&B: Accounting for Partnership & Corporation BCSV *Suggested key* I. CONCEPTUAL SKILLS. A. True or False. 1. B 2. A 3. A 4. B 5. A 6. A 7. A 8. A B. Multiple Choices. 16. C 17. B 18. A 19. D 20. D 21. C 22. D 23. C II. COMPUTATIONAL & ANALYTICAL SKILLS. 1. P 62,900 2. (P 37,900) 3. (P 7,580) 4. P 9,910 5. P 85,000 6. P 170,000 7. P 265,000 8. P 96,000 9. P 150,000 10. P 120,000 11. P 100,000 12. P 160,000 13. P 25,000 14. P 418,750 15. ANNIE 16. (P 39,000) 17. P 10,000 18. P 39,600 19. P 35,250 20. P 102,375 21. F 22. P 45,000 23. P 37,500 24. P 95,000 25. P 258,000 26. P 585,000 27. P 72,500 28. P 193,500 29. P 45,592.50

11 | P a g e

9. A 10. B 11. B 12. B 13. A 14. B 15. B 24. B 25. A 26. D 27. D 28. B 29. C 30. B 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58.

P -0P 11,110 P 29,515 P 11,216 P 17,271 P 18,792 P 12,882 P 103,362 P 123,000 P 483,000 P 91,350 P 193,000 P 2,500 P 81,000 P 405,000 P 45,636 P 2,589 P 434,268 P 46,000 P 408,410 Y P 134,947.50 P 382,847.50 P -0P 79,100 P 47,960 P 54,396 P 236,603.50 P 676,010