Question Bank

Part A

Q1) Describe the order in which outside liabilities are paid under piecemeal distribution. (5 marks)

A1) In the dissolution issue, we found that the assets were realized, the liabilities were paid, the realization of the losses was transferred to the partner's capital account, and finally the capital balance was paid. We assume that all assets will be realized on the day of dissolution and the liabilities will be repaid on the same day, so there will be no cash distribution issues. This assumption allows you to quickly see the realized gains or losses that are transferred to your partner's capital account and the final balances they result. All assets are transferred in one day, so you can pay all your liabilities and your partner's capital account balances at once.

However, in reality, this is unrealistic. Not all assets can be realized on the day of dissolution. In reality, there is a time interval of several months before the two assets are realized, and the entire dissolution process can take a very long time. Assets are gradually realized little by little. Therefore, it is not possible to pay off all debt at once and pay the membership fee from the company to the partner. The question arises here-how do you distribute cash between different parties and to whom is the first payment made?

Meaning:

In reality, assets are not realized all at once in a day unless the business is sold to someone. Partners expect a fair price for their assets, so we will gradually do so depending on market conditions. Therefore, the entire implementation process is time consuming. That means months, sometimes a year, or even more. The process that follows to fulfill a partner's liabilities and claims when the asset is realized is called a fragmentary distribution of cash.

Q2) Describe how piecemeal distribution is more realistic than normal dissolution of firm. (8 marks)

A2) So far, we have assumed that all assets will be realized immediately on the day of dissolution. All partner and creditor accounts will be settled on the same day.

However, this assumption is inherently impractical because the process of realizing an asset usually takes a long time and cash is distributed at the time of realization. In such cases, to avoid unpleasant consequences, the realized assets are distributed so that the outstanding balance of each partner's capital remains in the profit-sharing ratio.

When the asset is realized in stages, the cash is distributed in the following order:

Payment order:

The available cash and the cash collected at the time of realization of the asset must be distributed in the following order:

1. First, pay the realization cost. If you don't know the actual cost, you need to keep the estimated amount individually to meet the actual cost when it occurs. If there is a surplus, it should be made available to other creditors.

2. Second, a secured creditor who makes a specific claim against a particular asset or is secured by a variable claim against all assets.

A bank loan for a land and building mortgage or bank overdraft secured by a variable fee for the entire asset is an example of a fully secured creditor.

3. Next, unsecured creditors such as creditors, bills payable, balances, etc. are dissatisfied with partially secured creditors, loans or overdrafts, without specific or general charges and unpaid costs. It remains. These are paid proportionally, that is, in a proportional distribution.

4. Next, if there are multiple partner loans and prepayments, the payment will be made on a prorated basis.

5. Finally, payment to the partner for capital contributions / claims in such a way that the balance (loss or profit) is the profit-sharing ratio.

Repayment of capital:

Once the assets have been realized in pieces and all the liabilities have been paid off, the question is how to distribute cash between partners for the repayment of capital. One way is to wait until all the assets are realized. After all assets are realized, the loss or profit from the realization is known, which is transferred to the capital account and the final balance is repaid. This is not possible with the capital account and the final balance will be repaid. This is neither possible nor practical, as partners are not ready to wait indefinitely for the final realization of the asset. In these situations, there is a gradual, gradual, or intermediate cash distribution between partners. The gradual distribution of cash to partners raises the question of who and at what rate the first available cash will be paid. With fragmented distribution, the final loss of realization is a high profit-sharing rate and there is no overpayment to partners.

If the capital is in the profit-sharing ratio, the cash will be distributed in the profit-sharing ratio and the final deficit will be in the same ratio. However, if the capital is not in the profit-sharing ratio, the remaining final balance (realized loss) is not included in the profit-sharing ratio and the available cash cannot be distributed in the profit-sharing ratio. At the same time, it cannot be distributed by capital ratio. In that case, the partner must bear the final loss of the capital ratio, which is different from the profit-sharing ratio of the capital. It is different from the profit-sharing rate. Therefore, it is necessary to change the cash distribution method so that the unpaid amount will eventually become the profit-sharing ratio.

Q3) How is surplus capital calculated under piecemeal distribution? (8 marks)

A3) This method is also known as Surplus Capital Law, Supreme Relative Capital Law, Excess Capital Law or Commercial Code. If the partner's capital is in the ratio of the profit-sharing arrangement and then each is paid according to the capital adequacy ratio in each distribution. If the partner's capital is not in the profit-sharing ratio, the first cash available for distribution between partners (after payment of external liabilities and loans to the partner) must be paid to the partner whose capital exceeds the profit. Distribution ratio to bring capital to profit sharing level. After this, the available cash will be distributed to all partners according to the profit-sharing ratio.

The outstanding balance of the capital account represents the loss at realization, which is exactly the profit-sharing ratio.

In other words, the basic estimate of this method is that partners who contribute more than proportional capital should be paid first in the range of excess capital beyond proportional capital. Next steps to follow when deciding who and how much to pay:

Classification of debt

Liability, including the amount payable to a partner, can fall into three major categories. External responsibility, that is, membership fees for outsiders. Internal liability, ie partner loan; and partner's capital account.

External liabilities may be further subdivided into “preferred liabilities” and “other liabilities”. Preferred debt includes i) government membership fees such as income tax and property tax. Ii) Unpaid wages, membership fees for employees such as reserve funds, and

Iii) Realization cost. Other liabilities are either i) secured liabilities or ii) unsecured liabilities.

Provisions of the Indian Partnership Act, 1932:

Section 48 of the Indian Partnership Act of 1932 provides that the following rules shall be complied with, subject to agreement, in the settlement of accounts between partners after the dissolution of the partnership.

Gradual distribution of cash

i) Losses, including capital shortages, shall be adjusted individually, first from undivided profits, then from capital, and finally, if necessary, at the rate at which the partners are entitled to share profits. I will.

Ii) Company assets, including totals, provided by a partner to make up for a loss or deficiency of capital shall be applied in the following manner and order.

Therefore, the Partnership Law stipulates that the debit balance of capital or checking account should be adjusted first from undistributed profits before disposing of the business. Then, when the asset is realized, it first repays the external creditor, then the partner's loan, and then the partner's capital balance. There is no mention of the cost of realizing the law. But without it you can't dispose of your assets, so you need to prepare for the same first. If you need to advertise in the newspaper to dispose of your property, no one can know about such disposition without spending money on advertising.

Cash distribution between partners:

As mentioned above, after the settlement of external and internal liabilities, the cash obtained from the realization of the asset should be distributed between the partners to settle the equity balance. Again, you need to determine the order and percentage of payments to your partners in your capital account. Should cash be distributed in proportion to the partner's capital? The distribution must be made so that the unpaid amount after distribution of all realizations is the profit-sharing ratio. The balance outstanding in the capital account is the realized loss, which must be the profit-sharing ratio.

Partners share profits and losses in a particular ratio, the profit-sharing ratio. The exact amount of profit or loss from realization will not be known until all assets have been disposed of. The partner may not have capital in the profit share.

The problem arises when the partner's capital balance is not in the partner's ratio.

Share profits and losses. In such cases, the available cash cannot be distributed between partners in a profit-sharing ratio. This is because the unpaid amount, or loss, is not included in the profit-sharing ratio. See the example below. Revenue cannot be distributed by capital adequacy ratio. Then, the unpaid balance, that is, the loss, becomes the capital ratio, but it becomes the profit-sharing ratio.

Q4) Under what circumstances are the outside liabilities paid on a pro-rata basis? (5 marks)

A4) Once the assets have been realized in pieces and all the liabilities have been paid off, the question is how to distribute cash between partners for the repayment of capital. One way is to wait until all the assets are realized. After all assets are realized, the loss or profit from the realization is known, which is transferred to the capital account and the final balance is repaid. This is not possible with the capital account and the final balance will be repaid. This is neither possible nor practical, as partners are not ready to wait indefinitely for the final realization of the asset. In these situations, there is a gradual, gradual, or intermediate cash distribution between partners. The gradual distribution of cash to partners raises the question of who and at what rate the first available cash will be paid. With fragmented distribution, the final loss of realization is a high profit-sharing rate and there is no overpayment to partners.

If the capital is in the profit-sharing ratio, the cash will be distributed in the profit-sharing ratio and the final deficit will be in the same ratio. However, if the capital is not in the profit-sharing ratio, the remaining final balance (realized loss) is not included in the profit-sharing ratio and the available cash cannot be distributed in the profit-sharing ratio. At the same time, it cannot be distributed by capital ratio. In that case, the partner must bear the final loss of the capital ratio, which is different from the profit-sharing ratio of the capital. It is different from the profit-sharing rate. Therefore, it is necessary to change the cash distribution method so that the unpaid amount will eventually become the profit-sharing ratio.

If the assets are realized little by little, you need to follow the proper order to repay the liabilities. Of the scale revenue, the dissolution cost must be met first and the rest must be used to pay external creditors (bank O / D, B / P, creditors, loans, etc.) in the following order:

(1) Payment to a fully secured creditor.

(2) Payment to partially secured creditors within the realization of securities.

(3) Payment to priority creditors (salary, membership fee to the government).

(4) Payment to unsecured creditors.

(5) Internal liabilities must be paid in the form of a partner loan only after the unsecured external creditor has been fully repaid.

(6) Finally, the partner must pay a membership fee for the capital.

If creditors are indistinguishable in the above categories, payments must be "proportional zed" based on unpaid claims when the asset is realized.

Q5) What does the surplus method mean? (8 marks)

A5) You must adjust your partner's capital to a profit-sharing ratio and pay your partner an excess contribution first when cash is realized. This process should be repeated until the capital is proportional to the share of profits. Once a partner's excess contribution has been paid (capital adjusted to PSR), the cash realization may be distributed to all partners within the capital PSR.

This method is called the surplus / excess method because excess capital contributions are calculated in comparison to PSR and paid in advance. This is called the proportional capital / index method because capital must be purchased in proportion to the PSR.

Q6) What is the basis for the distribution of cash to a partner's capital in a gradual distribution of cash? (5 marks)

A6) As long as the union member's capital contribution rate and profit-sharing rate are the same, there is no problem with cash distribution at the time of realization if the distribution is proportionally distributed according to the claim. However, if these two ratios are different, the proportional distribution of cash according to their claim causes problems. If the available cash is distributed at the equity ratio, any loss or gain on dissolution shared by the partner may not be included in the profit-sharing ratio. Conversely, if the available cash is distributed in a profit-sharing ratio, one or two partners may get more than what is attributed to them.

What is the distribution method in the scheme that follows to distribute cash when realized in pieces?

These are ways to distribute cash in small increments.

1. Surplus / excess / proportional / commercial capital method.

2. Maximum possible / assumed loss method.

Surplus Method

You must adjust your partner's capital to a profit-sharing ratio and pay your partner an excess contribution first when cash is realized. This process should be repeated until the capital is proportional to the share of profits. Once a partner's excess contribution has been paid (capital adjusted to PSR), the cash realization may be distributed to all partners within the capital PSR.

This method is called the surplus / excess method because excess capital contributions are calculated in comparison to PSR and paid in advance. This is called the proportional capital / index method because capital must be purchased in proportion to the PSR.

Maximum Loss Method

The maximum loss method is an improved way to distribute cash at realization. Here, it is assumed that at every stage of the cash distribution realized, there will be no further realization and the company will suffer the greatest loss. Therefore, the hypothetical loss is distributed to the partner at a profit-sharing rate before the partner's claim is paid. The assumption that it will not be realized anymore results in the conceptual loss caused at this stage of realization.

Do you specify the order of debt forgiveness in the gradual distribution of cash?

When assets are realized little by little, you need to follow the proper order to fulfill your liabilities. Of the revenue of scale, the cost of dissolution must be met first and the balance must be used to pay external creditors (banks O / D, B / P, creditors, loans, etc.) in the following order:

(1) Fully secured creditor payments.

(2) Payment to partially secured creditors within the realization of securities.

(3) Payment to priority creditors (salary, membership fee to the government).

(4) Payment to unsecured creditors.

(5) Internal liabilities must be paid in the form of a partner loan only after the unsecured external creditor has been completely canceled.

(6) Finally, the partner must pay a membership fee for the capital.

If the creditors cannot be distinguished in the above categories, the payment must be made in a "proportional distribution" based on the unpaid claims at the time the asset was realized.

Q7) Write note on Maximum Loss Method. (5 mark)

A7) An alternative method of split distribution between partners is to calculate the maximum loss possible for all realizations after the external debt and the partner's loan have been paid. The amount distributable between partners is compared to the total amount of capital paid to the partners and the maximum loss is determined on the assumption that no amount will be realized in future assets. The maximum fixed loss is deducted from the partner's capital balance at each profit and loss share, and the balance remaining in the capital account after deducting the maximum loss is the amount to be paid to the partner.

If a partner's share of the maximum possible loss exceeds the amount credited to the capital account, he will be treated as insolvent and the shortfall will be debited to the insolvent partner's capital account as a percentage of that capital. Will be the Murray Rule on the dissolution date stated under Garner v / s. After deducting the share of maximum loss and the share of the insolvent partner's shortfall, the creditable amount of the partner is equal to the cash available for distribution between partners.

This maximum loss process repeats each realization until all assets are disposed of.

Q8) Write short note on Payment order. (5 marks)

A8) The available cash and the cash collected at the time of realization of the asset must be distributed in the following order:

1. First, pay the realization cost. If you don't know the actual cost, you need to keep the estimated amount individually to meet the actual cost when it occurs. If there is a surplus, it should be made available to other creditors.

2. Second, a secured creditor who makes a specific claim against a particular asset or is secured by a variable claim against all assets.

A bank loan for a land and building mortgage or bank overdraft secured by a variable fee for the entire asset is an example of a fully secured creditor.

3. Next, unsecured creditors such as creditors, bills payable, balances, etc. are dissatisfied with partially secured creditors, loans or overdrafts, without specific or general charges and unpaid costs. It remains. These are paid proportionally, that is, in a proportional distribution.

4. Next, if there are multiple partner loans and prepayments, the payment will be made on a prorated basis.

5. Finally, payment to the partner for capital contributions / claims in such a way that the balance (loss or profit) is the profit-sharing ratio.

Q9) Define Repayment of capital. (5 marks)

A9) Once the assets have been realized in pieces and all the liabilities have been paid off, the question is how to distribute cash between partners for the repayment of capital. One way is to wait until all the assets are realized. After all assets are realized, the loss or profit from the realization is known, which is transferred to the capital account and the final balance is repaid. This is not possible with the capital account and the final balance will be repaid. This is neither possible nor practical, as partners are not ready to wait indefinitely for the final realization of the asset. In these situations, there is a gradual, gradual, or intermediate cash distribution between partners. The gradual distribution of cash to partners raises the question of who and at what rate the first available cash will be paid. With fragmented distribution, the final loss of realization is a high profit-sharing rate and there is no overpayment to partners.

If the capital is in the profit-sharing ratio, the cash will be distributed in the profit-sharing ratio and the final deficit will be in the same ratio. However, if the capital is not in the profit-sharing ratio, the remaining final balance (realized loss) is not included in the profit-sharing ratio and the available cash cannot be distributed in the profit-sharing ratio. At the same time, it cannot be distributed by capital ratio. In that case, the partner must bear the final loss of the capital ratio, which is different from the profit-sharing ratio of the capital. It is different from the profit-sharing rate. Therefore, it is necessary to change the cash distribution method so that the unpaid amount will eventually become the profit-sharing ratio. There are two ways to distribute cash in the right way capital method or proportional capital method:

Q10) How is cash distributed between partners? (5 marks)

A10) As mentioned above, after the settlement of external and internal liabilities, the cash obtained from the realization of the asset should be distributed between the partners to settle the equity balance. Again, you need to determine the order and percentage of payments to your partners in your capital account. Should cash be distributed in proportion to the partner's capital? The distribution must be made so that the unpaid amount after distribution of all realizations is the profit-sharing ratio. The balance outstanding in the capital account is the realized loss, which must be the profit-sharing ratio.

Partners share profits and losses in a particular ratio, the profit-sharing ratio. The exact amount of profit or loss from realization will not be known until all assets have been disposed of. The partner may not have capital in the profit share.

The problem arises when the partner's capital balance is not in the partner's ratio.

Share profits and losses. In such cases, the available cash cannot be distributed between partners in a profit-sharing ratio. This is because the unpaid amount, or loss, is not included in the profit-sharing ratio. See the example below. Revenue cannot be distributed by capital adequacy ratio. Then, the unpaid balance, that is, the loss, becomes the capital ratio, but it becomes the profit-sharing ratio.

Part B

Q11) A, B, C are partners with capital Rs.20,000, Rs.10,000, Rs.5,000. The profit-sharing ratios of A, B and C are 2: 2: 1 respectively. Calculate surplus capital.(8  marks)

A1)                                     Statement showing Surplus Capital

Q12) A, B, and C share corporate profits in proportions of ½, ¼, and ¼, respectively. They decided to dissolve the company on March 31, 2019, when the balance sheet was as follows(8 marks)

Balance sheet

The assets were gradually realized as follows.

Second realization: Rs.14,000

Third realization: Rs.26,000

2.  Shows how revenue is distributed when received under the surplus capital method.

A2)

Statement Showing Surplus Capital

Statement Showing Piecemeal Distribution of Cash as per Surplus Capital Method

Order of Payment:

1.Creditors -Rs.30,000

2. B -Rs.2,000

3. B & C -Rs.8,000 (Rs.4,000 each)

Q13) 2. X, Y and Z continued to operate as partners sharing profits and losses in a 2: 2: 1 ratio, respectively. Their balance sheet is as follows:

Balance sheet as on 31st March, 2019

Their partnership has been broken and the amount has been realized as follows:

First installation: Rs.16,000

Second installation: Rs.28,000

Third installation: Rs.32,000

Realization cost reached Rs.2,000

Performance

a. Statement showing surplus capital

b. Statement showing cash distribution (12marks)

A3)

Statement showing surplus Capital

Order of Payment:

XRs.6,000

4. X and Y -Rs.20,000 (Rs.10,000 each)

Statement Showing Piecemeal Distribution of Cash

Q14) The Py Ra Mides company presents the following balance sheet prepared on March 31, 2014.

Partners shared profit and loss in a 4: 3: 3 ratios. Due to the differences between partners, we firmly realize assets and cash distribution between partners at the end of each month.

(I) April 2014 – Rs30,000 from the debtor and Rs 40,000 due to the sale of shares. Realization cost Rs1,000.

(II) May 2014 – The debtor's balance reached Rs 20,000. Balance of acquired inventory

Rs48,000.

(III) June 2014 – Some of the machines sold for Rs 36,000. Costs associated with the sale Rs1,200.

(Iv) July 2014 – Some of the machines rated "10,000" in the book were acquired by P and some were discharged at the agreed value of "20,000". The machine's balance was sold for Rs 60,000 (net).

Partners have decided to maintain a minimum cash balance of Rs 4,000 for the first two months and Rs 2,000 thereafter. Shows how the amount payable to the partner is settled according to the highest relative capital.(12 marks)

A4)               In the books of Py Ra Mides                 Statement of Excess Capital

Statement of Piecemeal Distribution of Cash (Highest Relative Capital)

Q15) From the balance sheet of M / s ideal store below, we share profit and loss in a ratio of 5: 3: 2 with Sunil, Anil and Neel as partners. The balance sheet on the dissolution date is as follows.

(I) The realization cost was estimated at Rs 4,000.

(II) Assets have been realized as follows.

First installment Rs61,280

Second time Rs28,720

Third Rs21,000

(III) The actual realization cost was only Rs 3,000.

Create a statement showing the gradual distribution of cash by adopting the excess capital method.(12 marks)

A5)            In the books of M/S Ideal Store Statement of Excess Capital

First, pay Neel Rs 10,480.

Next, pay Sunil and Neel Rs 6,720 in 5 : 2. Balance pay to all in 5 : 3 : 2.

Statement of Piecemeal Distribution of Cash

Q16) Maduri, Taboo and Juhi, who operate in partnership, have decided to dissolve after September 30, 2014. The date balance sheet is as follows:

Partner had the right to withdraw according to the arrangement with the bank.

Immediately 4,000, 9,000 after December 1, 2014. If the estimated realization cost is 1,000, the available funds must be distributed among the partners at the time of realization.

The following was realized:

The actual realization cost was 700 yen. You must submit a statement showing the distribution of cash between partners under the proportional capital method.(8 marks)

A6)

Q17) L, U, and M are in partnership, sharing profits and losses in proportions of 1/2, 1/3, and 1/6, respectively. Their company was dissolved on December 31, 2014, and on that date the company's balance sheet was as follows:

Balance sheet as at 31st December, 2014

It was agreed that the realizations should be distributed in the proper order at the end of each two weeks.

The realizations and costs were:

The shares were completely turned off and the remaining debtors were to be taken over by M for the agreed amount of Rs 600.

Display the cash distribution statement according to the relative capital method.(8 marks)

A7)                      Statement of Distribution

Payment of Liabilities (including Partner’s Loan)

Payment of Partner’s Capital

Working note:

(1)                                            Profit Sharing Ratio (PSR) given in fraction (1/2, 1/3 and 1/6) when converted becomes 3 : 2 : 1.

(2)                                            Cash available at each stage is debtors + stock – expenses.

Debtors taken over by M at Rs 600 are added in cash realization and distribution on 15-3 Rs 850 distributed to M on 15-3 is made up of debtors Rs 600 and balance Rs 250 in cash.

Q18) A, B, and C have partnered to share 2: 1 gains and losses, respectively. The partnership was dissolved on March 31, 2014. The balance sheet for the same day is as follows.

A contingent liability was incurred under a discount for the $ 10,000 claim paid on August 25, 2014. At the end of each month, it was agreed that online realization should be distributed as safely and in the proper order as possible. The realizations and costs are as follows:

The shares were completely disposed of, the amount payable to the debtor was realized, and the balance was irreparable. The recipient of the discounted invoice met the invoice on time.

Make a statement showing the gradual distribution using the surplus capital method.(8 marks)

A8)                                        Statement  of Excess Capitals

Payment Order:

Statement of Piecemeal Distribution of Cash

Q19) A, B and C are partners who share profits and losses in a 4: 2 ratio. 1. The balance sheet is as follows, and the partnership will be dissolved on March 31, 2014.

All creditors are required to pay a realization cost of Rs 2,400. After that, all cash received should be distributed between the parties.

The amount was realized as follows.

1st Rs30,000. Second time Rs36,000. The 3rd Rs210,000. The 4th Rs92,000. The actual realization cost was 1200 yen.

Make a statement stating the distribution of cash under the excess capital method.(12 marks)

A9)                                     Statement of Excess Capitals

Payment Schedule:

1. Pay 1st 50,000 to C.

2. Then 1,20,000 and 60,000 to B and C respectively.

3. Then to A, B and C in their PSR.

Statement showing distribution

Q20) X, Y, Z, which operates in partnership, decided to dissolve from 31st

December 2012. Below is the balance sheet for the day.

By arrangement with the bank, the partner is entitled to withdraw 10,000 each in January 2014, February 2014 and March 2014, and after securing an estimated realization cost of 2,000, when the available funds are realized. Partner.

The following was realized:

You will be asked to submit a statement indicating the distribution of cash (12 marks)

A10)

Statement of Excess  capitals

Statement of Piecemeal Distribution of Cash