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Chapter 14
Partnership Liquidation
PROBLEM 1: TRUE OR FALSE
1. FALSE – (9 – 2 liabilities = 7 cash available to partners)
2. TRUE (9 cash – 2 liabilities = 7 cash available to partners; 7 ÷ 2
= 3.5 each
3. TRUE – (18 cash – 8 liabilities = 10 cash available to partners)
4. TRUE – 7 capital balance less 1 share in loss = 6
5. TRUE – 5 capital balance less 1 share in loss = 4

PROBLEM 2: COMPUTATIONS
1. Solution:

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 Accounts 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 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 (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
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2. Solution:

Step 1: Compute for the gain or loss

a) Collection on accounts 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 expenses (10,000)
Net cash proceeds 305,000
Less: Carrying amount of all non-cash assets
(150K Accounts 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 (right of offset) 50,000 50,000
Total 450,000 450,000 250,000 1,150,000
Allocation of loss
[895K x (40%; 40% & 20%)] (358,000) (358,000) (179,000) (895,000)
Amts. received by the partners 92,000 92,000 71,000 255,000
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3. Solution:

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 liquidation expenses (3,000)
f) Cash retained for future expenses (10,000)
Net cash proceeds 65,000
Less: Carrying amount of all non-cash assets
(150K Accounts 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 (right of offset) 50,000 50,000
Total 450,000 450,000 250,000 1,150,000
Allocation of loss
[1.135M x (40%; 40% & 20%)] (454,000) (454,000) (227,000) (1,135,000)
Totals (4,000) (4,000) 23,000 15,000
Additional investments by
solvent partners 4,000 4,000 - 8,000
Amts. received by the partners - - 23,000 23,000
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4. Solution:

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 liquidation expenses (3,000)
f) Cash retained for future expenses (10,000)
Net cash proceeds 65,000
Less: Carrying amount of all non-cash assets
(150K Accounts 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 (right of offset) 50,000 50,000
Total 450,000 450,000 250,000 1,150,000
Allocation of loss
[1.135M 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 solvent partner 4,000 4,000 (8,000) -
Amts. received by the partners - - 15,000 15,000
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5. Solution:

Step 1: Determine the MLAC and Rankings

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

Capital balances 400,000 450,000 250,000
Payable to A (right of offset) 50,000
Total 450,000 450,000 250,000
Divide by: P/L ratios 40% 40% 20%
MLAC 1,125,000 1,125,000 1,250,000

Rankings 2nd 2nd 1st

Step 2: Equalize the MLAC

A (40%) B (40%) C (20%)
Rank of payment 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 (125,000 x 20%) 25,000
Totals - - 25,000
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6. Solution:

a) Collection on accounts 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 expenses (10,000)
Net cash proceeds 305,000
Add: Cash, beg. 50,000
Less: Accounts payable (100,000)
Cash available for distribution to partners 255,000

A B C
(40%) (40%) (20%) Total
Available cash 255,000
Allocation:
1st priority 25,000 (25,000)
Balance 230,000
Payment after priority
[230K x (40%; 40% & 20%)] 92,00 92,000 46,000 (230,000)
1st installment payment 92,000 92,000 71,000 -
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PROBLEM 3: COMPUTATIONS

1. Solution:

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
(200K Accounts receivable+ 300K Inventory + 800K Equipment) (1,300,000)
Total loss on sale (385,000)

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

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

Capital balances 600,000 420,000 170,000 1,190,000
Payable to A (right of offset) 50,000 50,000
Total 650,000 420,000 170,000 1,240,000
Allocation of loss
[385K x (50%; 40% & 10%)] (192,500) (154,000) (38,500) (385,000)
Amts. received by the partners 457,500 266,000 131,500 855,000
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2. Solution:

Step 1: Compute for the gain or loss

a) Collection on accounts 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 expenses (10,000)
Net cash proceeds 305,000
Less: Carrying amount of all non-cash assets
(200K Accounts receivable+ 300K Inventory + 800K Equipment) (1,300,000)
Total loss (995,000)

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

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

Capital balances 600,000 420,000 170,000 1,190,000
Payable to A (right of offset) 50,000 50,000
Total 650,000 420,000 170,000 1,240,000
Allocation of loss
[995K x (50%; 40% & 10%)] (497,500) (398,000) (99,500) (995,000)
Amts. received by the partners 152,500 22,000 70,500 245,000
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3. Solution:

Step 1: Compute for the gain or loss

a) Collection on accounts receivable 40,000

b) Sale of inventory 70,000
c) Sale of equipment 130,000
d) Actual liquidation expenses (2,000)
e) Estimated liquidation expenses (3,000)
f) Cash retained for future expenses (10,000)
Net cash proceeds 225,000
Less: Carrying amount of all non-cash assets
(200K Accounts receivable+ 300K Inventory + 800K Equipment) (1,300,000)
Total loss (1,075,000)

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

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

Capital balances 600,000 420,000 170,000 1,190,000
Payable to A (right of offset) 50,000 50,000
Total 650,000 420,000 170,000 1,240,000
Allocation of loss
[1.075M x (50%; 40% & 10%)] (537,500) (430,000) (107,500) (1,075,000)
Total 112,500 (10,000) 62,500 165,000
Additional investment by
solvent partner 10,000 10,000
Amts. received by the partners 112,500 - 62,500 175,000
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4. Solution:
Step 1: Compute for the gain or loss

a) Collection on accounts receivable 40,000

b) Sale of inventory 70,000
c) Sale of equipment 130,000
d) Actual liquidation expenses (2,000)
e) Estimated liquidation expenses (3,000)
f) Cash retained for future expenses (10,000)
Net cash proceeds 225,000
Less: Carrying amount of all non-cash assets
(200K Accounts receivable+ 300K Inventory + 800K Equipment) (1,300,000)
Total loss (1,075,000)

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

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

Capital balances 600,000 420,000 170,000 1,190,000
Payable to A (right of offset) 50,000 50,000
Total 650,000 420,000 170,000 1,240,000
Allocation of loss
[1.075M x (50%; 40% & 10%)] (537,500) (430,000) (107,500) (1,075,000)
Total 112,500 (10,000) 62,500 165,000
Allocation of capital
deficiency to solvent
partners* (8,333) 10,000 (1,667) -
Amts. received by the partners 104,167 - 60,833 165,000

* (10,000 x 50%/60%) = 8,333; (10,000 x 10%/60%) = 1,667

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5. Solution:

Step 1: Determine the MLAC and Rankings

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

Capital balances 600,000 420,000 170,000
Payable to A (right of offset) 50,000
Total 650,000 420,000 170,000
Divide by: P/L ratios 50% 40% 10%
MLAC 1,300,000 1,050,000 1,700,000

Rankings 2nd 3rd 1st

Step 2: Equalize the MLAC

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

Step 3: Cash priority program

Cash priority program
A (50%) B (40%) C (10%)
Rank of payment 2nd 3rd 1st
1st priority (400,000 x 10%) 40,000
2nd priority (250,000 x 50% & 10%) 125,000 25,000
Totals 125,000 - 65,000
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6. Solution:

a) Collection on accounts 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 expenses (10,000)
Net cash proceeds 305,000
Add: Cash, beg. 40,000
Less: Accounts payable (100,000)
Cash available for distribution to partners 245,000

A B C
(50%) (40%) (10%) Total
Available cash 245,000
Allocation:
1st priority 40,000 (40,000)
Balance 205,000
2nd priority 125,000 25,000 (150,000)
Balance 55,000
Payment after priority
[55K x (50%; 40% & 10%)] 27,500 22,000 5,500 (55,000)
1st installment payment 152,500 22,000 70,500 -
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PROBLEM 4: MULTIPLE CHOICE

1. B
Solution:
Step 1: Compute for the gain or loss
Net cash proceeds 90,000
Less: Carrying amount of all assets (100,000)
Total loss (10,000)

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

A (50%) B (50%) Totals

Capital balances 40,000 40,000 80,000
Allocation of loss
[10K x (50%& 50%)] (5,000) (5,000) (10,000)
Amts. received by the partners 35,000 35,000 70,000

2. B
Solution:
Step 1: Compute for the gain or loss
Net cash proceeds 180,000
Less: Carrying amount of all assets (200,000)
Total loss (20,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include
their right of offset)
A (50%) B (50%) Totals
Capital balances 70,000 50,000 120,000
Allocation of loss
[20K x (50%& 50%)] (10,000) (10,000) (20,000)
Amts. received by the partners 60,000 40,000 100,000
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3. C
Solution:

Sale of noncash assets 920,000

Liquidation expenses (5,000)
Net cash proceeds 915,000
Less: Carrying amount of non-cash assets (1,200,000)
Total loss on sale (285,000)

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

4. D
Solution:

Net cash proceeds (370,000 – 2,000) 368,000

Less: Carrying amount of non-cash assets (480,000)
Total loss on sale (112,000)

A (20%) B (30%) C (50%) Totals

Capital balances 100,000 170,000 200,000 470,000
Allocation of loss
[112K x (20%; 30% & 50%)] (22,400) (33,600) (56,000) (112,000)
Amts. received by the partners 77,600 136,400 144,000 358,000

5. C
Solution:
Assets Liabilities Equity
Cash Noncash A (20%) B (30%) C (50%)
160,000 980,000* 90,000 200,000 370,000 480,000

* (90,000 + 200,000 + 370,000 + 480,000 – 160,000) = 980,000

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6. D
Solution:
Net cash proceeds (870,000 – 12,000) 858,000
Less: Carrying amount of non-cash assets (980,000)
Total loss on sale (122,000)

7. A
Solution:

A (20%) B (30%) C (50%) Totals

Capital balances 200,000 370,000 480,000 1,050,000
Allocation of loss
[122K x (20%; 30% & 50%)] (24,400) (36,600) (61,000) (122,000)
Amts. received by the partners 175,600 333,400 419,000 928,000

8. D
Solution:

Net cash proceeds (70,000 – 8,000) 62,000

Less: Carrying amount of non-cash assets (480,000)
Total loss on sale (418,000)

A (20%) B (30%) C (50%) Totals

Capital balances 100,000 170,000 200,000 470,000
Allocation of loss
[418K x (20%; 30% & 50%)] (83,600) (125,400) (209,000) (418,000)
Total 16,400 44,600 (9,000) 52,000
Allocation to solvent
partners* (3,600) (5,400) 9,000 -
Amts. received by the partners 12,800 39,200 - 52,000

* (9,000 x 2/5 = 3,600); (9,000 x 3/5 = 5,400)

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9. D
Solution:

Step 1: Determine the MLAC and Rankings

A (50%) B (30%) C (20%)

Capital balances 540,000 360,000 200,000
Payable to A (right of offset) 50,000
Total 590,000 360,000 200,000
Divide by: P/L ratios 50% 30% 20%
MLAC 1,180,000 1,200,000 1,000,000

Rankings 2nd 1st 3rd

Step 2: Equalize the MLAC

A (50%) B (30%) C (20%)
Rank of payment 2nd 1st 3rd
Maximum loss absorption capacity 1,180,000 1,200,000 1,000,000
Difference between 1st and 2nd (20,000)
Total 1,180,000 1,180,000 1,000,000
Difference between 1st, 2nd, & 3rd (180,000) (180,000)
Equal balance of MLAC 1,000,000 1,000,000 1,000,000

Step 3: Cash priority program

Cash priority program
A (50%) B (30%) C (20%)
Rank of payment 2nd 1st 3rd
1st priority (20,000 x 30%) 6,000
2nd priority (180,000 x 50% & 30%) 90,000 54,000
Totals 125,000 60,000 -
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10. A
Solution:

Net cash proceeds (920,000 – 5,000) 915,000

Add: Cash, beg. 50,000
Less: Accounts payable (100,000)
Cash available for distribution to partners 865,000

A B C
(50%) (30%) (20%) Total
Available cash 865,000
Allocation:
1st priority 6,000 (6,000)
Balance 859,000
2nd priority 90,000 54,000 (144,000)
Balance 715,000
Payment after priority
[715K x (50%; 30% & 20%)] 357,500 214,500 143,000 (715,000)
1st installment payment 447,500 274,500 143,000 -

PROBLEM 5: CLASSROOM ACTIVITY

The students grade themselves and then submit the results to the
teacher for recording.