Illustration of maximum possible loss method-partnership, Financial Accounting

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Illustration of maximum possible loss method

A, B and C have been partners for several years, sharing profits and losses in the ratio 2:2:1. They decided to dissolve the firm on 31 October 2002, on which date the balance sheet was as follows:

Balance Sheet as at 31 October 2002

ASSETS	Ksh	Ksh
Non Current Assets
Property plant and equipment:
- Land and buildings		150,000
- Plant and machinery		77,200
- Fixtures and fittings		17,000
- Motor vehicles		8,000
		252,200
Goodwill		100,000
		352,000
Current Assets
Stock	64,000
Debtors	59,000
Cash	160
		123,160
		475,360
EQUITY AND LIABILITIES
Capitals: A		100,000
B		60,000
C		40,000
		200,000
Current accounts A	40,000
B	30,000
		70,000
		270,000
Non Current Liabilities
Loan – A		20,000
Current Liabilities
Creditors	57,000
Bank overdraft	128,360
		185,360
		475,360

1) The assets were duly sold and monies received as follows:

2002

November 17^th:	Freehold land and buildings	Sh 259,000
December 19^th:	Debtors (Part)	Sh 30,000
	Stock (Part)	Sh 20,000

2003
January 23^rd:	Plant and machinery	Sh 51,000
	Fixtures and fittings	Sh 12,000
	Motor vehicles	Sh 5,000
March 18^th:	Stock (Remainder)	Sh 36,000
	Debtors (Remainder)	Sh 42,000

2) Provision was made for dissolution expenses Sh 2,400.

3) As soon as sufficient money was available to pay all outstanding creditors, this was done, discounts being received amounting to Sh 1,000.

4) Dissolution expenses amounted to Ksh 3,400, and these were paid on 31 March 2003.

Required:

a) Statements showing how the dissolution proceeds would be distributed to partners; ignoring the ruling in Garner Vs Murray.
b) The creditors account, realization account, capital accounts and cashbook.

Solution:

	Total (Sh)	A (Sh)	B (Sh)	C (Sh)	Distribution (Sh)
Capitals	200,000	100,000	60,000	40,000
19^th December: Available cash	70,000	40,000	30,000	_-
Maximum possible loss	270,000	140,000	90,000	40,000
	(52,400)
	217,600	(87,040)	(87,040)	(43,520)
		52,960	2,960	(3,520)
		(1,760)	(1,760)	3,520
		51,200	1,200	__-	52,400

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