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Assume that the assets in the earlier example are sold for Birr 80,000resulting in Birr 100,000 loss. After distributing this loss, there will becapital deficiency in D, capital even after offsetting with his loan account.D’s capital deficiency is absorbed by A, B, and C in according to thepreviously existing profit and loss sharing plan. The result in C’s capitaldeficiency is further distributed among the other remaining ones. If partners with capital deficiency are personally solvent, the cash will bedistributed to the partners with positive capital balances as it becomesavailable. But if capital deficient partners become personally insolvent, then_____________________________________________________________________Accounting for partnership Handout32
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS________________________________________________________________________real loss will be recognized from capital deficient partners and the debitbalances in the capital account will be cancelled against the credit balancesof the other partners. As absorption of capital deficiency by other partners isdone on the assumption of a possible loss, this loss is only assumed forcomputational purposes to arrive at cash to be safely distributed and thus,no journal entry is done until the loss from capital deficiency is actuallyproved by the personal insolvency of a partner._____________________________________________________________________Accounting for partnership Handout33
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS________________________________________________________________________A B C & PARTNERSHIPSTATEMENT OF REALIZATION AND LIQUIDATIONJULY TO AUGUSTTABLE 3CASHOTHERASSETSLIABB, LOAND, LOANPARTNERS CAPITALA (30)B (30%)C (20%)D (20%)Balancebeforeliquidation SalesofAssetandLossdistribution 10,00080,000180,000(180,000)75,0006,0005,00042,000(30,000)31,000(30,000)20,500(20,000)10,000(20,000)BalancesPayment ofcreditors 90,000(75,000)-75,000(75,000)6,0005,00012,0001,500500(10,000)Balance offset of D,Loan 15,000-----6,000-5,000(5,000)12,000-1,500-500-(10,000)5,000BalancesPayment topartner (sub-schedulebelow)15,000(15,000)----6,000(5,250)--12,000(9,750)1,500-500-(5,000)Balances ---750-2,2501,500500(5,000)_____________________________________________________________________Accounting for partnership Handout34
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS_____________________________________________________________________________________________________________________________________________Accounting for partnership Handout35
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS________________________________________________________________________SUB SCHEDULE PARTNER’S CAPITAL BALANCESA (30%)B (30%)C (20%)D (20%)Capital BalancesLoan B12,0001,5006,000500(5,000)BalancesAbsorption of D’s Capitaldeficiency by A,B,C in 3:3:212,000(1,875)7,500(1,875)500(1,250)(5,000)5,000Balances Absorption of C’s Capital Deficiency by A & B in 3:310,125(375)5,625(375)(750)750--Payment to partners equity 9,7505,250--Loss on Realization that Results in Partnership Insolvency whilepartners are Solvent If the whole partnership in insolvent or has insufficient cash, even to pay forits outside creditors, then the recourse to the partners personal assetscomes. If one more of the partners are solvent then the question arises as tothe relative rights of (a) Partners creditors and (b) partners personalcreditors.The legal rule is the (a) partnership assets are first available to partnershipcreditors; (b) personal assets of partners are also first available to personalcreditors of partners. If after outside creditors are paid in full any assetsremain in the partnership, the personal creditors of a partner could haveclaim against these assets to the extent of the partners’ equity in thepartnership. If on the other hand any personal assets of the partners remain