Question

On January 1, the partners of Van, Bakel, and Cox (who share profits and losses in the ratio of 5:3:2, respectively) decide to terminate operations and liquidate their partnership. The trial balance at this date follows:

	Debit		Credit
Cash	$	35,000
Accounts receivable		100,000
Inventory		86,000
Machinery and equipment, net		223,000
Van, loan		64,000
Accounts payable			$	91,000
Bakel, loan				54,000
Van, capital				165,000
Bakel, capital				107,000
Cox, capital				91,000
Totals	$	508,000	$	508,000

The partners plan a program of piecemeal conversion of the partnership’s assets to minimize liquidation losses. All available cash, less an amount retained to provide for future expenses, is to be distributed to the partners at the end of each month. A summary of the liquidation transactions follows:

January	Collected $68,000 of the accounts receivable; the balance is deemed uncollectible.
	Received $55,000 for the entire inventory.
	Paid $3,000 in liquidation expenses.
	Paid $87,000 to the outside creditors after offsetting a $4,000 credit memorandum received by the partnership on January 11.
	Retained $27,000 cash in the business at the end of January to cover liquidation expenses. The remainder is distributed to the partners.
February	Paid $4,000 in liquidation expenses.
	Retained $15,000 cash in the business at the end of the month to cover additional liquidation expenses.
March	Received $163,000 on the sale of all machinery and equipment.
	Paid $6,000 in final liquidation expenses.
	Retained no cash in the business.

Prepare proposed schedules of liquidation on January 31, February 28, and March 31 to determine the safe payments made to the partners at the end of each of these three months.

Answer 1

Solution ;

                  VAN , BAKEL AND COX PARTNERSHIP

                Safe Installment Payments to Partners

                                        January 31

	Van	Bakel	Cox	Total
Profit / Loss ratio	50%	30%	20%	100%
Capital Balance - Opening balance	165,000	107,000	91,000	363000
Add/(deduct) loan (as per question)	(64,000)	54,000		(10,000)
Adjusted capital bal	101000	161000	91000	353000
January losses (Schedule 1)	(35000)	(21000)	(14000)	(70,000)
a . Equity of partnership January 31 potential losses (schedule 1)	66000	140000	77000	283000
b . Potential loss ( Schedule )	(125000)	(75000)	(50000)	(250000)
Sub (a - b )	(59000)	65000	27000	33000
Potential loss van's deficit balance(Bakel 3/5 ; Cox 2/5)	59000	(35400)	(23600)	0
Safe payment to partners	0	29600	3400	33000

                                         Schedule 1

                        Computation of Actual and potential Liquidation Losses

                                               January

                                                                                           Actual    Potential

                                                                                                losses     losses

Collection of account receivable (100,000-68,000)	32,000
Received inventory (86,000- 55,000)	31,000
Paid liquidation expenses	3000
Credit memorandum received	4000
Machinery and equipment net		223,000
Retained (Unrecorded liability)		27,000
Totals	70,000*	250,000*

  

            VAN , BAKEL , AND COX PARTNERSHIP

             Safe Installment payments to partners

                              February 28

	VAN	BAKEL	COX	Total
Profit / Loss ratio	50%	30%	20%	100%
Capital balance	165000	107000	91000	363000
Safe payment to partners	0	29600	3400	33000
Capital balance (as above)	66000	140000	77000	283000
Allocation of losses ( schedule 2)	(2000)	(1200)	(800)	(4000)
a . Capital balance	64000	138800	76200	279000
b . Potential losses	(119000)	(71400)	(47600)	(238000)
Sub total (a-b)	(55000)	67400	28600	41000
Allocation of deficit (Bakel 3/5 ;Cox 2/5)	55000	(33000)	(22000)	0
Safe payment to partners	0	34400	6600	41000

                                       Schedule 2

                  Computation of actual and potential liquidation losses                                     

	Actual losses	Potential losses
Paid liquidation expenses	4000
Machinery		223,000
Retained (Unrecorded liability)		15,000
Total	4000	238,000

     VAN , BAKEL AND COX PARTNERSHIP

             Safe installment payments to partners

                                  March 31

	VAN	BAKEL	COX	TOTAL
Profit / loss ratio	50%	30%	20%	100%
Capital balance	165000	107000	91000	363000
Safe payment to partners	0	34400	6600	41000
Capital balance (as above a)	64000	138800	76200	279000
Allocation of march loss (schedule 3)	(33000)	(19800)	(13200)	(66000)
Capital balance 31st March $	31000	119000	63000	213000
Safe partner to payment	31000	119000	63000	213000
Ending balance	-	-	-

                          Schedule 3

      Computation of actual and potential liqudation losses

Paid liquidation expenses		6000
Machinery and equipment net	223000
Received on sale of equipment	163000	60000
Net loss		66000