Problem 7-1 (Cash Priority Program)

Payment to

Noble Orbos Pimentel Quezon Noble Orbos Pimente Quezon

20% 30% l 20%
30%
Capital P24,120 P96,480 P109,02 P27,870
balance 0
before
liquidation
Add loans 15,000

Total P39,120 P96,480 P109,02 P27,870

partners’ 0
interest
Divide by 20% 30% 30% 20%
the profit
and loss
ratio
Loss P195,600 P321,600 P363,40 P139,350
Absorption 0
Capacity
Allocation I: (41,800) P12,540
Cash to
Pimentel
reducing
his loss
absorption
balance to
an amount
reported for
Orbos;
reduction of
P41,800
requires
payment of
30% x
P41,800
P195,600 P321,600 P321,60 P139,350
0
Allocation (126,000) (126,000 P37,80 37,800
II: Cash to ) 0
Orboz and
Pimentel
reducing
their loss
absorption
balances to
amount
reported for
Noble;
reduction of
P126,000
requires
payments
as follows:
To Orboz,
30% x
P126,000
To
Pimentel,
30% x
P126,000
P195,600 P195,600 P195,60 P139,350
0
Allocation (56,250) (56,250) (56,250) P11,250 16,875 16,875
III: Cash to
Noble,
Orboz and
Pimentel
reducing
their loss
absorption
balances to
amount
reported for
Quezon;
reduction of
P56,250
requires
payments
as follows:
To Noble,
20% x
P56,250
To Orboz,
30% x
P56,250
To
Pimentel,
30% x
P56,250
P139,350 P139,350 P139,35 P139,350 P11,250 P54,67 P67,215 -
0 5
Allocation
IV. Further
cash
distribution
s are to be
made in the
profit and
loss ratio.

Exercises
A.

Payment to

North South West North South West

30% 50% 20%
Capital P450,000 P300,000 P150,000
balance before
liquidation
Add loans (50,000) 100,000

Total partners’ P450,000 P250,000 P250,000

interest
Divide by the 30% 50% 20%
profit and loss
ratio
Loss P1,500,000 P500,000 P1,250,000
Absorption
Capacity
Allocation I: P75,000
Cash to North (250,000)
reducing his
loss
absorption
balance to an
amount
reported for
West;
reduction of
P250,000
requires
payment of
30% x
P250,000
P1,250,000 P500,000 P1,250,000

Allocation II: (750,000) (750,000) 225,000 P150,000

Cash to North
and West
reducing their
loss
absorption
 balances to
amount
reported for
South;
reduction of
P250,000
requires
payments as
follows:
To North, 30%
x P750,000
To West, 20%
x P750,000
P500,000 P500,000 P500,000 P300,000 - P150,000

Allocation III:
Further cash
distributions
are to be
made in the
profit and loss
ratio.

A summary of the information provided by the cash priority program follows:

After fully satisfying liabilities:
1. The first P75,000 cash available to partners should be paid to North.
2. The next P325,000 should be paid to North and West in the ratio of 30:20.
3. Amounts in excess of P400,000 should be paid to North, South, and West in the profit
and loss ratio of 30:50:20.

Required:
a. Assuming that P650,000 is available for the first distribution, show how the available
cash would be distributed.
Amount North South West
Cash Available P650,000
Liabilities (500,000)

P150,000
Allocation I: Payable to North 75,000 P75,000

Allocation II P75,000
N 75,000 x 30/50 (45,000) P45,000
W 75,000 x 20/50 (30,000) P30,000
 - P120,000 P30,000

b. Assuming that a total amount of P75,000 is available for distribution to partners after
liabilities to outside creditors have been paid, show how the cash will be distributed to
the partners.
- Cash Available to partners of P75,000 will only be allocated to North
B.

Payment to

Pisces Leo Gemini Pisces Leo Gemini

50% 30% 20%
Capital P120,000 P90,000 P40,000
balance before
liquidation
Add loans 45,000 30,000 13,000

Total partners’ P165,000 P120,000 P53,000

interest
Divide by the 50% 30% 20%
profit and loss
ratio
Loss P330,000 P400,000 P265,000
Absorption
Capacity
Allocation I: (70,000) P21,000
Cash to Leo
reducing his
loss
absorption
balance to an
amount
reported for
Pisces;
reduction of
P70,000
requires
payment of
30% x
P70,000
P330,000 P330,000 P265,000

Allocation II: (65,000) (65,000) P32,500 19,500

Cash to
Pisces and
Leo reducing
their loss
 absorption
balances to
amount
reported for
Gemini;
reduction of
P65,000
requires
payments as
follows:
To Pisces,
50% x
P65,000
To Leo, 30% x
P65,000
P265,000 P265,000 P265,000 P32,500 P40,500 -

Allocation III:
Further cash
distributions
are to be
made in the
profit and loss
ratio.

A summary of the information provided by the cash priority program follows:

After fully satisfying liabilities:
1. The first P21,000 cash available to partners should be paid to Leo.
2. The next P52,000 should be paid to Pisces and Leo in the ratio of 50:30.
3. Amounts in excess of P73,000 should be paid to Pisces, Leo, and Gemini in the profit
and loss ratio of 50:30:20.
b.)
Amount Pisces Leo Gemini
January:
Cash Available P15,000
Allocation I: Payable to Leo (15,000) P15,000
February:
Cash Available P40,000
Allocation I: Payable to Leo (6,000) P6,000

Allocation II; 50:30 P34,000

P 34,000 x 50/80 (21,250) P21,250
 L 34,000 x 30/80 (12,750) P12,750
P30,000
- P21,250 P18,750
March:
Cash Available P90,000
Allocation I: (18,000) P11,250 P6,750

Allocation III; P72,000 P36,000 P21,600

P14,400
- P47,250 P28,350
P14,400
April
Cash Available P30,000
Allocation III: (30,000) P15,000 P9,000 P6,000