Solution to Exercise 16-10
When we make a change in entity such as change a partnership to a corporation, the first thing we do is revalue
assets of the partnership to reflect the market value at the time of change, as follows
Market
Value
Book Value
Loss (gain)
22,400
21,600
800
Accounts receivable (net)
36,000
32,800
3,200
Inventory
47,200
40,000
7,200
Equipment (net)
105,600
94,400
11,200
Total
Revaluation resulted in a total loss of $11,200 and therefore must be allocated to partners as in a.1 below:
The following entries are recorded in the books of the Partnership
6,720 (11200 x 60%)
a.1
Dr. A, Capital
Dr. B, Capital
4,480 (11200 x 40%)
Cr. Allowance for doubtful accounts
800 (22,400 - 21,600)
Cr. Inventory
3,200 (36,000 - 32,800)
Cr. Equipment
7,200 (47,200 - 40,000)
To allocate the loss resulted from the revaluation to partners in the ratio of 60% : 40%
a.2
a.3
Dr. Investment in A&B Corporation
85,200 (Net assets of A&B Corporation)***
Dr. Accounts payable
17,200
Cr. Cash
8,000
Cr. Accounts receivable
21,600
Cr. Inventory
32,800
Equipment
40,000
To record the investment in A&B Corporation and transfer the net assets to the new entity.
*** Total Assets = 102,400 - Total Liabilities = 17,200 = Net Assets (Investment) = 85,200
*** Total Assets (8,000+21,600+32,800+40,000) = 102,400
Dr. A, Capital
(62,400 - 6,720)
55,680
Dr. B, Capital
29,520 (34,000 - 4,480)
Cr. Investment in A&B Corporation
To close the books of the partnership
b.
Dr. Cash
8,000
Dr. Accounts receivable
21,600
Dr. Inventory
32,800
Dr. Equipment
40,000
Cr. Accounts payable
Cr. Common stock
Cr. Paid in capital in excees of par
To record the net assets and the issuance of common stocks.
END
I have the following questions for you:
85,200 (55,680 + 29,520)
17,200
71,000 (7,100 shares x $10 par)
14,200 (85,200 - 71,000)
1. What is the market value per share?
2. How many shares should A receive?
3. How many shares should B receive?
Problem 16-14
Capital Balances
÷ PL Ratio
= Capital / PL Ratio
Required reduction in C (37,000 - 36,667)
Balances
Required reduction in B & C in the ratio of 3:2 (36,667-17,600)
Balances
Therefore, the cash distribution plan would be as follows:
1st Level: Retain for any liquidating expenses
2nd Level: Pay all liabilities (53,000-3,0000)
3rd Level: Pay to Chou (333x2)
4th Level: Pay to Bru and Chou (19067x3) & (19,067x2)
5th Level: Any remaining cash balance to be distributed
Liquidating Accounts
expenses Payable
100%
50,000
Art
88,000
5
17,600
Bru
110,000
3
36,667
17,600
0
17,600
36,667
19,067
17,600
Art
Bru
5:
57,201
3:
At the end of January total cash available for distribution = 18,000 (beg. balance) +51,000 (1)+38,000 (2) = $107,00
Out of this the following were paid:
(3) Paid $2,000 for liquidating expenses.
(4) Paid the accounts payable (53,000-3,000)
(5) Retained $10,000 for additional liquidating espenses
The remaining balance at end of January is $45,000
which should be paid to partners.
Now, we move to Level 3: C receives 333x2=666
Now, we move to Level 4: Remaining balance is
45,000-6666 = 44,334 to be distributed in Level 4
at the ratio of 3:2. Therefore,
B receives: 44,334 x 3/5 = 26,600
and C receives 44,334 x 2/5 = 17,734
In February, paid $4,000 liquidating expenses
out of the $10,000. So, $6,000 remain to be paid as
liquidating expenses in March.
BB
Jan (1)
Jan (2)
EB (Jan)
EB (Feb)
Mar (8)
Mar (9)
EB
Jan (5)
EB (Feb)
Balance
CASH
18,000 Jan (3)
51,000 Jan (4)
38,000 Jan (5)
45,000 Level 3
Level 4
0
146,000 Level 4
1,000 Level 5
0
Liquidating expenses
10,000 Feb (6)
6,000 Mar (9)
1,000 This 1,000 is
and will be p
partners.
In March received $146,000.
In March paid $5,000 liquidating expenses. Balance to be released is $1,000
Therefore, total cash available to distribute to partners = 146,000 + 1,000 = $147,000
With this $147,000 we will complete the payments for B and C at Level 4 as follows:
B received: 57,201 - 26,600 = $30,601
and C received: 38,134 - 17,734 = $20,400
Now, we move to Level 5 with cash balance of (146,000+1,000) - 30,601 - 20,400 = $95,999
A receives: 95,999 x 5/10 = $48,000
B receives: 95,999 x 3/10 = $28,799
C receives: 95,999 x 2/10 = 19,200
In summary total amount received by each partner is as follows:
Partner A:
In Level 5 receives
$48,000
Partner B:
In Level 4 receives
In Level 4 receives
In Level 5 receives
Total
$26,600
$30,601
$28,799
$86,000
Partner C:
In Level 3 receives
In Level 4 receives
In Level 4 receives
In Level 5 receives
Total
Solution to Problem 16-15
First we prepare a CASH DISTRIBUTION PLAN
e the net
CAP
Pen
55,000
5
11,000
Preliquidation capital balances
Profit Loss share
Loss Absorption Potential (Preliquidation capital / Profit Loss Ratio)
Decrease highest LAP to next highest LAP i.e
(15,000 to 12,000=$3,000/prifit loss ratio) equivalent to 3x$3,000 = $9,000
New Balance
Decrease highest LAP to next highest LAP i.e
Decrease Evan by 1,000 (12,000 -11,000) equivalent to (1,000 x 3)
Decrease Torves by 1,000 (12,000 -11,000) equivalent to (1,000 x 2)
New Balance
Any available cash at this point will be distributed in the ratio 5:3:2
11,000
11,000
We prepare now a SUMMARY CASH DISTRIBUTION PLAN
Level 1: Pay and withhold liquidating expenses if any
Level 2: Pay all Liabilities
Level 3: Pay all $9,000 (3 x $3000) to Evan
Level 4: Pay a total of $5,000 to Evans and Torves in
the ratio of 3:2 when available
Level 5: Pay any remaining cash to Pen, Evan, and
Torves in the ratio
Liquida.
Expenses Liabilities
0
17,000
Pen
5
Now, we can answer the question. If $100,000 offer is accepted, then total cash available is
$100,000 + $6,000 = $106,000 will be distributed as follows.
Level 1: Pay and withhold liquidating expenses if any
Level 2: Pay all Liabilities
Level 3: Pay all $9,000 (3 x $3000) to Evan
Level 4: Pay a total of $5,000 to Evans and Torves in
the ratio of 3:2 when available
Level 5: Remaining cash of
(106,000-17,000-9,000-5,000) $75,000 will be
Ditributed as follows:
Pen
75,000*5/10
Evan
75,000*3/10
Totves
75,000*2/10
So total cash is distributed
Liquida.
Expenses Liabilities
0
17,000
Pen
37,500
0
17,000
37,500
Chou
74,000
2
37,000
333
36,667
19,067
17,600
Chou
666
38,134
2
00
2,000
50,000
10,000
666
44,334
51,001
95,999
4,000
5,000
s released
paid for
$666
$17,734
$20,400
$19,200
$58,000
PITAL BALANCE
Evan
45,000
3
15,000
Torves
24,000
2
12,000
3,000
12,000
12,000
1,000
11,000
1,000
11,000
Evan
Torves
9,000
3,000
2,000
3
2
Evan
Torves
9,000
3,000
2,000
22,500
34,500
15,000
17,000