PROBLEM 2: FOR CLASSROOM DISCUSSION

Use the following information for the next independent cases:

Fact pattern
The partners of ABC Co. decided to liquidate their partnership. ABC Co's statement of financial position is shown below:

Cash 50,000 Accounts payable 100,000

Account receivable 150,000 Payable to A 50,000
Inventory 300,000 A, Capital (40%) 400,000
Equipment 750,000 B, Capital (40%) 450,000
Total 1,250,000 C, Capital (20%) 250,000
Total 1,250,000

Case #1: Lump-sum liquidation

Information on the conversion of non-cash assets is as follows:
a. 130,000 was collected on the accounts receivable; the balance is uncollectible
b. 200,000 was received for the entire inventory.
c. The equipment was sold for 590,000
d. 5,000 liquidation expense were paid.

Requirement: Determine the amounts of cash distributed to the partners in the final settlement of their interest.

Step 1: Compute for the gain or loss on the sale

a. Collection on accounts receivable 130,000

b. Sale of inventory 200,000
c. Sale of equipment 590,000
d. Liquidation expenses -5,000
Net cash proceeds 915,000
Less: Carrying amount of non-cash assets
(150k account receivable + 300k inventory +750k equipment) -1,200,000
Total loss on sale -285,000
Step 2: Allocate the gain or loss to the partners' capital balance (include their right of offset)

A (40%) B (40%) C (20%) Totals

Capital balances 400,000 450,000 250,000 1,100,000
Payable to A (right of offset) 50,000 50,000
Total 450,000 450,000 250,000 1,150,000
Allocation of loss
[285k x (40%; 40%; & 20%)] -114,000 -114,000 -57,000 -285,000
Amts. Received by the partners 336,000 336,000 193,000 865,000

Checking
Beginning balance of cash 50,000
Net proceeds from the sale of non-cash assets 915,000
Less: Payment to outside creditors -100,000
Cash available for distribution to partners 865,000

Case #2: Installment Liquidation

Use the fact pattern above but assume that the partnership will be liquidated over a prolonged period of time.
Distribution to the partners will be made as cash becomes available. Information on the conversion of non-cash assets is as follows:
a. 50% of the accounts receivable was collected for only 60,000
b. One-fourth of the inventory was sold for 40,000
c. Equipment with carrying amount of 200,000 was sold for 220,000
d. Actual liquidation expenses of 2,000 were paid.
e. Estimated future liquidation expense totaled 3,000
f. 10,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the amounts of cash distributed to the partners from the partial realization of partnership assets.

Step 1: Compute for the gain or loss

a. Collection on account receivable 60,000
b. Sale of inventory 40,000
c. Sale of equipment 220,000
d. Actual liquidation expenses -2,000
e. Estimated liquidation expenses -3,000
f. Cash retained for future expense -10,000
Net cash proceeds 305,000
Less: Carrying amount of all non-cash assets
(150k Account receivable + 300k Inventory + 750k Equipment) -1,200,000
Total loss -895,000

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

A (40%) B (40%) C (20%) Totals

Capital balances 400,000 450,000 250,000 1,100,000
Payable to A 50,000 50,000
Total 450,000 450,000 250,000 1,150,000
Allocation of loss
[895k x (40%; 40%; 20%)] -358,000 -358000 -179,000 -895,000
Amts. Received by the partners 92,000 92,000 71,000 255,000

Checking:
Beginning balance of cash 50,000
Net proceeds from the sale of non-cash assets 305,000
Less: Payment to outside creditors -100,000
Cash available for distribution to partners 255,000

Case #3: All partners are solvent

Use the fact pattern above. All partners are solvent. Information on the conversion of non-cash assets is as follows:
a. 50% of the accounts receivable was collected for only 20,000
b. one-fourth of the inventory was sold for 10,000
c. Equipment with carrying amount of 200,000 was sold for 50,000
d. actual liquidation expenses of 2,000 were paid.
e. Estimated future liquidation expenses totaled 3,000
f. 10,000 was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the amounts of cash distributed to the partners from the partial realization of partnership assets.

Step 1: Compute for the gain or loss

a. collection on accounts receivable 20,000
b. Sale of inventory 10,000
c. Sale of equipment 50,000
d. Actual liquidation expenses -2,000
e. Estimated future liquidation expenses -3,000
d. Cash retained for future expenses -10,000
Net cash proceeds 65,000
Less: Carrying amount of all non-cash assets
(150k Account receivable + 300k Inventory + 750k Equipment) -1,200,000
Total loss -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%) Totals
Capital balances 400,000 450,000 250,000 1,100,000
Payable to A 50,000 50,000
Total 450,000 450,000 250,000 1,150,000
Allocation of loss
[1,135,000 x (40%; 40%; 20%)] -454,000 -454,000 -227,000 -1,135,000
Totals -4,000 -4,000 23,000 15,000
Additional contribution of A and C 4,000 4,000 8,000
Amts, received by the partners 0 0 23,000 23,000
Checking:
Beginning balance of cash 50,000
Net proceeds 65,000
additional contribution by A and B 8,000
Less: Payment to outside creditors -100,000
Cash available for distribution to partners 23,000

Case #4: Some partner are insolvent

Use the fact pattern above. Partners A and B are insolvemt
Information on the conversion of non-cash assets is as follows:
a. 50% of the accounts receivable was collected for only 20,000
b. one-fourth of the inventory was sold for 10,000.
c. equipment with carrying amount of 200,000 was sold for 50,000
d. Actual liquidation expenses of 2,000 were paid.
e. Estimated future liquidation expenses totaled 3,000.
f. 10,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the amounts of cash distributed to the partners from the partial realization of partnership assets.

Step 1: Compute for the gain or loss

a. collection on accounts receivable 20,000
b. Sale of inventory 10,000
c. Sale of equipment 50,000
d. Actual liquidation expenses -2,000
e. Estimated future liquidation expenses -3,000
d. Cash retained for future expenses -10,000
Net cash proceeds 65,000
Less: Carrying amount of all non-cash assets
(150k Account receivable + 300k Inventory + 750k Equipment) -1,200,000
Total loss -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%) Totals
Capital balances 400,000 450,000 250,000 1,100,000
Payable to A 50,000 50,000
Total 450,000 450,000 250,000 1,150,000
Allocation of loss
[1,135,000 x (40%; 40%; 20%)] -454,000 -454,000 -227,000 -1,135,000
Totals -4,000 -4,000 23,000 15,000
Allocation of capital
deficiency to the other partners
(8k x ( 20%/40%) 4,000 4,000 -8,000 0
Amts, received by the partners 0 0 15,000 15,000

Case #5: Cash priority program - Preparation of schedule

Requirement: Prepare a cash priority program prior to the sale of any non-cash assets to determine which partners will be paid first
before the others, and the amount of those payments

STEP 1: Determine the MLAC and ranking

A (40%) B(40%) C(20%)
Payable to A 50,000
Capital balance before liquidation 400,000 450,000 250,000
Total interest in the partnership 450,000 450,000 250,000
Divide by: P/L percentage 40% 40% 20%
Max. loss absorption capacity 1,125,000 1,125,000 1,250,000

Rank of payment 2nd 2nd 1st

STEP 2: Partners MLAC are equalized

 A (40%) B (40%) C (20%)
Rank of payments 2nd 2nd 1st
Maximum loss absorption capacity 1,125,000 1,125,000 1,250,000
Difference between 1st and 2nd -125,000
Equal balance of MLAC 1,125,000 1,125,000 1,125,000

STEP 3: Cash priority program

Cash priority program
A (40%) B (40%) C (20%)
Rank of payment 2nd 2nd 1st
1st priority (125k x 20%) 25,000
Totals 0 0 25,000

Case 6: Application of cash priority program

Information on the conversion of non-cash assets is as follows:
a. 50% of the accounts receivable was collected for only 60,000
b. One-fourth of the inventory was sold for 40,000
c. equipment with carrying amount of 200,000 was sold for 220,000
d. Actual liquidation expenses of 2,000 were paid.
e. Estimated future liquidation expenses totaled 3,000.
f. 10,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the cash distribution to the partners using the cash priority program in Case #5 above.

a. Collection of accounts receivable 60,000

b. Sale of inventory 40,000
c. Sale of equipment 220,000
d. Payment for liquidation expenses -2,000
e. Cash set aside for estimated liquidation expenses -3,000
f. Cash set reatined for potential future cost -10,000
Net proceeds 305,000
Add: Cash balance, beg. 50,000
Less: Accounts payable -100,000
Cash available for distribution to partners 255,000

A (40%) B (40%) C (20%) Total

available cash 255,000
Allocation:
1st priority 25,000 -25,000
Balance 230,000
Payment after priorities
[230k x (40%; 40%; 20%)] 92,000 92,000 46,000 -230,000
1st installment payment 92,000 92,000 71,000 0

PROBLEM 3 COMPUTATIONS
Use the following information for the next six independent cases:
Fact pattern
The partners of ABC Co. decided to liquidate their partnership.
ABC Co's statement of financial position is shown below:
Cash 40,000
Account receivable 200,000
Inventory 300,000
Equipment 800,000
Total 1,340,000
Accounts payable 100,000
Payable to A 50,000
A, Capital (50%) 600,000
B, Capital (40%) 420,000
C, Capital (10%) 170,000
Total 1,340,000

1. Information on the conversion of non-cash assets is as follows.

a. 130,000 was collected on the account receivable; the balance is uncollectible.
b. 200,000 was received for the entire inventory
c. The equipment was sold for 590,000
d. 5,000 liquidation expense were paid.

Requirement: Determine the amounts of cash distributed to the partners in the final settlement of their interest.

a. Collection of accounts receivable 130,000

b. Sale of inventory 200,000
c. Sale of equipment 590,000
d. Payment for liquidation expenses -5,000
Net proceeds 915,000
Carrying amount of non-cash assets -1,300,000
Cash available for distribution to partners -385,000

A (50%) B(40%) C(10%) Total

Capital balances 600,000 420,000 170,000 1,190,000
Payable to A 50,000 50,000
Total 650,000 420,000 170,000 1,240,000
Allocation of loss -192,500 -154,000 -38,500 -385,000
Amts. Received by the partners 457,500 266,000 131,500 855,000

2. Use the fact pattern above but assume that the partnership will be liquidated over a prolonged period of time.
Distributions to the partners will be made as cash becomes available. Information on the conversion of non-cash assets is as follows:
a. 80% of the accounts receivable was collected for only 60,000
b. 90% of the inventory was sold for 40,000
c. Equipment with carrying amount of 600,000 was sold for 220,000
d. Actual liquidation expenses of 2,000 were paid.
e. Estimated future liquidation expenses totaled 3,000
f. 10,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the amounts of cash distributed to the partners from the partial realization of partnership assets.

a. Collection of accounts receivable 60,000

b. Sale of inventory 40,000
c. Sale of equipment 220,000
d. Payment for liquidation expenses -2,000
e. Cash set aside for estimated liquidation expenses -3,000
f. Cash set reatined for potential future cost -10,000
Net proceeds 305,000
Carrying amount of non-cash assets -1,300,000
Total loss -995,000

A (50%) B(40%) C(10%) Total

Capital balances 600,000 420,000 170,000 1,190,000
Payable to A 50,000 50,000
Total 650,000 420,000 170,000 1,240,000
Allocation of loss -497,500 -398,000 -99,500 -995,000
Amts. Received by the partners 152,500 22,000 70,500 245,000

3. Use the fact pattern above. All partners are solvent.

Information on the conversion of non-cash assets is as follows:
a. 80% of the accounts receivable was collected for only 40,000
b. Three-fourths of the inventory was sold for 70,000
c. Equipment with carrying amount of 500,000 was sold for 130,000
d. actual liquidation expenses of 2,000 were paid.
e. Estimated future liquidation expenses totaled 3,000
f. 10,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the amounts of cash distributed to the partners from the partial realization of partnership assets.
a. Collection of accounts receivable 40,000
b. Sale of inventory 70,000
c. Sale of equipment 130,000
d. Payment for liquidation expenses -2,000
e. Cash set aside for estimated liquidation expenses -3,000
f. Cash set reatined for potential future cost -10,000
Net proceeds 225,000
Carrying amount of non-cash assets -1,300,000
Total loss -1,075,000

A (50%) B(40%) C(10%) Total

Capital balances 600,000 420,000 170,000 1,190,000
Payable to A 50,000 50,000
Total 650,000 420,000 170,000 1,240,000
Allocation of loss -537,500 -430,000 -107,500 -1,075,000
Total 112,500 -10,000 62,500 165,000
Additional contribution of B 10,000 10,000
Amts. Received by the partners 112,500 0 62,500 175,000

4. Use the fact pattern above. Partner B is insolvent. Information on the conversion of non-cash assets is as follows:
a. 80% of the accounts receivable was collected for only 40,000
b. 90% of the inventory was sold for 70,000
c. Equipment with carrying amount of 500,000 was sold for 130,000
d. Actual liquidation expenses of 2,000 were paid.
e. Estimated future liquidation expenses totaled 3,000
f. 10,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the amounts of cash distributed to the partners from the partial realization of partnership assets.

a. Collection of accounts receivable 40,000

b. Sale of inventory 70,000
c. Sale of equipment 130,000
d. Payment for liquidation expenses -2,000
e. Cash set aside for estimated liquidation expenses -3,000
f. Cash set reatined for potential future cost -10,000
Net proceeds 225,000
Carrying amount of non-cash assets -1,300,000
Total loss -1,075,000

A (50%) B(40%) C(10%) Total

Capital balances 600,000 420,000 170,000 1,190,000
Payable to A 50,000 50,000
Total 650,000 420,000 170,000 1,240,000
Allocation of loss -537,500 -430,000 -107,500 -1,075,000
Total 112,500 -10,000 62,500 165,000
allocation of capital deficiency
to the other partner -8,333 10,000 -1,666 1
Amts. Received by the partners 104,167 0 60,834 165,001

5. Requirement: Prepare a cash priority program prior to the sale of any noncash assets to determine which partners will be paid first before the others, and the amoun

A (50%) B(40%) C(10%)

Payable to A 50,000
Capital balance before liquidation 600,000 420,000 170,000
Total interest in the partnership 650,000 420,000 170,000
Divide by: P/L percentage 50% 40% 10%
Max. loss absorption capacity 1,300,000 1,050,000 1,700,000

Rank of payment 2nd 3rd 1st

 A (50%) B (40%) C (10%)
Rank of payments 2nd 3rd 1st
Maximum loss absorption capacity 1,300,000 1,050,000 1,700,000
Difference between 1st and 2nd -400,000
Balance 1,300,000 1,050,000 1,300,000
Difference between 1st, 2nd and 3rd -250,000 -250,000
Equal balance of MLAC 1,050,000 1,050,000 1,050,000

A (50%) B (40%) C (10%)

Rank of payment 2nd 3rd 1st
1st priority 40,000
2nd priority 125,000 25,000
Total 125,000 65,000

6. Information on the conversion of non-cash assets is as follows:

a. 80% of the accounts receivable was collected for only 60,000
b. 90% of the inventory was sold for 40,000
c. Equipment with carrying amount of 600,000 was sold for 220,000
d. Actual liquidation expenses of 2,000 were paid.
e. Estimated future liquidation expenses totaled 3,000
f. 10,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the cash distribution to the partners using the cash

a. Collection of accounts receivable 60,000

b. Sale of inventory 40,000
c. Sale of equipment 220,000
d. Payment for liquidation expenses -2,000
e. Cash set aside for estimated liquidation expenses -3,000
f. Cash set reatined for potential future cost -10,000
Net proceeds 305,000
Cash Balance. Beg. 40,000
Accounts payable -100,000
Cash available for distribution to partners 245,000

A (50%) B (40%) C (10%) Total

Available cash 245,000
Allocation
1st priority 40,000 -40,000
2nd priority 125,000 25,000 150,000
Balances 55,000
Payment after priorities 27,500 22,000 5,500 -55,000
Total 152,500 22,000 70,500 0
before the others, and the amounts of those payments.