Partnership Accounts - Dissolution of Firm - Piecemeal Distribution

 

Partnership Accounts

Dissolution of a Partnership Firm -

Piecemeal distribution of realisations from assets

Part A: Discussion of basic theories and techniques

Part B: 8 Illustrations and Solutions

 

Part A

When a realisation account is prepared for closing the books of accounts of a firm in the process of dissolution, it is usually assumed that partners are paid off after realisation of all the assets and payment of all the outside liabilities. But in actual practice, when a partnership firm is in the process of being dissolved, assets are sold gradually one after another and cash is distributed among the partners (after paying off creditors and other outside liabilities) as and when realised. This process of distribution of cash among the partners as and when realised is called piecemeal distribution.

When the assets are realised gradually, available cash at any particular point of time should be utilised in paying off in the following order of priority:

1.     To meet the realisation expenses.

2.     To pay off preferential creditors (e.g. government rates and taxes, etc).

3.     To pay off secured creditors (a secured creditor gets a priority over the other ordinary creditors up to the amount realised from that particular asset by which his claim is secured by the firm, and for the balance of his claim he is considered at par with the other ordinary creditors).

4.     To pay off other ordinary creditors (in the ratio of their individual claims).

5.     To pay off partners’ loans (in the ratio of their individual balances).

 

Methods of piecemeal distribution

There are two methods for piecemeal distribution:

1.     Surplus capital method (also known as higher relative capital method and proportionate capital method).

2.     Maximum loss method.

 

Surplus capital method

This method is suitable when the following two conditions are satisfied:

(a)   Partners’ profit sharing ratio is not as per their capital contribution; and

(b)   All the partners are solvent and are likely to remain so.

 

Following two statements are prepared in this method:

(i)    Statement showing calculation of absolute surplus capital; and

(ii)    Statement showing distribution of proceeds of realisation.

 

Statement showing calculation of absolute surplus capital

Sl. No.	Particulars	A (Rs)	B (Rs)	C (Rs)
1	Original capital (see note below)	×××	×××	×××
2	Profit sharing ratio (PSR)	×××	×××	×××
3	Capital ÷ PSR	×××	×××	×××
4	Base capital (least of row: 3)	×××	×××	×××
5	Relative capital (base capital x PSR)	×××	×××	×××
6	Surplus capital (original capital – relative capital)	×××	×××	×××
7	Surplus capital ÷ PSR	×××	×××	×××
8	Revised base capital (least of row: 7)	×××	×××	×××
9	Revised relative capital (revised base capital x PSR)	×××	×××	×××
10	Absolute surplus capital (surplus capital – revised relative capital)	×××	×××	×××

 

Original capital = Capital account balance + Share of reserves and funds + Share of profit and loss account credit balance – Share of fictitious assets − Share of profit and loss account debit balance – Loan taken by partner ± Current account balance

 

Maximum loss method

This method is suitable when one-partner/partners is/are insolvent and is/are likely to remain so. Under this method, every instalment realised is considered as final realisation, i.e. the remaining assets and claims are worthless. The maximum possible loss (balance due − assets realised) after every instalment realised is distributed among all the partners in their profit sharing ratio. Any partner whose apportioned loss exceeds his balance due is assumed for this purpose to be insolvent and his negative balance will be shared by the solvent partners in their capital ratio in accordance with the decision in the English case of Garner vs. Murray, provided no specific method is mentioned in the problem to be followed as to how the deficiency of the insolvent partner has to be borne by the other solvent partners. This process is repeated till the negative balance is abolished. The partners having positive balances are paid off first. Same sequence of steps is to be followed for all the subsequent realisations.

 

Following two statements are prepared in this method:

(i)       Statement showing realisation and distribution of cash; and

(ii)      Statement showing distribution of cash on capital account.

Part B

Illustration: 1

Partners M, N and P have called upon you to assist them in winding up the affairs of their partnership on 30^th June, 2020. Their Balance Sheet as on that date is given below:

Liabilities	Rs	Assets	Rs
Capital:		Plant and equipment	99,000
M	67,000	Stock in trade	13,500
N	45,000	Sundry debtors	22,000
P	31,500	Cash at bank	6,500
Sundry creditors	17,000	Loan:
		M	12,000
		N	7,500
	1,60,500		1,60,500

 

(a)      The partners share profits and losses in the ratio of 5: 3: 2.

(b)      Cash is distributed to the partners at the end of each month.

(c)      A summary of liquidation transaction are as follows:

 

July:

Rs 16,000 — collected from Debtors; balance is irrecoverable

Rs 10,000 — received from sale of entire stock

Rs 1,000 — liquidation expenses paid

Rs 8,000 — cash retained in the business at the end of the month

 

August:

Rs 1,500 — liquidation expenses paid; as part of the payment of his capital, P accepted an equipment for Rs 10,000 (book value Rs 4,000)

Rs 2,500 — cash retained in the business at the end of the month

 

September:

Rs 75,000 — received on sale of remaining plant and equipment

Rs 1,000 — liquidation expenses paid. No cash is retained in the business

 

Required:

Prepare a Schedule of cash payments as on 30th September, showing how the cash was distributed.

 

Solution: 1

Statement showing calculation of absolute surplus capital

Sl. No.	Particulars	M (Rs)	N (Rs)	P (Rs)
1	Original capital	55,000	37,500	31,500
2	Profit sharing ratio (PSR)	5	3	2
3	Capital ÷ PSR	11,000	12,500	15,750
4	Base capital (least of row: 3)	11,000	11,000	11,000
5	Relative capital (base capital x PSR)	55,000	33,000	22,000
6	Surplus capital (original capital – relative capital)	-	4,500	9,500
7	Surplus capital ÷ PSR		1,500	4,750
8	Revised base capital (least of row: 7)		1,500	1,500
9	Revised relative capital (revised base capital x PSR)		4,500	3,000
10	Absolute surplus capital (surplus capital – revised relative capital)		-	6,500

 

Statement showing distribution of proceeds of realisation

	Amount Available (Rs)	Creditors (Rs)	M’s Capital (Rs)	N’s Capital (Rs)	P’s Capital (Rs)
Amount due		17,000	55,000	37,500	31,500
Cash at bank	6,500
LESS: Paid to creditors	6,500	6,500
Balance due		10,500	55,000	37,500	31,500
Net realisation of July	25,000
LESS: Cash retained	8,000
LESS: Paid to creditors	10,500	10,500
Balance due	6,500	-	55,000	37,500	31,500
LESS: Paid to P	6,500				6,500
Balance due		-	55,000	37,500	25,000
Net realisation of August	8,500
ADD: Cash retained in July	8,000
LESS: Cash retained	2,500
LESS: Paid to P	10,000				10,000
Balance due	4,000	-	55,000	37,500	15,000
LESS: Paid to N and P (3: 2)	4,000			2,400	1,600
Balance due		-	55,000	35,100	13,400
Net realisation of Sept.	74,000
ADD: Cash retained in August	2,500
LESS: Paid to M, N and P          [See W.N.]	76,500	-	41,500	27,000	8,000
Loss on realisation (Final unpaid balance)	-	-	13,500	8,100	5,400

 

Working note:

Particulars	Rs
Total cash available for disbursement at the end of September	76,500
Less: Total amount due to the partners (55,000 + 35,100 + 13,400)	1, 03,500
Total loss on realisation (Final unpaid balance)	27,000
M’s share of loss on realisation (27,000 × 5/10)	13,500
N’s share of loss on realisation (27,000 × 3/10)	8,100
P’s share of loss on realisation (27,000 × 2/10)	5,400
∴ Amount paid to M (55,000 – 13,500)	41,500
Amount paid to N (35,100 – 8,100)	27,000
Amount paid to P (13,400 – 5,400)	8,000

 

Illustration: 2

The firm of Blue Collars presented you with the following Balance Sheet drawn as on 31^st March 2020:

Liabilities	Rs	Assets	Rs
Capital:		Plant and equipment	51,000
L	40,000	Stock in trade	39,000
K	30,000	Sundry debtors	34,000
J	27,000	Cash at bank	3,000
Sundry creditors	37,000	Current Account:
		K	4,000
		J	3,000
	1,34,000		1,34,000

 

Partners shared profits and losses in the ratio of 4: 3: 3. Due to difference among the partners, it was decided to wind up the firm, realise the assets and distribute cash among the partners at the end of each month.

The following realisations were made:

i.          May - Rs 15,000 from debtors and Rs 20,000 by sale of stock.

Expenses on realisation were Rs 500.

ii.         June - Balance of debtors realised Rs 10,000. Balance of stock fetched Rs 24,000.

iii.        August - Part of machinery was sold for Rs 18,000. Expenses incidental to sale were Rs 600.

iv.       September - Part of machinery valued in the books at Rs 5,000 was taken by K, in part discharge at an agreed value of Rs 10,000. Balance of machinery was sold for Rs 30,000 (net).

Partners decided to keep minimum cash balance of Rs 2,000 in the first 3 months and Rs 1,000 thereafter.

Required:

Show how the amounts due to partners will be settled.

 

Solution: 2

Statement showing calculation of absolute surplus capital

Sl. No.	Particulars	L (Rs)	K (Rs)	J (Rs)
1	Original capital	40,000	26,000	24,000
2	Profit sharing ratio (PSR)	4	3	3
3	Capital ÷ PSR	10,000	8,667	8,000
4	Base capital (least of row: 3)	8,000	8,000	8,000
5	Relative capital (base capital x PSR)	32,000	24,000	24,000
6	Surplus capital (original capital – relative capital)	8,000	2,000	-
7	Surplus capital ÷ PSR	2,000	667	-
8	Revised base capital (least of row: 7)	667	667	-
9	Revised relative capital (revised base capital x PSR)	2,667	2,000	-
10	Absolute surplus capital (surplus capital – revised relative capital)	5,333	-	-

 

Statement showing distribution of proceeds of realisation

	Amount available	Creditors	L’s Capital	K’s Capital	J’s Capital
Amount due		37,000	40,000	26,000	24,000
Cash at bank	3,000
LESS: Minimum cash balance	2,000
LESS: Paid to creditors	1,000	1,000
Balance due		36,000	40,000	26,000	24,000
Net realisation of May	34,500
LESS: Paid to creditors	34,500	34,500
Balance due		1,500	40,000	26,000	24,000
Net realisation of June	34,000
LESS: Paid to creditors	1,500	1,500
LESS: Paid to L	5,333		5,333
LESS: Paid to L and K	4,667		2,667	2,000
LESS: Paid to all in 4: 3: 3	22,500		9,000	6,750	6,750
Balance due			23,000	17,250	17,250
Net realisation of August	17,400
ADD: Part of cash retained	1,000
LESS: Paid to all in 4: 3: 3	18,400		7,360	5,520	5,520
Balance due			15,640	11,730	11,730
Net realisation of Sept.	40,000
ADD: Bal. of cash retained	1,000
LESS: Machinery given to K	10,000			10,000
LESS: Paid to L and J in 4: 3	23,333		13,333		10,000
LESS: Paid to all in 4: 3: 3	7,667		3,067	2,300	2,300
Profit on realisation			760	570	570

 

Illustration: 3

A partnership firm was dissolved on 30^th June, 2020. Its Balance Sheet on that date was as follows:

Liabilities	Rs	Assets	Rs
Capital:		Sundry assets	94,600
Amit	38,000	Cash	5,400
Mohit	24,000
Udit	18,000
Loan Account - Mohit	5,000
Sundry creditors	15,000
	1,00,000		1,00,000

 

The assets were realised in instalments and the payments were made on the proportionate capital basis. Creditors were paid Rs 14,500 in full settlement of their account. Expenses of realisation were estimated to be Rs 2,700 but actual amount spent on this account was Rs 2,000. This amount was paid on 15^th September. Draw up a Memorandum of distribution of Cash, which was realised as follows:

On 5^th July – Rs 12,600

On 30^th August – Rs 30,000

On 15^th September – Rs 40,000

The partners shared profits and losses in the ratio of 2: 2: 1. Give working notes.

 

Solution: 3

Statement showing calculation of absolute surplus capital

Sl. No.	Particulars	Amit (Rs)	Mohit (Rs)	Udit (Rs)
1	Original capital	38,000	24,000	18,000
2	Profit sharing ratio (PSR)	2	2	1
3	Capital ÷ PSR	19,000	12,000	18,000
4	Base capital (least of row: 3)	12,000	12,000	12,000
5	Relative capital (base capital x PSR)	24,000	24,000	12,000
6	Surplus capital (original capital – relative capital)	14,000	-	6,000
7	Surplus capital ÷ PSR	7,000	-	6,000
8	Revised base capital (least of row: 7)	6,000	-	6,000
9	Revised relative capital (revised base capital x PSR)	12,000	-	6,000
10	Absolute surplus capital (surplus capital – revised relative capital)	2,000	-	-

 

Statement showing distribution of proceeds of realisation

	Amount available	Creditors	Mohit’s Loan	Amit’s Capital	Mohit’s Capital	Udit’s Capital
Amount due		15,000	5,000	38,000	24,000	18,000
Cash in hand	5,400
LESS: Cash retained	2,700
LESS: Paid to creditors	2,700	2,700
Balance due		12,300	5,000	38,000	24,000	18,000
Net realisation of July	12,600
LESS: Paid to creditors	11,800	11,800
LESS: Written off		500
LESS: Paid to M’s Loan	800		800
Balance due			4,200	38,000	24,000	18,000
Net realisation of August	30,000
LESS: Paid to Mohit’s Loan	4,200		4,200
LESS: Paid to Amit	2,000			2,000
LESS: Paid to Amit and Udit	18,000			12,000		6,000
LESS: Paid to all in 2: 2: 1	5,800			2,320	2,320	1,160
Balance due				21,680	21,680	10,840
Net realisation of Sept.	40,000
ADD: Cash retained unutilised	700
LESS: Paid to all in 2: 2: 1	40,700			16,280	16,280	8,140
Loss on realisation (Final unpaid balance)				5,400	5,400	2,700

 

Illustration: 4

East, South and North are in partnership sharing profits and losses in the ratio 3: 2: 1. They decided to dissolve the business on 31^st July, 2020 on which date their Balance Sheet was as follows:

Liabilities	Rs	Assets	Rs
Capital:		Land and buildings	30,810
East	38,700	Motor car	5,160
South	10,680	Investment	1,080
North	11,100	Stock	19,530
Loan Account - North	3,000	Debtors	11,280
Sundry creditors	10,320	Cash	5,940
	73,800		73,800

 

The assets were realised piecemeal as follows and it was agreed that cash should be distributed as and when realised:

14^th August Rs 10,380

20^th September Rs 27,900

16^th October Rs 3,600

(North took over investment on 15^th November at a value of Rs 1,260.)

18^th November Rs 19,200

 

Dissolution expenses were originally provided for an estimated amount of Rs 2,700, but actual amount spent on 25^th October was Rs 1,920. The creditors were settled for Rs 10,080.

Required:

Prepare a statement showing distribution of cash amongst the partners, according to Proportionate Capital Method.

 

Solution: 4

Statement showing calculation of absolute surplus capital

Sl. No.	Particulars	East (Rs)	South (Rs)	North (Rs)
1	Original capital	38,700	10,680	11,100
2	Profit sharing ratio (PSR)	3	2	1
3	Capital ÷ PSR	12,900	5,340	11,100
4	Base capital (least of row: 3)	5,340	5,340	5,340
5	Relative capital (base capital x PSR)	16,020	10,680	5,340
6	Surplus capital (original capital – relative capital)	22,680	-	5,760
7	Surplus capital ÷ PSR	7,560	-	5,760
8	Revised base capital (least of row: 7)	5,760	-	5,760
9	Revised relative capital (revised base capital x PSR)	17,280	-	5,760
10	Absolute surplus capital (surplus capital – revised relative capital)	5,400	-	-

 

Statement showing distribution of proceeds of realisation

	Amount available	Creditors	North’s Loan	East’s Capital	South’s Capital	North’s Capital
Amount due		10,320	3,000	38,700	10,680	11,100
Cash in hand	5,940
LESS: Cash retained	2,700
LESS: Paid to creditors	3,240	3,240
Balance due		7,080	3,000	38,700	10,680	11,100
Realisation on 14th August	10,380
LESS: Paid to creditors	6,840	6,840
LESS: Written off		240
LESS: Paid to North’s Loan	3,000		3,000
LESS: Paid to East	540			540
Balance due				38,160	10,680	11,100
Realisation on 20th September	27,900
LESS: Paid to East	4,860			4,860
LESS: Paid to East and North	23,040			17,280		5,760
Balance due				16,020	10,680	5,340
Realisation on 16th October	3,600
LESS: Paid to all in 3: 2: 1	3,600			1,800	1,200	600
Balance due				14,220	9,480	4,740
Unutilised retained cash On 25th October (2,700 – 1,920)	780
LESS: Paid to all in 3: 2: 1	780			390	260	130
Balance due				13,830	9,220	4,610
Realisation on 15th November	1,260
LESS: Paid to North	1,260					1,260
Balance due				13,830	9,220	3,350
Realisation on 18th November	19,200
LESS: Paid East and South(3:2)	6,300			3,780	2,520
LESS: Paid to all in 3: 2: 1	12,900			6,450	4,300	2,150
Loss on realisation (Final unpaid balance)				3,600	2,400	1,200

 

Illustration: 5

The following is the Balance Sheet of X, Y and Z as at 31^st December, 2020 on which date they decided to dissolve the partnership. They were sharing profits and losses in the ratio of 5: 3: 2.

Liabilities	Rs	Assets	Rs
X’s Capital	55,000	Sundry assets	13,04,000
Y’s Capital	37,500	Cash	20,000
Z’s Capital	31,500
Y’s Loan	2,00,000
Sundry creditors	10,00,000
	13,24,000		13,24,000

 

There was a bill for Rs 4,000 due on 1.4.2020 under discount. Other assets realised as under:

On 1^st January: Rs 8, 85,000; on 1^st February: Rs 3, 00,000; on 1^st March: Rs 8,000; on 1^st April: Rs 5,000; on 1^st May: Rs 10,000. The expenses of realisation were expected to be Rs 5,000, but ultimately amounted to Rs 4,000 only and were paid on 1^st May. The acceptor of the bill under discount met the bill on the due date.

Required:

Prepare a statement showing the monthly distribution of cash according to Maximum Loss Method.

 

Solution: 5

Statement showing realisation and distribution of cash

Particulars	Realisation (Rs)	Creditors (Rs)	Y’s Loan (Rs)	Partners’ Capital (Rs)
Cash in hand	20,000
LESS: Provision for bill discounted	(4,000)
LESS: Provision for expenses	(5,000)	11,000
Realisation on 1st January	8,85,000	8,85,000
Realisation on 1st February	3,00,000	1,04,000	1,96,000
Realisation on 1st March	8,000		4,000	4,000
Realisation on 1st April	5,000
Add: Discounted bill settled	4,000			9,000
Realisation on 1st May	10,000
ADD: Provision for expenses not reqd.	1,000			11,000
Total	12,24,000	10,00,000	2,00,000	24,000

 

Statement showing distribution of cash on capital account

Particulars	Total (Rs)	X’s Cap. (Rs)	Y’s Cap. (Rs)	Z’s Cap. (Rs)
Distribution of Rs 4,000
Balance due	1,24,000	55,000	37,500	31,500
LESS: Maximum possible loss (5: 3: 2)	1,20,000	60,000	36,000	24,000
		(5.000)	1,500	7,500
Deficiency of X written off against Y and Z in capital ratio of 25: 21		5,000	(2,717)	(2,283)
			(1,217)	5,217
Deficiency of Y written off against Z			1,217	(1,217)
Rs 4,000 distributed	4,000			4,000
Distribution of Rs 9,000
Balance due	1,20,000	55,000	37,500	27,500
LESS: Maximum possible loss (5: 3: 2)	1,11,000	55,500	33,300	22,200
		(500)	4,200	5,300
Deficiency of X written off against Y and Z in capital ratio of 25: 21		500	(272)	(228)
Rs 9,000 distributed	9,000		3,928	5,072
Distribution of Rs 11,000
Balance due	1,11,000	55,000	33,572	22,428
LESS: Maximum possible loss (5: 3: 2)	1,00,000	50,000	30,000	20,000
Rs 11,000 distributed	11,000	5,000	3,572	2,428
Loss on realisation (Final unpaid balance)	1,00,000	50,000	30,000	20,000

 

Illustration: 6

The following is the Balance Sheet of P, Q and R on 31st August, 2012 when they decided to dissolve the partnership. They were sharing profits and losses in the ratio of 2: 2: 1.

Liabilities	Rs	Assets	Rs
P’s Capital	15,000	Sundry assets	48,500
Q’s Capital	18,000	Cash	500
R’s Capital	9,000
P’s Loan	5,000
Sundry creditors	2,000
	49,000		49,000

The assets realised the following sums in instalments.

I— Rs 1,000, II— Rs 3,000, III— Rs 3,900, IV— Rs 6,000, V— Rs 20,000

The expenses of realisation were expected to be Rs 500 but ultimately amounted to Rs 400 only.

Required:

Show, how at each stage, the cash received should be distributed among partners according to Maximum Loss Method.

 

Solution: 6

Statement showing realisation and distribution of cash

Particulars	Realisation (Rs)	Creditors (Rs)	P’s Loan (Rs)	Partners’ Capital (Rs)
1st Realisation	1,000	1,000
2nd Realisation	3,000	1,000	2,000
3rd Realisation	3,900		3,000	900
4th Realisation	6,000			6,000
5th Realisation	20,000
Balance cash in hand after expenses	100			20,100
Total	34,000	2,000	5,000	27,000

 

Statement showing distribution of cash on capital account

Particulars	Total (Rs)	P’s Cap. (Rs)	Q’s Cap. (Rs)	R’s Cap. (Rs)
Distribution of Rs 900
Balance due	42,000	15,000	18,000	9,000
LESS: Maximum possible loss (2: 2: 1)	41,100	16,440	16,440	8,220
		(1,440)	1,560	780
Deficiency of P written off against Q and R in capital ratio of 2: 1		1,440	(960)	(480)
Rs 900 distributed	900		600	300
Distribution of Rs 6,000
Balance due	41,100	15,000	17,400	8,700
LESS: Maximum possible loss (2: 2: 1)	35,100	14,040	14,040	7,020
Rs 6,000 distributed	6,000	960	3,360	1,680
Distribution of Rs 20,100 (including balance cash in hand)
Balance due	35,100	14,040	14,040	7,020
LESS: Maximum possible loss (2: 2: 1)	15,000	6,000	6,000	3,000
Rs 20,100 distributed	20,100	8,040	8,040	4,020
Loss on realisation (Final unpaid balance)	15,000	6,000	6,000	3,000

 

Illustration: 7

Rahul, Roshan and Rohan were in partnership sharing profits and losses in the ratio of 3: 2: 1 respectively. The partnership was dissolved on 30^th June, 2020 when the position was as follows:

Liabilities	Rs	Assets	Rs
Capitals:		Stock in trade	1,12,000
Rahul	1,40,000	Sundry debtors	2,94,000
Roshan	70,000	Cash	28,000
Rohan	14,000
Sundry creditors	2,10,000
	4,34,000		4,34,000

 

There was bill for Rs 10,000, due on 30th November, 2020, under discount. It was agreed that the net realisations should be distributed in their due order (at end of each month) but as safely as possible. The realisations and expenses were as under:

Date	Stock and Debtors (Rs)	Expenses (Rs)
31st July	84,000	7,000
31st August	1,26,000	5,400
30th September	70,000	4,900
31st October	77,000	3,500
30th November	35,500	3,500

 

The Stock was completely disposed off and amounts due from debtors were realised, the balance being irrecoverable. The acceptor of the bill under discount met the bill on the due date. Prepare a Statement showing the piecemeal distribution of cash according to Maximum Loss Method.

 

Solution: 7

Statement showing realisation and distribution of cash

Particulars	Realisation (Rs)	Creditors (Rs)	Partners’ Capital (Rs)
Cash in hand	28,000
LESS: Provision for bill discounted	(10,000)	18,000
Realisation on 31st July	77,000	77,000
Realisation on 31st August	1,20,600	1,15,000	5,600
Realisation on 30th September	65,100		65,100
Realisation on 31st October	73,500		73,500
Realisation on 30th November	32,000
Add: Discounted bill settled	10,000		42,000
Total	3,95,700	2,10,000	1,85,700

 

Statement showing distribution of cash on capital account

Particulars	Total (Rs)	Rahul’s Cap. (Rs)	Roshan’s Cap. (Rs)	Rohan’s Cap. (Rs)
Distribution of Rs 5,600
Balance due	2,24,000	1,40,000	70,000	14,000
LESS: Maximum possible loss (3: 2: 1)	2,18,400	1,09,200	72,800	36,400
		30,800	(2,800)	(22,400)
Deficiency of Roshan and Rohan Written off against Rahul		(25,200)	2,800	22,400
Rs 5,600 distributed	5,600	5,600
Distribution of Rs 65,100
Balance due	2,18,400	1,34,400	70,000	14,000
LESS: Maximum possible loss (3: 2: 1)	1,53,300	76,650	51,100	25,550
		57,750	18,900	(11,550)
Deficiency of Rohan written off against Rahul and Roshan in 2: 1 ratio		(7,700)	(3,850)	11,550
Rs 65,100 distributed	65,100	50,050	15,050
Distribution of Rs 73,500
Balance due	1,53,300	84,350	54,950	14,000
LESS: Maximum possible loss (3: 2: 1)	79,800	39,900	26,600	13,300
Rs 73,500 distributed	73,500	44,450	28,350	700
Distribution of Rs 42,000
Balance due	79,800	39,900	26,600	13,300
LESS: Maximum possible loss (3: 2: 1)	37,800	18,900	12,600	6,300
Rs 42,000 distributed	42,000	21,000	14,000	7,000
Loss on realisation (Final unpaid balance)	37,800	18,900	12,600	6,300

 

Illustration: 8

E, F and G were partners in a firm, sharing profits and losses in the ratio of 3: 2: 1, respectively. Due to extreme competition, it was decided to dissolve the partnership on 31^st December, 2019. The Balance Sheet on that date was as follows:

Liabilities	Rs	Assets	Rs
Capital Accounts:		Machinery	1,54,000
E	1,13,100	Furniture and Fittings	25,800
F	35,400	Investments	5,400
G	31,500	Stock in trade	97,700
Current Accounts:		Sundry debtors	56,400
E	26,400	Bank Account	29,700
G	6,000	Current Account: F	18,000
Reserves	1,08,000
Loan Account: G	15,000
Sundry creditors	51,600
	3,87,000		3,87,000

 

The realisation of assets is spread over the next few months as follows:

February – Debtors Rs 51,900; March – Machinery Rs 1, 39,500; April – Furniture and Fittings Rs 18,000; May – G agreed to take over Investments at Rs 6,300; June – Stock Rs 96,000. Dissolution expenses, originally provided, were Rs 13,500, but actually amounted to Rs 9,600 and were paid on 30^th April. The partners decided that after creditors were settled for Rs 50,400, all cash received should be distributed at the end of each month in the most equitable manner.

Required:

Prepare a statement of actual cash distribution as is received following “Maximum Loss Method”.

 

Solution: 8

Statement showing realisation and distribution of cash

Particulars	Realisation (Rs)	Creditors (Rs)	G’s Loan (Rs)	Partners’ Capital (Rs)
Cash at bank	29,700
LESS: Provision for expenses	(13,500)	16,200
Realisation in February	51,900	34,200	15,000	2,700
Realisation in March	1,39,500			1,39,500
Realisation in April	18,000
ADD: Provision for expenses not reqd.	3,900			21,900
Cash brought in by G in May	6,300			6,300
Realisation in June	96,000			96,000
Total	3,31,800	50,400	15,000	2,66,400

 

Statement showing distribution of cash on capital account

Particulars	Total (Rs)	E’s Capital (Rs)	F’s Capital (Rs)	G’s Capital (Rs)
Distribution of Rs 2,700
Balance due	3,02,400	1,93,500	53,400	55,500
LESS: Maximum possible loss (3: 2: 1)	2,99,700	1,49,850	99,900	49,950
		43,650	(46,500)	5,550
Deficiency of F written off against E and G in fixed capital ratio 377: 105		(36,370)	46,500	(10,130)
		7,280		(4,580)
Deficiency of G written off against E		(4,580)		4,580
Rs 2,700 distributed	2,700	2,700
Distribution of Rs 1,39,500
Balance due	2,99,700	1,90,800	53,400	55,500
LESS: Maximum possible loss (3: 2: 1)	1,60,200	80,100	53,400	26,700
Rs 1,39,500 distributed	1,39,500	1,10,700		28,800
Distribution of Rs 21,900
Balance due	1,60,200	80,100	53,400	26,700
LESS: Maximum possible loss (3: 2: 1)	1,38,300	69,150	46,100	23,050
Rs 21,900 distributed	21,900	10,950	7,300	3,650
Distribution of Rs 6,300
Balance due	1,38,300	69,150	46,100	23,050
LESS: Maximum possible loss (3: 2: 1)	1,32,000	66,000	44,000	22,000
Rs 6,300 distributed	6,300	3,150	2,100	1,050
Distribution of Rs 96,000
Balance due	1,32,000	66,000	44,000	22,000
LESS: Maximum possible loss (3: 2: 1)	36,000	18,000	12,000	6,000
Rs 96,000 distributed	96,000	48,000	32,000	16,000
Loss on realisation (Final unpaid balance)	36,000	18,000	12,000	6,000