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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:
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
Stock
64,000
Debtors
59,000
Cash
160
123,160
475,360
EQUITY AND LIABILITIES
Capitals: A
B
60,000
C
40,000
200,000
Current accounts A
30,000
70,000
270,000
Loan – A
20,000
Creditors
57,000
Bank overdraft
128,360
185,360
1) The assets were duly sold and monies received as follows:
2002
November 17th:
Freehold land and buildings
Sh 259,000
December 19th:
Debtors (Part)
Sh 30,000
Stock (Part)
Sh 20,000
2003
January 23rd:
Plant and machinery
Sh 51,000
Fixtures and fittings
Sh 12,000
Motor vehicles
Sh 5,000
March 18th:
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)
Distribution
Capitals
19th December: Available cash
_-
Maximum possible loss
140,000
90,000
(52,400)
217,600
(87,040)
(43,520)
52,960
2,960
(3,520)
(1,760)
3,520
51,200
1,200
__-
52,400
THE SURPLUS CAPITAL METHOD Under this method, the initial amounts repaid to partners are in order to reduce their capitals to amounts such that these are now in the same ratio
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