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Homework answers / question archive / In the preparation of a Cash Distribution Program, the loss absorption potential is a computed by dividing the partners' capital balances by his profit and loss percentage
In the preparation of a Cash Distribution Program, the loss absorption potential is a computed by dividing the partners' capital balances by his profit and loss percentage. S2 The loss absorption potential is the maximum loss each partner can absorb and which can eliminate him from any cash distribution a.) S1 IS TRUE b.) S2 IS TRUE C) BOTH ARE TRUE d) BOTH ARE FALSE 2. Which will hold true in case a partner's share in loss on realization exceeds the partner's capital balance? a.) right of offset will be applied for any loan to partner balance b.) the partner is required to make additional investment, if the partner is solvent and is not a general partner c) loss absorplion will be applied to the other partners capital accounts if the deficient partner is a limited partner even if he is still personally solvent d) none of the above e) answer not given 3. Which slalement about capital stock transaction is to correct? a.) Tolal shareholders equily is increased by amount of cash received b.) Excess of par value over lait value of non-cash item received increases additional paid in capilal C.) Non cash consideration received is recorded at its fair value d.) Total shareholders equity is increased by the value of liability sel oll e.) None of the above
1) b) Both are TRUE
At the beginning of the liquidation process,it is common for accountants to prepare a cash distribution plan,which give the partners an idea of the installment cash payments each will receive as cash becomes available to the partnership. The Cash distribution plan is a pro forma projection of the application of cash as it becomes available.
Procedure to prepare Cash Distribution Program
1. Compute the loss absorption potential to each partner by dividing the total interest by the profit and loss percentage.
2. Determine the priority of payments to partners. The partner with the biggest loss absoption potential is priority.
3. Compute the amount to be paid to the partners under each priority by multiplying the excess loss absorption potential by his profit and loss percentage.
2) c-loss absorption will be applied to the other partners capital accounts if the deficient partner is a limited partner even if he is still personally solvent.
The capital deficiency of an insolvent partner is borne by all other solvent partners in their profit-sharing ratio.
3) a- Total shareholders equity is increased by amount of cash received.
What a company chooses to do with its profits will determine whether stockholder equity will rise. If a company chooses to hold onto its profits and either hold them as cash or use them to invest internally in its business, then shareholders equity will go up.
