Chapter 15, Problem 31P

Part A

To determine

Prepare a pre-distribution plan for the partnership.

Explanation of Solution

Pre-distribution plan for the partnership

Pre-distribution plan
Available Cash	Amount	Recipient
First	$                                              40,000	The firm pays all its liabilities of $40,000
Next	$                                              32,000	The firm pays $32,000 to person C
Next	$                                              32,000	The firm pays $32,000 distributed between person F and person C in the ratio of 75:25
Further cash balances		The firm pays all further cash balances distributed between person F, person W and person C in the ratio of 60:20:20

Table: (1)

Working note

Calculate the maximum allocated loss for the partners

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{F}=\frac{\$129,000}{60\%}\\ =\$129,000\times \frac{100}{60}\\ =\frac{\$12,900,000}{60}\\ =\$215,000\end{array}$

Now calculate for other partners

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{W}=\frac{\$35,000}{20\%}\\ =\$35,000\times \frac{100}{20}\\ =\frac{\$3,500,000}{20}\\ =\$175,000\end{array}$

Now calculate for other partners

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{C}=\frac{\$75,000}{20\%}\\ =\$75,000\times \frac{100}{20}\\ =\frac{\$7,500,000}{20}\\ =\$375,000\end{array}$

Person W has least maximum allocated loss and hence is considered first.

Calculate the loss share of all the partners

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{F}=\$175,000\times 60\%\\ =\$105,000\\ \text{Loss}\text{share}\text{to}\text{person}\text{W}\text{and}\text{person}\text{C}=\$175,000\times 20\%\\ =\$35,000\end{array}$

Calculate the ending capital balances of partners

Particulars	Person F	Person W	Person C
Beginning balance	$  129,000	$    35,000	$   75,000
Loss distribution	$ (105,000)	$   (35,000)	$ (35,000)
Ending capital balance	$    24,000	$              -	$   40,000

Table: (2)

Calculate maximum loss allocated to each partner

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{F}=\frac{\$24,000}{75\%}\\ =\$24,000\times \frac{100}{75}\\ =\frac{\$2,400,000}{75}\\ =\$32,000\end{array}$

Now, calculate for other partners

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{C}=\frac{\$40,000}{25\%}\\ =\$40,000\times \frac{100}{25}\\ =\frac{\$4,000,000}{25}\\ =\$160,000\end{array}$

Person F has least maximum allocated loss and hence is considered first.

Calculate the loss share of all the partners

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{F}=\$32,000\times 75\%\\ =\$24,000\\ \text{Loss}\text{share}\text{to person}\text{C}=\$32,000\times 25\%\\ =\$8,000\end{array}$

Calculate the ending capital balances of partners

Particulars	Person F	Person C
Beginning balance	$    24,000	$    40,000
Loss distribution	$  (24,000)	$     (8,000)
Ending capital balance	$             -	$    32,000

Table: (3)

Calculate the updated balances of partners after all loss adjustment

Particulars	Person F	Person W	Person C
Beginning balance	$  129,000	$    35,000	$   75,000
Assumed loss of $175,000	$ (105,000)	$   (35,000)	$ (35,000)
Updated balance	$    24,000	$              -	$   40,000
Assumed loss of $32,000	$  (24,000)		$   (8,000)
Updated balances	$             -	$              -	$   32,000

Table: (4)

Part B

To determine

Prepare a final statement of liquidation for the partnership using the predistribution plan to determine payments of cash to partners based on safe capital balances.

Explanation of Solution

Final statement of liquidation for the partnership using the predistribution plan to determine payments of cash to partners based on safe capital balances

Particulars	Person F	Person W	Person C	Cash	Non cash assets	Liabilities
Beginning balance	$  129,000	$    35,000	$   75,000	$     60,000	$  219,000	$  40,000
Distribute safe balances	$             -	$              -	$ (12,000)	$    (12,000)	$             -	$            -
Updated balances	$  129,000	$    35,000	$   63,000	$     48,000	$  219,000	$  40,000
Loss on the sale of non cash assets	$  (20,400)	$     (6,800)	$   (6,800)	$     60,000	$  (94,000)
Updated balances	$  108,600	$    28,200	$   56,200	$   108,000	$  125,000	$  40,000
Payment of liabilities				$    (40,000)		$ (40,000)
Updated balances	$  108,600	$    28,200	$   56,200	$     68,000	$  125,000	$            -
Distribute safe capital balances	$  (28,800)	$     (1,600)	$ (29,600)	$    (60,000)	$             -	$            -
Updated balances	$    79,800	$    26,600	$   26,600	$       8,000	$  125,000	$            -
Sale of non cash assets	$  (44,400)	$   (14,800)	$ (14,800)	$     51,000	$(125,000)
Updated balances	$    35,400	$    11,800	$   11,800	$     59,000	$             -	$            -
Liquidation expenses	$    (3,600)	$     (1,200)	$   (1,200)	$      (6,000)
Updated balances	$    31,800	$    10,600	$   10,600	$     53,000	$             -	$            -
Distribute remaining cash balance to partners	$  (31,800)	$   (10,600)	$ (10,600)	$    (53,000)
Closing balance	$             -	$              -	$            -	$               -	$             -	$            -

Table: (5)

Working note

Calculate safe balances according to pre distribution plan

Particulars	Person F	Person W	Person C	Cash	Non cash assets	Liabilities
Beginning balance	$  129,000	$    35,000	$   75,000	$     60,000	$  219,000	$              40,000
Liabilities				$    (40,000)		$            (40,000)
Liquidation expense	$    (4,800)	$     (1,600)	$   (1,600)	$      (8,000)
Loss on non cash assets	$(131,400)	$   (43,800)	$ (43,800)		$(219,000)
Potential balances	$    (7,200)	$   (10,400)	$   29,600	$     12,000	$             -	$                       -
Assume person F and Person W re insolvent	$      7,200	$    10,400	$ (17,600)
Safe balances	$             -	$              -	$   12,000	$     12,000	$              -	$                       -

Table: (6)

Calculate distribution of safe balances

Particulars	Person F	Person W	Person C	Cash	Non cash assets	Liabilities
Beginning balance	$  129,000	$    35,000	$   75,000	$     60,000	$  219,000	$              40,000
Distribute safe balances	$             -	$              -	$ (12,000)	$    (12,000)	$             -	$                       -
Updated balances	$  129,000	$    35,000	$   63,000	$     48,000	$  219,000	$              40,000

Table: (7)

Calculate the total negative balances to cover the deficit

$\begin{array}{c}\text{Negative}\text{balances}\text{of}\text{person}\text{F}\text{and}\text{person}\text{W}=\$7,200+\$10,400\\ =\$17,600\end{array}$

Calculate the amount of loss on the sale of non cash assets

$\begin{array}{c}\text{Loss}\text{on}\text{the}\text{sale}\text{of}\text{non}\text{cash}\text{assets}=\$94,000-\$60,000\\ =\$34,000\end{array}$

Calculate safe balances after the transaction

Particulars	Person F	Person W	Person C	Cash	Non cash assets	Liabilities
Beginning balance	$  129,000	$    35,000	$   75,000	$     60,000	$  219,000	$              40,000
Distribute safe balances	$             -	$              -	$ (12,000)	$    (12,000)	$             -	$                       -
Updated balances	$  129,000	$    35,000	$   63,000	$     48,000	$  219,000	$              40,000
Loss on the sale of non cash assets	$  (20,400)	$     (6,800)	$   (6,800)	$     60,000	$  (94,000)
Updated balances	$  108,600	$    28,200	$   56,200	$   108,000	$  125,000	$              40,000

Table: (8)

Calculate the balances after the payment of liabilities

Particulars	Person F	Person W	Person C	Cash	Non cash assets	Liabilities
Beginning balance	$  129,000	$    35,000	$   75,000	$     60,000	$  219,000	$  40,000
Distribute safe balances	$             -	$              -	$ (12,000)	$    (12,000)	$             -	$            -
Updated balances	$  129,000	$    35,000	$   63,000	$     48,000	$  219,000	$  40,000
Loss on the sale of non cash assets	$  (20,400)	$     (6,800)	$   (6,800)	$     60,000	$  (94,000)
Updated balances	$  108,600	$    28,200	$   56,200	$   108,000	$  125,000	$  40,000
Payment of liabilities				$    (40,000)		$ (40,000)
Updated balances	$  108,600	$    28,200	$   56,200	$     68,000	$  125,000	$            -

Table: (9)

Calculate the balance after the sale of non cash assets

Particulars	Person F	Person W	Person C	Cash	Non cash assets	Liabilities
Beginning balance	$  129,000	$    35,000	$   75,000	$     60,000	$  219,000	$  40,000
Distribute safe balances	$             -	$              -	$ (12,000)	$    (12,000)	$             -	$            -
Updated balances	$  129,000	$    35,000	$   63,000	$     48,000	$  219,000	$  40,000
Loss on the sale of non cash assets	$  (20,400)	$     (6,800)	$   (6,800)	$     60,000	$  (94,000)
Updated balances	$  108,600	$    28,200	$   56,200	$   108,000	$  125,000	$  40,000
Payment of liabilities				$    (40,000)		$ (40,000)
Updated balances	$  108,600	$    28,200	$   56,200	$     68,000	$  125,000	$            -
Distribute safe capital balances	$  (28,800)	$     (1,600)	$ (29,600)	$    (60,000)	$             -	$            -
Updated balances	$    79,800	$    26,600	$   26,600	$       8,000	$  125,000	$            -
Sale of non cash assets	$  (44,400)	$   (14,800)	$ (14,800)	$     51,000	$(125,000)
Updated balances	$    35,400	$    11,800	$   11,800	$     59,000	$              -	$            -

Table: (10)

Calculate the balance after the payment of liquidation expenses

Particulars	Person F	Person W	Person C	Cash	Non cash assets	Liabilities
Beginning balance	$  129,000	$    35,000	$   75,000	$     60,000	$  219,000	$  40,000
Distribute safe balances	$             -	$              -	$ (12,000)	$    (12,000)	$             -	$            -
Updated balances	$  129,000	$    35,000	$   63,000	$     48,000	$  219,000	$  40,000
Loss on the sale of non cash assets	$  (20,400)	$     (6,800)	$   (6,800)	$     60,000	$  (94,000)
Updated balances	$  108,600	$    28,200	$   56,200	$   108,000	$  125,000	$  40,000
Payment of liabilities				$    (40,000)		$ (40,000)
Updated balances	$  108,600	$    28,200	$   56,200	$     68,000	$  125,000	$            -
Distribute safe capital balances	$  (28,800)	$     (1,600)	$ (29,600)	$    (60,000)	$             -	$            -
Updated balances	$    79,800	$    26,600	$   26,600	$       8,000	$  125,000	$            -
Sale of non cash assets	$  (44,400)	$   (14,800)	$ (14,800)	$     51,000	$(125,000)
Updated balances	$    35,400	$    11,800	$   11,800	$     59,000	$              -	$            -
Liquidation expenses	$    (3,600)	$     (1,200)	$   (1,200)	$      (6,000)
Updated balances	$    31,800	$    10,600	$   10,600	$     53,000	$              -	$            -

Table: (11)

Part C

To determine

Prepare journal entries to record the liquidation transactions reflected in the final statement of liquidation.

Explanation of Solution

Journal entries to record the liquidation transactions reflected in the final statement of liquidation

Date	Accounts and Explanation	Post Ref.	Debit Amount	Credit Amount
	Person C's Capital		$         12,000
	Cash			$           12,000
	(To record the cash payments made according to predistribution plan)
	Cash		$         60,000
	Person F's Capital		$         20,400
	Person W's Capital		$           6,800
	Person C's Capital		$           6,800
	Non cash assets			$           94,000
	(To record non cash assets sold with losses allocated to partners)
	Liabilities		$         40,000
	Cash			$           40,000
	(To record the payment of liabilities)
	Person F's Capital		$         28,800
	Person W's Capital		$           1,600
	Person C's Capital		$         29,600
	Cash			$           60,000
	(To record cash payments to partners according to predistribution partners)
	Cash		$         51,000
	Person F's Capital		$         44,400
	Person W's Capital		$         14,800
	Person C's Capital		$         14,800
	Non cash assets			$         125,000
	(To record the sale of non cash assets allocated to partners)
	Person F's Capital		$           3,600
	Person W's Capital		$           1,200
	Person C's Capital		$           1,200
	Cash			$             6,000
	(To record the payment of liquidation expenses)
	Person F's Capital		$         31,800
	Person W's Capital		$         10,600
	Person C's Capital		$         10,600
	Cash			$           53,000
	(To record final cash payment to partners)

Table: (12)