Chapter 15, Problem 32P

Part A

To determine

Prepare a predistribution plan for the partnership.

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:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{for}\text{person}\text{W}=\frac{\$120,000}{30\%}\\ =\$120,000\times \frac{100}{30}\\ =\frac{\$12,000,000}{30}\\ =\$400,000\end{array}$

Now, calculate for other partners:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{for}\text{person}\text{N}=\frac{\$88,000}{10\%}\\ =\$88,000\times \frac{100}{10}\\ =\frac{\$8,800,000}{10}\\ =\$880,000\end{array}$

Now, calculate for other partners:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{for}\text{person}\text{R}=\frac{\$109,000}{20\%}\\ =\$109,000\times \frac{100}{20}\\ =\frac{\$10,900,000}{20}\\ =\$545,000\end{array}$

Now, calculate for other partners:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{for}\text{person}\text{G}=\frac{\$60,000}{40\%}\\ =\$60,000\times \frac{100}{40}\\ =\frac{\$6,000,000}{40}\\ =\$150,000\end{array}$

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

Calculate the loss share of all the partners:

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{W}=\$150,000\times 30\%\\ =\$45,000\\ \text{Loss}\text{share}\text{to}\text{person}\text{N}=\$150,000\times 10\%\\ =\$15,000\end{array}$

Now, calculate loss share for other partners:

$\begin{array}{c}\text{Loss}\text{share}\text{for}\text{person}\text{R}=\$150,000\times 20\%\\ =\$30,000\\ \text{Loss}\text{share}\text{for}\text{person}\text{G}=\$150,000\times 40\%\\ =\$60,000\end{array}$

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:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person W}=\frac{\$75,000}{\frac{3}{6}}\\ =\$75,000\times \frac{6}{3}\\ =\$150,000\end{array}$

Now, calculate for other partners:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{N}=\frac{\$73,000}{\frac{1}{6}}\\ =\$73,000\times 6\\ =\$438,000\end{array}$

Now, calculate for other partners:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person R}=\frac{\$79,000}{\frac{2}{6}}\\ =\$79,000\times \frac{6}{2}\\ =\frac{\$474,000}{2}\\ =\$237,000\end{array}$

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

Calculate the loss share of all the partners:

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{W}=\$150,000\times \frac{3}{6}\\ =\$75,000\\ \text{Loss}\text{share}\text{to person}\text{N}=\$150,000\times \frac{1}{6}\\ =\$25,000\end{array}$

Now, calculate loss share for other partners:

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{R}=\$150,000\times \frac{2}{6}\\ =\$50,000\end{array}$

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:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person N}=\frac{\$48,000}{\frac{1}{3}}\\ =\$48,000\times 3\\ =\$144,000\end{array}$

Now, calculate for other partners:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{R}=\frac{\$29,000}{\frac{2}{3}}\\ =\$29,000\times \frac{3}{2}\\ =\$43,500\end{array}$

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

Calculate the loss share for partners:

$\begin{array}{c}\text{Loss}\text{share}\text{for}\text{partner}\text{N}=\$43,500\times \frac{1}{3}\\ =\$14,500\\ \text{Loss}\text{share}\text{for}\text{partner}\text{R}=\$43,500\times \frac{2}{3}\\ =\$29,000\end{array}$

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.

To determine

Prepare journal entries to record the liquidation transactions.

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:

$\begin{array}{c}\text{Cash}\text{available}=\text{Beginning}\text{balance}+\text{A/R}\text{collected}+\text{Non}\text{cash}\text{assets}\text{sale}\\ =\$15,000+\$65,600+\$150,000\\ =\$230,600\end{array}$

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

$\begin{array}{c}\text{Cash}\text{available}=\text{Total}\text{cash}-\text{Liabilities}-\text{Liquidation}\text{expenses}\\ =\$230,600-\$74,000-\$16,000\\ =\$230,600-\$90,000\\ =\$140,600\end{array}$

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.