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Chapter 15 Advanced Solutions
Chapter 15 Advanced Solutions
7. A safe capital balance is the amount of a partner's capital account that exceeds all possible
needs of a partnership as it goes through liquidation. A partner should, therefore, be able to
receive this balance immediately without endangering the future amount to be received by
any other party connected with the liquidation. Safe capital balances are computed by
projecting a series of assumptions whereby the partnership undergoes maximum losses
during the remainder of the liquidation process. All noncash assets are assumed to have no
resale value, liquidation expenses are set at the largest possible estimation, and all
partners are viewed as personally insolvent. Any capital balance that would remain after this
series of anticipated events can be distributed to the partners immediately without incurring
any risk.
8. The marshaling of assets doctrine is a provision within the Uniform Partnership Act that
indicates the priority of claims when a partner becomes personally insolvent. By providing a
ranking of these claims, an orderly and fair distribution of available property can be made.
The marshaling of assets provision states:
Where a partner has become bankrupt or his estate is insolvent, the claims against his
separate property shall rank in the following order:
(I) Those owing to separate creditors,
(II) Those owing to partnership creditors,
(III) Those owing to partners by way of contributions.
9. A partner's personal creditors do have a limited claim against partnership assets. Recovery
is possible but only if payment of all partnership debts is assured and the insolvent partner
has a positive capital balance.
10. For distribution purposes, the Uniform Partnership Act states that loans from partners rank
ahead of the partners capital balances. Thus, the handling of loans in a liquidation would
seem to be obvious: When money becomes available for the partners, all loans from
partners should be repaid before any amount is given to a partner because of a safe capital
balance.
A problem arises, though, in the above solution if a partner (especially if the partner is
currently insolvent) has made a loan to a partnership but has a potentially negative capital
balance. The final capital balance may require a contribution to the partnership that the
partner may be unable or unwilling to make. If the Uniform Partnership Act is followed
precisely, a partner could collect money on a loan while still having an obligation to the
partnership because of a negative capital balance.
To avoid this problem, in practice a partners loan balance is usually merged with that
partners capital balance to minimize the chance of a negative capital balance occurring.
This particular partner may get less money from the liquidation because of this treatment
but the other partners are better protected.
11. A proposed schedule of liquidation is used by the accountant to determine the allocation of
any cash balances generated during the early stages of liquidation. Often, sufficient cash
will be collected to pay all liabilities as well as potential liquidation expenses. Additional cash
should then be distributed to the partners to allow them immediate use of their funds. A
proposed schedule of liquidation can be produced to determine the allocation of this
available cash. The statement is based on anticipating a series of assumed losses from the
current day forward: all remaining noncash assets are scrapped, maximum liquidation
expenses are incurred, and each partner is personally insolvent. The ending balances that
would result from these simulated transactions represent safe capital balances. This
amount of cash can be distributed presently and the partners will still retain enough capital
to absorb all future losses.
12. A predistribution plan is produced based on an assumed series of losses. Each loss is
calculated to eliminate in turn the capital balance of one of the partners. In this manner, the
accountant can determine the vulnerability to losses exhibited by each capital account.
When the last balance is eliminated, the accountant will have established a series of losses
that exactly offsets each balance. The predistribution plan is then developed by measuring
the effects that are created if the losses do not occur. In effect, the accountant works
backwards through the assumed losses to create a pattern of available cash, the
predistribution plan.
Answers to Problems
1. C
2. A
3. D
4. B
5. B
Reported balances
Potential loss from
Cassidy deficit
(split 5/8:3/8)
Cash distributions
Angela, Capital
Woodrow, Capital
Cassidy, Capital
$19,000
$18,000
$(12,000)
(7,500)
$11,500
(4,500)
$13,500
12,000
-0-
6. B
Bell
Reported balances
$50,000
Loss on sale of assets ($110,000)
split on a 4:3:2:1 basis
(44,000)
Adjusted balances
$ 6,000
Potential loss from Dennard
deficit (split 4:3:1)
(4,000)
Minimum cash distributions
$2,000
Hardy
$56,000
Dennard
$14,000
Suddath
$80,000
(33,000)
$23,000
(22,000)
$(8,000)
(11,000)
$69,000
(3,000)
$20,000
8,000
$ -0-
(1,000)
$68,000
7. A
8. A
Reported balances .....................................
Loss on sale of assets ($22,000) split
on a 4:3:3 basis ........................................
Adjusted balances .....................................
Anticipated liquidation expenses ($12,000)
split on a 4:3:3 basis ...............................
Anticipated maximum loss on inventory
($31,000) split on a 4:3:3 basis ...............
Potential balances .....................................
Potential loss from Art deficit (split 3:3) .
Current cash distribution ..........................
Art
$18,000
Raymond
$25,000
Darby
$26,000
(8,800)
$ 9,200
(6,600)
$18,400
(6,600)
$19,400
(4,800)
(3,600)
(3,600)
(12,400)
$(8,000)
8,000
$ -0-
(9,300)
$ 5,500
(4,000)
$ 1,500
(9,300)
$ 6,500
(4,000)
$ 2,500
9. D Since the partnership currently has total capital of $400,000, the $30,000
that is available would indicate maximum potential losses of $370,000.
A
$100,000
B
$120,000
Reported balances
Anticipated loss ($370,000) split on
a 2:3:5 basis
(74,000)
Potential balances
$ 26,000
Potential loss from C's deficit (split 2:3)
(2,000)
Current cash distribution
$ 24,000
(111,000)
$ 9,000
(3,000)
$ 6,000
C
$180,000
(185,000)
$ (5,000)
5,000
$
-0-
$59,000/40%
$39,000/30%
$34,000/10%
$34,000/20%
$147,500
130,000
340,000
170,000
Michael Brendan
$39,000
$34,000
(39,000)
$
-0-
Jonathan
$34,000
(13,000)
$21,000
(26,000)
$ 8,000
Brendan
$21,000
Jonathan
$8,000
(1,750)
$19,250
(3,500)
$4,500
$19,250/1/3
$4,500/2/3
$57,750
6,750
Beginning balances
Assumed loss of $90,000 (see
Schedule 1)(4:3:2:1)
Step one balances
Assumed loss of $42,000 (see
Schedule 2) (allocated on
a 4:0:2:1 basis)
Step two balances
Assumed loss of $15,000 (see
Schedule 3) (allocated on a
0:0:2:1 basis)
Step three balances
Carney
Pierce
$60,000 $27,000
Menton
$43,000
(36,000) (27,000)
$24,000
$ -0-
(18,000)
(9,000)
$25,000 $11,000
(24,000)
$ -0-
$ - 0$ -0-
(12,000)
$13,000
(6,000)
$ 5,000
- 0$ - 0-
(10,000)
$ 3,000
(5,000)
$ - 0-
- 0$ - 0-
Hoehn
$20,000
Partner
Carney
Pierce
Menton
Hoehn
Schedule 1
Maximum Loss
Capital Balance/
That Can
Loss Allocation
Be Absorbed
$60,000/40%
$150,000
$27,000/30%
$ 90,000 (most vulnerable)
$43,000/20%
$215,000
$20,000/10%
$200,000
Partner
Carney
Menton
Hoehn
Schedule 2
Maximum Loss
Capital Balance/
That Can
Loss Allocation
Be Absorbed
$24,000/(4/7)
$ 42,000 (most vulnerable)
$25,000/(2/7)
$ 87,500
$11,000/(1/7)
$ 77,000
Partner
Menton
Hoehn
Schedule 3
Maximum Loss
Capital Balance/
That Can
Loss Allocation
Be Absorbed
$13,000/(2/3)
$ 19,500
$ 5,000/(1/3)
$ 15,000 (most vulnerable)
12. C The $16,000 available cash can be distributed but should be done under the
assumption that all deficit balances will be total losses. After offsetting
Jones' loan, the two deficits total $4,000. Fuller and Rogers, the two
partners with positive capital balances, share profits in a 30:20 relationship
(the equivalent of a 60%:40% ratio). Fuller would absorb $2,400 of the
potential loss with Rogers being allocated $1,600. The remaining capital
balances ($10,600 and $5,400) are safe capital balances and those amounts
can be immediately distributed.
13. (8 Minutes) (Payment of safe capital balances)
$6,800 to Cleveland and $1,200 to Pierce
Since the partnership currently has total capital of $350,000, the $8,000 that is
available would indicate maximum potential losses of $342,000.
Nixon
Reported balances ..............................
$170,000
Anticipated loss ($342,000) split
on a 5:3:2 basis ..............................
(171,000)
Potential balances ...............................
$ (1,000)
Potential loss from Nixon's deficit (split 3:2) 1,000
Current cash distribution ...................
$
-0-
Cleveland
Pierce
$110,000
$70,000
(102,600)
$ 7,400
(600)
$6,800
(68,400)
$ 1,600
(400)
$ 1,200
Brown gets $21,000, Fish gets $12,000, and Stone gets $2,000.
Brown
$25,000
Fish
$15,000
Stone
$5,000
(4,000)
$21,000
(3,000)
$12,000
(3,000)
$2,000
Fish
$15,000
Stone
$5,000
Brown
Reported balances ......................................
$25,000
Loss on sale of land ($20,000) split on
a 4:3:3 basis............................................
(8,000)
Adjusted balances .......................................
$17,000
Potential loss from Stone's deficit (split 4:3)
(571)
Cash distribution .........................................
$16,429
Part c.
(6,000)
$ 9,000
(429)
$ 8,571
(6,000)
$(1,000)
1,000
$
-0-
Brown
Reported balances ......................................
$25,000
Loss on sale of land ($30,000) split on
a 4:3:3 basis............................................
(12,000)
Adjusted balances .......................................
$13,000
Potential loss from Stone's deficit (split 4:3)
(2,286)
Cash distribution .........................................
$10,714
Fish
$15,000
(9,000)
$ 6,000
(1,714)
$ 4,286
Stone
$5,000
(9,000)
$(4,000)
4,000
$
-0-
15. (10 Minutes) (Distribution made of contribution made by partner with deficit
balance)
The entire $20,000 goes to Atkinson.
Atkinson
Reported balances
Capital contribution
Adjusted balances
Potential loss from Dennsmore
and Rasputin ($60,000) split
on a 4:3 basis
Adjusted balances
Potential loss from Kaporale
($5,714)
Cash distribution
Kaporale Dennsmore
$60,000
-0$60,000
$20,000
-0$20,000
$(30,000)
-0$(30,000)
(34,286)
$25,714
(25,714)
$(5,714)
30,000
$
-0-
5,714
-0-
-0$ -0-
(5,714)
$20,000
Rasputin
$(50,000)
20,000
$(30,000)
30,000
-0-0$ -0-
Ball
$28,000
Eaton
$20,000
Lake
$22,000
(25,500)
(17,000)
(17,000)
(1,500)
$ 1,000
(1,000)
$ 2,000
(1,000)
$ 4,000
(857)
143
(571)
$ 1,429
(572)
$ 3,428
Saunders,
Capital
Ferris,
Loan &
Capital
200,000
(38,400)
230,000
(38,400)
Hardwick,
Accounts Loan and
Payable
Capital
Cash
Beginning
balances
90,000 820,000
210,000
270,000
Sold assets
200,000 (328,000)
(51,200)
Assumed: loss
on remaining
assets
(492,000)
(196,800)
Paid liabilities (210,000)
(210,000)
Safe balances
80,000
0
0
22,000
(147,600) (147,600)
14,000
44,000
Share of Loss
New Capital Balance
30/60 x $15,000 = $7,500
$ (4,500)
10/60 x $15,000 = $2,500
$ (5,500)
20/60 x $15,000 = $5,000
$10,000
Black, who is also insolvent, now has a deficit capital of $4,500 that would
have to be absorbed by Brown and Green (on a 10:20 basis):
Partner
Green
Brown
Share of Loss
New Capital Balance
10/30 x
$4,500 = $1,500
$ (7,000)
20/30 x
$4,500 = $3,000
$ 7,000
Share of Loss
New Capital Balance
2/10 x $250,000 = $50,000
$ 30,000
2/10 x $250,000 = $50,000
$(20,000)
3/10 x $250,000 = $75,000
$(15,000)
3/10 x $250,000 = $75,000
$ 15,000
$ 16,000
$ (6,000)
Absorbing the final $6,000 loss from Dobbs would leave Adams with a safe
capital balance of $10,000.
c. Adams receives $57,500 and Dobbs gets $22,500.
The $50,000 loss on sale of the building would be allocated as follows:
Partner
Adams
Baker
Carvil
Dobbs
Share of Loss
10% x $50,000 = $5,000
30% x $50,000 = $15,000
30% x $50,000 = $15,000
30% x $50,000 = $15,000
21. c. (continued)
Maximum potential loss of $130,000 on the land would be allocated as follows:
Partner
Share of Loss
Adams
Baker
Carvil
Dobbs
$ 58,572
$ (4,286)
$ 25,714
$57,500
$22,500
Baker
$ 30,000
$
(30,000)
-0-
Carvil
$ 60,000
Dobbs
$ 90,000
(40,000)
$ 20,000
(20,000)
$ 70,000
(20,000)
-0-
(10,000)
$ 60,000
- 0-0-
- 0- 0-
- 0- 0-
(60,000)
$
- 0-
21. d. (continued)
PREDISTRIBUTION PLAN
The first $35,000 available goes to Adams. Next $90,000 is split between
Adams and Dobbs on a 1:2 basis. Next $35,000 is split between Adams, Carvil,
and Dobbs on a 1:4:2 basis. All remaining cash is split between Adams, Baker,
Carvil, and Dobbs on the original profit and loss ratio.
Total cash of $125,000 ($35,000 + $90,000) has to be available before Carvil will
receive any cash. Since the partnership already has $10,000 cash in excess of
its liabilities, the land and building must be sold for over $115,000 to ensure
Carvil of receiving some amount.
As another approach to the problem, Carvil's capital balance is eliminated
through the $100,000 Step One loss and the $35,000 Step Two loss. Thus,
avoiding a complete $135,000 loss ensures that Carvil will receive cash. Since
the land and buildings have a book value of $250,000, such losses would be
avoided by receiving over $115,000.
Schedule 1
Partner
Adams
Baker
Carvil
Dobbs
Capital Balance/
Loss Allocation
$80,000/10%
$30,000/30%
$60,000/40%
$90,000/20%
Schedule 2
Partner
Adams
Carvil
Dobbs
Capital Balance/
Loss Allocation
$70,000/(1/7)
$20,000/(4/7)
$70,000/(2/7)
Schedule 3
Partner
Adams
Dobbs
Capital Balance/
Loss Allocation
$65,000/(1/3)
$60,000/(2/3)
Maximum Loss
That Can
Be Absorbed
$800,000
$100,000 (most vulnerable)
$150,000
$450,000
Maximum Loss
That Can
Be Absorbed
$490,000
$ 35,000 (most vulnerable)
$245,000
Maximum Loss
That Can
Be Absorbed
$195,000
$ 90,000 (most vulnerable)
Capital Balance/
Loss Allocation
$15,000/20%
$60,000/30%
$75,000/20%
$41,250/30%
Schedule 2
Partner
Norris
Spencer
Harrison
Partner
Norris
Spencer
Capital Balance/
Loss Allocation
$37,500/(3/8)
$60,000/(2/8)
$18,750/(3/8)
Schedule 3
Capital Balance/
Loss Allocation
$18,750/(3/5)
$47,500/(2/5)
Maximum Loss
That Can
Be Absorbed
$ 75,000 (most vulnerable)
$200,000
$375,000
$137,500
Maximum Loss
That Can
Be Absorbed
$100,000
$240,000
$ 50,000 (most vulnerable)
Maximum Loss
That Can
Be Absorbed
$ 31,250 (most vulnerable)
$118,750
$50,000/.2
$60,000/.3
$50,000/.5
$250,000
200,000
100,000 (most vulnerable to losses)
Moon
$60,000
(30,000)
$30,000
Yerkl
$50,000
(50,000)
$
0
$30,000/.4
$30,000/.6
$75,000
50,000 (most vulnerable to losses)
Able
$30,000
(20,000)
$10,000
Moon
$30,000
(30,000)
$
0
PREDISTRIBUTION PLAN
The first $62,000 will go to pay liquidation expenses ($12,000) and liabilities
($50,000).
The next $10,000 goes entirely to Able (to pay off loan).
The next $50,000 is split between Able and Moon based on a 2:3 basis,
respectively.
All remaining cash will be divided among the partners according to their
profit and loss ratio.
Part b.
After this sale, the partnership has $76,000 in cash. The first $62,000 should be
held for the liabilities and the liquidation expenses. The next $10,000 goes to
Able. The remaining $4,000 is divided between Able ($1,600 or 40%) and Moon
($2,400 or 60%).
24. (25 Minutes) (Produce a predistribution plan for a partnership liquidation)
$18,000/20%
$40,000/40%
$48,000/20%
$135,000/20%
Hart
$40,000
Bobb
$48,000
Reidl
$135,000
(36,000)
$ 4,000
(18,000)
$30,000
(18,000)
$117,000
$4,000/4/8
$30,000/2/8
$117,000/2/8
Bobb
$30,000
(2,000)
$28,000
Reidl
$117,000
(2,000)
$115,000
$28,000/2/4
$115,000/2/4
Bobb
$28,000
(28,000)
$
0
Reidl
$115,000
(28,000)
$ 87,000
PREDISTRIBUTION PLAN
The first $59,000 goes to pay liabilities and expected liquidation expenses.
The next $87,000 goes entirely to Reidl.
The next $56,000 is split evenly between Bobb and Reidl.
The next $8,000 is split among Hart (4/8), Bobb (2/8), and Reidl (2/8).
All remaining cash is split among the partners according to their original
profit and loss ratio.
Part A.
(a) $48,000. Maximum losses of $100,000 on the noncash assets would
increase Milburn's deficit balance by $40,000 (or 40%). Maximum losses
would not create any other deficit balances.
(b) All $19,000 should go to Thomas. As Ross and Thomas view the current
situation, maximum potential losses total $108,000: $100,000 on the
noncash assets and $8,000 on Milburn's deficit balance. In determining safe
capital balances, these assumed losses would be allocated on a 4:2 basis
or $72,000 to Ross and $36,000 to Thomas. Since such a loss would entirely
eliminate Ross' capital account, only Thomas has a safe capital balance at
the current time.
(c) The minimum cash payment to Thomas would be $35,667 ($19,000 +
$16,667). As shown in (b) above, the available $19,000 is distributed to
Thomas, thus reducing that partner's capital balance to $39,000. A loss of
$59,000 on the noncash assets would further reduce this partner's balance
by $11,800 ($59,000 x 20%) to $27,200. That same loss would reduce Ross'
capital to $45,400 and Milburn's deficit to ($31,600). The minimum cash
amount would be caused by Milburn's failure to contribute this $31,600 so
that it has to be absorbed by Ross (4/6 or $21,067) and Thomas (2/6 or
$10,533). The remaining safe capital balance of $16,667 would be paid to
Thomas.
Part B.
(a) Carton will have to contribute $7,429. The $29,000 in deficits will have to be
absorbed by Sampson and Carton on a 4:3 basis. Thus, Carton will be
allocated $12,429 of this amount which creates a deficit of $7,429.
(b) Klingon will have to contribute $19,667 [$17,000 + (20/90 x $12,000)] that will
be distributed as follows:
Creditors
Sampson
Carton
$15,000
$ 3,667
$ 1,000
Since Romulan is insolvent, the remaining partners will have to absorb the
$12,000 deficit on a 4:2:3 basis. This allocation increases Klingon's deficit
by 2/9 of $12,000 or $2,667. Klingon must contribute an amount equal to the
new deficit balance of $19,667. The first $15,000 will go to the creditors that
remain after the $9,000 in partnership cash is distributed. The remaining
$4,667 is distributed to the two partners in accordance with their remaining
positive capital balances after absorbing Romulan's loss, 4/9 to Sampson
and 3/9 to Carton. Sampson has a postive capital balance of $3,667 [$9,000
($12,000 x 4/9)] and Carton has a positive capital balance of $1,000
[$5,000 ($12,000 x 3/9)].
25. (continued)
(c) Sampson should receive $500. If Klingon is insolvent, the $17,000 deficit
balance will have to be absorbed by the remaining three partners on a 4:3:1
basis. This loss would decrease Sampson's capital balance by $8,500 (4/8)
to $500.
26. (25 Minutes) (Prepare journal entries for a partnership liquidation)
JOURNAL ENTRIES
a. Cash .............................................................................
March, Capital (2/6 of loss) .......................................
April, Capital (3/6) .......................................................
May, Capital (1/6) ........................................................
Inventory ................................................................
56,000
6,000
9,000
3,000
74,000
2,500
3,750
1,250
c. Liabilities .....................................................................
Cash .......................................................................
40,000
d. Cash .............................................................................
Accounts Receivable ............................................
45,000
e.
Partner
March
April
May
Current Capital
Adjusted
$16,500
$62,250
$41,750
7,500
40,000
45,000
Share of
Potential
Maximum Loss*
Capital
2/6 x $77,000 = $25,667 $ (9,167)
3/6 x $77,000 = $38,500
$23,750
1/6 x $77,000 = $12,833
$28,917
Potential Capital
(above)
$23,750
$28,917
Share of
March's Deficit
3/4 x $9,167 = $6,875
1/4 x $9,167 = $2,292
Potential
Capital
$16,875
$26,625
26. (continued)
As the above amounts represent safe capital balances, payments can be
presently made to these two partners.
April, Capital ...............................................................
16,875
May, Capital .................................................................
26,625
Cash .......................................................................
43,500
f. Cash (30%) ..................................................................
March, Capital (2/6 of loss) .......................................
April, Capital (3/6)........................................................
May, Capital (1/6).........................................................
Accounts Receivable ............................................
11,700
9,100
13,650
4,550
g. Cash ............................................................................
March, Capital (2/6 of loss) .......................................
April, Capital (3/6) .......................................................
May, Capital (1/6) ........................................................
Land, Building and Equipment ............................
17,000
7,000
10,500
3,500
h. Liabilities .....................................................................
Cash .......................................................................
21,000
39,000
38,000
21,000
i. Since $28,700 cash remains and each partner has a positive capital
balance, the money left can be distributed based on these ending totals.
March, Capital .............................................................
April, Capital ...............................................................
May, Capital .................................................................
Cash .......................................................................
400
21,225
7,075
28,700
W
X
$ 60,000 $ 78,000
$
(60,000) (36,000)
-0- $ 42,000
- 0- 0-
(42,000)
$
- 0-
- 0- 0-
- 0- 0-
Y
$ 40,000
Z
$ 30,000
(12,000)
$ 28,000
(12,000)
$ 18,000
(14,000)
$ 14,000
(14,000)
$ 4,000
(4,000)
$ 10,000
(4,000)
- 0-
PREDISTRIBUTION PLAN
27. (continued)
Schedule 1
Partner
W
X
Y
Z
Capital Balance/
Loss Allocation
$60,000/50%
$78,000/30%
$40,000/10%
$30,000/10%
Maximum Loss to
Be Absorbed
$120,000 (most vulnerable)
$260,000
$400,000
$300,000
Capital Balance/
Loss Allocation
$42,000/(3/5)
$28,000/(1/5)
$18,000/(1/5)
Maximum Loss to
Be Absorbed
$ 70,000 (most vulnerable)
$140,000
$ 90,000
Capital Balance/
Loss Allocation
$14,000/(1/2)
$ 4,000/(1/2)
Maximum Loss to
Be Absorbed
$ 28,000
$ 8,000 (most vulnerable)
Schedule 2
Partner
X
Y
Z
Schedule 3
Partner
Y
Z
Total
100%
Van
50%
Bakel
30%
Cox
20%
$118,000
(30,000)
88,000
(14,000)
$ 90,000
20,000
110,000
(8,400)
$74,000
-074,000
(5,600)
74,000
(99,500)
(25,500)
101,600
(59,700)
41,900
68,400
(39,800)
28,600
25,500
$ -0-
(15,300)
$ 26,600
(10,200)
$18,400
Schedule 1
Computation of Actual and Potential Liquidation Losses
January 2009
Actual
Potential
Losses
Losses
Collection of accounts receivable ($66,000 $51,000)
$15,000
Sale of inventory ($52,000 $38,000) ............................
14,000
Liquidation expenses ......................................................
2,000
Gain resulting from January credit memorandum
reducing liability to creditors ....................................
(3,000)
Machinery and equipment, net .......................................
$189,000
Potential unrecorded liabilities and anticipated expenses
10,000
Totals ...........................................................................
$ 28,000 $199,000
28. (continued)
VAN, BAKEL, AND COX PARTNERSHIP
Safe Installment Payments to Partners
February 28, 2009
Total
Equity of partnership
January 31, 2009 (above) .. $244,000
Safe payments (above) ...........
(45,000)
February liquidation expenses
(3,000)
Equity of partnership
February 28, 2009 ..............
196,000
Potential liabilities and expenses (6,000)
Potential loss on machinery and
equipment .......................... (189,000)
1,000
Potential lossVan's deficit balance
(Bakel 3/5; Cox 2/5) ...........
- 0Safe payments to partners .....
$ 1,000
Van
Bakel
Cox
$74,000
-0(1,500)
$101,600
(26,600)
(900)
$68,400
(18,400)
(600)
72,500
(3,000)
74,100
(1,800)
49,400
(1,200)
(94,500)
(25,000)
(56,700)
15,600
(37,800)
10,400
25,000
$ -0-
(15,000)
$ 600
(10,000)
$ 400
Van
Bakel
Cox
$72,500
-0-
$74,100
(600)
$49,400
(400)
(21,500)
(2,500)
$48,500
(12,900)
(1,500)
$59,100
(8,600)
(1,000)
$39,400
29. (35 Minutes) (Determine cash distributions for four different partnership
liquidations)
Part A
Beginning balances
Contribution by Jackson
Capital balances
Elimination of Jackson's deficit
(40:20 basis)
Final distribution
Part B
Beginning balances
$82,000 loss on disposal (allocated on a
50:40:10 basis)
Liquidation expenses (50:40:10 basis)
Capital balances
Allocation of Luck's deficit (50:10 basis)
Final distribution
Part C
Beginning balances
$82,000 loss on disposal (allocated on a
2:4:4 basis)
Liquidation expenses (2:4:4 basis)
Capital balances
Allocation of Cummings' deficit balance
(2:4 basis)
Capital balances
Allocation of Luck's deficit balance
Final distribution
Simon,
Capital
$16,000
- 0$16,000
(6,000)
$10,000
Hough,
Loan and
Capital
$82,000
(41,000)
(10,500)
30,500
(1,000)
$29,500
Hough,
Loan and
Capital
$82,000
Haynes,
Loan and
Capital
$ 4,000
- 0$ 4,000
(3,000)
$ 1,000
Jackson,
Capital
($12,000)
3,000
($ 9,000)
$
9,000
- 0-
Luck,
Loan and Cummings,
Capital
Capital
$40,000
$20,000
(32,800)
(8,400)
(1,200)
1,200
$ - 0-
(8,200)
(2,100)
9,700
(200)
$ 9,500
Luck,
Loan and Cummings,
Capital
Capital
$40,000
$20,000
(16,400)
(1,200)
$64,400
(32,800)
(2,400)
$ 4,800
(32,800)
(2,400)
($15,200)
(5,067)
$59,333
(5,333)
$54,000
(10,133)
($ 5,333)
5,333
$ - 0-
15,200
-0- 0$ - 0-
29. (continued)
Part D
Beginning balances
Allocation of Redmond's
deficit balance (10:30:40
basis)
Capital balances
$32,000 contribution by
Ledbetter and $3,000 contribution by Watson
Final distribution*
Redmond,
Loan and Ledbetter,
Capital
Capital
Watson,
Capital
Sandridge,
Capital
($16,000) ($30,000)
$ 3,000
$15,000
(2,000)
($32,000)
(6,000)
($3,000)
(8,000)
$ 7,000
32,000
$ - 0-
3,000
$ - 0-
- 0$ 7,000
16,000
-0- 0$ - 0-
Beginning balances
Cash
$48,000
Noncash
Assets
$177,000
Liabilities
$35,000
Frick,
Capital
(60%)
$101,000
Wilson,
Capital
(20%)
$28,000
Clarke,
Capital
(20%)
$61,000
Distribution of $4,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan Schedule 1
Updated balances
Noncash assets sold
Updated balances
All liabilities are paid
Updated balances
(4,000)
$44,000
48,000
$92,000
(35,000)
$57,000
$177,000
(80,000)
$97,000
$97,000
$35,000
$35,000
(35,000)
$-0-
$101,000
(19,200)
$81,800
$28,000
(6,400)
$21,600
(4,000)
$57,000
(6,400)
$50,600
$81,800
$21,600
$50,600
Distribution of $48,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan Schedule 1:
(23,333)
(22,667)
(2,000)
$9,000
44,000
$53,000
(7,000)
$46,000
(46,000)
$-0-
$97,000
(97,000)
$-0-
(17,000)
(1,200)
$63,600
(31,800)
(400)
$21,200
(10,600)
(23,333)
(5,667)
(400)
$21,200
(10,600)
$10,600
(1,400)
$9,200
$10,600
(1,400)
$9,200
(9,200)
$-0-
(9,200)
$-0-
$-0-
$-0-
$-0-
$-0-
$31,800
(4,200)
$27,600
$-0-
$-0-
(27,600)
$-0-
30. (continued)
Schedule 1
Development of Predistribution Schedule
Frick,
Capital
$101,000
Wilson,
Capital
$28,000
Clarke,
Capital
$61,000
(84,000)
$ 17,000
(28,000)
$
-0-
(28,000)
$33,000
(17,000)
- 0-
- 0- 0-
(5,667)
$27,333
PREDISTRIBUTION PLAN
Partner
Frick
Wilson
Clarke
Capital Balance/
Loss Allocation
$101,000/60%
$ 28,000/20%
$ 61,000/20%
Maximum Loss
That Can
Be Absorbed
$168,333
$140,000 (most vulnerable to loss)
$305,000
Schedule 3
Partner
Frick
Clarke
Capital Balance/
Loss Allocation
$17,000/(60/80)
$33,000/(20/80)
Maximum Loss
That Can
Be Absorbed
$ 22,667 (most vulnerable to loss)
$132,000
31. (50 Minutes) (Produce a predistribution plan and journal entries for a
partnership liquidation)
Rodgers,
Part A
Wingler,
Norris,
Loan and
Guthrie,
Capital
Capital
Capital
Capital
Beginning balances ...............
$120,000
$88,000
$109,000
$60,000
Loss of $150,000 assumed (allocated on a 30:10:20:40
basis) see Schedule 1 .........
(45,000)
(15,000)
(30,000)
(60,000)
Step One balances ..................
$ 75,000
$73,000
$ 79,000
$
-0Loss of $150,000 assumed (allocated on a 30:10:20 basis)
see Schedule 2 .....................
(75,000)
(25,000)
(50,000)
-0Step Two balances ..................
$
-0$48,000
$ 29,000
$
-0Loss of $43,500 assumed
(allocated on a 10:20 basis) see
Schedule 3 ...........................
-0(14,500)
(29,000)
-0Step Three balances ...............
$
-0$33,500
$
-0$
-0PREDISTRIBUTION PLAN
Partner
Capital Balance/
Loss Allocation
Wingler
Norris
Rodgers
Guthrie
$120,000/30%
$ 88,000/10%
$109,000/20%
$ 60,000/40%
Maximum Loss
That Can Be
Absorbed
$400,000
$880,000
$545,000
$150,000 (most vulnerable to loss)
31. a. (continued)
Schedule 2
Partner
Wingler
Norris
Rodgers
Capital Balance/
Loss Allocation
$75,000/(30/60)
$73,000/(10/60)
$79,000/(20/60)
Maximum Loss
That Can Be
Absorbed
$150,000 (most vulnerable to loss)
$438,000
$237,000
Schedule 3
Partner
Norris
Rodgers
Capital Balance/
Loss Allocation
$48,000/(10/30)
$29,000/(20/30)
Maximum Loss
That Can Be
Absorbed
$144,000
$ 43,500 (most vulnerable to loss)
31. (continued)
Part B
Cash ............................................................................. 65,600
Wingler, Capital (30% of $16,400 loss) ...............
4,920
Norris, Capital (10%) .............................................
1,640
Rodgers, Capital (20%) .........................................
3,280
Guthrie, Capital (40%) ...........................................
6,560
Accounts Receivable ......................................
Receivables are collected with losses allocated
to partners.
82,000
74,000
74,000
31. b. (continued)
Cash ..................................................................
71,000
Wingler, Capital (30% of $30,000 loss) ..........
9,000
Norris, Capital (10%) .......................................
3,000
Rodgers, Capital (20%) ...................................
6,000
Guthrie, Capital (40%) .....................................
12,000
Inventory.....................................................
Inventory is sold with loss allocated to partners.
101,000
Wingler, Capital.................................................
35,500
Norris, Capital...................................................
11,833
Rodgers, Capital...............................................
23,667
Cash............................................................
71,000
Above entry distributes available cash according to predistribution
plan. Although $87,000 in cash is being held, $16,000 must be
retained to pay liquidation expenses. The remaining $71,000 is
divided among Wingler, Norris, and Rodgers on a 30:10:20 basis.
According to the predistribution plan, a total of $150,000 must be
divided on this ratio but only $63,600 was allocated in this manner
in the first distribution above. Therefore, all $71,000 (making a total
of $134,600) is paid out on this 30:10:20 basis.
Wingler, Capital (30% of expenses)................
Norris, Capital (10%)........................................
Rodgers, Capital (20%)....................................
Guthrie, Capital (40%)......................................
Cash............................................................
Liquidation expenses are paid.
3,300
1,100
2,200
4,400
11,000
31. b. (continued)
CAPITAL ACCOUNT BALANCES
Beginning balances.................
Loss on accounts receivable.
Loss on land, building, and
equipment ..............................
Cash distribution.....................
Loss on inventory....................
Cash distribution.....................
Liquidation expenses..............
Subtotal ..............................
Guthrie insolvent......................
Current balances......................
Wingler,
Capital
$120,000
(4,920)
Norris,
Capital
$88,000
(1,640)
(30,900)
(31,800)
(9,000)
(35,500)
(3,300)
4,580
(2,080)
$2,500
(10,300)
(58,600)
(3,000)
(11,833)
(1,100)
1,527
(693)
$ 834
Rodgers,
Loan and Guthrie,
Capital
Capital
$109,000
$60,000
(3,280)
(6,560)
(20,600)
(50,200)
(6,000)
(23,667)
(2,200)
3,053
(1,387)
$1,666
Wingler, Capital............................................................
2,500
Norris, Capital..............................................................
834
Rodgers, Capital..........................................................
1,666
Cash
.................................................................
To distribute remaining cash based on final capital balances.
(41,200)
-0(12,000)
-0(4,400)
(4,160)
4,160
$ -0-
5,000