Solution manual Fundamentals of Accounting by Cabrera Chapter 06 SM PDF

Preview

Summary

Download Solution manual Fundamentals of Accounting by Cabrera Chapter 06 SM PDF

Description

Chapter 6 Accounting for Partnership Termination of Operations Review Questions 1. The three steps in liquidating a partnership are (1) selling the assets of the entity, (2) paying its liabilities, and (3) disbursing any remaining cash to the partners. 2. J & E share (a) gains and losses on the sale of noncash assets based on their profit-and-loss ratio and (b) the final cash distribution based on their capital balances. 3. In addition to considering remaining assets worthless, the schedule of safe payments further must reduce capital balances by any additional estimated disposition costs. 4. The right of offset allows partners to treat any loan to the partnership as a contribution to capital if the partner’s capital account becomes deficient. The significance of this right is that the two amounts are summed to determine the amount of interim distributions that are allocable to the partner during liquidation. Payments are first applied, however, against the loan balance. 5. Dissolution of a partnership terminates the partnership as a legal entity, but the partnership business may continue under a new agreement. When a partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity. Thus, a partnership may be dissolved without liquidation, but it may not be liquidated without dissolution. 6. A simple partnership liquidation is the liquidation of a solvent partnership in which all partners have equity capital and all gains and losses are realized and recognized before any distributions are made to the partners. In simple partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances. 7. The distribution of assets for capital interests prior to the payment of loan balances to the partners is not in accordance with Partnership Act. But the partners may agree to distribute cash or other assets for capital interests

2

Chapter 6

before all losses on liquidation are known. With agreement among all partners, distributions to the partners would be based on each partner’s equity (combined capital and loan balances) in relation to his share of possible future losses. A partner with sufficient equity to absorb his share of possible future losses would be included in distributions, but a partner with loans to the partnership would not be included in distributions until his equity is sufficient to absorb his share of possible future losses. 8. A statement of partnership liquidation is a summary of transactions and balances for a partnership during its liquidation stage. Such statements provide continuous records of liquidation events. Interim liquidation statements are particularly helpful in showing the progress that has been made toward liquidation to date and in identifying remaining assets to be liquidated and liabilities to be paid. Interim liquidation statements are helpful to partners and creditors in providing a basis for current decisions as well as future planning. Liquidation statements are important legal documents for partnership liquidations that come under the jurisdiction of a court. 9. Available cash may be distributed to partners according to their profit and loss sharing ratios only when nonpartner liabilities have been satisfied and partner equities (capital and loan balances combined) are aligned with the relative profit and loss sharing ratios of the partners. In the absence of loans or advances payable to or receivables from individual partners, cash can be distributed to partners in their profit and loss sharing ratios when capital balances are in the relative profit and loss sharing ratios of the partners and all nonpartner liabilities have been paid. 10. Partnership insolvency occurs when partnership liabilities exceed partnership assets. In this case, all available cash is distributed to partnership creditors. Individual partners will be called upon to use their personal assets to satisfy the remaining claims of the partnership creditors. 11. Partners with credit capital balances after all partnership assets have been distributed in liquidation have a claim against partners with debit capital balances. If the partners with debit balances are personally solvent, they should pay amounts equal to their partnership claims in full. If partners with debit capital balances are insolvent, the partners with credit balances will absorb the losses of the insolvent partners with debit capital balances in relation to their relative profit and loss sharing ratios.

Accounting for Partnership Termination of Operations

Exercises Exercise 1 Schedule of Capital Balances

Capital balances January 1, 2007 January losses: Lumber Receivables Capital balances before distribution

P15,000 4,000

Cash distribution: Accounts payable Black White Total cash

60% Black P40,000 (9,000) (2,400) P28,600

40% White P20,000 (6,000) (1,600) P12,400

P15,000 28,600 12,400 P56,000

Exercise 2 Sale of inventory Cash Inventory To record sale of inventory items.

P10,000 P10,000

Distribution of cash Accounts payable Cash To record payment to creditors.

P5,000 P5,000

Blue, capital P12,600 Pink, capital 6,200 Yellow, capital 25,200 Cash P44,000 To record distribution of available cash to partners computed as follows:

3

4

Chapter 6

Blue capital Pink capital Yellow capital Totals

Possible Loss from Unsold Inventory P2,400 1,800 1,800 P6,000

Capital Balance P15,000 8,000 27,000 P50,000

Balance P12,600 6,200 25,200 P25,200

Exercise 3

January 2 balances Contingency fund of P10,000 Possible losses on asset disposal (P120,000) Loss on Violet’s possible default divided 3/7 and 4/7 Available cash is distributed

30% Teal P 85,000 (3,000)

30% Violet 40% Magenta P 25,000 P 90,000 (3,000) (4,000)

(36,000) 46,000

(36,000) (14,000)

(48,000) 38,000

(6,000) P 40,000

P

14,000 0

(8,000) P 30,000

Exercise 4

Beginning balances Offset Orange’s loan Loss on sale of assets (P180,000 – P120,000) Additional liability Distribute Orange’s debit balance, 5/7, 2/7 Cash distribution

Creditors P60,000

50% Carnation P59,000

30% Orange P29,000 (20,000)

20% Mocha P52,000

5,000 65,000

(30,000) (2,500) 26,500

(18,000) (1,500) (10,500)

(12,000) (1,000) (1,000)

P65,000

(7,500) P19,000

10,500 0

(3,000) P36,000

Orange owes P7,500 to Carnation and P3,000 to Mocha.

Accounting for Partnership Termination of Operations

5

Exercise 5 Schedule to Correct Capital Accounts

December 31, 2008 Overvalued inventory Corrected balances

P10,000

Red Capital P40,000 (5,000) P35,000

Green Capital P35,000 (3,000) P32,000

Gray Capital P25,000 (2,000) P23,000

The capital balances are adjusted for the error in computing net income in the partners’ residual equity ratios. Exercise 6 Requirement (1) Value of total investment 1/5 (P250,000 + X) P50,000 + 1/5X P50,000 P62,500

= = = = =

X X X 4/5 X X

Requirement (2) (a) Investment recorded as bonus: Cash Lime, Capital Moss, Capital Neon, Capital Green, Capital

88,000 10,200 7,650 2,550 67,600 *

* (P88,000 – P62,500) x 1/5 = P5,100; P62,500 + P5,100 = P67,600

(b) Investment recorded as goodwill: Cash Goodwill Lime, Capital Moss, Capital Neon, Capital Green, Capital

88,000 102,000 51,000 38,250 12,750 88,000

6

Chapter 6

Requirement (3) Lump sum liquidation schedule:

Beginning balances Sale of assets Balances Cash distributions Ending balances

Assets Cash Noncash P 45,000 P297,000 249,000 (297,000) P294,000 -0(294,000) – -0-0-

Liabilities P92,000 P92,000 (92,000) -0-

Partners’ Capital Accounts Lime Moss Neon P160,000 P 65,000 P 25,000 (24,000) (18,000) (6,000) P136,000 P 47,000 P 19,000 (136,000) (47,000) (19,000) -0-0-0-

Exercise 7

Beginning balances Capital and loan balance Allocation of expected liquidation expenses Balances Maximum loss absorbed (MLA) Amount needed to reduce highestranked MLA to next higher MLA New MLA Reduction in capital needed to achieve reduction in MLA New capital balances

Predistribution Plan Capital Balances Fuchsia Plum Aqua 30% 30% 40%

Maximum Loss Absorbable Fuchsia Plum Aqua – – –

P33,000

P33,000

P24,000

–

–

–

(3,000) P30,000

(3,000) P30,000

(4,000) P24,000

– –

– –

– –

–

–

–

P100,000

P100,000

P100,000

– –

– –

– –

(50,000) P 50,000

(50,000) P 50,000

– P 50,000

Fuchsia

Plum

Aqua

50% 30%

50% 30%

40%

(15,000) P15,000

(15,000) P15,000

– P20,000

All above transactions should be profit and loss ratios. Payable to

Level I II III IV

Amount First P20,000 Next P10,000 Next P30,000 Any additional payments

Liabilities P20,000

Estimated Liquidation Expenses P10,000

Accounting for Partnership Termination of Operations

7

Exercise 8 Part a. Square gets P21,000, Circle gets P12,000, and Triangle gets P2,000. Square Circle Triangle Reported balances .......................................... P25,000 P15,000 P5,000 Loss on sale of land (P10,000) split on a 4:3:3 basis ......................................... (4,000) (3,000) (3,000) Cash distribution ............................................ P21,000 P12,000 P2,000 Part b. Square gets P16,429 and Circle gets P8,571 Square Circle Triangle Reported balances ........................................... P25,000 P15,000 P5,000 Loss on sale of land (P20,000) split on a 4:3:3 basis ............................................... (8,000) (6,000) (6,000) Adjusted balances ........................................... P17,000 P 9,000 P(1,000) Potential loss from Triangle's deficit (split 4:3) ... (571) (429) 1,000 Cash distribution ............................................. P16,429 P 8,571 P -0Part c. Square gets P10,714 and Circle gets P4,286 Square Circle Triangle Reported balances ........................................... P25,000 P15,000 P5,000 Loss on sale of land (P30,000) split on a 4:3:3 basis ............................................... (12,000) (9,000) (9,000) Adjusted balances ........................................... P13,000 P 6,000 P(4,000) Potential loss from Triangle's deficit (split 4:3) ... (2,286) (1,714) 4,000 Cash distribution ............................................. P10,714 P 4,286 P -0Exercise 9 The entire P20,000 goes to Faith. Reported balances Capital contribution Adjusted balances Potential loss from Love and Joy (P60,000) split on a 4:3 basis Adjusted balances Potential loss from Hope (P5,714) Cash distribution

Faith P60,000 -0P60,000

Hope P20,000 -0P20,000

Love P(30,000) -0P(30,000)

(34,286) P25,714

(25,714) P(5,714)

P

(5,714) P20,000

P

5,714 -0-

P

Joy P(50,000) 20,000 P(30,000)

30,000 -0-

P

30,000 -0-

-0-0-

P

-0-0-

8

Chapter 6

Multiple Choice Questions 1. C 2. A 3. D 4. B 5. B

Sunshine, Capital

Reported balances Potential loss from Sunset deficit (split 5/8:3/8) Cash distributions

Sunrise, Capital

Sunset, Capital

P19,000

P18,000

P(12,000)

(7,500) P11,500

(4,500) P13,500

12,000 -0-

6. B Reported balances Loss on sale of assets (P110,000) split on a 4:3:2:1 basis Adjusted balances Potential loss from Dennard deficit (split 4:3:1) Minimum cash distributions

Lualm

Michelle

Snowie

Jovie

P50,000

P56,000

P14,000

P80,000

(44,000) P 6,000

(33,000) P23,000

(22,000) (11,000) P(8,000) P69,000

(4,000) P2,000

(3,000) P20,000

8,000 P -0-

(1,000) P68,000

7. C A predistribution plan should be created. Maximum Losses That Can Be Absorbed JC PJ Tin Bers

P59,000/40% P39,000/30% P34,000/10% P34,000/20%

P147,500 130,000 (most vulnerable to losses) 340,000 170,000

The assumption is made that a P130,000 loss occurs.

Accounting for Partnership Termination of Operations

JC Reported balances .................................. P59,000 Assumed loss (P130,000) split on a 4:3:1:2 basis .................................. (52,000 ) Adjusted balances ................................... P 7,000 Maximum Losses That Can Now Be Absorbed JC P7,000/4/7 P12,250 Tin P21,000/1/7 147,000 Bers P8,000/2/7 28,000

9

PJ P39,000

Tin P34,000

Bers P34,000

(39,000) P -0-

(13,000) P21,000

(26,000) P 8,000

(most vulnerable to losses)

JC Reported balances .................................... P7,000 Assumed loss (P12,250) split on a 4:1:2 basis .......................................... (7,000) Adjusted balances P -0Maximum Losses That Can Now Be Absorbed Tin P19,250/1/3 P57,750 Bers P4,500/2/3 6,750

Tin

Bers

P21,000

P8,000

(1,750) P19,250

(3,500) P4,500

(most vulnerable to losses)

The assumption is made that a P6,750 loss occurs.

Reported balances ............................................. Assumed loss (P6,750) split on a 1:2 basis ...... Adjusted balances ............................................

Tin P19,250 (2,250) P17,000

Bers P4,500 (4,500) P -0-

8. C To work this problem, a predistribution schedule is necessary. That schedule, which is computed below, is as follows: —First P3,000 goes to Ayen —Next P15,000 goes to Ayen (2/3) and Det (1/3) —Next P42,000 goes to Tins (4/7), Ayen (2/7), and Det (1/7) —All remaining cash goes to Tins (4/10), Bert (3/10), Ayen (2/10), and Det (1/10)

10

Chapter 6

Beginning balances Assumed loss of P90,000 (see Schedule 1)(4:3:2:1) Step one balances Assumed loss of P42,000 (see Schedule 2) (allocated on a 4:0:2:1 basis) Step two balances Assumed loss of P15,000 (see Schedule 3) (allocated on a 0:0:2:1 basis) Step three balances

Tins P60,000

Bert P27,000

Ayen P43,000

Det P20,000

(36,000) P24,000

(27,000) P -0-

(18,000) P25,000

(9,000) P11,000

(24,000) P -0-

P -0P -0-

(12,000) P13,000

(6,000) P 5,000

-0P -0-

-0P -0-

(10,000) P 3,000

(5,000) P -0-

Schedule 1

Partner Tins Bert Ayen Det

Capital Balance/ Loss Allocation P60,000/40% P150,000 P27,000/30% P 90,000 P43,000/20% P215,000 P20,000/10% P200,000

Maximum Loss That Can Be Absorbed (most vulnerable)

Schedule 2

Partner Tins Ayen Det

Capital Balance/ Loss Allocation P24,000/(4/7) P 42,000 P25,000/(2/7) P 87,500 P11,000/(1/7) P 77,000

Maximum Loss That Can Be Absorbed (most vulnerable)

Schedule 3

Partner Ayen Det

Capital Balance/ Loss Allocation P13,000/(2/3) P 19,500 P 5,000/(1/3) P 15,000

Maximum Loss That Can Be Absorbed (most vulnerable)

9. C The P16,000 available cash can be distributed but should be done under the assumption that all deficit balances will be total losses. After offsetting Jack’ loan, the two deficits total P4,000. Hansel and Gretel, the two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a 60%:40% ratio). Hansel would absorb P2,400 of the potential loss with Gretel being allocated P1,600. The remaining capital balances (P10,600 and P5,400) are safe capital balances and those amounts can be immediately distributed.

Accounting for Partnership Termination of Operations

11

Test Materials Test Material 6-1 A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

B

C D Good, Better, and Best Sale of Noncash Assets (For P145,000)

E

F

Noncash Good Better Best Assets Capital Capital Capital Cash Liabilities -----------------------------------------------------------------------------------------------------------------------------P 6,000 P126,000 P77,000 P12,000 P37,000 P6,000 145,000 (126,000) 4,750 10,450 3,800 ---------------------------------------------------------P151,000 P 0 P77,000 P16,750 P47,450 P9,800 ======= ====== ====== ====== ====== ===== (For P95,000)

Noncash Good Better Best Cash Liabilities Assets Capital Capital Capital -----------------------------------------------------------------------------------------------------------------------------P 6,000 P126,000 P77,000 P12,000 P37,000 P 6,000 95,000 (126,000) (7,750) (17,050) (6,200) ---------------------------------------------------------P4,250 P19,950 P (200) P101,000 P 0 P77,000 ======= ======= ====== ====== ====== ======

Two ways the partners can deal with Best’s capital deficiency include: 1. Best may contribute assets of P200 to the partnership to erase the deficiency. 2. Good and Better can absorb Best’s deficiency in proportion to their remaining profit-sharing percentages: Good, 25/80; Better, 55/80.

12

Chapter 6

Test Material 6-2 Requirement 1 (a) Single, Double, and Triple Summary of Liquidation Transactions Noncash Assets

Liabilities

P 27,000

P202,000

P131,000

212,000 239,000 (131,000) 108,000

(202,000) -0-

Cash Balances before sale of assets Sales of assets and sharing of gain Balances Payment of liabilities Balances Disbursement of cash to partners Balances

-0-

(108,000) P -0-

P

-0-

Single 10% P21,000 1,000* 22,000

131,000 (131,000) -0-

P

-0-

Double 30% P39,000

Triple 60% P38,000

3,000* 42,000

6,000* 44,000

22,000

42,000

(44,000)

(22,000) P -0-

(42,000) P -0-

(44,000) P -0-

Double 30%

Triple 60%

________________ * Allocation of gain to partners: Gain: P212,000 – P202,000 Single: P 10,000 x 0.10 Double: P 10,000 x 0.30 Triple: P 10,000 x 0.60

= = = =

P10,000 P 1,000 P 3,000 P 6,000

Requirement 1 (b) Single, Double, and Triple Summary of Liquidation Transactions Noncash Assets

Liabilities

P 27,000

P202,000

P131,000

182,000 209,000 (131,000) 78,000

(202,000) -0-

Cash Balances before sale of assets Sales of assets and sharing of gain ...