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 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)
|
B
(Sh)
|
C
(Sh)
|
Distribution
(Sh)
|
|
Capitals
|
200,000
|
100,000
|
60,000
|
40,000
|
|
|
19th 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
|