Chapter 10, Problem 20P

a.

To determine

Determine how the amount of $10,000 is to be divided when profits and losses are allocated in the ratio of 2:3:3:2.

Explanation of Solution

Calculate the amount of non cash assets:

$\begin{array}{c}\text{Non}\text{cash}\text{assets}=\text{Land}+\text{Building}\\ =\$130,000+\$120,000\\ =\$250,000\end{array}$

Calculate the amount of new capital balance

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Loss on non cash assets	$   (50,000)	$   (75,000)	$  (75,000)	$   (50,000)
Adjusted capital balance	$     30,000	$   (45,000)	$  (15,000)	$     40,000

Table: (1)

There is a deficit balance of $45,000 from person B and $15,000 from person C which is to be distributed among the partners in their profit sharing ratio.

Calculate the distribution of loss:

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{A}\text{and}\text{person}\text{D}=\$60,000\times \frac{2}{4}\\ =\$30,000\end{array}$

Calculate the ending capital balance of the partners:

Particulars	Person A	Person D
Beginning balance	$     30,000	$     40,000
Loss distribution	$   (30,000)	$   (30,000)
Adjusted capital balance	$               -	$     10,000

Table: (2)

Person D will receive $10,000 cash.

b.

To determine

Determine how the amount of $10,000 is to be divided when profits and losses are allocated in the ratio of 2:2:3:3.

Explanation of Solution

Calculate the amount of new capital balance

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Loss on non cash assets	$   (50,000)	$   (50,000)	$  (75,000)	$   (75,000)
Adjusted capital balance	$     30,000	$   (20,000)	$  (15,000)	$     15,000

Table: (3)

There is a deficit balance of $20,000 from person B and $15,000 from person C which is to be distributed among the partners in their profit sharing ratio.

Calculate the distribution of loss

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{A}=\$35,000\times \frac{2}{5}\\ =\$14,000\\ \text{Loss}\text{share}\text{to}\text{person}\text{D}=\$35,000\times \frac{3}{5}\\ =\$21,000\end{array}$

Calculate the ending capital balance of the partners

Particulars	Person A	Person D
Beginning balance	$     30,000	$     15,000
Loss distribution	$   (14,000)	$   (21,000)
Adjusted capital balance	$     16,000	$     (6,000)

Table: (4)

Loss of $6,000 will be transferred to person A and the net balance of person A would be

$\begin{array}{c}\text{Capital}\text{balance}\text{of}\text{person}\text{A}=\$16,000-\left(\$6,000\right)\\ =\$10,000\end{array}$

Person A will receive the $10,000 cash.

c.

To determine

Determine the amount of money that each partner will receive if profits and losses are allocated in the ratio of 1:3:3:3.

Explanation of Solution

The value of the building is $120,000 and it is sold for $70,000.

Calculate the amount of loss in the sale of building:

$\begin{array}{c}\text{Loss}\text{in}\text{the}\text{sale}\text{of}\text{building}=\$120,000-\$70,000\\ =\$50,000\end{array}$

Calculate the loss distribution to other partners

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{A}=\$50,000\times \frac{1}{10}\\ =\$5,000\\ \text{Loss}\text{share}\text{to}\text{person}\text{B}=\$50,000\times \frac{3}{10}\\ =\$15,000\end{array}$

Now, loss share to other partners

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{C}=\$50,000\times \frac{3}{10}\\ =\$15,000\\ \text{Loss}\text{share}\text{to}\text{person}\text{D}=\$50,000\times \frac{3}{10}\\ =\$15,000\end{array}$

Calculate the ending balances of capital

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Loss on non cash assets	$     (5,000)	$   (15,000)	$  (15,000)	$   (15,000)
Adjusted capital balance	$     75,000	$     15,000	$    45,000	$     75,000

Table: (5)

Calculate the loss of land $130,000:

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{A}=\$130,000\times \frac{1}{10}\\ =\$13,000\\ \text{Loss}\text{to}\text{person}\text{B}=\$130,000\times \frac{3}{10}\\ =\$39,000\end{array}$

Now, loss to other partners:

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{C}=\$130,000\times \frac{3}{10}\\ =\$39,000\\ \text{Loss}\text{to}\text{person}\text{D}=\$130,000\times \frac{3}{10}\\ =\$39,000\end{array}$

Calculate the ending capital balances:

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     75,000	$     15,000	$    45,000	$     75,000
Loss on non cash assets	$   (13,000)	$   (39,000)	$  (39,000)	$   (39,000)
Adjusted capital balance	$     62,000	$   (24,000)	$      6,000	$     36,000

Table: (6)

Calculate the loss distribution of person B to other partners:

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{A}=\$24,000\times \frac{1}{7}\\ =\$3,429\\ \text{Loss}\text{to}\text{person}\text{C}\text{and}\text{D}=\$24,000\times \frac{3}{7}\\ =\$10,286\end{array}$

Calculate the new capital balances after allocation:

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     62,000	$   (24,000)	$      6,000	$     36,000
Loss distribution	$     (3,428)	$     24,000	$  (10,286)	$   (10,286)
New capital balance	$     58,572	$              -	$    (4,286)	$     25,714

Table: (7)

Person C is having a loss of $4,286 which is distributed by person A and person D in their profit sharing ratio

Calculate the loss distribution of partners:

$\begin{array}{c}\text{Loss}\text{share}\text{of}\text{person}\text{A}=\$4,286\times \frac{1}{4}\\ =\$1,072\\ \text{Loss}\text{share}\text{of}\text{person}\text{D}=\$4,286\times \frac{3}{4}\\ =\$3,214\end{array}$

Calculate the ending balance of partners:

Particulars	Person A	Person D
Beginning balance	$     58,572	$     25,714
Loss distribution	$     (1,072)	$     (3,214)
New capital balance	$     57,500	$     22,500

Table: (8)

Person A and person D will receive $57,500 and $22,500 of cash respectively.

d.

To determine

Determine the amount of money that the firm receive from selling the land and building to ensure that person C receives a portion if profits and losses are allocated on 1:3:4:2 basis.

Explanation of Solution

Calculate the amount of money that the firm receive from selling the land and building

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Assumed loss of $100,000	$   (10,000)	$   (30,000)	$  (40,000)	$   (20,000)
New balance	$     70,000	$              -	$    20,000	$     70,000
Assumed loss of $35,000	$     (5,000)		$  (20,000)	$   (10,000)
New balance	$     65,000	$              -	$             -	$     60,000
Assumed loss of $90,000	$   (30,000)			$   (60,000)
New balance	$     35,000	$              -	$              -	$              -

Table: (9)

$35, 000 goes to person A and $90,000 is distributed in the profit sharing ratio of partners of 1:2. Then, $35,000 is distributed among the partners in their profit sharing ratio of 1:4:2 and$100,000 is distributed among the partners in their profit sharing ratio of 1:3:4:2.

The firm has total cash of $125,000 before person C receives any cash. The partnership firm has a cash of $10,000 after paying the liabilities of the firm. The land and building is to be sold for $115,000 for providing a portion to person C.

Working note

Calculate the assumed loss of $100,000:

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Maximum allocated loss	$   800,000	$   100,000	$  150,000	$   450,000

Table: (10)

The maximum allocated loss of person B is less of $100,000. Hence, 100,000 is to be taken as assumed loss.

Calculate the assumed loss of $35,000:

Particulars	Person A	Person C	Person D
Beginning balance	$     70,000	$     20,000	$    70,000
Maximum allocated loss	$   490,000	$     35,000	$  245,000

Table: (11)

The maximum allocated loss of person C is less of $35,000. Hence, $35,000 is to be taken as assumed loss.

Calculate the assumed loss of $90,000:

Particulars	Person A	Person D
Beginning balance	$     65,000	$     60,000
Maximum allocated loss	$   195,000	$     90,000

Table: (12)

The maximum allocated loss of person D is less of $90,000. Hence, $90,000 is to be taken as assumed loss.