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FA2


Unit - 2


PIECEMEAL DISTRIBUTION OF CASH


When the partnership Firm is dissolved, it is assumed that all the assets were realised on the date of dissolution and accounts settled on the same date. However the process of realizing the assets takes a long time and cash is distributed as and when it is realized. Such a process of gradual distribution of money is known as “Piecemeal Distribution”.

The following are the key methods for distribution of cash under piecemeal distribution:


If the capitals of the partners are in the ratio of their profit sharing arrangement, then each of them is paid out according to his capital ratio at each distribution. If the capitals of the partners are not in the profit sharing ratio then the first cash available (after making payment of outside liabilities and loans due to the partners) for distribution amongst the partners should be paid to those partners whose capitals are more than their profit sharing ratio so as to bring their capitals to their profit sharing levels. After this the cash available is distributed amongst all partners according to their profit sharing ratio.

The unpaid balance of capital accounts will represent loss on realisation and this loss will be exactly in their profit sharing ratio.

STEPS:

  1. Calculate the order of Payment first(for distribution between the partners)
  1. Divide the capitals of partners by their individual Profit Sharing Ratio to get capital per unit.
  2. Using the least capital per unit, calculate the amount paid by multiplying with individual PSR.
  3. Subtract the amount calculated in (b) from the total capital.
  4. Repeat the steps until balance of only one partner remains.
  5. Decide order of payments

 

2.      Prepare Statement of Distribution of Cash

  1. Start with writing balances of Cash and all the liabilities to be paid along with partner’s capital.
  2. Keep aside provision for realization expenses/dissolution expenses given.
  3. Keep recording Cash received through realization according to their order given in question and accordingly follow payments mentioned in below steps.
  4. Pay outside liabilities first. If there are more than one outside liability and cash available is less, then pay in ratio of outstanding amount of liabilities.
  5. Next pay, Partner’s Loan.
  6. Lastly pay partner’s capital according to the order of payments.

 


 

An alternative method of piecemeal distribution amongst partner is to calculate the maximum possible loss on every realisation after the outside liabilities and the partner’s loan has been paid. The amount available for distribution amongst partners is compared with the total amount of capital payable to the partners and the maximum loss is ascertained on the assumption that in future assets will not realize any amount. The maximum possible loss so ascertained is deducted from the capital balances of the partners in their profit and loss sharing ratio and the balance left in the capital account after deducting the maximum possible loss will be the amount payable to the partner.

If a partner’s share of maximum possible loss is more than the amount standing to the credit of his capital account, he should be treated as insolvent and his deficiency should be debited to the capital accounts of the solvent partners in the proportion of their capitals which stood on the dissolution date as stated under the Garner V/s. Murray Rule. The amount standing to the credit of the partners after debiting their share of maximum loss and their share of insolvent partner’s deficiency will be equal to the cash available for the distribution amongst the partners.

This process of maximum possible loss is repeated on each realisation till all the assets are disposed.

Note: This method is not in the syllabus

 


Q.1. A, B and C are partners having capital of Rs. 20,000; 10,000 and 5,000. The  profit sharing ratio of A, B and C is 2:2:1 respectively. Calculate the surplus capital.

Solution: 

Statement showing Surplus Capital

 

A

B

C

Profit sharing ratio

2

2

1

Actual Capital

20,000

10,000

5,000

Capital’s of partner’s on the basis of C’s capital (C is having the least capital)

 

10,000

 

10,000

 

5,000

Surplus Capital

10,000

------------

---------

 

Conclusion:

  1. First pay Rs 10,000 to A only
  2. Next pay Rs 25,000 to all in their PSR

Note: After paying the surplus capital to A, the remaining capital should be distributed among all the partners among their capital sharing ratio of 2:2:1.

Q.2. The partners A, B and C have called you to assist them in winding up the affairs of their partnership on 30th June, 2005. Their Balance Sheet as on that date is given below:

Liabilities

Amt (Rs)

Assets

Amt (Rs)

Sundry Creditors

17,000

Cash at Bank

6,000

Capital Accounts:

 

Sundry Debtors

22,000

A        67,000

 

Stock in trade

14,000

B       45,000

 

Plant and Equipment

99,000

C       31,500

1,43,500

Loan-A

12,000

 

 

Loan-B

7,500

 

1,60,500

 

1,60,500

 

Notes:

  1. The partners share profit and losses in the ratio of 5 : 3 : 2.
  2. Cash is distributed to the partners at the end of each month.
  3. A summary of liquidation transactions are as follows:

July 2005

Rs. 16,500 - collected from Debtors; balance is uncollectable. 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 2005

Rs. 1,500 – liquidation expenses paid. As part payment of his Capital, C accepted a piece of 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 2005

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

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

 

Prepare a schedule of cash payments as of September 30, showing how the cash was distributed.

 

Solution:

Statement showing Distribution of Cash

 

 

 

Capitals

 

Cash

(Rs)

Creditors

(Rs)

A

(Rs)

B

(Rs)

C

(Rs)

Balance Due

 

17,000

55,000

37,500

31,500

July

 

 

 

 

 

Balance available

6,000

 

 

 

 

Realisation less expenses and cash retained

 

17,500

 

 

 

 

Amount available and paid

23,500

17,000

 

 

6,500

Balance due

 

55,000

 

37,500

 

4,000

25,000

 

10,000

August

 

 

Opening balance

8,000

 

Expenses paid and balance carried forward

 

4,000

 

Available for distribution

4,000

 

Cash paid to ‘B’ and Equipment given to C.

 

 

 

 

 

 

 

(Excess paid to ‘C’ 7,333)

 

 

 

 

 

 

55,000

33,500

15,000

September

 

 

 

 

Opening balance

 

 

 

 

Amount realized less

 

 

 

 

Expenses

 

 

 

 

Amount paid to partners

 

41,500

25,400

9,600

 

 

13,500

8,100

5,400

 

Working Notes:

  1. Highest Relative Capital Basis

A

B                   C

Scheme of payment for July

 

 

Balance of Capital Accounts

67,000

45,000 31,500

Less: Loans

12,000

7,500

 

55,000

37,500   31,500

Profit sharing ratio

5

3                  2

Capital Profit sharing ratio

11,000

12,500 15,750

Capital in profit sharing ratio taking

 

 

A’s Capital as base

   55,000     

33,000   22,000

Excess of C’s Capital and B’s Capital

 

4,500  9,500

Excess of C’s Capital over B

 

(9,500 – 3,000) 6,500

2.      Scheme of distribution of available cash

Scheme of payment for September

A

B

C

Balance of Capital Accounts

55,000

33,500

15,000

Profit Sharing Ratio

5

3

2

Capital/Profit sharing Ratio

11,000

11,167

7,500

Capital in profit sharing ratio taking

 

 

 

C’s Capital as base

37,500

22,500

15,000

Excess of A’s Capital and B’s Capital

17,500

11,000

 

Excess in Profit Sharing Ratio

3,500

3,667

 

Excess in profit sharing Ratio taking

 

 

 

A’s excess as base

17,500

10,500

 

Excess

500

Payment 500

 

(500)

 

Balance of Excess

17,500

10,500

 

Payment 28,000

(17,500)

(10,500)

 

Balance

37,500

22,500

15,000

Payment ( 76,500 – 28,500) 48000

(24,000)

(14,400)

(9,600)

Loss

13,500

8,100

5,400

Total Payment 76,500

41,500

25,400

9,600

 

Q.3. A, B & C sharing profits and losses in the proportion of 3:2:1. Their Balance Sheet was as follows:

 

Liabilities

Amount

Assets

Amount

Creditors

50,000

Land and Buildings

70,000

A’s Loan A/c

10,000

Plant & Machinery

40,000

A’s Capital A/c

50,000

Stock

25,000

B’s Capital A/c

10,000

Debtors

20,000

C’s Capital A/c

40,000

Cash

5,000

Total

1,60,000

Total

1,60,000

 

The partnership is dissolved & the Assets are realized as follows

1st Realisation

40,000

2nd Realisation

30,000

3rd Realisation

54,000

4th Realisation

7,000

 

Prepare a statement showing how the distribution should be made by using proportionate capital method.

 

Solution:

Statement showing Surplus Capital

 

 

A

B

C

1.

Profit sharing ratio

3

2

1

2.

Actual Capital

50,000

10,000

40,000

3.

Capital per Unit (2÷1)

16,667

5,000

40,000

4.

Capital’s of partner’s on the basis of B’s capital (B is having the least capital) (5,000 x 1)

15,000

10,000

5,000

5.

Balance (2-4)

35,000

----

35,000

 

 

 

 

 

6.

Capital per Unit (5÷1)

11,667

----

35,000

7.

Capital’s of partner’s on the basis of A’s capital (A is having the least capital) (11667 x 1)

35,000

----

11,667

 

Surplus Capital (5-7)

----

----

23,333

 

Order of Payment:

  1. First Pay Rs. 23,333 to C only
  2. Next Pay Rs. 46,667 to A & C in PSR
  3. Balance pay to all in PSR.

 

Statement Showing Distribution of Cash

Particulars

Cash Available

Creditors

A’s Loan

Capitals

A

B

C

Balances

5,000

50,000

1,0000

50,000

10,000

40,000

Add: 1st Realization

40,000

 

 

 

 

 

 

45,000

 

 

 

 

 

Less: Paid to Creditors

(45,000)

(45,000)

----

----

----

----

 

----

5,000

1,0000

50,000

10,000

40,000

Add: 2nd Realization

30,000

 

 

 

 

 

Less: Paid Creditors and A’s Loan

(15,000)

(5,000)

(10,000)

----

----

----

Balance

15,000

----

----

50,000

10,000

40,000

Less: Paid to C

(15,000)

 

 

----

----

(15,000)

Balance

----

 

 

50,000

10,000

25,000

Add: 3rd Realization

54,000

 

 

 

 

 

Less: Paid to C

(8,333)

 

 

----

----

(8,333)

Balance

45,667

 

 

50,000

10,000

16,667

Less: Paid to A & C in PSR

(45,667)

 

 

(34,250)

----

(11,417)

Balance

----

 

 

15,750

10,000

5,250

Add: 4th Realization

7,000

 

 

 

 

 

Less: Paid Rs 1000 to A and C in PSR

(1,000)

 

 

(750)

----

(250)

Balance

6,000

 

 

15,000

10,000

5,000

Less: Paid to all in PSR

(6,000)

 

 

(3,000)

(2,000)

(1,000)

Unpaid Balance/ Loss

 

 

 

12,000

8,000

4,000

 

Q.4. M, N & O were partners in a firm sharing profits and losses in the ratio of 2:1:1 respectively on the date of dissolution their balance sheet was as follows:

 

Liabilities

Amount

Assets

Amount

Creditors

28,000

Sundry Assets

80,000

L’s Capital A/c

20,000

 

 

M’s Capital A/c

20,000

 

 

O’s Capital A/c

12,000

 

 

Total

80,000

Total

80,000

 

The assets realized Rs. 68,000 & it was received in installments of Rs. 28,000, Rs. 20,000 & Rs. 20,000. Prepare a statement showing distribution of cash by using proportionate capital method.

 

Solution:

Statement showing Surplus Capital

 

 

L

M

O

1.

Profit sharing ratio

2

1

1

2.

Actual Capital

20,000

20,000

12,000

3.

Capital per Unit (2÷1)

10,000

20,000

12,000

4.

Capital’s of partner’s on the basis of L’s capital (L is having the least capital) (10,000 x 1)

20,000

10,000

10,000

5.

Balance (2-4)

----

10,000

2,000

 

 

 

 

 

6.

Capital per Unit (5÷1)

----

10,000

2,000

7.

Capital’s of partner’s on the basis of O’s capital (O is having the least capital) (2000 x 1)

 

2,000

2,000

 

Surplus Capital (5-7)

----

8,000

----

Order of Payment:

  1. First Pay Rs. 8,000 to M only
  2. Next Pay Rs. 4,000 to M & O in PSR
  3. Balance pay to all in PSR.

 

Statement Showing Distribution of Cash

Particulars

Cash Available

Creditors

Capitals

L

M

O

Balances

-

28,000

20,000

20,000

12,000

Add: 1st Realization

28,000

 

 

 

 

Balance

28,000

 

 

 

 

Less: Paid to Creditors

(28,000)

(28,000)

----

----

----

Balance

----

----

20,000

20,000

12,000

Add: 2nd Realization

20,000

 

 

 

 

Less: Paid to O

(8,000)

----

----

(8,000)

----

Balance

12,000

 

20,000

12,000

12,000

Less: Paid Rs 4,000 to M & O in PSR

(4,000)

 

 

(2,000)

(2,000)

Balance

8,000

 

20,000

10,000

10,000

Less: Paid to all in PSR

(8,000)

 

(4,000)

(2,000)

(2,000)

Balance

----

 

16,000

8,000

8,000

Add: 3rd Realization

20,000

 

 

 

 

Less: Pay to all in PSR

(20,000)

 

(10,000)

(5,000)

(5,000)

Unpaid Balance/Loss

 

 

6,000

3,000

3,000

 

Q.5. Lily, Poppy and Cosmos are in partnership sharing profits and losses in the ratio of 3:2:1 respectively. They decide to dissolve the business on 31st December 2004 on which date their Balance Sheet was as follows:

Liabilities

Amt. Rs.

Assets

Amt. Rs.

Capital Accounts:

Lily                         38,700

Poppy                    10,680

Cosmos                 11,000

Loan Account: Cosmos

Creditors

 

60,480

3,000

10,320

73,800

Land & Building

Motor Car

Investment

Stock

Debtors

Cash

30,850

5,160

1,080

19,530

11,280

5,900

73,800

The assets were realized piecemeal as follows and it was agreed should be distributed as and when realized:                                                                                                                             

Rs.

10th January, 2005        10,980 

15th February, 2005       28,600

20th March, 2005       13,500

14th April, 2005 – Cosmos took over investment at a value of    1,300  

29th April, 2005       18,600

Dissolution expenses were originally provided for at an estimated amount of Rs. 2,700, but the actual amount spent on 25th March 2005 was Rs. 1,860. You are required to prepare a statement showing the distribution of cash on the basis of “highest relative capital”. Show also the final journal entry for closing the books of the firm.

 

Solution:

 

Statement showing Surplus Capital

 

 

Lilly

Poppy

Cosmos

1.

Profit sharing ratio

3

2

1

2.

Actual Capital

38,700

10,680

11,000

3.

Capital per Unit (2÷1)

12,900

5,340

11,000

4.

Capital’s of partner’s on the basis of Poppy’s capital (Poppy is having the least capital) (5,340 x 1)

16,020

10,680

5,340

5.

Balance (2-4)

22,680

----

5,660

 

 

 

 

 

6.

Capital per Unit (5÷1)

7,560

----

5,660

7.

Capital’s of partner’s on the basis of Cosmos’s capital (Cosmos is having the least capital) (2000 x 1)

15,120

----

5,660

 

Surplus Capital (5-7)

7,560

----

----

 

Order of Payment:

  1. First Pay Rs. 7560 to Lilly only
  2. Next Pay Rs. 20780 to Lilly & Cosmos in PSR
  3. Balance pay to all in PSR.

 

Statement Showing Distribution of Cash

Particulars

Cash Available

Creditors

Cosmos

Loan

Capitals

Lilly

Poppy

Cosmos

Balances

5,900

10,320

3,000

38,700

10,680

11,000

Less: Provision for Dissolution Expenses

(2,700)

 

 

 

 

 

Balance

3,200

 

 

 

 

 

Less: Paid to Creditors

(3,200)

(3,200)

----

----

----

----

Balance

----

7,120

3,000

38,700

10,680

11,000

Add: Realization 10 Jan

10,980

 

 

 

 

 

Less: Paid Creditors

(7,120)

(7,120)

 

 

 

 

Less: Paid Cosmos loan

(3,000)

----

(3,000)

----

----

----

Balance

860

----

----

38,700

10,680

11,000

Add: Realization 15 Feb

28,600

 

 

 

 

 

Balance

29,460

 

 

 

 

 

Less: Paid Rs 7,560 to Lilly

(7,560)

 

 

(7,560)

 

 

Balance

21,900

 

 

31,140

10,680

11,000

Less: Paid Rs 20,780 to Lilly & Cosmos

(20,780)

 

 

(15,120)

 

(5,660)

Balance

1,120

 

 

16,020

10,680

5,340

Add: Realization 20 Mar

13,500

 

 

 

 

 

Balance

14,620

 

 

 

 

 

Less: Paid to all in PSR

(14,620)

 

 

(7,310)

(4,873)

(2,437)

Balance

----

 

 

8,710

5,807

2,903

Add: Excess Provision(2700-1860)

840

 

 

 

 

 

c14 Apr

1300

 

 

 

 

 

Balance

2,140

 

 

 

 

 

Less: Paid to all in PSR

(2,140)

 

 

1,070

713

357

Balance

----

 

 

7,640

5,094

2,546

Add: Realization 29 Apr

18,600

 

 

 

 

 

Less: Paid to all in PSR

(18,600)

 

 

(9,300)

(6,200)

(3,100)

Surplus Profit

----

 

 

1,660

1,106

554

 


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