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:
- Calculate the order of Payment first(for distribution between the partners)
- Divide the capitals of partners by their individual Profit Sharing Ratio to get capital per unit.
- Using the least capital per unit, calculate the amount paid by multiplying with individual PSR.
- Subtract the amount calculated in (b) from the total capital.
- Repeat the steps until balance of only one partner remains.
- Decide order of payments
2. Prepare Statement of Distribution of Cash
- Start with writing balances of Cash and all the liabilities to be paid along with partner’s capital.
- Keep aside provision for realization expenses/dissolution expenses given.
- Keep recording Cash received through realization according to their order given in question and accordingly follow payments mentioned in below steps.
- 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.
- Next pay, Partner’s Loan.
- 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:
- First pay Rs 10,000 to A only
- 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:
- The partners share profit and losses in the ratio of 5 : 3 : 2.
- Cash is distributed to the partners at the end of each month.
- 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
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|
| Capitals | ||
| Cash (Rs) | Creditors (Rs) | A (Rs) | B (Rs) | C (Rs) |
Balance Due |
| 17,000 | 55,000 | 37,500 | 31,500 |
July |
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Balance available | 6,000 |
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Realisation less expenses and cash retained |
17,500 |
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Amount available and paid | 23,500 | 17,000 |
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| 6,500 |
Balance due |
| — | 55,000
— | 37,500
4,000 | 25,000
10,000 |
August |
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| |||
Opening balance | 8,000 |
| |||
Expenses paid and balance carried forward |
4,000 |
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Available for distribution | 4,000 |
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Cash paid to ‘B’ and Equipment given to C. |
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(Excess paid to ‘C’ 7,333) |
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| 55,000 | 33,500 | 15,000 | |
September |
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Opening balance |
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Amount realized less |
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Expenses |
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Amount paid to partners |
| 41,500 | 25,400 | 9,600 | |
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| 13,500 | 8,100 | 5,400 | |
Working Notes:
- Highest Relative Capital Basis
A | B C | |
Scheme of payment for July |
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|
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 |
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C’s Capital as base | 37,500 | 22,500 | 15,000 |
Excess of A’s Capital and B’s Capital | 17,500 | 11,000 |
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Excess in Profit Sharing Ratio | 3,500 | 3,667 |
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Excess in profit sharing Ratio taking |
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A’s excess as base | 17,500 | 10,500 |
|
Excess | – | 500 | – |
Payment 500 |
| (500) |
|
Balance of Excess | 17,500 | 10,500 |
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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 |
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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:
- First Pay Rs. 23,333 to C only
- Next Pay Rs. 46,667 to A & C in PSR
- 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 |
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| 45,000 |
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Less: Paid to Creditors | (45,000) | (45,000) | ---- | ---- | ---- | ---- |
| ---- | 5,000 | 1,0000 | 50,000 | 10,000 | 40,000 |
Add: 2nd Realization | 30,000 |
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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 |
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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 | ---- |
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| 15,750 | 10,000 | 5,250 |
Add: 4th Realization | 7,000 |
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Less: Paid Rs 1000 to A and C in PSR | (1,000) |
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| (750) | ---- | (250) |
Balance | 6,000 |
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| 15,000 | 10,000 | 5,000 |
Less: Paid to all in PSR | (6,000) |
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| (3,000) | (2,000) | (1,000) |
Unpaid Balance/ Loss |
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| 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 |
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M’s Capital A/c | 20,000 |
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O’s Capital A/c | 12,000 |
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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 |
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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:
- First Pay Rs. 8,000 to M only
- Next Pay Rs. 4,000 to M & O in PSR
- 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 |
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Balance | 28,000 |
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Less: Paid to Creditors | (28,000) | (28,000) | ---- | ---- | ---- |
Balance | ---- | ---- | 20,000 | 20,000 | 12,000 |
Add: 2nd Realization | 20,000 |
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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 |
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Less: Pay to all in PSR | (20,000) |
| (10,000) | (5,000) | (5,000) |
Unpaid Balance/Loss |
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| 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 |
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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:
- First Pay Rs. 7560 to Lilly only
- Next Pay Rs. 20780 to Lilly & Cosmos in PSR
- 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) |
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Balance | 3,200 |
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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 |
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Less: Paid Creditors | (7,120) | (7,120) |
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Less: Paid Cosmos loan | (3,000) | ---- | (3,000) | ---- | ---- | ---- |
Balance | 860 | ---- | ---- | 38,700 | 10,680 | 11,000 |
Add: Realization 15 Feb | 28,600 |
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Balance | 29,460 |
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Less: Paid Rs 7,560 to Lilly | (7,560) |
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| (7,560) |
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Balance | 21,900 |
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| 31,140 | 10,680 | 11,000 |
Less: Paid Rs 20,780 to Lilly & Cosmos | (20,780) |
|
| (15,120) |
| (5,660) |
Balance | 1,120 |
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| 16,020 | 10,680 | 5,340 |
Add: Realization 20 Mar | 13,500 |
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Balance | 14,620 |
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Less: Paid to all in PSR | (14,620) |
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| (7,310) | (4,873) | (2,437) |
Balance | ---- |
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| 8,710 | 5,807 | 2,903 |
Add: Excess Provision(2700-1860) | 840 |
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c14 Apr | 1300 |
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Balance | 2,140 |
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Less: Paid to all in PSR | (2,140) |
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| 1,070 | 713 | 357 |
Balance | ---- |
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| 7,640 | 5,094 | 2,546 |
Add: Realization 29 Apr | 18,600 |
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Less: Paid to all in PSR | (18,600) |
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| (9,300) | (6,200) | (3,100) |
Surplus Profit | ---- |
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| 1,660 | 1,106 | 554 |
