Chapter 16, Problem 16.18P

a

To determine

Introduction: Installment liquidation involves selling assets of partnership in several installments. It requires several months to complete liquidation, and regular installments are paid to partners as assets get liquidated. Installment liquidation is chosen with the aim to obtain the large possible amount from the realization of the assets. It involves the distribution of cash to partners before complete liquidation of assets occurs. There are two methods for ensuring fairness and equality in making cash distributions (1) safe payment schedule and (2) cash distribution plan. For the purpose of distribution of cash a ranking partner in terms of their exposure to possible losses is carried out. It is done by preparing a schedule of assumed loss absorption.

The preparation of statement as of June 30, 20X5 for cash distribution

Answer to Problem 16.18P

Cash distribution for June for partners D, S, and V are $0, $27,500 + 52,500 and $35,000 respectively.

Explanation of Solution

DSV

Cash distribution plan

July 1 20X5 to September 30, 20X5

	Loss absorption power			Capital Accounts
	D	S	V	D	S	V
Profit and loss ratio				50%	30%	20%
Capital balances				$100,000	$140,000	$75,000
LAP = Capital / P&L ratio	$200,000	$466,667	$375,000
Decrease highest LAP to Next highest		($91,667)
Cash distribution $91,667 / .30					($27.500)
	$200,000	$375,000	$375,000	$100,000	$112,500	$75,000
Decrease LAP with next		$175,000	$175,000
S cash distribution $175,000 x .30					52,500
V cash distribution $175,000 x.20						$35,000
	$200,000	$200,000	$200,000	$100,000	$60,000	$40,000
Balance in P/L ratio	50%	30%	20%

Cash distribution summary

	Creditors	Liquidation expenses	D	S	V
First $405,000	100%
Next $10,000		100%
Next $27,500				100%
Next $87,500				60%	40%
Additional distribution			50%	30%	20%

b

To determine

Introduction: Installment liquidation involves selling assets of partnership in several installments. It requires several months to complete liquidation, and regular installments are paid to partners as assets get liquidated. Installment liquidation is chosen with the aim to obtain the large possible amount from the realization of the assets. It involves the distribution of cash to partners before complete liquidation of assets occurs. There are two methods for ensuring fairness and equality in making cash distributions (1) safe payment schedule and (2) cash distribution plan. For the purpose of distribution of cash a ranking partner in terms of their exposure to possible losses is carried out. It is done by preparing a schedule of assumed loss absorption.

The preparation of schedule for cash distribution in July, August and September.

Answer to Problem 16.18P

Cash distribution for July for partners D, S, and V is $0, $22,500 and $0 respectively.

Cash distribution for August for partners D, S, and V is $0, $13,700 and $5,800 respectively.

Cash distribution for September for partners D, S, and V is $0, $37,500 and $25,000 respectively.

Explanation of Solution

DSV

Capital account balance

June 30 20X5 to September 30, 20X5

	D	S	V
Profit and loss ratio	50%	30%	20%
Pre liquidation balance June 30	$100,000	$140,000	$75,000
July
Loss on disposal of asset and liquidation cost $120,000 + $2,500	$(61,250)	$(36,750)	$(24,500)
	$38,750	$103,250	$50,500
Distribution July 31 Schedule 1 $22,500		$(22,500)
	$38,750	$80,750	$50,500
August
Disposal of asset $13,000 and liquidation cost $2,500	$(7,750)	$(4,650)	$(3,100)
	$31,000	$76,100	$47,400
Distribution $19,500 of cash schedule 2
S 100%		$(5,000)
Next 14,500
S 60% of 14,500		$(8,700)
V 40% of 14,500			$(5,800)
	$31,000	$62,400	$41,600
September
Loss on sale of asset $70,000 and liquidation costs $2,500	$(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
Cash distribution $62,500 schedule 3
S 60%		$(37,500)
V 40%			$(25,000)
	0	0	0

Schedule 1

	Amount $
Cash balance July 1, 20X5	50,000
Cash from sale of non-cash asset	390,000
Less payment of liquidation expenses	(2,500)
Less payment to creditors	(405,000)
Less amount held for future liquidation expenses	(10,000)
Cash available to partners July 31, 20X5	22,500

Schedule 2

	Amount $
Cash balance August 1, 20X5	10,000
Cash from sale of non-cash asset	22,000
Less payment of liquidation expenses	(2,500)
Less amount held for future liquidation expenses	(10,000)
Cash available to partners July 31, 20X5	19,500

Schedule 3

	Amount $
Cash balance September 1, 20X5	10,000
Cash from sale of non-cash asset	55,000
Less payment of liquidation expenses	(2,500)
Cash available to partners September 31, 20X5	62,500