Question: EXERCISE 8-11. Comprehensive Problem. Following an unprecedented decline in the sales for the past five years, the manufacturing business of partners Ace, Cholo, and Vensim
EXERCISE 8-11. Comprehensive Problem. Following an unprecedented decline in the sales for the past five years, the manufacturing business of partners Ace, Cholo, and Vensim was on the brink of bankruptcy. On January 7, 2020, the partners decided to liquidate. Vensim, the managing partner, spearheaded the liquidation process and utilized the most recent statement of financial position shown below as starting point: ACV Manufacturing
Statement of Financial Position
December 31, 2019
ASSETS
Cash 20,000
Investments in Trading Securities 50,000
Trade and other receivables (Note 5) 97,000
Inventories (Note 6) 65,000
Prepaid expenses (Note 7) 3,500
Property, plant, and equipment (Note 8) 219,000
Total Assets 454,500
LIABILITIES AND PARTNERS EQUITY
Trade and other payables (Note 9) 36,500
Ace, Capital (30%) 170,000
Cholo, Capital (30%) 48,000
Vensim, Capital (40%) 200,000
Total Liabilities and Partners Equity 454,500
Additional information pertaining to liquidation process:
- Investments in Trading Securities were realized for 30,000. The business was charged 2,800 for early settlement of securities.
- Note 5 included accounts receivable with a net realizable value of 47,000. It was ascertained that only 50% would be collected. For the remaining balance, only 40% would be collected.
- A sale of inventory costing 15,000 supposedly to be delivered on January 3, 2020 did not push through. The sale was not recorded by the business but was properly included in inventory. The business was able to realize 70% of the amount.
- The remaining balance reflected in Note 6 had the proportion 1:2:7 for raw materials, work-in-process, and finished goods, respectively. It was determined that only 30% of the raw materials and 50% of the finished goods were realized. There was no market for the work-in-process.
- The prepaid expenses were never realized.
- Property, plant, and equipment were realized for 60% of their carrying value.
- Note 9 was short of 6,800 representing unrecorded operating expenses received on January 4, 2020. Moreover, it included 8,000 loan from Ace.
- Except Cholo, all partners were personally solvent.
REQUIRED: Prepare a statement of liquidation and related journal entries to record the liquidation process.
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts