Realization and Liquidation
20. It has been mutually agreed that Joseph Mason shall act as liquidating partner with full authority to sell all property, pay all debts and distribute liquidating dividends among the partners. Mason’s fee as liquidator shall be 5% commission on the converted value of all the assets and is to be paid at each dividend date.
Interest is to be allowed on the loan accounts, and profits and losses are to be shared ½ by Howe, and ¼ each by Mason and Bartlett, during the period of liquidation.
Settlements are to be made on the last day of each month.
Based on the post-closing trial balance in the preceding problem and the information given below:
(a) Prepare a working sheet which will present the information in convenient form for preparing the statements incidental to liquidation.
(b) Show the partners’ loan accounts properly closed for each period.
(c) Set up the partners’ capital accounts, and balance them after the payment of each liquidating dividend.
During the month ended July 31, 1918, delivery equipment having a book value of $3,300 was sold for $3,000 in cash; accounts receivable in the amount of $4,000 were collected and $980 in bad debts were charged off. A sale of the land and buildings granted the use of the premises during the liquidation. The land was sold for $17,000 and the buildings for $31,500, the mortgage (with accrued interest to July 3) being assumed by the purchaser as part payment. The partially secured creditors accepted the F. D. Co. Stock held as collateral at 90% of its book value and the balance of their claim was paid in cash. Incidental expenses of $350 and the liquidating fees were paid in cash. From the goods in the inventories there were sold bags of a book value of $1,200 for $1,120, and trunks, book value $2,530, for $2,280. There was paid to holders of unsecured notes payable $2,000 and interest of $100. The accrued labor was paid and $10,000 in unsecured accounts payable were settled. The balance of the cash was applied in paying off partners’ loans and capital as a liquidating dividend.
The next month the delivery equipment was sold for $1,850. Furniture and fixtures having a book value of $2,100 were sold for $1,700. Of the I O U’s $70 was collected; the balance proved worthless. The notes receivable as collateral in the hands of fully secured creditors were settled in full and our equity was paid to us in cash, also accrued interest of $120. Bags having a book value of $2,500 were sold for $2,100, and trunks at book $3,700 brought $3,200. Mason accepted $4,200 in settlement of $5,000 in accounts receivable.
Legal fees of $150; sundry expenses of $460; all the existing debts and the liquidating fees were paid in cash. The cash remaining was distributed as a liquidating dividend.
In the course of the last month the remaining furniture and fixtures were sold for $1,900. The good-will went to the same purchaser for $1,000 additional.
The prepaid insurance is without value. Office supplies yielded $20. The notes receivable, together with the balance of accrued interest were collected in full. There was lost in bad debts $740. The bags were sold at a 10% reduction. The partners divided the trunks among themselves one-third to each, taking them at book value.
Sundry expenses of $340 and the liquidating fees were paid in cash, after which the cash on hand was distributed.
Note: Converted value means the value at which any asset is disposed of, whether for cash or in the cancellation of any claim.
21. Show on the books of the firm of Howard, Mason & Co. all the entries necessary to carry into effect the liquidation of the business under the conditions set forth in the foregoing problem.
22. The firm of Norton & Brown decided to liquidate at a time when their condition, as shown by the balance sheet given below, was still solvent.
Balance Sheet, March 31, 1918
| Assets | Liabilities | ||
| Plant and Equipment | $20,000.00 | Notes Payable | $ 6,000.00 |
| Office Furniture | 2,000.00 | Accounts Payable | 17,000.00 |
| Inventory, Material | 12,000.00 | Norton, Loans | 5,000.00 |
| Notes Receivable | 5,000.00 | Brown, Loans | 3,000.00 |
| Cash | 3,000.00 | Brown, Capital | 15,000.00 |
| $71,000.00 | $71,000.00 | ||
Profits and losses were shared three-fourths by Norton and one-fourth by Brown. Interest was allowed on the loan accounts but not on the capital accounts. At the end of the first month, April 30, it was found that material inventoried at $5,000 had produced $3,600; accounts receivable to the amount of $15,000 had been collected in cash and $2,800 in bad debts charged off; notes receivable collected in cash $2,000; expenses of $600 had been paid in cash; equipment valued at $4,000 produced $3,000. Interest on partner’s loan accounts was not entered this month.
During the month ended May 31, office furniture valued at $1,600 was sold for $1,000. Material costing $4,000 produced $3,200 and the balance of material was divided equally between the partners at cost. Plant equipment listed at $6,000 was sold for $6,200. A $200 note proved worthless and was charged off. Accounts receivable to the amount of $6,065 and notes receivable of $2,000 were collected in cash. Bad debts charged off $435. Expenses paid in cash $300. Interest was credited on Norton’s loan account $40 and Brown’s loan account $25.
Arrange your solution to show:
(a) Your method of obtaining the proper cash distribution.
(b) A statement showing each partner’s capital and loan at the end of each month, or a detailed capital and loan account for each partner with a balance entered in each account each month.
(c) A balance sheet at the close of the second month.
23. Walter Hopkins, while perfectly solvent and doing a profitable manufacturing business, had so tied up his capital in plant and materials that he was on the point of suspending for want of funds to pay for labor, and his creditors were preparing to commence legal proceedings to enforce a settlement. The condition of his affairs at this time was as follows:
Balance Sheet
| Assets | Liabilities | ||
| Plant | $25,198.00 | Creditors | $20,230.00 |
| Cash | 212.00 | Capital | 50,000.00 |
| Materials, Raw and Surplus | 4,900.00 | ||
| Partly Finished | 40,400.00 | ||
| Finished Goods | 6,070.00 | ||
| Accounts Receivable | 3,250.00 | ||
| $75,130.00 | $75,130.00 | ||
At a meeting of creditors he said that while his plant was entirely efficient, it was all of special character and would realize on forced sale only the value of scrap, that the unfinished goods would require the employment of skill and processes known to him only, and that while forced suspension would yield to his creditors not over 50%, it would ruin him absolutely.
The creditors decided to advance him a loan of $5,000 to continue operations and allow him additional credit for materials and expenses. A trustee was appointed to see that the proceeds were used solely for recuperation of the business.
The subsequent operations under the supervision of the trustee were as follows:
Purchases on book account, charged to materials $5,100, to expense $12,100; sales on book account $57,802; losses on bad debts $300; cash receipts (loan from creditors) $5,000; settlement from debtors $58,100; cash payments for labor $12,500, for expense $4,350; for plant $600; creditors $42,030; Walter Hopkins’ personal drawings $3,000.
There remained raw materials $4,000, finished goods $22,388.
Prepare:
- (a) Realization and liquidation account.
- (b) Trustee’s cash account.
- (c) Balance sheet of the estate as restored to Walter Hopkins.
24. X, Y, and Z, foundrymen, unable to meet their obligations, suspended payment January 1, 1918, and appointed a trustee to realize and liquidate for the benefit of their creditors. The books showed the following assets and liabilities:
| Assets | ||
| Land and Buildings | $125,000.00 | |
| Machinery and Tools | 75,000.00 | |
| Furniture and Fixtures | 10,000.00 | |
| Materials and Supplies | 95,000.00 | |
| Bills Receivable | 15,000.00 | |
| Accounts Receivable | 115,000.00 | |
| Cash | 450.00 | |
| Total Assets | $435,450.00 | |
| Liabilities | ||
| Mortgage on Foundry Premises | $100,000.00 | |
| Bills Payable | 135,000.00 | |
| Accounts Payable | 105,000.00 | |
| Interest Accrued on Mortgage | 1,250.00 | |
| Taxes Accrued (estimated) | 835.00 | |
| Capital | 93,365.00 | |
| Total Liabilities | $435,450.00 | |
The trustee’s cash receipts and payments during the year 1918 were as follows:
| Receipts | ||
| Bills Receivable (outstanding January 1, 1918) | $ 15,000.00 | |
| Accounts Receivable (outstanding January 1, 1918) | 106,500.00 | |
| Cash Sales | 5,435.00 | |
| Bills Receivable (contracted during year 1918) | 13,500.00 | |
| Accounts Receivable (contracted during year 1918) | 212,000.00 | |
| Total Receipts | $352,435.00 | |
| Payments | ||
| Bills Payable | $ 25,000.00 | |
| Accounts Payable | 35,000.00 | |
| Interest on Mortgage (one year at 5%) | 5,000.00 | |
| Taxes for the year 1917 | 865.00 | |
| Purchases of Materials and Supplies | 98,000.00 | |
| Labor | 135,000.00 | |
| General Expenses | 45,000.00 | |
| Interest on Bills Payable (to September 30, 1918, at 5%) | 2,800.00 | |
| Total Payments | $346,665.00 | |
Other transactions were as follows:
| Sales on Credit | $335,000.00 | |
| Bad Debts Written Off: | ||
| Accounts prior to January 1, 1918 | $8,000.00 | |
| Accounts subsequent to January 1, 1918 | 2,000.00 | 10,000.00 |
| Discounts and Allowances to Customers: | ||
| Accounts prior to January 1, 1918 | $500.00 | |
| Accounts subsequent to January 1, 1918 | 300.00 | 800.00 |
| Notes Received from Customers | 20,000.00 | |
| Notes Given to Creditors ($110,000 being renewals) | 180,000.00 | |
| Inventory of Materials and Supplies, | ||
| December 31, 1918, amounted to | 92,000.00 |
The trust terminated at the end of the year and the business was turned back to the owners.
Prepare realization and liquidation account; also a balance sheet showing the financial condition of the business at the termination of the trust. Accrued taxes for the year in the usual manner, i.e., on the basis of the charge for previous year.