Cash Priority Program

Instead of preparing a schedule showing how cash will p distributed every time a partial cash settlement
will be made among the partners, a cash priority program can be prepared, which will show i advance
how future cash available can be distributed without making y under or over payment to the partners.

Using Illustration 4, a cash priority program can be prepared follows:

30% 20% 50%

jo ko lo total

jo ko lo

800,00 675,000 280,000

(125,000) 37,500 37,500

675,000 675,000 280,000

(395,000) (395,000) 118,500 79,000 197,500

280,000 280,000 280,000 84,000 56,000 140,000 280,000

240,000 135,000 140,000 515,000

Procedures:

1. Compute the loss absorption capacity of each partner by dividing h adjusted capital by his profit-
sharing ratio. His adjusted capital is t capital balance after offsetting his receivable from the partnership
and his loan to the partnership, if any. In the illustration, the lon absorption capacity of the partners is
computed as follows:

Jo (P 240,000/0.30) =P 800,000

Ko (P135,000/0.20) =675,000

Lo (P 140,000/0.50) =280,000

The loss absorption capacity is the maximum partnership loss partner's adjusted capital can absorb out
of his share in the los without having a capital deficiency. In the foregoing illustration, Jo adjusted capital
can absorb a total partnership loss of P 800,000 out of his share of 30%. His share in the loss will be P
240,000 (P 800,000x0.30), which is equal to his adjusted capital. The partner with the highest loss
absorption capacity will have the first priority in the distribution of cash available (after full payment of
creditors). The partner with the second highest, will have the second priority, and so forth and so on. The
order of priority therefore depends on the loss absorption capacity of the partners.

2. After computing the loss absorption capacity of all the partners, get the difference between the
highest and the second highest, then the difference between the second and third highest, and so forth
and so on, until all the partners' loss absorption capacity will be the same.

3. Multiply the difference in number 2 by the profit and loss sharing ratio of the partner(s) with the
highest loss absorption capacity and extend to his capital column.
Cash Priority Program:

The cash priority program is a plan that helps partners in a business know in advance how any future
available cash will be distributed among them, making sure no one is paid too little or too much. This is
done based on each partner's ability to absorb losses, which is determined by their adjusted capital and
profit-sharing ratio.

Procedures:

1. Compute Loss Absorption Capacity:

For each partner, figure out their loss absorption capacity. This is the maximum amount of partnership
loss a partner can handle without running into financial trouble.

To find this, divide each partner's adjusted capital (their share of the business after considering any
money they owe or are owed by the partnership) by their profit-sharing ratio.

Example:

Jo's Loss Absorption Capacity: P 240,000 / 0.30 = P 800,000

Ko's Loss Absorption Capacity: P 135,000 / 0.20 = P 675,000

Lo's Loss Absorption Capacity: P 140,000 / 0.50 = P 280,000

2. Determine Priority:

Arrange the partners in order of their loss absorption capacity, from highest to lowest. The partner with
the highest capacity gets the first priority, the second highest gets the second priority, and so on.

Calculate the differences between each partner's loss absorption capacity. The difference between the
highest and second highest, then between the second and third highest, and so on until all partners have
the same capacity.

3. Distribute Cash:

Multiply each difference (calculated in step 2) by the profit and loss sharing ratio of the partner with the
highest loss absorption capacity.

Allocate this calculated amount to the capital column of that partner.

Continue this process until all partners have the same loss absorption capacity.

Explanation in Simple Terms:

Imagine you and your friends are running a business together. The cash priority program helps decide
who gets paid first when there's money available. It's like having a plan in place so everyone knows the
order in which they'll get paid. This order is based on how much financial hits each person can handle
without causing problems.

To figure this out, we look at each person's share in the business and how much loss they can take. The
person who can handle the most loss gets paid first, and so on. We calculate this in a way that's fair to
everyone. If there's a difference in how much loss each person can handle, we use that difference to
decide who gets paid how much.

The goal is to make sure everyone gets their fair share and that the business stays healthy financially.
Analysis of the cash priority program

In the cash priority program, it is determined that the first P 37,500 cash available will all go to Jo (having
the highest loss absorption capacity). In excess of P37,500, but not exceeding P 235,000 (P37,500 +
197,500), the cash will be divided between Jo and Ko using their profit and loss sharing ratio. Beyond
P235,000, the distribution will be based on the profit and loss sharing ratio of all the partners. Using
illustration 4, P 220,000 is the first distribution of cash (see Schedule 1). The same distribution can be
computed without preparing the schedule merely by applying the cash priority program. The
computation is as follows:

First distribution

jo ko Lo cash

Jo 37,500 37,500

Jo and Ko, 30-20 109,500 73,000 182,500

total 147,000 73,000 220,000

Note: Because the amount exceeds P37,500, the excess is divided using the profit-sharing ratios of Jo
(30%) and Ko (20%) only.

Second distribution

jo ko Lo cash

jo and ko, 30:20 6,000 4,000 10,000

Note: The amount has not exceeded P 235 000 the cash will be divided between JO and KO.

First Distribution of Cash:

Initial Cash Available: There's a total of P 37,500 cash available.

Recipient: Jo gets the entire P 37,500 initially.

Excess Cash Distribution (P 37,500 to P 235,000): If there's more cash available beyond P 37,500 but
not exceeding P 235,000, it will be shared between Jo and Ko based on their profit and loss ratio.

Jo's share is 30%.

Ko's share is 20%.

Calculation Example: If the total cash available is P 109,500, Jo gets 30% (P 32,850), and Ko gets 20% (P
21,900). The remaining cash will go to other partners (Lo).

Total Distribution: In the example, the total cash distributed is P 220,000.

Second Distribution of Cash:

Distribution Range: The cash being distributed is within the range of P 37,500 to P 235,000.

Recipient: Jo and Ko share the cash based on their profit and loss ratio.

Jo's share is 30%.

Ko's share is 20%.

Calculation Example: If the total cash available is P 10,000, Jo gets 30% (P 3,000), and Ko gets 20% (P
2,000).
Assume instead that the first distribution of cash is in the amount of P 250,000. Using the cash priority
program, the distribution can be computed as follows:

jo ko lo cash

Jo P 37,500 P 37,500

Jo, Ko, and Lo, 30:20 118,500 79,000 197,500

Jo, ko, and lo 30: 20:50 4,500 3,000 7,500 15,000

Total P160.500 P82.000 P7,500 P 250 000

Note:

Because the amount to be distributed is more than P 235,000, the excess of P 15,000 is divided among
the partners using their profit and loss ratios. Lo will only share in the distribution if the amount to be
distributed will exceed P 235,000.

Assumptions:

The first distribution of cash is P 250,000.

The cash distribution is done using a priority program, which involves Jo, Ko, and Lo.

The profit and loss ratio for Jo and Ko is 30:20.

Lo will share in the distribution only if the total amount exceeds P 235,000.

Explanation:

Initial Cash Distribution (P 37,500):

The first P 37,500 is given to Jo.

Excess Cash Distribution (P 37,500 to P 235,000):

The remaining cash, P 250,000 - P 37,500 = P 212,500, is distributed among Jo, Ko, and Lo based on their
profit and loss ratio (30:20).

Jo's share is 30%, Ko's share is 20%, and Lo doesn't get any share in this step.

Additional Distribution (P 15,000 Excess):

Because the total distribution exceeds P 235,000, the excess amount of P 15,000 is divided among the
partners based on their profit and loss ratios.

In this case, Lo's share is determined by the 50% profit and loss ratio.

So, P 15,000 * 50% = P 7,500 is given to Lo.

Total Distribution:

The total cash distribution is now P 250,000, with Jo, Ko, and Lo receiving their respective shares based
on the profit and loss ratios.

In simple terms, Jo gets an initial amount, and the remaining cash is shared among Jo, Ko, and Lo
based on their profit and loss ratios. If the total distribution exceeds P 235,000, the excess is divided
among all partners, and Lo gets a share based on its profit and loss ratio. The process ensures a fair
distribution of cash among the partners according to their contributions to the business.
assume that Jo is to receive P 87,000 in the first distribution of cash. How much cash should be
available?

Using the cash priority program, the computation is as follows:

Jo Ko Lo Cash

Jo P 37,500 P 37,500

Jo and Ko, 30:20 49,500 33,000 82,500

Total P 87,000 P33,000 P120,000

Jo initially receives P 37,500.

The remaining cash needed for Jo to receive a total of P 87,000 is calculated based on the profit and loss
ratio, so an additional P 49,500 is distributed between Jo and Ko.

Therefore, the total cash available for distribution in this scenario is P 120,000.

how much will Lo received if Ko will get P 95,000? Using the cash priority program, the computation is as
follows:

Jo Ko Lo Cash

Jo P 37,500 P 37,500

Jo and Ko, 30:20 118,500 79,000 197,500

Jo, Ko, and Lo, 30:20:50 24,000 16,000 40,000 80,000

Total P180,000 P95,000 P40,000 P315,000

Jo initially receives P 37,500.

The remaining cash needed for Ko to receive a total of P 95,000 is calculated based on the profit and loss
ratio, so an additional P 57,500 is distributed between Jo, Ko, and Lo.

Therefore, the total cash available for distribution in this scenario is P 315,000.

Lo's share in this distribution is based on the profit and loss ratio, and Lo receives P 40,000.

This process ensures that each partner receives their specified amounts based on the profit and loss
ratios, maintaining fairness in the distribution among partners.