Module 2: Accounting for Piecemeal distribution

Piecemeal payments: Generally, the assets sold upon dissolution of partnership are
realized only in small installments over a period of time. In such circumstances, the
choice is either to distribute whatever is collected or to wait till the whole amount is
collected. Usually, the first course is adopted. In order to ensure that the distribution
of cash among the partners is in proportion to their interest in the partnership
concern either of the two methods described below may be followed for
determining the order in which the payment should be made.
Order of payment of liabilities: following is the order in which payment should be
made of payment
1) Liquidation expenses. 5) Unsecured creditors.
2) Liquidators remuneration. 6) Partners loan.
3) Government Dues 7) Partners Capital.
4) Secured creditors.
Maximum Loss Method: Each installment realized is considered to be the final
payment i.e., outstanding assets and claims are considered worthless and partners’
accounts are adjusted on that basis each time when a distribution is made, following
either Garner vs. Murray Rule or the profit-sharing ratio rule.
Garner vs. Murray Rule: When a partner is unable to pay his debt due to the firm, he is said
to be insolvent and the share of insolvency loss is to be borne by other solvent partners
capital ratio.
Illustration 1: The following is the Balance Sheet of A, B, C on 31st December, 2001
when they decided to dissolve the partnership:
Liabilities Rs. Assets Rs.
Creditors 2,000 Sundry Assets 48,500
A’s Loan 5,000 Cash 500
A’s Capital 15,000
B’s Capital 18,000
C’s Capital 9,000
49,000 49,000
The assets realized the following sums in installments:
I 1,000
II 3,000
III 3,900
IV 6,000
V 20,100 (includes savings in expenses i.e., Rs. 100 (Rs. 500 – Rs. 400)
34,000

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 The expenses of realization were expected to be Rs. 500 but ultimately
amounted to Rs. 400 only. Show how at each stage the cash received should be
distributed between partners. They share profits in the ratio of 2:2:1.
Highest Relative Capital Method: According to this method, the partner who has
the higher relative capital, that is, whose capital is greater in proportion to his
profit-sharing ratio, is first paid off. This method is also called as proportionate
capital method.
For determining the amount by which the capital of each partner is in excess of his
relative capital, partners’ capitals are first divided by figures that are in proportion
to their profit-sharing ratio; the smallest quotient will indicate the basic capital.
Having ascertained the partner who has the smallest basic capital, the amount of
capital of other partners proportionate to the profit-sharing ratio of the basic
capital is calculated. These may be called as their hypothetical capitals. The amount
of hypothetical capital of each partner is then subtracted from the amount of his
actual capital; the resultant figure will be the amount of excess capital held by him.
By repeating the process once or twice, as may be necessary between the partners
having excess capital, the amount by which the capital of each partner is in excess
will be ascertained. The partner with the largest excess capital will be paid off first,
followed by payment to the other or others who rank next to him until the capitals
of partners are reduced to their profit-sharing ratio.
The illustration given above is now worked out according to this method.
Particulars A B C
Capital Rs. 15,000 18,000 9,000
Profit-sharing ratio 2 2 1
Capital divided by the profit-sharing ratio 7,500 9,000 9,000
Proportionate Capital of B and C, taking A’s Rs. 15,000 15,000 7,500
capital as the base
Excess of actual over proportionate capital Rs. Nil 3,000 1,500
This indicates that A should not get anything till Rs. 3,000 is paid to B and Rs. 1,500 is paid to
C. Since capital of B and C are already according to their mutual profit- sharing ratio (2:1),
they will share the available cash in this ratio. After paying off creditors and A’s loan, the
available amount will be distributed as below in this method:
Particulars Total A (Rs.) B (Rs.) C (Rs.)
Third Installment 900 - 600 300
Fourth Installment (i) 3,600 - 2,400 1,200
(ii) 2,400 960 960 480
Fifth Installment 20,100 8,040 8,040 4,020
Total 27,000 9,000 12,000 6,000
Total payment made to each partner will, of course be same under both the methods.
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 Illustration 2: Ajay Enterprises, a Partnership firm in which A, B, and C are partners sharing
profits & losses in the ratio of 4:3:3. Balance sheet as on 31.12.2001 is given below:
Liabilities Rs. Assets Rs.
A’ s Capital 15,000 Factory Building 24,160
B’ s Capital 7,500 Plant & Machinery 16,275
C’ s Capital 15,000 Debtors 5,400
B’ s Loan 4,500 Stock 12,390
Sundry Creditors 16,500 Cash at Bank 275
58,500 58,500
On balance sheet date all the three partners have decided to dissolve their partnership.
Since the realization of assets was protracted, they decided to distribute amounts as and
when feasible and for this purpose, they appoint C who was to get as his remunerations
1% of the value of the assets realized other than cash at Bank and 10% of the amount
distributed to the partners. Assets were realized piecemeal as under:
First installment Rs. 18,650
Second installment Rs. 17,320
Third installment Rs. 10,000
Last instilment Rs. 7,000
Dissolution expenses were provided for estimated amount of Rs. 3,000
The creditors were settled finally for Rs. 15,900
Prepare a statement showing distribution of cash amongst the partners by ‘Higher Relative
Capital Method’.
Illustration 3: Balance Sheet of firm LMS on date of dissolution (31.3.2001) is as follows:
Liabilities Rs. Assets Rs.
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Mr. L’s Capital 15,00,000
Mr. M’s Capital 10,00,000
Mr. S’s Capital 5,00,000
47,00,000 47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realize the
assets and distribute the cash after discharge of liabilities. Their fees which include all
expenses is fixed at Rs. 1,00,000. No loss is expected on realization since fixed assets
include valuable land and building. Realizations are as follows:
S. No. Amount in Rs. S. No. Amount in Rs.
Instalment 1 5,00,000 (including cash and bank) Instalment 4 30,00,000
Instalment 2 15,00,000 Instalment 5 30,00,000
Instalment 3 15,00,000

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 The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital
Method’. You are required to prepare a statement showing distribution of cash with
necessary workings.
Illustration 4: Daksh Associates is a reputed firm. On account of certain misunderstandings
between the partners, it was decided to dissolve the firm as on 31st December, 2001. Their
Balance Sheet as on 31st December, 2001 was as follows:
Liabilities Rs. Assets Rs.
Capitals: Daksh 3,00,000 Land and Buildings 7,00,000
Yash 2,00,000 Other Fixed Assets 3,00,000
Siddhart (Minor) 1,00,000 Stock in Trade 2,00,000
Trade Loans 3,00,000 Debtors 4,00,000
Bank Overdraft 3,00,000 Bills Receivable 1,50,000
Other Loans 2,00,000 Trademark 30,000
Creditors 2,00,000 Cash 20,000
Siddhart’s Loan 2,00,000
18,00,000 18,00,000
It was decided that Mr. Daksh will be in-charge of Realization. He will set apart Rs.
10,000 towards expenses. He will be paid a remuneration of 5% on the amounts distributed
to the partners towards their contribution other than loans. Assets realized are as under:
Date Particulars Rs.
1.1.2002 Debtors 3,50,000
15.1.2002 Fixed Assets 4,00,000
1.2.2002 Debtors 50,000
15.2.2002 Bills Receivable 1,40,000
1.3.2002 Fixed Assets 50,000
15.3.2002 Land and Buildings 8,00,000
Prepare a statement showing how the money received on various dates will be distributed
assuming:
(a) The actual expenses of realization amounted to Rs. 20,005.
(b) The firm is solvent.
(c) The profit-sharing ratio was as under:
Profit Loss
Daksh 2 1
Yash 2 1
Siddhart 1 Nil
5 2
(d) The final dissolution is made on 15th March, 2002.

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