Worked Solution
✓ VerifiedMaximum Loss Basis Method – Statement of Cash Distribution
The Maximum Loss Basis (Surplus Capital / Highest Relative Loss Method) is applied when assets are realised piecemeal. At each distribution point, it is assumed all unrealised assets will fetch ₹NIL (maximum possible loss is absorbed notionally), partner capitals are adjusted for that notional loss, and only the surplus above each partner's adjusted capital is paid out.
Note: The question does not specify the exact capital balances or external liabilities. The following assumed balance sheet is used (consistent with all asset figures given and producing clean arithmetic):
Balance Sheet as at 31 December 2017
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Creditors | 16,200 | Machinery | 1,24,000 |
| Capital – E.P. | 1,80,000 | Furniture & Fittings | 23,000 |
| Capital – O | 1,20,000 | Investments | 6,000 |
| Stock | 97,700 | ||
| Debtors | 51,500 | ||
| Bank | 14,000 | ||
| Total | 3,16,200 | Total | 3,16,200 |
Profit Sharing Ratio: E.P. : O = 3 : 1
Net Realization Loss: Book value of non-cash assets ₹3,02,200 – Cash realised ₹2,31,000 = ₹71,200 (E.P. bears ₹53,400; O bears ₹17,800)
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Statement of Cash Distribution (Maximum Loss Basis)
| Month | Cash Received (₹) | Creditors (₹) | E.P. Capital (₹) | O Capital (₹) |
|---|---|---|---|---|
| Opening Balances | — | 16,200 | 1,80,000 | 1,20,000 |
| Dec: Bank ₹14,000 → Pay creditors (partial) | (14,000) | (14,000) | — | — |
| Balance c/f | — | 2,200 | 1,80,000 | 1,20,000 |
| Feb: Debtors ₹51,500; Pay balance creditors ₹2,200; Net cash ₹49,300. Max loss working: unrealised = ₹2,50,700; E.P. adjusted capital = (8,025) → Nil; O adjusted = 57,325 – 8,025 deficiency = ₹49,300. Pay O only. | (49,300) | (2,200) | — | (49,300) |
| Balance c/f | — | — | 1,80,000 | 70,700 |
| Mar: Machinery ₹1,39,500. Max loss working: unrealised = ₹1,26,700; E.P. pays ₹84,975 (base) + ₹11,625 (surplus 3/4) = ₹96,600; O pays ₹39,025 + ₹3,875 = ₹42,900 | (1,39,500) | — | (96,600) | (42,900) |
| Balance c/f | — | — | 83,400 | 27,800 |
| (Capitals now in 3:1 ratio — all future distributions in 3:1) | ||||
| Apr: Furniture ₹18,000 distributed in 3:1 | (18,000) | — | (13,500) | (4,500) |
| Balance c/f | — | — | 69,900 | 23,300 |
| May: Goodwill/Investments ₹6,000 in 3:1 | (6,000) | — | (4,500) | (1,500) |
| Balance c/f | — | — | 65,400 | 21,800 |
| Jun: Stock ₹16,000 in 3:1 | (16,000) | — | (12,000) | (4,000) |
| Final Balances (= Realization Loss in 3:1) | — | — | 53,400 | 17,800 |
| TOTALS | 2,45,000 | 16,200 | 1,26,600 | 1,02,200 |
Final balances of ₹53,400 (E.P.) and ₹17,800 (O) = Net realization loss ₹71,200 shared 3:1. These are written off via Realization Account; Capital Accounts close to nil.
Total cash distributed to partners: ₹1,26,600 (E.P.) + ₹1,02,200 (O) = ₹2,28,800
Write it like this
1The skeleton
- Head your answer with the method name and its core assumption — write 'Maximum Loss Basis: at each instalment, unrealised assets are assumed to fetch ₹NIL' in line 1, because examiners want to see you know WHY you're doing the working, not just that you can do it.
- Clear creditors first before touching partner capitals — in December, bank balance goes straight to creditors; show this as a separate row so the examiner sees you haven't mixed it with partner payments, which is a dedicated step-mark.
- At every instalment, show the 'max loss working' as a mini-table beside your main table — write unrealised assets total, split loss 3:1, deduct from each capital, and pay out only the positive remainder; this working is where 6–8 marks hide — skip it and you lose them even if the final number is right.
- Flag the 'ratio-convergence' moment explicitly — after March, write a note 'Capitals now stand in 3:1; all future distributions in PSR directly' — this one line tells the examiner you understand the logic and not just the mechanics, and it protects you if your earlier arithmetic drifts slightly.
- Close your table with a reconciliation line — show that final capital balances (₹53,400 + ₹17,800 = ₹71,200) equal the net realisation loss shared in 3:1; this signals a complete, self-checking answer and earns the presentation mark.
- Put totals at the bottom and verify cash-in = cash-out — ₹2,45,000 received = ₹16,200 to creditors + ₹2,28,800 to partners; examiners love a closing reconciliation because it proves your table is internally consistent.
2Examiner-rewarded phrases
3Common trap
The single biggest killer here is distributing every instalment in 3:1 from the start — you'll lose 8–10 marks because the whole point of maximum loss basis is that early distributions are NOT in PSR. Don't switch to PSR until you've explicitly shown (with working) that the adjusted capitals have converged to 3:1.