Assume that the assets in the earlier example are

This preview shows page 32 - 37 out of 46 pages.

Assume that the assets in the earlier example are sold for Birr 80,000 resulting in Birr 100,000 loss. After distributing this loss, there will be capital 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 the previously existing profit and loss sharing plan. The result in C’s capital deficiency is further distributed among the other remaining ones. If partners with capital deficiency are personally solvent, the cash will be distributed to the partners with positive capital balances as it becomes available. But if capital deficient partners become personally insolvent, then _____________________________________________________________________ Accounting for partnership Handout 32
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS ________________________________________________________________________ real loss will be recognized from capital deficient partners and the debit balances in the capital account will be cancelled against the credit balances of the other partners. As absorption of capital deficiency by other partners is done on the assumption of a possible loss, this loss is only assumed for computational purposes to arrive at cash to be safely distributed and thus, no journal entry is done until the loss from capital deficiency is actually proved by the personal insolvency of a partner. _____________________________________________________________________ Accounting for partnership Handout 33
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS ________________________________________________________________________ A B C & PARTNERSHIP STATEMENT OF REALIZATION AND LIQUIDATION JULY TO AUGUST TABLE 3 CASH OTHER ASSETS LIAB B, LOAN D, LOAN PARTNERS CAPITAL A (30) B (30%) C (20%) D (20%) Balance before liquidation Sales of Asset and Loss distribution 10,000 80,000 180,000 (180,000) 75,000 6,000 5,000 42,000 (30,000) 31,000 (30,000) 20,500 (20,000) 10,000 (20,000) Balances Payment of creditors 90,00 0 (75,00 0) - 75,000 (75,000) 6,000 5,000 12,000 1,500 500 (10,000) Balance offset of D, Loan 15,00 0 - - - - - 6,000 - 5,000 (5,000) 12,000 - 1,500 - 500 - (10,000) 5,000 Balances Payment to partner (sub- schedule below) 15,00 0 (15,00 0) - - - - 6,000 (5,250) - - 12,000 (9,750) 1,500 - 500 - (5,000) Balances - - - 750 - 2,250 1,500 500 (5,000) _____________________________________________________________________ Accounting for partnership Handout 34
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS ________________________________________________________________________ _____________________________________________________________________ Accounting for partnership Handout 35
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS ________________________________________________________________________ SUB SCHEDULE PARTNER’S CAPITAL BALANCES A (30%) B (30%) C (20%) D (20%) Capital Balances Loan B 12,000 1,500 6,000 500 (5,000) Balances Absorption of D’s Capital deficiency by A,B,C in 3:3:2 12,000 (1,875) 7,500 (1,875) 500 (1,250) (5,000) 5,000 Balances Absorption of C’s Capital Deficiency by A & B in 3:3 10,125 (375) 5,625 (375) (750) 750 - - Payment to partners equity 9,750 5,250 - - Loss on Realization that Results in Partnership Insolvency while partners are Solvent If the whole partnership in insolvent or has insufficient cash, even to pay for its outside creditors, then the recourse to the partners personal assets comes. If one more of the partners are solvent then the question arises as to the relative rights of (a) Partners creditors and (b) partners personal creditors. The legal rule is the (a) partnership assets are first available to partnership creditors; (b) personal assets of partners are also first available to personal creditors of partners. If after outside creditors are paid in full any assets remain in the partnership, the personal creditors of a partner could have claim against these assets to the extent of the partners’ equity in the partnership. If on the other hand any personal assets of the partners remain

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture