Chapter 4

Problem I
1: Gain on Realization Fully Allocated to Partner’s Capital Balances.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Non- S,
Cash Q, Capital R, Capital Capital
Cash Assets Liabilities Q, Loan 30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution _
of gain 96,000 (84,000) _____ _____ 3,600 6,000 2,400
Balances after realization 120,000 12,000 2,400 13,200 54,000 38,400
Payment of liabilities (12,000) (12,000)
Balances after payment of
liabilities 108,000 2,400 13,200 54,000 38,400
Payment to partners - loan (2,400) (2,400) ______ ______ _______
Balances after payment of
partners’ loans 105,600 13,200 54,000 38,400
Payment to partners -
capital (105,600) (13,200) (54,000) (38,400)

2: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
S,
Non-Cash Q, capital R, Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of loss 48,000 (84,000) _____ ______ (10,800) (18,000) (7,200)
Balances after realization 72,000 12,000 2,400 (1,200) 30,000 28,800
Payment of liabilities (12,000) (12,000)
Balances after payment of
liabilities 60,000 2,400 (1,200) 30,000 28,800
Offset deficit versus loans _______ (1,200) 1,200 _______ _______
Balances after offsetting 60,000 1,200 30,000 28,800
Payment to partners – loan (1,200) (1,200) _______ ______
Balances after payment of
partners’ loans 58,800 30,000 28,800
Payment to partners -
capital (58,800) (30,000) (28,800)

3: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised and Additional Capital Investment is Required and
Made).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

S,
Non-Cash Q, capital R, Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution ______
of loss 36,000 (84,000) __ ________ (14,400) (24,000) (9,600)
Balances after realization 60,000 12,000 2,400 ( 4,800) 24,000 26,400
Payment of liabilities (12,000) (12,000) ________ _______ _______ _______
Balances after payment of
liabilities 48,000 2,400 ( 4,800) 24,000 26,400
 Offset loan versus deficit – _______ (2,400) 2,400 _______ _______
Balances after offsetting
partner’s loan 48,000 (2,400) 24,000 26,400
Additional investment by Q __2,400 2,400 _______ _______
Balances after additional
Investment 50,400 24,000 26,400
Payment to partners -
capital (50,400) (24,000) (26,400)

4: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

S,
Non-Cash Q, capital R, Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of gain 42,000 (84,000) _______ ________ (12,600) (21,000) (8,400)
Balances after realization 66,000 12,000 2,400 ( 3,000) 27,000 27,600
Payment of liabilities (12,000) (12,000) _______ _______ _______ _______
Balances after payment of
liabilities 54,000 2,400 (3,000) 27,000 27,600
Offset loan versus deficit _______ (2,400) 2,400 ______ ______
Balances after offsetting 54,000 ( 600) 27,000 27,600
Additional loss due to
insolvency of Q _______ 600 ( 429) ( 171)
Balances after additional ,
Loss 54,000 26,571 27,429
Payment to partners -
capital (54,000) (26,571) (27,429)

5: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

S,
Non-Cash Q, capital R, Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of gain 24,000 (84,000) _______ _______ (18,000) (30,000) (12,000)
Balances after realization 48,000 12,000 2,400 ( 8,400) 18,000 24,000
Payment of liabilities (12,000) (12,000) _______ _______ _______ _______
Balances after payment of
liabilities 36,000 2,400 ( 8,400) 18,000 24,000
Offset loan versus deficit ______ (2,400) 2,400 ______ _______
Balances after offsetting 36,000 (6,000), 18,000 24,000
Additional investment by Q _3,600 _ 3,600 ______ _______
Balances after additional
investment 39,600 (2,400) 18,000 24,000
Additional loss due to
insolvency of Q ______ 2,400 (1,714) ( 686)
Balances after additional
Loss 39,600 16,286 23,314
Payment to partners -
capital (39,600) (16,286) (23,314)
6: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

S,
Non-Cash Q, capital R, Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Payment of liquidation
expenses (14,400) ______ ________ ________ (4,320) (7,200) (2,880)
Balances after payment of
liquidation expenses 9,600 84,000 12,000 2,400 5,280 40,800 33,120
Write-off goodwill and
prepaid expenses _______ (72,000) _______ ________ (21,600) (36,000) (14,400)
Balances after write-offs 9,600 12,000 12,000 2,400 (16,320) 4,800 18,720
Realization and distribution
of loss 1,200 (12,000) _______ ________ ( 3,240) ( 5,400) ( 2,160)
Balances after realization 10,800 12,000 2,400 ( 19,560) ( 600) 16,560
Payment of liabilities (10,800) (10,800) ________ _______ ________ _______
Balances after payment of
Liabilities -0- 1,200 2,400 (19,560) ( 600) 16,560
Offset loan versus deficit ______ _______ (2,400) 2,400 _______ _______
Balances after offsetting -0- 1,200 (17,160) ( 600) 16,560
Additional investment by Q
and R 17,760 _______ 17,160 600 ______
Balances after additional
Investment 17,760 1,200 16,560
Payment of liabilities (1,200) (1,200) _______
Balances after payment of
Liabilities 16,560 16,560
Payment to partners -
Capital (16,560) (16,560)

7: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) with Revaluation of Assets.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

S,
Non-Cash Q, capital R, Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Increase in equipment 1,200 360 600 240
Decrease in furniture ______ (600) _______ ______ _(180) (300) (120)
Balances after revaluation 24,000 84,600 12,000 2,400 9,780 48,300 36,120
Refund of prepaid
expenses _6,960 (8,400) _______ ______ _(432) (720) (288)
Balances after refunds 30,960 76,200 12,000 2,400 9,348 47,580 35,832
Received noncash assets ______ (10,200) _______ ______ _____ (7,200) (3,000)
Balances after receipt
of noncash assets 30,960 66,000 12,000 2,400 9,348 40,380 32,832
Realization and distribution
of loss 32,400 (66,000) _______ ______ ( 10,080) ( 16,800) ( 8,064)
Balances after realization 63,360 12,000 2,400 ( 732) 23,580 26,112
Payment of liabilities (12,000) (12,000) _______ _______ _______ _______
Balances after payment of
liabilities 51,360 2,400 ( 732) 23,580 26,112
Offset loan versus deficit _______ ( 732) 732 ______ ______
Balances after offsetting 51,360 1,668 23,580 26,112
Payment to partners -
loan (1,668) (1,668) ______ _______
 Balances after payment
of loans 49,692 23,580 26,112
Payment to partners-
capitals (49,692) (23,580) (26,112)

Problem II
DISCOUNT PARTNERSHIP
Schedule of Partnership Liquidation
January 14, 20x4

Capital Balances
Explanation Cash Other Assets Liabilities Dawson Feeney Hardin
Balances before realization P25 P120,000 P(40 P(31 P(65 P(9

Sales of noncash assets 60 (120,000) _____ 18 24 18

Balances 85 0 (40 (13 (41

Payment of liabilities (40 __________ 40 ________ ________ ________

Balances 45 0 0 (13 (41
Allocation of Hardin's debit balance

______ __________ ______ 3 5(9,000)

Balances 45 0 0 (9 (35 0

Distribution of cash to partners (45 __________ ______ 9 35 ________

Balances P 0 P 0 P 0 P 0 P 0 P 0

Problem III
1.
CDG Partnership
Statement of Realization and Liquidation
Lump-sum Liquidation on December 10, 20X6
              Capital Balances              
Noncash  Carlos    Dan    Gail    
  Cash     Assets   Liabilities    20%        40%       40%   

Preliquidation balances 25,000  475,000  (270,000) (120,000) (50,000) (60,000)

Sale of assets and distribution

of P215,000 loss 260,000  (475,000)                43,000  86,000  86,000 
285,000  -0-  (270,000) (77,000) 36,000  26,000 
Cash contributed by Gail to
extent of positive net worth    25,000                                                            (25,000)
310,000  -0-  (270,000) (77,000) 36,000  1,000 
Distribution of deficit of
insolvent partner: (1,000)
20/60(P1,000) 333 
40/60(P1,000)                                                                   667               
310,000  -0-  (270,000) (76,667) 36,667  -0- 

Contribution by Dan to remedy    36,667                                              (36,667)              
deficit
346,667  -0-  (270,000) (76,667) -0-  -0- 

Payment to creditors (270,000)                 270,000                                           
76,667  -0-  -0-  (76,667) -0-  -0- 

Payment to partner   (76,667)                               76,667                             
 
Post-liquidation balances           -0-            -0-            -0-         -0-        -0-          -0- 
 2.
CDG Partnership
Net Worth of Partners
December 10, 20X6
  Carlos      Dan       Gail     
Personal assets, excluding
partnership capital interests 250,000  300,000  350,000 
Personal liabilities (230,000) (240,000) (325,000)
Personal net worth, excluding
partnership capital interests, Dec. 1, 20X6 20,000  60,000  25,000 
Contribution to partnership (36,667) (25,000)
Liquidating distribution from partnership    76,667            -0-            -0- 
Net worth, December 10, 20X6    96,667  23,333            -0- 

This computation assumes that no other events occurred in the 10-day period that changed any of the partners’
personal assets and personal liabilities. In practice, the accountant must be sure that a computation of net worth is
current and timely.

The table shows the effects of the transactions between the partnership and each partner. A presumption of this
table is that the personal creditors of Dan or Gail would not seek court action to block the settlement transactions
with the partnership. Upon winding up and liquidation, the partnership does not have any priority to the partner’s
personal assets. Thus, the personal creditors may seek to block the transactions with the partnership in order to
provide more resources from which they can be paid. A partner who fails to remedy his or her deficit can be sued
by the other partners who had to make additional contributions or even by a partnership creditor if the failed partner
is liable to the partnership creditor. But those claims are not superior to the other claims to the partner’s individual
assets.

When accountants provide professional services to partnerships and to its partners, the accountant should expect, at
some time, legal suits involving the partnership and/or individual partners. A strong and thorough understanding of
the legal and accounting foundations of partnerships will be very important to that accountant.

Problem IV
Noncash Capital and Loan Balances
Cash Assets Liabilities Merz Dechter Flowers

Beginning balances P 25,000 P200,000 P165,000 P 40,000 P30,000 P(10,000)

Liquidation expense (20,000) (8,000) (8,000) (4,000)
Sale of non-cash assets 160,000 (200,000) (16,000) (16,000) (8,000)
Payment of liabilities (165,000) (165,000)
Contribution by Flowers 10,000 10,000
Allocation of Flower's deficit (6,000) (6,000) 12,000
Distribution to partners (10,000) (10,000) 0 0
Ending balances 0 0 0 0 0 0

Problem V
Cash Liabilities Able Bower Cramer
Beginning: P20,000 P(30,000) P(10,000) P5,000 P15,000
Payment of liabilities (20,000) 20,000
P 0 P(10,000) P(10,000) P5,000 P15,000
Cramer/Bower pay in
from personal worth
to cover
deficit balances: 12,000 ________ ________ (2,000) (10,000)
P12,000 P(10,000) P(10,000) P3,000 P 5,000
Payment of liabilities (10,000) 10,000
 P 2,000 P 0 P(10,000) P3,000 P 5,000
Allocation of
deficit balances: ______ ________ 8,000 (3,000) (5,000)
P 2,000 P 0 P (2,000) P 0 P 0
Able paid: (2,000) 2,000
P 0 P 0 P 0 P 0 P 0

Problem VI
Answer:
Cash 70,000
Arthur, Capital 6,000
Baker, Capital 15,000
Casey, Capital 9,000
Other Assets 100,000
To record realization of assets at a loss of $30,000, divided
among Arthur, Baker, and Casey in 2:5:3 ratio, respectively.

Trade Accounts Payable 65,000

Cash 65,000
To record payment of liabilities.

Arthur, Capital 20,000

Loan Receivable from Arthur 20,000
To offset Arthur's loan account against Arthur's capital
account.

Arthur, Capital 14,000

Loan Payable to Baker 20,000
Casey, Capital 1,000
Cash 35,000
To record payments to partners, computed as follows:

Arthur Baker Casey

Capital account balances P70,000 P80,000 P55,000
Add: Loan payable to Baker 30,000
Less: Loan receivable from Arthur (20,000)
Loss on realization of assets,
P30,000 (6,000) (15,000) (9,000)
Balances P44,000 P95,000 P46,000
Maximum potential additional loss
of P150,000 (P250,000 – P100,000 =
P150,000) divided in 2:5:3 ratio (30,000) (75,000) (45,000)
Cash payments P14,000 P20,000 P 1,000

Multiple Choice Problems

1. c     JJ       CC    TT       Total     

Profit ratio 40% 50% 10% 100%

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)  
 2. a Prior capital (160,000)   (45,000)   (55,000)   (260,000)  
Loss on sale
of inventory    72,000     90,000     18,000    180,000   
(88,000)   45,000    (37,000)   (80,000)  
Allocate Charles'
capital deficit: (45,000)  
JJ = .40/.50 36,000   
TT = .10/.50                                   9,000                    
 (52,000)       -0-     (28,000)    (80,000)  

3. c – (P234,000 – P434,000) x 20% = P40,000

4. d
A B C
Capital before realization 80,000   90,000   130,000  
Liquidation expenses (3,600) (2,400) (6,000)
Loss on sale (134 - 434) (90,000) (60,000) (300,000)
(13,600) 27,600 (176,000)
5. a
Capital before realization - C 130,000  
Liquidation expenses (12,000 x 50%) (6,000)
Share on loss on realization (132,000)
Capital balance after realization ( 8,000)

Total loss on realization: P132,000/50% (264,000)

Non-cash assets 434,000
Proceeds 170,000

6. c
X Y Z
Capital before realization 130,000   130,000   100,000  
Divided by: 50% 30% 20%
Loss absorption abilities 260,000 260,000 500,000

7. d – P80,000 – (P150,000 – P50,00) x 50% = P30,000

8. b
T D H
Capital before realization 40,000   10,000   15,000  
Loss on sale (85,000 – 33,000) (26,000) (15,600) (10,400)
14,000 ( 5,600) 4,600
Additional loss (5:2) (4,000) 5,600 ( 1,600)
10,000 3,000
9. c
T D H
Capital before realization 40,000   10,000   15,000  
Loss on sale (85,000 – 65,000) (10,000) (6,000) (4,000)
30,000 4,000 11,000

10. a
T D H
Capital before realization 40,000   10,000   15,000  
Loss on sale (85,000 – 21,100) (31,950) (19,170) (12,780)
 8,050 ( 9,170) 2,220
Additional loss (5:2) (6,550) 9,170 (2,620)
1,500 ( 400)
Additional loss ( 400) 400
1,100
11. b
K L M
Capital before realization 60,000   40,000   80,000  
Liquidation expenses (2,000) ( 4,000) ( 4,000)
Loss on sale (300 - 180) (24,000) (48,000) ( 48,000)
34,000 (12,000) 28,000
Additional loss (2:4) ( 4,000) 12,000 ( 8,000)
30,000 20,000

12. d
K L M
Capital before realization 60,000   40,000   80,000  
Liquidation expenses (2,000) ( 4,000) ( 4,000)
Loss on sale (300 - 180) (24,000) (48,000) ( 48,000)
34,000 (12,000) 28,000
Additional investment _____ 12,000 ______
34,000 28,000

13. a
Cash, beginning P90,000
Payment of liquidation expenses ( 5,000)
Payment of liabilities ( 60,000)
Payment to partners P25,000

14. d
H I J Total
Capital before realization 80,000   110,000   140,000   330,000
Loss on sale (2:4:4) (61,000) (122,000) (122,000) (305,000)
19,000 (12,000) 18,000 25,000
Additional loss (2:4) ( 4,000) 12,000 ( 8,000)
15,000 10,000

15. c
P Q R
Capital before realization 70,000   50,000   100,000  
Liquidation expenses (1,600) ( 3,200) ( 3,200)
68,400 46,800 96,800
Divided by: 20% 40% 40%
Loss absorption abilities 342,000 117,000 242,000

Selling Price 183,000

Book value 300,000
Loss (117,000)

or,
Quincy capital before liquidation………………………………………………..P 50,000
Less: Share in liquidation expenses (P8,000 x 40%)………………………….… 3,200
Quincy capital before realization of non-cash assets……………………….P 46,800
Less: Cash received by Quincy (minimum)……………………………………. 0
 Share in the loss on realization……………………………………………………P 46,800
Divided by: Profit and loss ratio………………………………………………….. 40%
Loss on realization…………………………………………………………………..P117,000
Less; Non-cash assets………………………………………………...................... 300,000
Proceeds from sale…………………………………………………………………P183,000

16. a – installment liquidation (refer for more problems in Chapter 5)

INTERESTS PAYMENTS ___
P Q R P Q R Total
Balances before realization
Totall interests………... P 70,000 P 50,000 P100,000
Divided by: P&L ratio………… 20% 40% 40%
Loss absorption abilities……….. P350,000 P125,000 P250,000
Priority I…………………………. (100,000) 0 P20,000 P20,000
P250,000 P125,000 P250,000
Priority II………………………… (125,000) (125,000) 25,000 P50,000 75,000
P125,000 P125,000 P125,000 P75,000 P 4,500 P50,000 P95,000

Cash, beginning P 90,000

Add (deduct):
Liquidation expenses paid ( 8,000)
Payment of liabilities (170,000)
Proceeds from sale of assets (?) 108,000
Payment to partner before payment to Renquist (priority I only) P 20,000

17. No answer available – Justice P15,533

J      Z D Total
Capital balances 23,000   22,000   (14,000)   31,000  
Potential loss from Douglass (40:35) (7,467) (6,533) 14,000 0
15,533   15,467   0   31,000  
Note:
1. Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000 deficit may not be
recovered for purposes of distribution of cash.
2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Justice and Zobart is not
the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)

or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5)

J      Z D
Capital balances 23,000   22,000   (14,000)  
Additional contribution 0 0 14,000
Capital balances 23,000 22,000
Divided by: Profit and loss ratio 40/75 35/75
Loss absorption power 43,125   47,143 
Loss to reduce Z to D:
(4,018 x 35/55 = 1,875)              4,018   
Balances 43,125   43,125  

Cash available P31,000

Less: Priority I to Douglass (P4,018 x 35/75) 1,875 P 1,875
P29,125
Less: P& L (40:35) (29,125) P15,533 13,592
P15,533 P15,467

18. a - (P100,000 – P72,000 – P3,000 = P25,000)

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

20. a –
B P L S
Capital before realization 25,000   110,000   100,000   65,000
Loss on sale (4:2:1:3) (60,000) ( 30,000) (15,000) (45,000)
(35,000) 80,000 85,000 20,000
Additional loss (2:1:3) (35,000) (11,667) ( 5,833) (17,500)
15,000 68,333 79,167 2,500
21. b- refer to No. 20
22. c – refer to No. 20
23. a
B P L S
Capital before realization 25,000   110,000   100,000   65,000
Loss on sale (3:2:1:4)) (45,000) ( 30,000) (15,000) (60,000)
(20,000) 80,000 85,000 5,000
Additional loss (2:1:4) (20,000) ( 5,714) ( 2,857) (11,429)
74,286 82,143 ( 6,429)
Additional loss (2:1) ( 4,286) ( 2,143) 6,429
70,000 80,000
24. a – refer to No. 23
25. d – refer to No. 23
26. b
Assets: Fair Value
Cash P 25,000
Accounts receivable (net) 26,000
Inventory 46,000
Equipment 84,000 P181,000
Liabilities:
Accounts payable 50,000
Net Assets equivalent to Investment P131,000

27. c
Net Assets, at book value (P100,000 + P50,000) P150,000
Net assets at fair value 131,000
Net adjustments P 19,000
For Wilfred: P19,000 x 70% P 13,300
For Mike: P19,000 x 30% P 5,700

Wilfred: P100,000 – P13,300 (refer to No. 27)= P86,700

28. d – Mike: P50,000 – P5,700 (refer to No. 27) = P44,300

29. c – [P131,000 – (10,000 shares x P10 par)] = P31,000

30. b –
Accumulated depreciation 70,000
K, capital (P150,000 + P10,000 + P10,000 – P70,000) 100,000
Machinery, at cost 150,000
Rice [P110,000 – (P150,000 – P70,000)] x 1/3 10,000
Long [P110,000 – (P150,000 – P70,000)] x 1/3 10,000

31. c
X Y Z Total
Capital before realization 90,000   60,000   30,000   180,000
Loss on sale (35%:35%:30%) (42,000) (42,000) (36,000) *(120,000)
48,000 18,000) ( 6,000) 60,000
 *balancing figure – total reduction in capital

32. c – this problem is more on installment liquidation principles.

M K C Total
Capital before realization 100,000   175,000   75,000   350,000
Loss on sale (50%:30%:20%) (162,500) (97,500) (65,000) *(325,000)
( 62,500) 77,500 10,000 **25,000
Additional loss (3:2) 62,500 (37,500) (25,000) ______-
40,000 (15,000) 25,000
Additional loss (15,000) 15,000 -0-
25,000
*balancing figure – total reduction in capital

Payment to partners: P200,000 – P25,000 – P150,000 = P25,000**

Theories

True or False
1. True 6. True
2. False 7. True
3. False 8. True
4. False 9. False
5. False 10, True

Multiple Choice Theories

1. c 6. b 11. b 16. d
2. b 7. c 12. a 17. b
3. d 8. a 13. d 18. a
4. b 9. c 14. b
5. d 10, d 15, c