Part A
Prepare a predistribution plan for the
Part A
Explanation of Solution
Predistribution plan for the partnership:
Predistribution plan | ||
Available Cash | Amount | Receipient |
First | $ 90,000 | The firm pays all its liabilities and liquidation expenses of $90,000 |
Next | $ 33,500 | The firm pays $33,500 to person N |
Next | $ 43,500 | The firm pays $43,500 distributed between person N and person R in the ratio of 1:2 |
Next | $ 150,000 | The firm pays $150,000 distributed between person W, person N and person R in the ratio of 3:1:2 |
Further cash balances | The firm pays all further cash balances distributed between person W, person N, person R and person G in the ratio of 3:1:2:4 |
Table: (1)
Working note:
Calculate maximum allocated loss for all the partners:
Now, calculate for other partners:
Now, calculate for other partners:
Now, calculate for other partners:
Person G has least maximum allocated loss and hence is considered first.
Calculate the loss share of all the partners:
Now, calculate loss share for other partners:
Calculate the ending capital balances of partners:
Particulars | Person W | Person N | Person R | Person G |
Beginning balance | $ 120,000 | $ 88,000 | $ 109,000 | $ 60,000 |
Loss distribution | $ (45,000) | $ (15,000) | $ (30,000) | $ (60,000) |
Ending capital balance | $ 75,000 | $ 73,000 | $ 79,000 | $ - |
Table: (2)
Calculate maximum loss allocated to each partner:
Now, calculate for other partners:
Now, calculate for other partners:
Person W has least maximum allocated loss and hence is considered first.
Calculate the loss share of all the partners:
Now, calculate loss share for other partners:
Calculate the ending capital balances of partners:
Particulars | Person W | Person N | Person R |
Beginning balance | $ 75,000 | $ 73,000 | $ 79,000 |
Loss distribution | $ (75,000) | $ (25,000) | $ (50,000) |
Ending capital balance | $ - | $ 48,000 | $ 29,000 |
Table: (3)
Calculate maximum loss allocated to each partner:
Now, calculate for other partners:
Person R has least maximum allocated loss and hence is considered first.
Calculate the loss share for partners:
Calculate the ending capital balances of partners:
Particulars | Person N | Person R |
Beginning balance | $ 48,000 | $ 29,000 |
Loss distribution | $ (14,500) | $ (29,000) |
Ending capital balance | $ 33,500 | $ - |
Table: (4)
Calculate the updated balances of partners after all loss adjustment:
Particulars | Person W | Person N | Person R | Person G |
Beginning balance | $ 120,000 | $ 88,000 | $ 109,000 | $ 60,000 |
Assumed loss of $150,000 | $ (45,000) | $ (15,000) | $ (30,000) | $ (60,000) |
Step one balances | $ 75,000 | $ 73,000 | $ 79,000 | $ - |
Assumed loss of $150,000 | $ (75,000) | $ (25,000) | $ (50,000) | $ - |
Step two balances | $ - | $ 48,000 | $ 29,000 | $ - |
Assumed loss of $43,500 | $ - | $(14,500) | $ (29,000) | $ - |
Step three balances | $ - | $ 33,500 | $ - | $ - |
Table: (5)
b.
Prepare
b.
Explanation of Solution
The journal entries to record the liquidation transactions are as follows:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
1 | Cash | 65,600 | ||
Person W's Capital | 4,920 | |||
Person N's Capital | 1,640 | |||
Person R's Capital | 3,280 | |||
Person G's Capital | 6,560 | |||
| 82,000 | |||
(To record the 80 percent collection of accounts receivables) | ||||
2 | Cash | 150,000 | ||
Person W's Capital | 30,900 | |||
Person N's Capital | 10,300 | |||
Person R's Capital | 20,600 | |||
Person G's Capital | 41,200 | |||
Building and equipment | 168,000 | |||
Land | 85,000 | |||
(To record the sale of office equipment, building and land) | ||||
3 | Person R's Loan | 35,000 | ||
Person W's Capital | 31,800 | |||
Person N's Capital | 58,600 | |||
Person R's Capital | 15,200 | |||
Cash | 140,600 | |||
(To record safe capital distribution) | ||||
4 | Person W's Capital | |||
Person N's Capital | ||||
Person R's Capital | ||||
Person G's Capital | ||||
(To record the insolvency of person G) | ||||
5 | Liabilities | 74,000 | ||
Cash | 74,000 | |||
(To record the payment of all liabilities) | ||||
6 | Cash | 71,000 | ||
Person W's Capital | 9,000 | |||
Person N's Capital | 3,000 | |||
Person R's Capital | 6,000 | |||
Person G's Capital | 12,000 | |||
Inventory | 101,000 | |||
(To record the sale of cash inventory) | ||||
7 | Person R's Loan | 35,000 | ||
Person W's Capital | 31,800 | |||
Person N's Capital | 58,600 | |||
Person R's Capital | 15,200 | |||
Cash | 140,600 | |||
(To record safe capital distribution) | ||||
8 | Person W's Capital | 3,300 | ||
Person N's Capital | 1,100 | |||
Person R's Capital | 2,200 | |||
Person G's Capital | 4,400 | |||
Cash | 11,000 | |||
(To record the payment of liquidation expenses) | ||||
9 | Person R's Loan | 35,000 | ||
Person W's Capital | 31,800 | |||
Person N's Capital | 58,600 | |||
Person R's Capital | 15,200 | |||
Cash | 140,600 | |||
(to record final amount paid to partners) |
Table: (6)
Working note:
Calculation of cash available to pay liabilities and liquidation expenses:
Calculate the cash available after the payment of liabilities and liquidation expenses:
The amount of safe balances is calculated on the basis of the predistribution plan
Particulars | Person W | Person N | Person R | Person G | Cash |
Beginning balance | $120,000 | $88,000 | $74,000 | $60,000 | $15,000 |
Loan of person R | $35,000 | ||||
Collection of A/R | ($4,920) | ($1,640) | ($3,280) | ($6,560) | $65,600 |
Sale of non cash assets | ($30,900) | ($10,300) | ($20,600) | ($41,200) | $150,000 |
Cash distribution | ($31,800) | ($58,600) | ($15,200) | ($140,600) | |
Current balances | $52,380 | $17,460 | $69,920 | $12,240 | $90,000 |
Table: (7)
Person G becomes insolvent and the capital amount is divided among the other partners.
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Chapter 10 Solutions
FUNDAMENTALS OF ADVANCED ACCOUNTING >I
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