Solution Manual/ Answer key. Chapter 14 Partnership Liquidation by Zeus Millan PDF

Preview

Summary

The Solution Manual or Answer key to the book of Zeus Vernon B. Millan in Financial Accounting and Reporting (fundamentals) Chapter 14...

Description

Page |1

Chapter 14 Partnership Liquidation PROBLEM 1: TRUE OR FALSE 1. FALSE – (9 – 2 liabilities = 7 cash available to partners) 2. TRUE (9 cash – 2 liabilities = 7 cash available to partners; 7 ÷ 2 = 3.5 each 3. TRUE – (18 cash – 8 liabilities = 10 cash available to partners) 4. TRUE – 7 capital balance less 1 share in loss = 6 5. TRUE – 5 capital balance less 1 share in loss = 4

PROBLEM 2: FOR CLASSROOM DISCUSSION 1. Solution: Step 1: Compute for the gain or loss on the sale a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Liquidation expenses Net cash proceeds Less: Carrying amount of non-cash assets

130,000 200,000 590,000 (5,000) 915,000

(150K Accounts receivable+ 300K Inventory + 750K Equipment)

Total loss on sale

(1,200,000) (285,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset)

Capital balances Payable to A (right of offset) Total Allocation of loss

A (40%)

B (40%)

C (20%)

400,000 50,000 450,000

450,000

250,000 1,100,000 50,000 250,000 1,150,000

(114,000) Amts. received by the partners 336,000 [285K x (40%; 40% & 20%)]

450,000

(114,000) (57,000) 336,000 193,000

Totals

(285,000) 865,000

Page |2

2. Solution: Step 1: Compute for the gain or loss a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Actual liquidation expenses e) Estimated liquidation expenses f) Cash retained for future expenses Net cash proceeds Less: Carrying amount of all non-cash assets

60,000 40,000 220,000 (2,000) (3,000) (10,000) 305,000

(150K Accounts receivable+ 300K Inventory + 750K Equipment)

Total loss

(1,200,000) (895,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset)

Capital balances Payable to A (right of offset) Total Allocation of loss [895K x (40%; 40% & 20%)] Amts. received by the partners

A (40%) 400,000 50,000 450,000 (358,000) 92,000

B (40%) 450,000 450,000

C (20%) Totals 250,000 1,100,000 50,000 250,000 1,150,000

(358,000) (179,000) (895,000) 92,000 71,000 255,000

Page |3 3. Solution: Step 1: Compute for the gain or loss a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Actual liquidation expenses e) Estimated liquidation expenses f) Cash retained for future expenses Net cash proceeds Less: Carrying amount of all non-cash assets

20,000 10,000 50,000 (2,000) (3,000) (10,000) 65,000

(150K Accounts receivable+ 300K Inventory + 750K Equipment)

Total loss

(1,200,000) (1,135,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset) A (40%)

B (40%)

C (20%)

Capital balances Payable to A (right of offset) Total Allocation of loss

400,000 50,000 450,000

450,000

250,000 1,100,000 50,000 250,000 1,150,000

[1.135M x (40%; 40% & 20%)]

(454,000) (4,000)

Totals Additional investments by solvent partners Amts. received by the partners

4,000 -

450,000

Totals

(454,000) (227,000) (1,135,000) (4,000) 23,000 15,000 4,000 -

23,000

8,000 23,000

Page |4

4. Solution: Step 1: Compute for the gain or loss a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Actual liquidation expenses e) Estimated liquidation expenses f) Cash retained for future expenses Net cash proceeds Less: Carrying amount of all non-cash assets

20,000 10,000 50,000 (2,000) (3,000) (10,000) 65,000

(150K Accounts receivable+ 300K Inventory + 750K Equipment)

Total loss

(1,200,000) (1,135,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset) A (40%)

B (40%)

C (20%)

Capital balances Payable to A (right of offset) Total Allocation of loss

400,000 50,000 450,000

450,000

250,000 1,100,000 50,000 250,000 1,150,000

[1.135M x (40%; 40% & 20%)]

(454,000) (4,000)

Totals Allocation of capital deficiency to solvent partner Amts. received by the partners

4,000 -

450,000

Totals

(454,000) (227,000) (1,135,000) (4,000) 23,000 15,000 4,000 -

(8,000) 15,000

15,000

Page |5 5. Solution: Step 1: Determine the MLAC and Rankings

Capital balances Payable to A (right of offset) Total Divide by: P/L ratios

MLAC

A (40%)

B (40%)

C (20%)

400,000 50,000 450,000 40% 1,125,000

450,000

250,000

450,000 40% 1,125,000

250,000 20% 1,250,000

2nd

2nd

1st

Rankings Step 2: Equalize the MLAC Rank of payment Maximum loss absorption capacity Difference between 1st and 2nd Equal balance of MLAC

A (40%) 2nd 1,125,000 1,125,000

B (40%) C (20%) 2nd 1st 1,125,000 1,250,000 (125,000) 1,125,000 1,125,000

Step 3: Cash priority program Cash priority program A (40%) Rank of payment 2nd 1st priority (125,000 x 20%) Totals -

B (40%) 2nd -

C (20%) 1st 25,000 25,000

Page |6 6. Solution: a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Actual liquidation expenses e) Estimated liquidation expenses f) Cash retained for future expenses Net cash proceeds Add: Cash, beg. Less: Accounts payable Cash available for distribution to partners A (40%) Available cash Allocation: 1st priority Balance Payment after priority [230K x (40%; 40% & 20%)] 1st installment payment

92,00 92,000

B (40%)

92,000 92,000

60,000 40,000 220,000 (2,000) (3,000) (10,000) 305,000 50,000 (100,000) 255,000 C (20%)

Total 255,000

25,000

(25,000) 230,000

46,000 71,000

(230,000) -

Page |7 PROBLEM 3: COMPUTATIONS 1. Solution: Step 1: Compute for the gain or loss on the sale a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Liquidation expenses Net cash proceeds Less: Carrying amount of non-cash assets

130,000 200,000 590,000 (5,000) 915,000

(200K Accounts receivable+ 300K Inventory + 800K Equipment)

Total loss on sale

(1,300,000) (385,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset)

Capital balances Payable to A (right of offset) Total Allocation of loss [385K x (50%; 40% & 10%)] Amts. received by the partners

A (50%)

B (40%)

C (10%)

600,000 50,000 650,000

420,000

170,000 1,190,000 50,000 170,000 1,240,000

(192,500) 457,500

420,000

(154,000) (38,500) 266,000 131,500

Totals

(385,000) 855,000

Page |8 2. Solution: Step 1: Compute for the gain or loss a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Actual liquidation expenses e) Estimated liquidation expenses f) Cash retained for future expenses Net cash proceeds Less: Carrying amount of all non-cash assets

60,000 40,000 220,000 (2,000) (3,000) (10,000) 305,000

(200K Accounts receivable+ 300K Inventory + 800K Equipment)

Total loss

(1,300,000) (995,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset)

Capital balances Payable to A (right of offset) Total Allocation of loss [995K x (50%; 40% & 10%)] Amts. received by the partners

A (50%)

B (40%)

C (10%)

600,000 50,000 650,000

420,000

170,000 1,190,000 50,000 170,000 1,240,000

(497,500) 152,500

420,000

(398,000) (99,500) 22,000 70,500

Totals

(995,000) 245,000

Page |9 3. Solution: Step 1: Compute for the gain or loss a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Actual liquidation expenses e) Estimated liquidation expenses f) Cash retained for future expenses Net cash proceeds Less: Carrying amount of all non-cash assets

40,000 70,000 130,000 (2,000) (3,000) (10,000) 225,000

(200K Accounts receivable+ 300K Inventory + 800K Equipment)

Total loss

(1,300,000) (1,075,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset) A (50%)

B (40%)

C (10%)

Capital balances Payable to A (right of offset) Total Allocation of loss

600,000 50,000 650,000

420,000

170,000 1,190,000 50,000 170,000 1,240,000

[1.075M x (50%; 40% & 10%)]

(537,500) (430,000) (107,500) (1,075,000) 112,500 (10,000) 62,500 165,000

Total Additional investment by solvent partner Amts. received by the partners

112,500

420,000

10,000 -

62,500

Totals

10,000 175,000

P a g e | 10 4. Solution: Step 1: Compute for the gain or loss a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Actual liquidation expenses e) Estimated liquidation expenses f) Cash retained for future expenses Net cash proceeds Less: Carrying amount of all non-cash assets

40,000 70,000 130,000 (2,000) (3,000) (10,000) 225,000

(200K Accounts receivable+ 300K Inventory + 800K Equipment)

Total loss

(1,300,000) (1,075,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset) A (50%)

B (40%)

C (10%)

Capital balances Payable to A (right of offset) Total Allocation of loss

600,000 50,000 650,000

420,000

170,000 1,190,000 50,000 170,000 1,240,000

[1.075M x (50%; 40% & 10%)]

Total

(537,500) (430,000) (107,500) (1,075,000) 112,500 (10,000) 62,500 165,000

Allocation of capital deficiency to solvent partners*

(8,333)

10,000

Amts. received by the partners

104,167

-

420,000

* (10,000 x 50%/60%) = 8,333; (10,000 x 10%/60%) = 1,667

(1,667) 60,833

Totals

165,000

P a g e | 11 5. Solution: Step 1: Determine the MLAC and Rankings

Capital balances Payable to A (right of offset) Total Divide by: P/L ratios

MLAC

A (50%)

B (40%)

C (10%)

600,000 50,000 650,000 50% 1,300,000

420,000

170,000

Rankings

2nd

420,000 40% 1,050,000 3rd

170,000 10% 1,700,000 1st

Step 2: Equalize the MLAC Rank of payment Maximum loss absorption capacity Difference between 1st and 2nd Total Difference between 1st, 2nd, & 3 rd Equal balance of MLAC

A (50%) 2nd 1,300,000 1,300,000 (250,000) 1,050,000

B (40%) C (10%) 3rd 1st 1,050,000 1,700,000 (400,000) 1,050,000 1,300,000 (250,000) 1,050,000 1,050,000

Step 3: Cash priority program Cash priority program A (50%) Rank of payment 2nd 1st priority (400,000 x 10%) 2nd priority (250,000 x 50% & 10%) 125,000 Totals 125,000

B (40%) 3rd

-

C (10%) 1st 40,000 25,000 65,000

P a g e | 12 6. Solution: a) Collection on accounts receivable b) Sale of inventory c) Sale of equipment d) Actual liquidation expenses e) Estimated liquidation expenses f) Cash retained for future expenses Net cash proceeds Add: Cash, beg. Less: Accounts payable Cash available for distribution to partners

A (50%) Available cash Allocation: 1st priority Balance 2nd priority Balance Payment after priority [55K x (50%; 40% & 10%)] 1st installment payment

B (40%)

60,000 40,000 220,000 (2,000) (3,000) (10,000) 305,000 40,000 (100,000) 245,000

C (10%)

40,000 125,000

27,500 152,500

25,000

22,000 22,000

5,500 70,500

Total 245,000 (40,000) 205,000 (150,000) 55,000 (55,000) -

P a g e | 13 PROBLEM 4: MULTIPLE CHOICE 1. B Solution: Step 1: Compute for the gain or loss Net cash proceeds Less: Carrying amount of all assets Total loss

90,000 (100,000) (10,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset)

Capital balances Allocation of loss [10K x (50%& 50%)] Amts. received by the partners

A (50%) 40,000

B (50%) 40,000

Totals 80,000

(5,000) 35,000

(5,000) 35,000

(10,000) 70,000

2. B Solution: Step 1: Compute for the gain or loss Net cash proceeds Less: Carrying amount of all assets Total loss

180,000 (200,000) (20,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset) A (50%)

B (50%)

Capital balances Allocation of loss

70,000

50,000

[20K x (50%& 50%)]

(10,000) 60,000

(10,000) 40,000

Amts. received by the partners

Totals 120,000 (20,000) 100,000

P a g e | 14 3. C Solution: Sale of noncash assets Liquidation expenses Net cash proceeds Less: Carrying amount of non-cash assets Total loss on sale

Capital balances Payable to A (right of offset) Total Allocation of loss [285K x (40%; 40% & 20%)] Amts. received by the partners

920,000 (5,000) 915,000 (1,200,000) (285,000)

A (40%)

B (40%)

C (20%)

400,000 50,000 450,000

450,000

250,000 1,100,000 50,000 250,000 1,150,000

(114,000) 336,000

450,000

(114,000) (57,000) 336,000 193,000

Totals

(285,000) 865,000

4. D Solution: Net cash proceeds (370,000 – 2,000) Less: Carrying amount of non-cash assets Total loss on sale

Capital balances Allocation of loss [112K x (20%; 30% & 50%)] Amts. received by the partners

368,000 (480,000) (112,000)

A (20%) 100,000

B (30%) 170,000

C (50%) 200,000

Totals 470,000

(22,400) 77,600

(33,600) (56,000) 136,400 144,000

(112,000) 358,000

5. C Solution: Cash 160,000

Assets Noncash 980,000*

Liabilities 90,000

A (20%) 200,000

Equity B (30%) 370,000

* (90,000 + 200,000 + 370,000 + 480,000 – 160,000) = 980,000

C (50%) 480,000

P a g e | 15

6. D Solution: Net cash proceeds (870,000 – 12,000) Less: Carrying amount of non-cash assets Total loss on sale

858,000 (980,000) (122,000)

7. A Solution:

Capital balances Allocation of loss [122K x (20%; 30% & 50%)] Amts. received by the partners

A (20%) 200,000

B (30%) 370,000

C (50%) Totals 480,000 1,050,000

(24,400) 175,600

(36,600) (61,000) 333,400 419,000

(122,000) 928,000

8. D Solution: Net cash proceeds (70,000 – 8,000) Less: Carrying amount of non-cash assets Total loss on sale

Capital balances Allocation of loss [418K x (20%; 30% & 50%)]

Total Allocation to solvent partners* Amts. received by the partners

A (20%) 100,000

B (30%) 170,000

62,000 (480,000) (418,000) C (50%) 200,000

Totals 470,000

(83,600) (125,400) (209,000) (418,000) 16,400 44,600 (9,000) 52,000 (3,600) 12,800

* (9,000 x 2/5 = 3,600); (9,000 x 3/5 = 5,400)

(5,400) 39,200

9,000 -

52,000

P a g e | 16 9. D Solution: Step 1: Determine the MLAC and Rankings

Capital balances Payable to A (right of offset) Total Divide by: P/L ratios

MLAC

A (50%) 540,000 50,000 590,000 50% 1,180,000

Rankings

2nd

B (30%) 360,000

C (20%) 200,000

360,000 30% 1,200,000

200,000 20% 1,000,000

1st

3rd

Step 2: Equalize the MLAC Rank of payment Maximum loss absorption capacity Difference between 1st and 2nd Total Difference between 1st, 2nd, & 3 rd Equal balance of MLAC

A (50%) 2nd 1,180,000 1,180,000 (180,000) 1,000,000

B (30%) C (20%) 1st 3rd 1,200,000 1,000,000 (20,000) 1,180,000 1,000,000 (180,000) 1,000,000 1,000,000

Step 3: Cash priority program Cash priority program A (50%) Rank of payment 2nd 1st priority (20,000 x 30%) 2nd priority (180,000 x 50% & 30%) 90,000 Totals 125,000

B (30%) 1st 6,000 54,000 60,000

C (20%) 3rd

-

P a g e | 17 10. A Solution:

Net cash proceeds (920,000 – 5,000) Add: Cash, beg. Less: Accounts payable Cash available for distribution to partners

A (50%) Available cash Allocation: 1st priority Balance 2nd priority Balance Payment after priority [715K x (50%; 30% & 20%)] 1st installment payment

B (30%)

915,000 50,000 (100,000) 865,000

C (20%)

6,000 90,000

357,500 447,500

54,000

214,500 143,000 274,500 143,000

Total 865,000 (6,000) 859,000 (144,000) 715,000 (715,000) -

PROBLEM 5: CLASSROOM ACTIVITY The students grade themselves and then submit the results to the teacher for recording....