Chapter 5

Problem I
1.
A, B, C and D Partnership
Statement of Liquidation
January 1, 20x4 to May 31, 20x4
Non- A, B, C, D,
Cash capital capital capital capital
Cash Assets Liabilities A, loan D, loan (40%) (20%) (20%) (20%)
Balances before
Liquidation 181,800 84,000 6,000 3,000 26,400 25,800 20,400 16,200
January
- Realization 72,000 (90,000) (7,200) (3,600) (3,600) (3,600)
- Payment of
expenses (1,200) ( 480) ( 240) ( 240) ( 240)
- Payment
of liabilities (66,000) ______ (66,000) _____ _____ ______ ______ ______ ______
Balances after Jan 4,800 91,800 18,000 6,000 3,000 18,720 21,960 16,560 12,360

February (30,000) (1,680) (1,680) (1,680)

- Realization 21,600 (3,360)
- Payment of ( 264)
expenses (1,320) ( 528) ( 264) ( 264)
- Payment ______ _____ ______ ______ ______
of liabilities (18,000) _ (18,000) _ ______ ______ _
Balances before
payment to
partners 7,080 61,800 6,000 3,000 14,832 20,016 14,616 10,416
Payment to _____
Partners (Sch. 1) ( 5,280) ______ _ _____ ______ (5,280) ______ _____
Balances after
February 1,800 61,800 6,000 3,000 14,832 14,736 14,616 10,416
March
- Realization 19,200 (24,000) (1,920) ( 960) ( 960) ( 960)
- Payment of _____
expenses ( 1,440) ______ _ _____ ( 576) ( 288) ( 288) ( 288)
Balances before
payment to
partners 19,560 31,500 6,000 3,000 12,336 13,488 13,368 9,168
Payment to
Partners (Sch. 2) (18,360) ______ (2,736) (3,000) (5,688) (5,568) (1,368)
Balances after
March 1,200 37,800 3,264 12,336 7,800 7,800 7,800
April
- Realization 6,000 (19,800) (5,520) (2, 760) (2,760) (2,760)
- Payment of
expenses (4,800) ______ (1,920) ( 960) ( 960) ( 960)
Balances before
payment to
partners 2,000 15,000 3,264 4,896 4,080 4,080 4,080
Payment to
Partners (Note 1) (1,500) ______ ( 720) ( 360) ( 360) ( 360)
Balances after
April 500 18,000 2,554 4,896 3,720 3,720 3,720
May
- Realization 2,400 (18,000) (6,240) (3,120) (3,120) (3,120)
- Payment of
expenses ( 960) _____ ( 384) ( 192) ( 192) ( 192)
Balances before
Offsetting 1,440 2,554 ( 1,728) 408 408 408
Offset deficit vs.
Loan ______ (1,728) 1,728 _____ ______ _____
Balances before
payment 2,040 816 408 408 408
Payment to
Partners (Note 2) (2,040) (816) (408) (408) (408)
2.
A, B, C and D Partnership
Schedule of Safe Payments
Schedule 1 February 28, 20x4
Computation of Distribution of Cash on February 28, 20x4
A, B, C, D,
capital capital capital capital
(40%) (20%) (20%) (20%)
Balances before payment to partners:
Loans 6,000 3,000
Capital 14,832 20,016 14,616 10,416
Total Interest 20,832 20,016 14,616 13,416
Restricted interest for possible losses:
Unrealized non-cash assets P 61,800
Cash withheld 1,800
P 63,600 (25,440) (12,720) (12,720) (12,720)
( 4,608) 7,296 1,896 696
Restricted for possible insolvency of A (2:2:2) 4,608 (1,536) (1,536) (1,536)
5,760 360 ( 840)
Restricted for possible insolvency of D (2:2) ( 420) ( 420) 840
5,340 ( 60)
Restricted for possible insolvency of C ( 60) 60
Payment to partner (s) 5,280

Applied to:
Loans -0-
Capital 5,280
5,280

Schedule 2 March 31, 20x4

Computation of Distribution of Cash on March 31, 20x4
A, B, C, D,
capital capital capital capital
(40%) (20%) (20%) (20%)
Balances before payment to partners:
Loans 6,000 3,000
Capital 12,336 13,488 13,488 9,168
Total Interest 18,336 13,488 13,488 12,168
Restricted interest for possible losses:
Unrealized non-cash assets P 37,800
Cash withheld 1,200
P 39,000 (15,600) ( 7,800) ( 7,800) ( 7,800)
2,736 5,688 5,568 4,368

Applied to:
Loans 2,736 -0- -0- 3,000
Capital ___-0- 5,688 5,568 1,368
2,736 5,688 5,568 4,368

3.
T, U, V and W Partnership
Cash Payment Priority Program*
January 31, 20x4
Interests Payments
V, capital W, capital V, capital W, capital
T, capital U, capital (20%) (20%) T, capital U, capital (20%) (20%)
(40%) (20%) (40%) (20%) Total
Balances
before
liquidat
ion:
Loans 6,000 3,000
Capital 26,400 25,800 20,400 16,200
Total 32,400 25,800 20,400 19,200

2
 Interests
Divided
by: P & L
% __40% ___20% __20% __20%
Loss
Absorptio
n
Abilitie
s 81,000 129,000 102,000 96,000
Priority I ______ (27,000) _______ _______ 5,400 5,400
81,000 102,000 102,000 96,000
Priority II ______ ( 6,000) ( 6,000) _______ 1,200 1,200 2,400
81,000 96,000 96,000 96,000
Priority III ______ (15,000) (15,000) (15,000) _______ 3,000 3,000 3,000 9,000
81,000 81,000 81,000 81,000 ____-0- 9,600 4,200 3,000 16,800
*also known as Schedule of Cash Distribution Plan / Pre-distribution Plan.

4.
T, capital U, capital V, capital W, capital
(40%) (20%) (20%) (20%)
Total Interests P 32,400 P 25,800 P 20,400 P 19,200
Divided by: P & L % ____40% ____20% ____20% ____20%
Loss Absorption
Abilities P 81,000 P129,000 P 102,000 P 96,000
Order of Cash Distribution (4) (1) (2) (3)
Vulnerability Rankings (1
Is most vulnerable) (1) (4) (3) (2)

The vulnerability ranks indicate that partner T is most vulnerable to losses because his equity were
reduced to zero with a partnership liquidation loss of P81,000. Partner U is least vulnerable because
his equity is sufficient to absorb his share of liquidation losses up to P129,000. This interpretation
helps explain why partner U received all the cash distributed to partner on the first installment
distribution (August 20x4).

Incidentally, the cash priority program developed will yield the same cash payment as the process of
computing safe payments each time cash is available. The cash distribution under the cash priority
program is as follows:

Order of Cash Distribution Creditors T U V W

1. First P70,000 100%
2. Next P 4,500 100%
3. Next P2,000 50% 50%
4. Next P7,500 33 1/3% 33 1/3% 33 1/3%
5. Remainder 40% 20% 20% 20%

The first P84,000 available is, of course paid to the creditors. Cash may be held back from
distribution if it is anticipated that additional expenses will be incurred and unrecorded liabilities will
be discovered. The distribution of cash in excess of the reserve amount proceeds as determined.
Partner U will receive all of an additional ash up to P5,400. Additional cash in excess of P5,400 and
up to P7,800 is distributed 50:50 to partners U and V. Any amount in excess of P7,800up to P16,800
is distributed 1: 1: 1 to partners U, V, and W, respectively. After P16,800 (P5,400 + P2,400 + P9,000)
has been distributed to the partners, the capital accounts are in the desired profit and loss ratio of
4:2:2:2. Any further distributions to the partners are made in accordance with the profit and loss ratio.

Even though both methods produce the same results, the cash payment priority program is more
informative to both personal and partnership creditors, and to the partners. Interested parties now
 know the order in which the individual partners will receive cash and the amounts that each may
receive at each period of the distribution process.

One requirement that must be satisfied in the development of the advance plan is that the partners
must share income in the same ratio that they share losses. If this were not the case the potential
amount of a new loss would need to be computed after every allocation to the partners capital
accounts. This occurs because the allocation of liquidation gain alters the order of cash distribution
computed in the priority program.

Problem II
ABC Partnership
Statement of Partnership Realization and Liquidation
For the period from January 1, 20x4, through March 31, 20x4
Capital Balances
Other Accounts AA BB CC
Cash Assets Payable 50% 30% 20%
Balances before Liquidation, 18,000 307,000 (53,000) (88,000) (110,000) (74,000)
January 1,20x4
January transactions:
1 Collection of accounts
. receivable at a loss
of P15,000 51,000 (66,000) 7,500 4,500 3,000
2 Sale of inventory at a loss 38,000 (52,000) 7,000 4,200 2,800
. of P14,000
3 Liquidation expenses paid (2,000) 1,000 600 400
.
4 Share of credit memorandum 3,000 (1,500) (900) (600)
.
5 Payments to creditors (50,000) 50,000
.
55,000 189,000 -0- (74,000) (101,600) (68,400)
Safe payments to partners
(Schedule 1) (45,000) __ 26,600 18,400
10,000 189,000 -0- (74,000) (75,000) (50,000)
February transactions:
6 Liquidation expenses paid
. (4,000) __ 2,000 1,200 800
6,000 189,000 -0- (72,000) (73,800) (49,200)
Safe payments to partners
(Schedule 2) -0- __ ___ -0- -0- -0-
6,000 189,000 -0- (72,000) (73,800) (49,200)
March transactions:
8 Sale of M&Eq. at a loss of 146,000 (189,000) 21,500 12,900 8,600
. P43,000
9 Liquidation expenses paid
. (5,000) 2,500 1,500 1,000
147,000 -0- -0- (48,000) (59,400) (39,600)
10. Payments to partners (147,000) 48,000 59,400 39,600

Balances at end of liquidation,

March 31, 20x4 -0- -0- -0- -0- -0- -0-

ABC Partnership
Schedules of Safe Payments to Partners

AA BB CC

4
Schedule 1: 50% 30% 20%
January 31,
20x4
Capital (74,000) (101,600) (68,400)
balances
Possible
loss:
Other
assets
(P189,000)
and
possible
liquidatio 99,500 59,700 39,800
n costs
(P10,000)
25,500 (41,900) (28,600)
Absorption (25,500)
of AAs
potential
deficit
balance
BB: 15,300
(P25,500 x
3/5 =
P15,300)
CC: 10,200
(P25,500 x
2/5 =
P10,200)
Safe -0- (26,600) (18,400)
payment,
January 31,
20x4

Schedule 2:
February
27, 20x4
Capital (72,000) (73,800) (49,200)
balances
Possible
loss:
Other
assets
(P189,000)
and
possible
liquidatio 97,500 58,500 39,000
n costs
(P6,000)
25,500 (15,300) (10,200)
Absorption (25,500)
of AAs
potential
deficit
balance:
BB: 15,300
(P25,500 x
3/5 =
P15,300)
CC: 10,200
(P25,500 x
2/5 =
P10,200)
Safe -0- -0- -0-
payment,
February
27, 20x4

Note that the computation of safe payments on February 27, 20x4, resulted in no payments to partners. This is
due to the large book value of Other Assets still unrealized and the reservation of the $6,000 cash on hand for
possible future liquidation expenses.

Problem III: Cash Distribution Plan

PET Partnership
Cash Distribution Plan
June 30, 20x4
Loss Absorption Power Capital Accounts

PP EE TT PP EE TT
Profit and loss
percentages 50% 30% 20%

Preliquidation
capital balances (55,000) (45,000) (24,000)

Loss absorption
Power (Capital
balances /
Loss percent) (110,000) (150,000) (120,000)

Decrease highest LAP

to next highest:
EE
(P30,000 x .30) 30,000 9,000
(110,000) (120,000) (120,000) (55,000) (36,000) (24,000)

Decrease LAPs
to next highest:
EE
(P10,000 x .30) 10,000 3,000
TT
(P10,000 x .20) 10,000 2,000
(110,000) (110,000) (110,000) (55,000) (33,000) (22,000)

Summary of Cash Distribution

(If Offer of P100,000 is Accepted)
Accounts PP EE TT

6
 Payable 50% 30% 20%
Cash available P106,000
First (17,000) P17,000
Next (9,000) P 9,000
Next (5,000) 3,000 P 2,000
Additional paid
in P&L ratio (75,000) ______ P37,500 22,500 15,000
P -0- P17,000 P37,500 P34,500 P17,000

Problem IV
PET Partnership
Statement of Partnership Liquidation and Realization
From July 1, 20x4, through September 30, 20x4
Capital
Noncash Accounts PP EE TT
Cash Assets Payable 30% 20%
50%
Preliquidation balances 6,000 135,000 (17,000) (55,000) (45,000) (24,000)

July:
Assets Realized 26,500 (36,000) 4,750 2,850 1,900
Paid liquidation costs (1,000) 500 300 200
Paid creditors (17,000) 17,000
14,500 99,000 -0- (49,750) (41,850) (21,900)
Safe Payments (Sch. 1) (6,500) 6,500

8,000 99,000 -0- (49,750) (35,350) (21,900)

August:
Equipment withdrawn (4,000) (3,000) (1,800) 8,800
(allocate P6,000 gain)
Paid liquidation costs (1,500) 750 450 300
6,500 95,000 -0- (52,000) (36,700) (12,800)
Safe Payments (Sch. 2) (4,000) 4,000
2,500 95,000 -0- (52,000) (32,700) (12,800)

September:
Assets Realized 75,000 (95.000) 10,000 6,000 4,000
Paid liquidation costs (1,000) 500 300 200
76,500 -0- -0- (41,500) (26,400) (8.600)
Payments to partners (76,500) 41,500 26,400 8,600
Postliquidation balances -0- -0- -0- -0- -0- -0-

PET Partnership
Schedules of Safe Payments to Partners
PP EE TT
Schedule 1: July 31, 20x4 50% 30% 20%
Capital balances (49,750) (41,850) (21,900)
Possible loss on noncash assets (P99,000) 49,500 29,700 19,800
Cash retained (P8,000) 4,000 2,400 1,600
3,750 (9,750) (500)
Absorption of Pen's potential deficit (3,750)
EE: P3,750 x .30/.50 2,250
TT: P3,750 x .20/.50 1,500
-0- (7,500) 1,000
 Absorption of TTs potential deficit (1,000)
EE P1,000 x .30/.30 1,000
Safe payment -0- (6,500) -0-

Schedule 2: August 31, 20x4

Capital balances (52,000) (36,700) (12,800)
Possible loss on noncash assets (P95,000) 47,500 28,500 19,000
Cash retained (P2,500) 1,250 750 500
(3,250) (7,450) 6,700
Absorption of TTs potential deficit (6,700)
PP: P6,700 x .50/.80 4,188
EE: P6,700 x .30/.80 2,512
938 (4,938) -0-
Absorption of PPs potential deficit (938)
EE: P938 x .30/.30 938
Safe payment -0- (4,000) -0-

Problem V
DSV Partnership
Statement of Partnership Realization and Liquidation Installment Liquidation
From July 1, 20x4, through September 30, 20x4
Capital Balances
Noncash D S V
Cash Assets Liabilities 50% 30% 20%
Preliquidation balances, 6/30 50,000 670,000 (405,000) (100,000) (140,000) (75,000)

July, 20x4: Sale of assets and

distribution of P120,000 loss (510,000) 60,000 36,000 24,000
390,000
440,000 160,000 (405,000) (40,000) (104,000) (51,000)
Liquidation expenses (2,500) 1,250 750 500
437,500 160,000 (405,000) (38,750) (103,250) (50,500)
Payment to creditors (405,000) 405,000
32,500 160,000 -0- (38,750) (103,250) (50,500)
Payments to partners (Sch. 1) (22,500) 22,500
10,000 160,000 -0- (38,750) (80,750) (50,500)
August, 20x4: Sale of assets &
distribution of P13,000 loss 22,000 (35,000) 6,500 3,900 2,600
32,000 125,000 -0- (32,250) (76,850) (47,900)
Liquidation expenses (2,500) 1,250 750 500
29,500 125,000 -0- (31,000) (76,100) (47,400)
Payments to partners (Sch. 2) (19,500) 13,700 5,800
10,000 125,000 -0- (31,000) (62,400) (41,600)

September, 20x4: Sale of assets

distribution of P70,000 loss 55,000 (125,000) 35,000 21,000 14,000
65,000 -0- -0- 4,000 (41,400) (27,600)
Allocate D's deficit to S and V (4,000) 2,400 1,600
65,000 -0- -0- -0- (39,000) (26,000)
Liquidation expenses (2,500) 1,500 1,000
62,500 -0- -0- -0- (37,500) (25,000)
Payments to partners (62,500) -0- 37,500 25,000
Postliquidation balances -0- -0- -0- -0- -0- -0-

DSV Partnership
Schedule of Safe Payments to Partners
D S V
Schedule 1, 50% 30% 20%
July 31, 20x4:

8
Capital
balances, July
31,
Before cash (38,750) (103,250) (50,500)
distribution
Assume full
loss of
P160,000 on
remaining
noncash
assets and
P10,000 in
possible
future
liquidation 85,000 51,000 34,000
expenses
46,250 (52,250) (16,500)
Assume D's
potential
deficit
must be (46,250)
absorbed by S
and V:
30/50 x 27,750
P46,250
20/50 x 18,500
P46,250
-0- (24,500) 2,000
Assume V's
potential
deficit
must be 2,000 (2,000)
absorbed by S
completely
Safe
payments to
partners
on July 31, -0- (22,500) -0-
20x4

Schedule 2,
August 31,
20x4:
Capital
balances,
August 31,
before cash (31,000) (76,100) (47,400)
distribution
Assume full
loss of
P125,000 on
remaining
noncash
assets and
P10,000 in
possible
liquidation
expenses 67,500 40,500 27,000
36,500 (35,600) (20,400)
Assume D's
potential
deficit
 must be (36,500)
absorbed by S
and V:
30/50 x 21,900
P36,500
20/50 x 14,600
P36,500
Safe -0- (13,700) (5,800)
payments to
partners

Problem VI: Cash Distribution Plan (or better use the format presented in the discussion)
DSV Partnership
Cash Distribution Plan
June 30, 20x4

Loss Absorption Power Capital Accounts

D S V D S V

Profit and loss sharing ratio 50% 30% 20%

Preliquidation capital balances (100,000) (140,000) (75,000)
Loss absorption power (LAP)
capital accounts /
loss sharing percentage (200,000) (466,667) (375,000)

Decrease highest LAP to next

highest LAP:
Decrease S by P91,667 91,667
(Cash distribution: P91,667 x .30) 27,500
(200,000) (375,000) (375,000) (100,000) (112,500) (75,000)

Decrease LAP to next highest level:

Decrease S by P175,000 175,000
Cash distribution: P175,000 x .30) 52,500
Decrease V by P175,000 175,000
Cash distribution: P175,000 x .20) 35,000

(200,000) (200,000) (200,000) (100,000) (60,000) (40,000)

Decrease LAPs by distributing
cash in the P/L sharing ratio 50% 30% 20%

Summary of Cash Distribution Plan

(Estimated on June 30, 20x4)
Liquidation
Creditors Expenses D S V
1. First P405,000 100%
2. Next P10,000 100%
3. Next P27,500 100%
4. Next P87,500 60% 40%
5. Any additional distributions
in the partners' profit
and loss ratio 50% 30% 20%

b. Confirmation of cash distribution plan

DSV Partnership
Capital Account Balances
June 30, 20x4, through September 30, 20x4
D S V
Profit and loss ratio 50% 30% 20%
Preliquidation balances, June 30 (100,000) (140,000) (75,000)

10
July loss of P120,000 on disposal of assets
and P2,500 paid in liquidation costs 61,250 36,750 24,500
(38,750) (103,250) (50,500)
July 31 distribution of P22,500 of
available cash to partners (Sch. 1)
First P22,500 of P27,500 layer:
100% to S 22,500
(38,750) (80,750) (50,500)
August loss of P13,000 on disposal of
assets and P2,500 paid in
liquidation costs 7,750 4,650 3,100
(31,000) (76,100) (47,400)
August 31 distribution of P19,500 of
available cash to partners (Sch. 2)
Remaining P5,000 of P27,500 layer
of which P22,500 paid on July 31:
100% to S 5,000
Next $14,500 of P87,500 layer:
60% to S 8,700
40% to V 5,800
(31,000) (62,400) (41,600)
September loss of P70,000 on disposal of
assets and P2,500 paid in liquidation
costs 36,250 21,750 14,500
5,250 (40,650) (27,100)
Distribution of D's deficit (5,250) 3,150 2,100
-0- (37,500) (25,000)
September 30 distribution of P62,500 of
available cash to partners (Sch. 3)
Next P62,500 of P87,500 layer of which
P14,500 paid on August 31:
60% to S 37,500
40% to V 25,000
Postliquidation balances -0- -0- -0-

Schedule 1, July 31, 20x4: Computation of P22,500 of cash available to be distributed to partners on July
31, 20x4:
Cash balance, July 1, 20x4 P 50,000
Cash from sale of noncash assets 390,000
Less: Payment of actual liquidation expenses (2,500)
Less: Payments to creditors (405,000)
Less: Amount held for possible
future liquidation expenses (10,000)
Cash available to partners, July 31, 20x4 P 22,500

Schedule 2, August 31, 20x4: Computation of P19,500 of cash available to be distributed to partners on
August 31, 20x4:

Cash balance, August 1, 20x4 P10,000

Cash from sale of noncash assets 22,000
Less: Payment of actual liquidation expenses (2,500)
Less: Amount held for possible
future liquidation expenses (10,000)
Cash available to partners, August 31, 20x4 P 19,500

Schedule 3, September 30, 20x4: Computation of P62,500 of cash available to be distributed to partners on
September 30, 20x4:

Cash balance, September 1, 20x4 P10,000

Cash received from sale of noncash assets 55,000
Less: Payment of actual liquidation expenses (2,500)
 Cash available to partners, September 30, 20x4 P62,500

Problem VII
Cash distribution program:
Creditors Ames Beard Craig
First P 50,000100%
Next 34,000 100%
Next 48,000 33 1/3% 66 2/3%
All over P132,000 40% 20% 40%

Working paper for cash distributions to partners during liquidation (not required):
Ames Beard Craig
Capital balances before liquidation P60,000 P80,000P92,000
Income-sharing ratio 4 4 2
Capital per unit of income sharing P15,000 P40,000P23,000
Reduce Beard's capital to next highest capital for Craig ______(17,000) ______
Capital per unit of income sharing P15,000 P23,000P23,000
Reduce Beard's and Craig's capital to Ames's capital ______ (8,000) (8,000)
Capital per unit of income sharing P15,000 P15,000P15,000

Problem VIII
Cash 60,000
Quanto, Capital 5,000
Rollo, Capital 3,000
Simms, Capital 2,000
Assets 70,000
To record realization of assets at a loss of $10,000, divided
amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively.

Liabilities 30,000
Cash 30,000
To record payment to creditors.

Loan Payable to Quanto 9,500

Rollo, Capital 10,500
Simms, Capital 5,000
Cash 25,000
To record payment to partners, computed as follows:

Quanto Rollo Simms

Capital (including Quanto's
loan of P10,000)
before liquidation P42,000 P30,000P18,000
Loss on realization of assets (5,000) (3,000) (2,000)
Balances P37,000 P27,000 P16,000
Maximum potential
additional
loss (P5,000 +
P50,000 = P55,000)
divided in 5:3:2 ratio (27,500) (16,500)(11,000)
Cash payments P 9,500 P10,500 P 5,000

Multiple Choice Problems

1. d JJ CC TT Total

12
 Prior capital (160,000) (45,000) (55,000) (260,000)
Loss on sale
of inventory 24,000 30,000 6,000 60,000
(136,000) (15,000) (49,000) (200,000)
Possible loss
of remaining
inventory 64,000 80,000 16,000 160,000
(72,000) 65,000 (33,000) (40,000)
Allocate Charles'
potential
capital deficit: 52,000 (65,000) 13,000
(20,000) (20,000) (40,000)
-0-
2. a
Peter Paul Mary Total
Capital balances 300,000 350,000 400,000 1,050,000
Loss on sale of assets
(475,000 600,000) 4:4:2 (50,000) (25,000) (125,000)
( 50,000)
250,000 300,000 375,000 925,000
Possible loss for unrealized
assets
P1,000,000 P600,000 = 160,000 160,000 80,000 400,000
400,000
(90,000 140,000 295,000 525,000

3. a The loan payable to AA has the same legal status as the

partnerships other liabilities. After payment of the loan, then any
available cash can be distributed to the partners using the safe
payments computations.

4. a CC DD EE Total
Profit and loss ratio 5/10 3/10 2/10 10/10
Beginning capital 80,000 90,000 70,000 240,000
Actual loss on assets (5:3:2) (15,000) (9,000) (6,000) ( 30,000
)
65,000 81,000 64,000 210,000
Possible loss unrealized NCA ( 50,000 (30,000) (20,000) ( 20,000
) )
Safe payments 15,000 51,000 44,000 190,000

5. b

6. d AA BB CC
Capital balances 37,000 65,000 48,00
0
Divided by: Profit and loss ratio 40% 40% 20
%
Loss absorption power 92,500 162,500 240,00
0
Loss to reduce CC to BB:
(77,500 x .20 = 15,500) 77,500
Balances 92,500 162,500 162,500
 Loss to reduce BB & CC to AA:
(B:70,000 x .40 = 28,000) 70,000
(C:70,000 x .20 = 14,000) 70,000
Balances 92,500 92,500 92,500

Cash of P20,000 after settlement of liabilities: CC receives first P15,500;

remaining P4,500 split 2/3 to BB and 1/3 to CC

7. d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB

and 1/3 to CC.

8. a If all partners received cash after the second sale, then the remaining 12,000 is
distributed in the loss ratio.

9. a AE BT KT
Profit and loss ratio 40% 30% 30%
Capital balances (40,000) (180,000) (30,000)
Loss of P100,000 40,000 30,000 30,000
Remaining equities -0- (150,000) -0-

AE will receive nothing; the entire P150,000 will be paid to BT.

10. b
Ding Laurel Ezzard Tillman Total
Capital before realization 60,00 67,000 17,000 96,000 240,000
0
Loss on sale (4:2:2:2) (52,800) ( 26,400 (26,400 (26,400) (132,000
) ) )
7,200 40,600 ( 9,400 69,600 108,000
)
Possible insolvency loss (4:2:2) ( 4,700) ( 2,350) ( 9,400) ( 2,350) -0-
Safe payments 2,500 38,250 295,000 67,250 108,000

11. a
D R N J
Capital balances 72,00 32,00 52,00 24,00
0 0 0 0
Divided by: Profit and loss ratio 40 20% 20 20
% % %
Loss absorption power 180,00 160,00 260,00 120,00
0 0 0 0
Loss to reduce CC to BB:
(80,000 x .20 = 16,000) 80,000 ____0
Balances 180,00 160,00 180,000 120,00
0 0 0

12. No answer available Harding, P6,107; Jones, P12,275

H J S Total
Capital balances 20,00 22,00 (10,000 32,00
0 0 ) 0
Potential loss from Sandy deficit (5,882 (4,118) 10,000 0
)
14,118 17,882 0 32,000
Loss to reduce H and J:

14
 (50:35) (8,011) (5,607) (13,618)
Balances 6,107 12,275 13,382
Note:
1. Regardless there is a forthcoming contribution to be made by Sandy, it is assumed that the P10,000 deficit may
not be recovered for purposes of distribution of cash.
2. The P13,382 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Harding
and Jones is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)

or, alternatively: Using Cash Payment Priority Program

H J S
Capital balances 20,00 22,00 (10,000
0 0 )
Additional contribution 0 0 10,000
Capital balances 20,000 22,000
Divided by: Profit and loss ratio 50/85 35/85
Loss absorption power 34,00 53,429
0
Loss to reduce JJ to HH:
(19,428 x 35/85 = 8,000) 19,428
Balances 34,00 34,000
0

Cash available P18,382

Less: Priority I to Jones (P19,428 x 35/85) 8,000 P 8,000

P10,382
Less: P& L (50:35)
(10,382) P 6,107 4,275

P6,107 P 12,275

13. b
Gonda Herron Morse Total
Capital before realization 60,00 70,000 40,000 170,00
0 0
Loss on sale (30:45:25); [200 150] (15,000) ( 22,500 (12,500) (50,000)
)
45,000 47,500 27,500 120,000

14. a
Since the partnership currently has total capital of P350,000, the P150,000 that is available would
indicate maximum potential losses of P200,000 that is hypothetically split among the partners.
White Sands Luke Total
Capital before realization 50,00 100,000 200,000 350,00
0 0
Loss on sale (30:20:50); [350 150] (60,000) ( 40,000 (100,000 (200,000
) ) )
(10,000) 60,000 100,000 150,000
Possible insolvency (2:5) 10,000 (2,857) (7,143) 0
Safe payments
57,143 92,857 150,000

15. a
D E F
 Capital balances 40,000 90,00 30,00
0 0
Less: Machine, at fair value ______ (35,000) ______
Capital balances 40,000 55,00 30,00
0 0
Divided by: Profit and loss ratio 1/3 1/3 1/3
Loss absorption power 120,00 165,00 90,000
0 0
Loss to reduce E to D:
(45,000 x 1/3 = 15,000) (45,000) ____0
Balances 120,00 120,00 90,000
0 0

16. c
S D F Total
Capital 40,00 15,000 5,000 60,000
0
Loan _______ _______ 5,000 5,000
_
Total interests 40,000 15,000 10,000 65,000
Loss on sale (5:3:2) - [90,000 (32,000) ( 19,200 (12,800 (64,000)
26,000] ) )
8,000 ( 4,200) ( 2,800) 1,000
Possible insolvency (5:3) (1,750) ( 1,050) 2,800 0

6,250 ( 5,250) 1,000

Additional investment _______
5,250 5,250

6,250
6,250

17. d [(P240,000 P96,000) /30% = P480,000]

18. b - (P13,000 P1,000 share of gain = P12,000, refer to entries below)

Revaluation entry:
Accumulated depreciation
3,000
Gym, capital
1,000
Hob, capital
1,000
Ing, capital
1,000

Withdrawal of equipment:
Accumulated depreciation (8,000 3,000)
5,000
Hob, capital
13,000
Equipment
18,000

19. b
A B C Total
Capital before realization 37,00 65,000 48,00 150,000
0 0
Loss on sale (2:2:1); [90 50] (16,000) ( 16,000 ( 8,000) (40,000)

16
 )
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized (36,000) (36,000 (18,000) 90,000
NCA )

(15,000) 13,000 22,000 20,000

Possible insolvency loss (2:1) 15,000 (10,000) ( 5,000) 0

3,000 17,000

20. b
A B C Total
Capital before realization 37,00 65,000 48,00 150,000
0 0
Loss on sale (2:2:1); [90 50] (16,000) ( 16,000 ( 8,000) (40,000)
)
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized
NCA (37,200) (37,200 (18,600) 93,000
plus P3,000 = P93,000 )

(16,200) 11,800 21,400 17,000

Possible insolvency loss (2:1) 16,200 (10,800) ( 5,400) 0

1,000 16,000 17,000

21. d - Since the partnership currently has total capital of P400,000, the P30,000 that is available would
indicate maximum potential losses of P370,000.

A B C
Reported balances P100,000 P120,000 P180,000
Anticipated loss (P370,000) split on
a 2:3:5 basis (74,000) (111,000) (185,000)
Potential balances P 26,000 P 9,000 P (5,000)
Potential loss from C's deficit (split 2:3) ( 2,000) (3,000) 5,000
Current cash distribution P 24,000 P 6,000 P -0-

22. c
K M B J
Capital balances 59,00 39,00 34,00 34,00
0 0 0 0
Divided by: Profit and loss ratio 40 30% 10 20
% % %
Loss absorption power 147,50 130,00 340,00 170,00
0 0 0 0
Loss to reduce CC to BB:
(170,000 x .10 = 17,000) 170,000 ____0
Balances 147,50 130,00 170,000 170,00
0 0 0

23. c
C P H M
Capital balances 60,00 27,00 43,00 20,00
0 0 0 0
Divided by: Profit and loss ratio 40 30% 20 10
 % % %
Loss absorption power 150,00 90,000 215,00 200,00
0 0 0
Loss to reduce CC to BB:
(15,000 x .20 = 3,000) 15,000 ____0
Balances 150,00 90,000 200,000 200,00
0 0

24. 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 JJ loan, the two deficits total P4,000. FF and RR, the
two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a
60%:40% ratio). FF would absorb P2,400 of the potential loss with RR being allocated P1,600. The
remaining capital balances (P10,600 and P5,400) are safe capital balances and those amounts can be
immediately distributed.

or, alternatively:
W J F R
Capital balances (2,000 (5,000 13,00 7,000
) ) 0
Loan ______ 3,000 ______ __
_
Total interests (2,000) (2,000) 13,000 7,000
Potential insolvency loss (3:2) 2,000 2,000 ( 2,400 (1,600)
)
10,600 5,400
25. b
A B C Total
Capital balances (5,000 18,000 6,000 19,00
) 0
Potential loss from A deficit (5:3) 5,000 (3,125) (1,875) 0
14,875 4,125 19,000

Loss to reduce H and J:

(5:3) (8,750) (5,250) (14,000)
6,125 (1,125) 5,000
Possible insolvency loss (1,125) 1,125 0

5,000

26. c
A B C Total
Capital before realization 70,00 30,000 50,00 150,000
0 0
Loan 20,000 ______ ______ 20,000
Total interests 90,000 30,000 50,000 170,000
Loss on sale (240,000 195,000) (15,000) ( 15,000 (15,000) (45,000)
)
75,000 15,000 35,000 125,000

27. b liabilities should be paid first, then the balance of P30,000 should be given to Able since he is the
one entitled to the first priority.
INTERESTS PAYMENTS______
A B C A B C Total
Balances before realization

18
 Loans.. P 20,000
Capital... 70,000 P 30,000 P 50,000
Total interests... P 90,000 P 30,000 P 50,000
Divided by: P&L ratio 1/3 1/3 1/3
Loss absorption ability.. P270,000 P 90,000 P150,000
Priority I. 120,000 - _______ P40,000 P40,000
P150,000 P90,000 P150,000
Priority II 60,000 0 60,000 20,000 0 P20,000 40,000
P 90,000 P90,000 P 90,000 P60,000 P 0 P20,000 P80,000

28. d
A B C Total
Capital before realization 70,00 30,000 50,00 150,000
0 0
Loan 20,000 ______ ______ 20,000
Total interests 90,000 30,000 50,000 170,000
Loss on sale (240,000 195,000) (15,000) ( 15,000 (15,000) (45,000)
)
75,000 15,000 35,000 125,000
Payment of loans to partner (20,000) ______ _____ (20,000)
55,000 15,000 35,000 105,000
Asset received ______ ______ (30,000) (30,000)
Payment to partners after payment of loan 55,000 15,000 5,000 75,000
Note: The requirement is payment to partners after outside creditors and loans to partners had been paid, therefore, the payment
to partners is in so far as capital is concerned.

29. d
INTERESTS PAYMENTS ___
D K R D K R Total
Balances before realization
Loans.. P 0 P 10,000 P(20,000)
Capital... 170,000 170,000 100,000
Total interests... P170,000 P180,000 P 80,000
Divided by: P&L ratio 50% 30% 20%
Loss absorption abilities.. P340,000 P600,000 P400,000
Priority I. - (200,000) 0 P60,000 P60,000
P340,000 P400,000 P400,000
Priority II - (60,000) (60,000) 18,000 18,000 36,000
P340,000 P340,000 P340,000 P P 78,000 P18,000 P 96,000

Cash received by the partner Kemp P 60,000

Add (deduct):
Liabilities paid 250,000
Expenses paid 5,000
Contingency 10,000
Cash, beginning (120,000)
Proceeds from sale of other assets P205,000

30. b
INTERESTS PAYMENTS ___
T N D T N D Total
Balances before realization
Loans.. P 0 P 0 P 0
Capital... 22,000 15,500 14,000
Total interests... P 22,000 P15,500 P 14,000
Divided by: P&L ratio 2/4 1/4 1/4
Loss absorption abilities.. P 44,000 P62,000 P 56,000
Priority I. - ( 6,000) 0 P 1,500 P1,500
 P 44,000 P56,000 P56,000
Priority II - (12,000) (12,000) __ 3,000 P 3,000 6,000
P 44,000 P44,000 P44,000 P P 4,500 P 3,000 P 7,500

Cash received by Tree P 6,250

Divided by: P & L ratio 2/4
Amount in excess of P7,500 P 12,500
Total cash payments refer to program 7,500
Payment to partners P 20,000

31. d
Cash, beginning P 12,000
Add (deduct):
Proceeds from sale of certain assets 32,000
Liquidation expenses paid ( 1,000)
Payment of liabilities ( 5,400)
Payment to partners (refer to No. 30) ( 20,000)
Cash withheld P 17,600

32. b - (P40,000 + P10,000 P2,000 P4,000 = P44,000)

33. d

INTERESTS PAYMENTS______
P Q R P Q R Total
Balances before realization
Loans.. P 6,000 P(10,000)
Capital... 24,000 P36,000 60,000
Total interests... P30,000 P36,000 P50,000
Divided by: P&L ratio 3/10 3/10 4/10
Loss absorption abilities.. P100,000 P120,000 P125,000
Priority I. - - (5,000) P 2,000 P 2,000
P100,000 P120,000 P120,000
Priority II - (20,000) (20,000) P6,000 8,000 14,000 (d)
P100,000 P100,000 P100,000 P P6,000 P10,000 P16,000

34. d

Priority
Creditors Mattews Norell Reams Total
First P300,000. P300,000 P300,000
Next P80,000 (7:3) P56,000 P24,000 80,000
Next P70,000 (3:4) 30,000 P40,000 70,000
Remainder*.. 22,000 34,000 44,000 100,000
P300,000 P108,000 P58,000 P84,000 P550,000 (d)

*P550,000 P300,000 P80,000 P70,000 = P100,000

Theories
1 b 6. d 11. e 16. b
.
2 b 7. d 12. a 17. a
.
3 a 8. a 13. a 18. b
.

20
4 a 9. d 14. c 19. c
.
5 a 10 b 15, d 20. d
. ,