Fundamentals of Advanced Accounting
Fundamentals of Advanced Accounting
7th Edition
ISBN: 9781259722639
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
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Chapter 10, Problem 32P

Part A

To determine

Prepare a predistribution plan for the partnership.

Part A

Expert Solution
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Explanation of Solution

Predistribution plan for the partnership:

Predistribution plan
   
Available CashAmountReceipient
First $   90,000The firm pays all its liabilities and liquidation expenses of $90,000
Next $   33,500The firm pays $33,500 to person N
Next $   43,500The firm pays $43,500 distributed between person N and person R in the ratio of 1:2
Next $ 150,000The 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:

MaximumallocatedlossforpersonW=$120,00030%=$120,000×10030=$12,000,00030=$400,000

Now, calculate for other partners:

MaximumallocatedlossforpersonN=$88,00010%=$88,000×10010=$8,800,00010=$880,000

Now, calculate for other partners:

MaximumallocatedlossforpersonR=$109,00020%=$109,000×10020=$10,900,00020=$545,000

Now, calculate for other partners:

MaximumallocatedlossforpersonG=$60,00040%=$60,000×10040=$6,000,00040=$150,000

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

Calculate the loss share of all the partners:

LosssharetopersonW=$150,000×30%=$45,000LosssharetopersonN=$150,000×10%=$15,000

Now, calculate loss share for other partners:

LossshareforpersonR=$150,000×20%=$30,000LossshareforpersonG=$150,000×40%=$60,000

Calculate the ending capital balances of partners:

ParticularsPerson WPerson NPerson RPerson 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:

Maximumallocatedlosstoperson W=$75,00036=$75,000×63=$150,000

Now, calculate for other partners:

MaximumallocatedlosstopersonN=$73,00016=$73,000×6=$438,000

Now, calculate for other partners:

Maximumallocatedlosstoperson R=$79,00026=$79,000×62=$474,0002=$237,000

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

Calculate the loss share of all the partners:

LosssharetopersonW=$150,000×36=$75,000Lossshareto personN=$150,000×16=$25,000

Now, calculate loss share for other partners:

LosssharetopersonR=$150,000×26=$50,000

Calculate the ending capital balances of partners:

ParticularsPerson WPerson NPerson 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:

Maximumallocatedlosstoperson N=$48,00013=$48,000×3=$144,000

Now, calculate for other partners:

MaximumallocatedlosstopersonR=$29,00023=$29,000×32=$43,500

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

Calculate the loss share for partners:

LossshareforpartnerN=$43,500×13=$14,500LossshareforpartnerR=$43,500×23=$29,000

Calculate the ending capital balances of partners:

ParticularsPerson NPerson 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:

ParticularsPerson WPerson NPerson RPerson 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.

To determine

Prepare journal entries to record the liquidation transactions.

b.

Expert Solution
Check Mark

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 
  Accounts receivable           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:

Cashavailable=Beginningbalance+A/Rcollected+Noncashassetssale=$15,000+$65,600+$150,000=$230,600

Calculate the cash available after the payment of liabilities and liquidation expenses:

Cashavailable=TotalcashLiabilitiesLiquidationexpenses=$230,600$74,000$16,000=$230,600$90,000=$140,600

The amount of safe balances is calculated on the basis of the predistribution plan

ParticularsPerson WPerson NPerson RPerson GCash
      
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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