Question

The Pen, Evan, and Torves Partnership has asked you to assist in winding-up its business affairs. You compile the following information:

1. The partnership’s trial balance on June 30, 20X1, is

	Debit				Credit
Cash		$	5,800
Accounts Receivable (net)			21,500
Inventory			11,000
Plant and Equipment (net)			97,900
Accounts Payable						$	18,100
Pen, Capital							53,100
Evan, Capital							43,000
Torves, Capital							22,000
Total		$	136,200			$	136,200

2. The partners share profits and losses as follows: Pen, 60 percent; Evan, 20 percent; and Torves, 20 percent.
3. The partners are considering an offer of $101,000 for the firm’s accounts receivable, inventory, and plant and equipment as of June 30. The $101,000 will be paid to creditors and the partners in installments, the number and amounts of which are to be negotiated.

Required:
Prepare a cash distribution plan as of June 30, 20X1, showing how much cash each partner will receive if the partners accept the offer to sell the assets.
  

Answer 1

Answer :

Cash Distribution Plan
June 30, 20X1
	Loss Absorption Power			Capital Accounts
	Pen	Evan	Torves	Pen	Evan	Torves
Profit and Loss percentages				60%	20%	20%
Preliquidation capital balances				(53,100)	(43,000)	(22,000)
Loss Absorption Power (Capital balances / Loss percent) **	(88,500)	(215,000)	(110,000)
Decrease highest LAP to next highest :
Evan 215,000 to 110,000 = 105,000*0.20		105,000			21,000
	(88,500)	(110,000)	(110,000)	(53,100)	(22,000)	(22,000)
Decrease highest LAP to next highest :
Evan    - 110,000 to 88,500 = 21,500 * 0.2		21,500			4,300
Torves - 110,000 to 88,500 = 21,500 * 0.2			21,500			4,300
	(88,500)	(88,500)	(88,500)	(53,100)	(17,700)	(17,700)

Summary of Cash Distribution
(If Offer of $101,000 is accepted)
		Accounts Payable	Pen	Evan	Torves
Cash Available (101,000+5,800)	$               106,800
First	(18,100)	18,100
Next	(21,000)			21,000
Next	(8,600)			4,300	4300
Additional in Profit & loss ratio(6:2:2)	(59,100)		35,460	11820	11820
	-	$                 18,100	$     35,460	$     37,120	$     16,120

** Working of Loss absorption power:

Loss Absorption Power:
Pen	53,100/0.6	88,500
Evan	43,000/0.2	215,000
Torves	22,000/0.2	110,000