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CHAPTER 15 PARTNERSHIPS: TERMINATION AND LIQUIDATION

Chapter Outline
I. The termination of a partnership and liquidation of its property may take place for a number of reasons. A. The death, withdrawal, or retirement of a partner can lead to cessation of business activity. B. The bankruptcy of either an individual partner or the partnership as a whole can necessitate this same conclusion.

II. Because of the importance of liquidating and distributing assets fairly, all parties look to the accountant to play an important role in the process. A. The accountant provides timely financial information. B. The accountant works to ensure an equitable settlement of all claims. III. The schedule of liquidation A. The liquidation process usually involves the disposal of noncash assets, payment of liabilities and liquidation expenses, and distribution of any remaining cash to the partners based on their final capital balances. B. A schedule of liquidation should be produced periodically by the accountant to disclose losses and gains that have been incurred, remaining assets and liabilities, and current capital balances. IV. Deficit capital balances A. By the end of the liquidation process, one or more partners may have a negative (or deficit) capital balance often as a result of losses incurred in disposing of assets. B. Legally, any deficit should be eliminated by having that partner contribute enough additional assets to offset the negative balance. C. If this contribution is not immediately received, the remaining partners may request a preliminary distribution of any partnership cash that is available. 1. This payment is based on safe capital balances, the amounts that will remain in the individual capital accounts even if all deficits and other properties prove to be complete losses that must be absorbed by the remaining partners. 2. If a portion (or all) of a deficit is subsequently recovered from a partner, a further distribution to the other partners is made based on newly computed safe capital balances. 3. Any deficit that is not recovered from a partner must be charged to the remaining partners based on their relative profit and loss ratio.

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V. Marshaling of assets A. To provide an equitable system for distributing assets during liquidation, the Uniform Partnership Act states that claims against an insolvent partner shall be ranked as follows: 1. Claims by separate creditors 2. Claims by partnership creditors 3. Claims by partners B. This priority listing is referred to as the marshaling of assets doctrine . C. The Uniform Partnership Act also provides that an individual partner's own creditors may seek recovery of losses directly from the partnership 1. Payment of all partnership debts must be assured before any distribution to an individual partners' creditors. 2. Payment of personal debts cannot exceed the capital balance of the specific partner. Vl. Preliminary distribution of assets to the partners A. The liquidation process can extend over a lengthy period of time as business activities wind down and property is sold. B. More cash may be generated than the amount needed to extinguish all potential liabilities and liquidation expenses. C. If possible, the distribution of excess cash amounts should be made as quickly as possible to enable the partners to make use of their funds. 1. The accountant may choose to produce a proposed schedule of liquidation at such times to determine the equitable distribution of cash amounts that become available. 2. The proposed schedule of liquidation is developed based upon simulating the accounting recognition that would be required by a possible series of transactions: assets are sold, expenses are paid, etc. a. These events are simulated with the anticipation of maximum losses in each case. b. Noncash assets are assumed to have no resale value; maximum possible liquidation expenses are included; all partners are considered personally insolvent; etc. 3. Ending potential capital balances that remain on a proposed schedule of liquidation are safe capital balances, the amounts that could be immediately paid to each partner without jeopardizing future payments. Safe capital balances indicate that the partner will still have a sufficient interest in the partnership to absorb all potential losses even after a preliminary distribution. Vll. Predistribution plan A. The proposed schedule of liquidation (described above) indicates safe capital balances but a newly revised schedule must be prepared frequently. B. Accountants often prefer to produce a single predistribution plan at the start of a liquidation to provide guidance for all payments made to the partners throughout this process.

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C. Information for the predistribution plan is generated by assuming the occurrence of a series of losses, each just large enough to eliminate one partner's claim to any partnership property. D. Once a series of losses has been simulated that would eliminate the capital balances of all partners, the actual plan is developed by measuring the effects that occur if the losses do not materialize. E. By working backwards through this series of possible losses, a predistribution plan can be produced that will direct all payments made within the liquidation.

Learning Objectives
Having completed Chapter 15 of this textbook, "Partnerships: Termination and Liquidation," students should be able to fulfill each of the following learning objectives: 1. Discuss the roles played by the accountant in the termination and liquidation of a partnership. 2. Produce journal entries to record the transactions incurred in the liquidation of a partnership. 3. Prepare a schedule of liquidation. 4. Determine the appropriate distribution of any cash that remains at the end of a liquidation when one or more of the partners has a deficit capital balance. 5. Explain the meaning of the term "safe capital balance." 6. Discuss “marshaling of assets” and explain how this doctrine is applied in distributing the assets of an insolvent partnership. 7. Prepare a proposed schedule of liquidation to determine an equitable preliminary distribution of available partnership assets. 8. Develop a predistribution plan and explain the advantages of such a plan over a proposed schedule of liquidation.

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Answer to Discussion Question
What Happens if a Partner Becomes Insolvent? This case demonstrates one of the nightmares of a partnership: the apparent insolvency of a partner is threatening the future of a successful business. The problem is especially acute to Wilkinson and Walker since this partnership was created solely for convenience; the partners share the facilities but do not actually work together. Therefore, the presence of Rogers is not essential to the other partners except that he pays a portion of the business's expenses. However, the claim that has been filed could lead to the actual liquidation of the entire business. Obviously, the partners should take no immediate action until they have spoken with Rogers. The entire issue may prove to be a mistake. Conversely, numerous other claims against Rogers may also be outstanding with the initial claim simply being the first to be filed. Because of the various possibilities, Wilkinson and Walker should consult with a lawyer to learn of the partnership laws that apply in their state. They should also begin considering possible alternatives to salvage their business if Rogers is indeed insolvent. One course of action is for Wilkinson and Walker to buy out the partnership interest of Rogers. In that way, Rogers would receive his money and the remaining partnership could be left intact. However, they would have to prove—for legal reasons—that a fair price was being paid. They would also be forced to come up with a significant amount of cash in a short period of time. Finally, Wilkinson and Walker would have a building that was apparently larger than their needs. Unless they could utilize the space in some manner, they might have no way of recouping their additional investment. As a second possibility, a new dentist could be brought in to acquire Rogers’ interest in the partnership. Again, the money is conveyed to Rogers but now the original partners are not forced to make the payment. The building would continue to be fully utilized so that the partners' expenses would not escalate. In this case, though, a new partner may have to be identified in a short period of time. Furthermore, since the partners are sharing space, Wilkinson and Walker will probably want to ensure that the new partner is someone with whom they can work comfortably. Because of time considerations, they may not have the opportunity of getting the new partner they would like. Finally, the partnership can be liquidated. Wilkinson and Walker could then take their share of the proceeds and buy a new building for the continuation of their practices. Unfortunately, in liquidation, assets do not always bring fair market value. Thus, the partners may be forced to absorb significant losses as a result of Rogers' insolvency. In addition, the moving of any business can disrupt service and have a possible adverse impact on profitability. Although Wilkinson and Walker have several possible actions that can be taken, none of these is without problems. Therefore, partners should always include agreements within their Articles of Partnership to specify actions that will be taken in such cases. The insolvency of a partner is not a particularly unusual event. Hence, the partners (or their lawyers and accountants) should have the forethought to arrange the resolution of the business if insolvency of a partner does occur.

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From a legal viewpoint. Information to be presented includes the balances of all remaining assets. retirement. actual business activities must cease. Advanced Accounting. Therefore. Doupnik. 2009 15-5 . In a liquidation. the computation of a net income figure is of diminished importance since normal operations have ceased. A schedule of liquidation provides financial data about the liquidation process as it has progressed to date. 9/e © The McGraw-Hill Companies. this process is simply a preliminary step in the transfer of business property to a newly formed partnership. During the liquidation process.Answers to Questions 1. an additional contribution should be made to offset the negative amount. 3. monitoring the balance of the partners' capital accounts becomes of paramount importance. liquidation is often necessary to settle the partner's interest in the business. The remaining partners may choose to allocate the available cash immediately based on the assumption that the deficit balance eventually will prove to be a total loss. McGraw-Hill/Irwin Hoyle. however. 5. any partner who incurs a negative (or deficit) capital balance is obligated to make an additional contribution to offset that amount. The business might simply have failed to generate sufficient profits or the partners may elect to enter other lines of work. the liability total. Inc. A dissolution refers to the cessation of a partnership. The bankruptcy of an individual partner can also force the termination of the business as can the bankruptcy of the partnership itself. Liquidation can also be required by the death. the allocation of all gains and losses incurred in the liquidation process as well as the payment of expenses should be evident. Many reasons can exist that would lead to the termination and liquidation of a partnership. Final distributions made to the various partners are based solely on their ending capital account balances unless the partners have agreed otherwise. Partnership property is sold with the remaining cash distributed to creditors and to any partners with positive capital balances. 6. As an additional factor. Such recording enhances the informational value of the accounts. Consequently. or withdrawal of one of the partners. 2. all liquidation gains and losses are recorded directly as changes to these capital balances. That amount will eventually indicate either the cash to be received by the partners as final distributions or the additional contributions that they are required to pay. If any partner has a deficit balance. In addition. In such cases. and the capital account of each partner. In many cases. In some situations. Schaefer.. Dissolution refers to changes in the composition of a partnership whereas liquidation is the selling of a partnership's assets. a question may arise as to whether compensation for a deficit will ever be forthcoming from the responsible party. a dissolution does not necessarily affect the operations of the business. 4.

be able to receive this balance immediately without endangering the future amount to be received by any other party connected with the liquidation. To avoid this problem. If the Uniform Partnership Act is followed precisely. therefore. in practice a partner’s loan balance is usually merged with that partner’s capital balance to minimize the chance of a negative capital balance occurring. the handling of loans in a liquidation would seem to be obvious: When money becomes available for the partners. Thus. 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. A partner's personal creditors do have a limited claim against partnership assets. This particular partner may get less money from the liquidation because of this treatment but the other partners are better protected. 8. an orderly and fair distribution of available property can be made. a partner could collect money on a loan while still having an obligation to the partnership because of a negative capital balance. though. and all partners are viewed as personally insolvent. (II) Those owing to partnership creditors. Recovery is possible but only if payment of all partnership debts is assured and the insolvent partner has a positive capital balance. the claims against his separate property shall rank in the following order: (I) Those owing to separate creditors. 10. McGraw-Hill/Irwin 15-6 © The McGraw-Hill Companies. 2009 Solutions Manual . Safe capital balances are computed by projecting a series of assumptions whereby the partnership undergoes maximum losses during the remainder of the liquidation process. 9. A problem arises. A partner should. liquidation expenses are set at the largest possible estimation. Inc. the Uniform Partnership Act states that loans from partners rank ahead of the partners’ capital balances. Any capital balance that would remain after this series of anticipated events can be distributed to the partners immediately without incurring any risk.. For distribution purposes.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. The marshaling of assets provision states: Where a partner has become bankrupt or his estate is insolvent. 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. All noncash assets are assumed to have no resale value. The final capital balance may require a contribution to the partnership that the partner may be unable or unwilling to make. (III) Those owing to partners by way of contributions. all loans from partners should be repaid before any amount is given to a partner because of a safe capital balance. By providing a ranking of these claims.

Advanced Accounting. In this manner. 12. the predistribution plan.. Often. and each partner is personally insolvent. The predistribution plan is then developed by measuring the effects that are created if the losses do not occur. the accountant works backwards through the assumed losses to create a pattern of available cash. The ending balances that would result from these simulated transactions represent safe capital balances. sufficient cash will be collected to pay all liabilities as well as potential liquidation expenses. McGraw-Hill/Irwin Hoyle. The statement is based on anticipating a series of assumed losses from the current day forward: all remaining noncash assets are scrapped. 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. Inc. A predistribution plan is produced based on an assumed series of losses. When the last balance is eliminated.11. This amount of cash can be distributed presently and the partners will still retain enough capital to absorb all future losses. Schaefer. Each loss is calculated to eliminate in turn the capital balance of one of the partners. maximum liquidation expenses are incurred. Additional cash should then be distributed to the partners to allow them immediate use of their funds. the accountant can determine the vulnerability to losses exhibited by each capital account. A proposed schedule of liquidation can be produced to determine the allocation of this available cash. the accountant will have established a series of losses that exactly offsets each balance. In effect. Doupnik. 2009 15-7 . 9/e © The McGraw-Hill Companies.

.000 -0Suddath $80...000 7. 2009 Solutions Manual .....500) $13.000 (7.......200 (4...... B Bell Reported balances $50..000) split on a 4:3:3 basis ..500 (4..000) $ 1...500 Darby $26. Art $18....000 (4.600) (9.000 Dennard $14...........000 (6..800) (12.............000 6.000 $ -0Cassidy...000 (6.000 Loss on sale of assets ($110..500) $11..... B Reported balances Potential loss from Cassidy deficit (split 5/8:3/8) Cash distributions Angela..000) 8.....000 (22..500 (4.......000) split on a 4:3:2:1 basis (44......300) $ 5...000) split on a 4:3:3 basis .....400 (3..........400 (3..000) 8....500 $18.. D 4.... Capital $19... Anticipated liquidation expenses ($12....000 $ -0- Raymond $25..... Potential loss from Art deficit (split 3:3) .. B 5..000 (8...000 (33............600) $18..Answers to Problems 1....... A 3...... Adjusted balances .........000) $68.000) $ 2........000 (11...000) $(8...000) Minimum cash distributions $2. Inc..........000 (1.....000 Potential loss from Dennard deficit (split 4:3:1) (4.....000) Adjusted balances $ 6...... Capital Woodrow..500 McGraw-Hill/Irwin 15-8 © The McGraw-Hill Companies.000) split on a 4:3:3 basis ...... Anticipated maximum loss on inventory ($31....600) $19...600) (9.300) $ 6..800) $ 9..000) $23......000) $20.000) $69. A 8.. Potential balances .........400) $(8... C 2..000) 12...500 Hardy $56..000 (3. Capital $(12... A Reported balances ....... Current cash distribution . Loss on sale of assets ($22....

....000) $ 9............ Maximum Losses That Can Be Absorbed Kevin Michael Brendan Jonathan $59.000) Adjusted balances $ -0Maximum Losses That Can Now Be Absorbed Brendan Jonathan $19.......... C A predistribution plan should be created.000/2/7 28.000 B $120.......250 $4.000) Potential balances $ 26..000 $ -0- The assumption is made that a $130...000 (26.000/30% $34.$59. Kevin Reported balances ..... Reported balances Anticipated loss ($370.......000) split on a 2:3:5 basis (74.500 The assumption is made that a $6....000) $ 8.000 goes to Menton © The McGraw-Hill Companies... (2.000 (1..500) Adjusted balances ...000 $34.000 (185..500/2/3 $57.000 Assumed loss ($12.000 Maximum Losses That Can Now Be Absorbed Kevin $7.500 130..000 loss occurs..000) 5.. $19. Inc.000 that is available would indicate maximum potential losses of $370...000 (most vulnerable to losses) A $100.000) $ (5.....000..000 (111.250) (4.000/40% $39...000/1/7 147.......... a predistribution schedule is necessary............000) $ -0(13...000 10............000) split on a 4:3:1:2 basis ... 2009 15-9 McGraw-Hill/Irwin Hoyle... 9/e ..250 Jonathan $8.(52.000 170.......000 (3.... C To work this problem.......750) split on a 1:2 basis ... $17...........750 (most vulnerable to losses) Brendan $21...$ 7.......500 Assumed loss ($6. That schedule...000.....000/10% $34.......000 (39....000 Potential loss from C's deficit (split 2:3) (2.. is as follows: • First $3......000 Michael Brendan $39..250/1/3 $4....000 (3.........000) $ 6.. Doupnik...............000) $21. Schaefer....000 C $180.000 $ -011. Brendan Jonathan Reported balances. which is computed below.. the $30...000 Jonathan $34......(7...000/4/7 $12...750 6...250 (most vulnerable to losses) Brendan $21................000 Kevin Reported balances ............250) split on a 4:1:2 basis ...000/20% $147.$7.......9.. D Since the partnership currently has total capital of $400...750 loss occurs...000 Jonathan $8.000 340.000) Adjusted balances ....500) $4....750) $19......000) Current cash distribution $ 24...000 Assumed loss ($130.... Advanced Accounting..

000 $27. 2009 Solutions Manual . After offsetting Jones' loan.000 (most vulnerable) Partner Carney Menton Hoehn Partner Menton Hoehn 12.000 (see Schedule 1)(4:3:2:1) Step one balances Assumed loss of $42.600.000 $11.000) $ 5.000/30% $ 90.000) (27.000 (6.000 (5.000) $13.000. the two deficits total $4. Inc.000 Schedule 3 Maximum Loss Capital Balance/ That Can Loss Allocation Be Absorbed $13.0$ -0. Fuller would absorb $2. Menton (2/10).000 (12. Menton (2/7).000 goes to Menton (2/3) and Hoehn (1/3) Next $42.000 goes to Carney (4/7).000/(1/7) $ 77.000 Beginning balances Assumed loss of $90.000) $ -0. Fuller and Rogers.000 Schedule 2 Maximum Loss Capital Balance/ That Can Loss Allocation Be Absorbed $24.000) $ .400 of the potential loss with Rogers being allocated $1..000 $ -0(24.0$ .000) (9.500 $11.000) $ 3.0- Partner Carney Pierce Menton Hoehn Schedule 1 Maximum Loss Capital Balance/ That Can Loss Allocation Be Absorbed $60.000/10% $200.500 $ 5. The remaining capital McGraw-Hill/Irwin 15-10 © The McGraw-Hill Companies. Pierce (3/10). C The $16.000) $24.000 (see Schedule 2) (allocated on a 4:0:2:1 basis) Step two balances Assumed loss of $15.000 (most vulnerable) $25.000 (most vulnerable) $43.000/(4/7) $ 42.000/20% $215. and Hoehn (1/7) All remaining cash goes to Carney (4/10). the two partners with positive capital balances.000/(1/3) $ 15.000 $20.000 $27.000/40% $150. share profits in a 30:20 relationship (the equivalent of a 60%:40% ratio).000 (see Schedule 3) (allocated on a 0:0:2:1 basis) Step three balances (18.• • • Next $15.0$ .000 (36.000 Hoehn $20.000/(2/7) $ 87. and Hoehn (1/10) Carney Pierce $60.0$ .000 available cash can be distributed but should be done under the assumption that all deficit balances will be total losses.0Menton $43.000 (10.000/(2/3) $ 19.000) $25.

000) Potential loss from Nixon's deficit (split 3:2) 1.000... $170.. 9/e © The McGraw-Hill Companies.200 McGraw-Hill/Irwin Hoyle............. the $8.800 Pierce $70....600 (400) $ 1.....000 (102....... Advanced Accounting..800 to Cleveland and $1... Doupnik........400 (600) $6........200 to Pierce Since the partnership currently has total capital of $350.000.....600 and $5.000 Anticipated loss ($342...600) $ 7....000 (68.... Nixon Reported balances .... Schaefer......000 that is available would indicate maximum potential losses of $342...balances ($10.... 13.000) split on a 5:3:2 basis . Inc..... $ -0Cleveland $110.....000) Potential balances ..400) $ 1.......... (8 Minutes) (Payment of safe capital balances) $6...... $ (1........000 Current cash distribution . (171... 2009 15-11 ......400) are safe capital balances and those amounts can be immediately distributed.

.286) $25.... Brown gets $21...000 (6......................................000) split on a 4:3 basis Adjusted balances Potential loss from Kaporale ($5....... 2009 Solutions Manual ......000 (1...000) split on a 4:3:3 basis...... Brown $25.........000 Potential loss from Stone's deficit (split 4:3) (571) Cash distribution ...000 (9.........286 Stone $5. Loss on sale of land ($10.. Inc............ (20 Minutes) (Final settlement of a partnership being liquidated) Part a..000 $ -0- 15..714 and Fish gets $4...000..000) -0$(30....429 Part c.......000) split on a 4:3:3 basis.........000 -0$20... Part b...000 (6.714) $20... and Stone gets $2..... $13.........000 Potential loss from Stone's deficit (split 4:3) (2........000 -0-0$ -0- $ McGraw-Hill/Irwin 15-12 © The McGraw-Hill Companies...000) split on a 4:3:3 basis.....000) $ 9..714) $ 5..000) $2..000) $ 6..000) 4..000 (9.000) $12. $25...............571 Fish $15..714 (5... Fish gets $12......... (12....000 $ -0- Brown Reported balances .000) $(4..000 (4...... (8. $16......000 (34.714) $ 4........714 -0$(30.......... $17.... Brown gets $10...........000 Stone $5.................000) 30..........000) $21.............000 goes to Atkinson....000 (25.286) Cash distribution ....... Atkinson Reported balances Capital contribution Adjusted balances Potential loss from Dennsmore and Rasputin ($60........... $10.000.......... (10 Minutes) (Distribution made of contribution made by partner with deficit balance) The entire $20...000....000 $(30......000) $(1.......286 Brown Reported balances ..000) 30....000 Loss on sale of land ($20.....000 Reported balances .......14...............000) Adjusted balances .000 (3.000 (429) $ 8... Cash distribution ...571 Stone $5....714) $(5.......714 Fish $15..........429 and Fish gets $8........000 (3.000) 20.... Brown gets $16..000) Adjusted balances .000 Kaporale Dennsmore $20............. $25..............000 Fish $15..........000 -0$60...........000 Loss on sale of land ($30.714) Cash distribution $60...........000 $ -0-0$ -0Rasputin $(50............000) 1.........

.429 Lake $22...000) Safe balances 80..400) Cash Beginning balances 90.. Loan & Capital 230. $ 0 Ball $28.000 (147...428 17......000 0 0 22.000) split on a 3:2:2 basis ....000) $ 2.. McGraw-Hill/Irwin Hoyle... Accounts Loan and Payable Capital Saunders.... $25...200) Assumed: loss on remaining assets (492. (1....000 Of the available $80.... $22...000 to Ferris...000) $ 4..........000 to Saunders.428....000 270...000) Potential loss from Ace ($2.000. and $44........000 (38. 9/e © The McGraw-Hill Companies.000) split on a 3:3:2:2 basis (25....16.000 (571) $ 1... Ace Reported balances ...000) (1. SAUNDERS....000) (51.000 Sold assets 200.000) (196...000 Maximum losses on land and building ($85.000 will go to Hardwick.. $(2.600) 14. and Lake gets $3. (8 Minutes) (Determine safe capital balances) Ball gets $143.600) (147... Capital 200. AND FERRIS Proposed Schedule of Liquidation Other Assets Hardwick......000 (25.000 820.000 (38......000 44. (15 Minutes) (Prepare a proposed schedule of liquidation) HARDWICK....000 (572) $ 3.000) split 3:3:2:2...400) Ferris.. 2.000) (210. Advanced Accounting.... Doupnik..429.000 Cash distributions .500) $ 1.....000 (17.000 (17.500) Estimated liquidation expenses ($5. Eaton gets $1.. Schaefer.. $14......000 $ (857) 143 Eaton $20..000) (1......000 (328...500) Potential balances . Inc..500) (1.000 210...800) Paid liabilities (210... 2009 15-13 .

000 Thus.000 loss to eliminate capital Thus. they must be sold for any amount over $90. McGraw-Hill/Irwin 15-14 © The McGraw-Hill Companies.000.000 for all partners to get cash.500) 20/60 x $15. who is also insolvent..800. if the loss on disposal is less than $50.000 $ 7. 19.000. The remaining $2.000 = $7.000 = $5. Inc.200).500 $ (4. now has a deficit capital of $4. Such a loss would reduce the capital balances to: Babb $8. since "other assets" are $140. Whitaker ($5.500 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. A loss of only $50. and Edwards ($1.500 $ (7.800) to be able to absorb the possible losses of Whitaker and Edwards.500) 10/60 x $15.000.18.000 loss on the noncash assets.000/20% = $ 50.000 Black. Green must contribute $7.000.000 is a safe capital balance for Babb.000 loss to eliminate capital Watson $10. (5 Minutes) (Determine safe capital balances) Maximum potential losses are $128.000 $10.000/60% = $ 83. Because of this. (10 Minutes) (Determine amount to be contributed by partner with a deficit balance) White and Blue are both insolvent and have negative capital balances (after offsetting the loan from White) totaling $15. $8.600). 20.000 = $2.000 would completely eliminate Watson's capital balance: Miller $50.500 = $1.000) 20/30 x $4. (7 Minutes) (Amount of cash needed to assure payments to all partners) Watson is the partner most vulnerable to a loss.000 that will go to Brown.000 in liquidation expenses and a complete $120. Babb must retain sufficient capital ($6. all partners will retain positive capital balances and receive some cash in liquidation. 2009 Solutions Manual .333 loss to eliminate capital Tyson $50. Absorption by the other partners of these losses would be as follows (on a 30:10:20 basis): Partner Black Green Brown Share of Loss New Capital Balance 30/60 x $15.500 = $3.500 $ (5.000/20% = $250.

Adams receives $57.000 = $21.000 = $50. Maximum potential losses of $250.000 $ 40.000 $(20.000 = $75.000 $ 30.000 Absorbing the final loss would leave Dobbs with a safe capital balance of $10.000 $ 45.000 $(15. Schaefer.000 2/10 x $250.000 Baker 3/10 x $250.000 = $50.000 30% x $50.21.000 $(15.000 = $75.000 $ 10. Dobbs receives the entire $10.000 loss on sale of the building would be allocated as follows: Partner Adams Baker Carvil Dobbs Share of Loss 10% x $50..000.000 loss from Dobbs would leave Adams with a safe capital balance of $10.000 -0Dobbs 2/4 x $60. 2009 15-15 . c.000) Dobbs 2/10 x $250.000 3/5 x $35.000 30% x $50. Adams receives the entire $10.000 $ 75. (50 Minutes) (Compute effects of a liquidation under a variety of circumstances) a.000 $(45.000) Carvil 3/10 x $250. 9/e © The McGraw-Hill Companies. Maximum potential losses of $250. Inc.000.000 30% x $50.000.000.000 = $15.000 $ 30.000 = $75.000 = $14.000 to be absorbed from Baker and Carvil above would then be allocated as follows on a 2:2 basis: Adams 2/4 x $60.000 to be absorbed from Baker and Carvil above would be allocated as follows on a 2:3 basis: Adams Dobbs 2/5 x $35.000 on noncash assets would be allocated as follows: Partner Adams Baker Carvil Dobbs Share of Loss New Capital Balance 2/10 x $250.000 = $50.000 Maximum total potential losses of $60.000 = $15.000) 3/10 x $250.500.000 McGraw-Hill/Irwin Hoyle.500 and Dobbs gets $22.000 $ 16.000) 3/10 x $250.000 $ (6.000 Maximum total potential losses of $35.000 New Capital Balance $ 75.000 = $30.000 = $75. Doupnik. The $50. b.000 = $5.000) Absorbing the final $6.000 = $15.000 = $50.000 $ 15.000 on noncash assets would be allocated as follows: Partner Share of Loss New Capital Balance Adams 2/10 x $250.000 = $30. Advanced Accounting.000 $ 15.

000) -0.000 = $39.000 30% x $130.000) $ 6.000) Step Three balances $ 35.286 = $1.21.500 These amounts represent safe capital balances for distribution purposes.000 = $39.714 Maximum potential loss of $4.000 $ 36.0Carvil $ 60.000 (10.000 = $13.000 (60.000 (see Schedule 2) (allocated on a 1:0:4:2 basis) (5. (continued) Maximum potential loss of $130.000) Step Two balances $ 65.0Dobbs $ 90.000) $ 20.000 Baker $ 30.000 New Capital Balance $ 62.000 on the land would be allocated as follows: Partner Adams Baker Carvil Dobbs Share of Loss 10% x $130. The land and building must be sold for over $115.0.000) Step One balances $ 70.000 = $39.286 3/7 x $24.428 3/7 x $24.000 (40.0.286 to be absorbed from Carvil would be allocated as follows on a 1:3 basis: Adams Dobbs 1/4 x $4.000 $ (24..0- $ $ $ $ McGraw-Hill/Irwin 15-16 © The McGraw-Hill Companies.000 = $10.0-0. c. d. Inc.286) $ 25.000 Assumed loss of $35.000 (20. 2009 Solutions Manual .214 $57.000 Maximum potential loss of $24.286 = $3.000) $ 60.286 $ 58.000 Assumed loss of $100.000 30% x $130. Adams Beginning balances $ 80.000 Assumed loss of $90.000 (see Schedule 1) (1:3:4:2) (10.000 $ (30.000 (see Schedule 3) (allocated on a 1:0:0:2 basis) (30.000) $ .000) $ 70.000 30% x $130.500 $22.000 (20.000 to ensure that Carvil will receive some cash.000) -0.000 = $3.000 to be absorbed from Baker would be allocated as follows on a 1:3:3 basis: Adams Carvil Dobbs 1/7 x $24.572 $ (4.072 3/4 x $4.000 = $10.

such losses would be avoided by receiving over $115.21.000 (most vulnerable) $245.000/20% Maximum Loss That Can Be Absorbed $800. Inc.000 Step One loss and the $35.000 Step Two loss..000 $ 90.000 is split between Adams and Dobbs on a 1:2 basis. Carvil.000. Total cash of $125.000 is split between Adams.000 Maximum Loss That Can Be Absorbed $490.000 available goes to Adams. Carvil.000 (most vulnerable) McGraw-Hill/Irwin Hoyle. (continued) PREDISTRIBUTION PLAN The first $35. Schedule 1 Partner Adams Baker Carvil Dobbs Schedule 2 Partner Adams Carvil Dobbs Schedule 3 Partner Adams Dobbs Capital Balance/ Loss Allocation $65.000/(1/3) $60. Doupnik.000/(2/7) Capital Balance/ Loss Allocation $80. Carvil's capital balance is eliminated through the $100. d. 9/e © The McGraw-Hill Companies. Thus. Advanced Accounting. and Dobbs on a 1:4:2 basis.000/(2/3) Capital Balance/ Loss Allocation $70. Since the partnership already has $10.000 Maximum Loss That Can Be Absorbed $195. avoiding a complete $135.000 $100.000/40% $90. Baker. As another approach to the problem.000 + $90.000/(1/7) $20. the land and building must be sold for over $115.000 cash in excess of its liabilities.000 loss ensures that Carvil will receive cash.000/30% $60. and Dobbs on the original profit and loss ratio.000) has to be available before Carvil will receive any cash.000/10% $30. 2009 15-17 .000 ($35. Next $90.000 to ensure Carvil of receiving some amount.000 $450. All remaining cash is split between Adams.000. Next $35.000 (most vulnerable) $150.000 $ 35. Since the land and buildings have a book value of $250. Schaefer.000/(4/7) $70.

000 is split among Norris.000 $ 41.750/(3/8) Schedule 3 Capital Balance/ Loss Allocation $18.000 $ -0PREDISTRIBUTION PLAN • First $55. • Next $50.000/20% $41.500 $ 60.22.000 $ 18.750 $ 47.750/(3/5) $47.000/(2/8) $18.500/(2/5) Maximum Loss That Can Be Absorbed $ 75. • All remaining cash is split among Larson. Spencer.250 Assumed loss of $75.000 (see Schedule 1) (allocated on a 2:3:2:3 basis) (15.000 (most vulnerable) $200.500 $ -0Assumed loss of $31.750) Step Two balances $ -0$ 18. • Next $35.000 available goes to Spencer.500) -0Step Three balances $ -0$ -0$ 35. (30 Minutes) (Prepare a predistributlon plan) An assumed series of losses is simulated which eliminates each partner's capital account in turn: Larson Norris Spencer Harrison Beginning balances $ 15.000 goes to pay liabilities ($47.000 $137.500) (15. • Next $31.250 (see Schedule 3) (allocated on a 0:3:2:0 basis) -0(18. Inc.500/(3/8) $60. Norris.000 $ 60.250/30% Schedule 2 Partner Norris Spencer Harrison Capital Balance/ Loss Allocation $37.000 $ 75.0(18.000) and liquidation expenses (estimated at $8. and Harrison on the original profit and loss ratio.000/30% $75.000) (22.750) (12.500) Step One balances $ -0$ 37.250 is split between Norris and Spencer on a 3:2 basis.000 $ 50. and Harrison on a 3:2:3 basis.000 $240.750) (12. Spencer.000 (most vulnerable) Maximum Loss That Can Be Absorbed $ 31.750 Partner Norris Spencer McGraw-Hill/Irwin 15-18 © The McGraw-Hill Companies.750 Assumed loss of $50.500) (18.000 (see Schedule 2) (allocated on a 0:3:2:3 basis) . 2009 Solutions Manual .500 Maximum Loss That Can Be Absorbed $100.000 $375.250 (most vulnerable) $118.000) (22.000/20% $60. Schedule 1 Partner Larson Norris Spencer Harrison Capital Balance/ Loss Allocation $15..000).

000 (20. Reported balances Assumed loss ($50.000 (50. The remaining $4.6 $75.000) $10.000 (30.000 Moon $30. The next $10.000/.2 $60. (20 Minutes) (Prepare and use a predistribution plan) Part a.400 or 60%).000 Maximum Losses That Can Now Be Absorbed Able Moon $30. (25 Minutes) (Produce a predistribution plan for a partnership liquidation) McGraw-Hill/Irwin Hoyle.000 50.000) $ 0 The assumption is made that a $50.000 goes to Able. The assumption is made that a $100. The next $50.000 (30.000/.000 Yerkl $50.4 $30. Advanced Accounting.000 (most vulnerable to losses) *Able's balance includes capital and the loan to the partnership.600 or 40%) and Moon ($2. Maximum Losses That Can Be Absorbed Able* Moon Yerkl $50. 9/e © The McGraw-Hill Companies.000 loss occurs.000 (most vulnerable to losses) Moon $60.000 will go to pay liquidation expenses ($12.000) and liabilities ($50.000 in cash. Inc. Doupnik.3 $50.000 should be held for the liabilities and the liquidation expenses.000) $30.000 is split between Able and Moon based on a 2:3 basis.000 100.000 Assumed loss ($100.000/.000 loss occurs. Part b. the partnership has $76. 24.000). All remaining cash will be divided among the partners according to their profit and loss ratio.000) Adjusted balances $30.. 2009 15-19 . Able Reported balances $50. respectively. After this sale.000) $ 0 The first $62.23.000 goes entirely to Able (to pay off loan).5 $250.000/.000 is divided between Able ($1.000 200.000) split on a 2:3:5 basis (20. The first $62.000/.000) split on a 2:3 basis Adjusted balances PREDISTRIBUTION PLAN • • • • Able $30. Schaefer. The next $10.

Bobb (2/8).000 (36.Maximum Losses That Can Be Absorbed Simpson Hart Bobb Reidl $18.000) $ 87.000 675.000 (2.000) Adjusted balances $ 0 Hart $40.000/20% $135.000/2/4 $115.000) $115. Reported balances Assumed loss ($56.000/20% $ 90. Inc.000 Reidl $117.000/20% $40. All remaining cash is split among the partners according to their original profit and loss ratio.000 goes entirely to Reidl.000 (most vulnerable to losses) 230.000 (most vulnerable to losses) 100.000 Bobb $30.000 Reidl $135.000 Assumed loss ($90.000/4/8 $30. 25. 2009 Solutions Manual .000 (18.000 (most vulnerable to losses) 120.000 loss occurs.000) $117.000 (28.000 Maximum Losses That Can Now Be Absorbed Hart Bobb Reidl $4.000 The assumption is made that a $56..000/2/4 56. The next $56.000/40% $48.000) $ 0 Reidl $115.000 The first $59.000/2/8 $117. The next $8.000 loss occurs. (30 Minutes) (Determine the ramifications of a variety of liquidation situations) McGraw-Hill/Irwin 15-20 © The McGraw-Hill Companies.000 (2.000 The assumption is made that a $90.000) Adjusted balances $ 0 Maximum Losses That Can Now Be Absorbed Bobb Reidl $28.000) split on a 4:2:2 basis (4.000) $ 4.000 (18. Hart Reported balances $4.000 Assumed loss ($8. Simpson Reported balances $18.000 goes to pay liabilities and expected liquidation expenses.000 (28.000) split on a 2:4:2:2 basis (18.000 loss occurs.000 Bobb $48.000 The assumption is made that an $8.000) $28. The next $87.000 240.000 is split among Hart (4/8).000 468.000/2/8 $ 8. and Reidl (2/8).000) $30.000 is split evenly between Bobb and Reidl.000) split on a 2:2 basis Adjusted balances PREDISTRIBUTION PLAN • • • • • Bobb $28.

The first $15.000 or $2.000 Since Romulan is insolvent.429 of this amount which creates a deficit of $7.000 + (20/90 x $12. (a) $48. Carton will be allocated $12. As shown in (b) above. Klingon must contribute an amount equal to the new deficit balance of $19.000 in partnership cash is distributed. Inc. 9/e © The McGraw-Hill Companies.667 ($19. Maximum losses would not create any other deficit balances. In determining safe capital balances. (c) The minimum cash payment to Thomas would be $35.000 x 20%) to $27.000. (a) Carton will have to contribute $7.000 should go to Thomas. (b) All $19.000.Part A. 4/9 to Sampson and 3/9 to Carton.000 $ 3.600).000 will go to the creditors that remain after the $9. Maximum losses of $100. thus reducing that partner's capital balance to $39.000 to Thomas.000 – ($12.429. Part B.000 x 4/9)] and Carton has a positive capital balance of $1. Schaefer. Advanced Accounting. Thus.667. McGraw-Hill/Irwin Hoyle.429. these assumed losses would be allocated on a 4:2 basis or $72.667 is distributed to the two partners in accordance with their remaining positive capital balances after absorbing Romulan's loss.533). maximum potential losses total $108. The remaining $4.000 on the noncash assets would further reduce this partner's balance by $11.000: $100.400 and Milburn's deficit to ($31. As Ross and Thomas view the current situation.000 x 3/9)]. Since such a loss would entirely eliminate Ross' capital account.000 [$5.000 + $16.600 so that it has to be absorbed by Ross (4/6 or $21. A loss of $59. The remaining safe capital balance of $16. The minimum cash amount would be caused by Milburn's failure to contribute this $31.000 on the noncash assets would increase Milburn's deficit balance by $40. That same loss would reduce Ross' capital to $45.000)] that will be distributed as follows: Creditors Sampson Carton $15.800 ($59. Doupnik. This allocation increases Klingon's deficit by 2/9 of $12.000 on the noncash assets and $8.000 on Milburn's deficit balance.667 [$17.000 deficit on a 4:2:3 basis. the available $19. The $29.667.000 is distributed to Thomas.000 to Ross and $36. 2009 15-21 . only Thomas has a safe capital balance at the current time.067) and Thomas (2/6 or $10..667 would be paid to Thomas. Sampson has a postive capital balance of $3.200.000 in deficits will have to be absorbed by Sampson and Carton on a 4:3 basis. (b) Klingon will have to contribute $19.000 – ($12.667 $ 1.667 [$9.667).000 (or 40%). the remaining partners will have to absorb the $12.

..625 McGraw-Hill/Irwin 15-22 © The McGraw-Hill Companies... Cash ......................... Capital (1/6) ..... Cash .........875 1/4 x $9..................... 26. (25 Minutes) (Prepare journal entries for a partnership liquidation) JOURNAL ENTRIES a....... Based on the above potential losses...167 which in turn has to be allocated to the two partners having positive capital balances: Partner April May Potential Capital (above) $23..........................000 in accounts receivable and the $38.....................................000 3........ Cash .750 1.....................833 $28.......500 $62............. (continued) (c) Sampson should receive $500.167 = $2.............................250 $41...750 $28....... Liabilities .............000 = $38..500 40.. c.917 Share of March's Deficit 3/4 x $9..................................292 Potential Capital $16..........750 56..... March....... 2009 Solutions Manual ... building.................... Cash ...... Capital (2/6 of expenses) .......... d.........500 (4/8) to $500.......000 deficit balance will have to be absorbed by the remaining three partners on a 4:3:1 basis.......000 Share of Potential Maximum Loss* Capital 2/6 x $77......................500 $23......................................000 = $25.... Capital (1/6) .....167 = $6.........000 6... b..667 $ (9. the $17..................917 *Maximum losses could be suffered on the remaining $39...................000 = $12.... March.. May...................................... Capital (3/6) ................ This loss would decrease Sampson's capital balance by $8............. e....... Accounts Receivable .........250 7..........................000 2.000 45. April...........................875 $26............ Inc.......... and equipment. Inventory ..000 40...... April..........000 74...........................000 in land............000 45...........750 1/6 x $77..... Capital (3/6) ....................... If Klingon is insolvent............. March would have a deficit capital balance of $9............500 3..... Capital (2/6 of loss) ....... Partner March April May Current Capital Adjusted $16............000 9....... May........25......167) 3/6 x $77........

..... 400 21..................... 26....700 9...................... March...............500 f.000 7................................. May................................................................... April..... h...... payments can be presently made to these two partners................ Building and Equipment .... (continued) As the above amounts represent safe capital balances............... Capital ........................... Capital (1/6)...........................................000 i.......... Inc.... Capital ....................................... March................................................................500 38............................ Advanced Accounting... Capital (3/6) ...... 11.. Capital ........500 3...........625 Cash ..... April.......... 9/e © The McGraw-Hill Companies....... April.........................075 28... Cash (30%) .................................. May......................... 16................000 17... Since $28................. Capital (2/6 of loss) ..700 McGraw-Hill/Irwin Hoyle..000 10........................ Capital (3/6)..... Accounts Receivable ......... Land............................. Capital ......... Doupnik........000 21...... March..................................... 2009 15-23 .100 13......................26.............................. Liabilities ............... g.......... Capital (1/6) ..... Cash .............. Cash .............................. Capital .................... the money left can be distributed based on these ending totals................................. Cash ........... Capital (2/6 of loss) ........550 39.................................................................................... May.....875 May........................000 21................650 4.... 43............... April................................................................ Schaefer....700 cash remains and each partner has a positive capital balance............225 7.

. Inc.000 in cash above the current level must first be generated for creditors and liquidation expenses.000 goes to creditors.000 + $8.000 from the next cash generated in order to satisfy this personal claim.000) .000 (14. Z is entitled to 1/5 of the proceeds. the next $10.000 + $10.000 + $5.000.000).000 from Z's portion of partnership property.000 goes to Y.000. A third $8. Y. (30 Minutes) (Determine liquidation proceeds necessary to give partner a specified amount) The other assets must be sold for at least $50. Thus.0.000 goes to Y and Z on a 1:1 basis. 2009 Solutions Manual .000 (12.$ 42.000 is received solely by Y. $5. For this creditor to get $5. and Z on a 3:1:1 basis.000.0- $ $ $ $ Current cash of $30.000) -0. For Z's creditor to get $5. Next $8. Next $10.27.000 (14.000 (see Schedule 3) (allocated on a 0:0:1:1 basis) Step Three balances PREDISTRIBUTION PLAN • • • • • • W X $ 60.000 would be split evenly between Y and Z (giving Z $4.000) $ 10. the other assets have to be sold for $50.000 (see Schedule 1) (5:3:1:1) Step One balances Assumed loss of $70.0.000 must be collected for Z to receive $1. A predistribution plan must be developed to generate this information: Beginning capital Assumed loss of $120.000 generated goes to remaining creditors ($12. $27.000).000 needed).000) $ 28. Any remaining cash is split among all four partners based on a 5:3:1:1 basis.000 (see Schedule 2) (allocated on a 0:3:1:1 basis) Step Two balances Assumed loss of $8.000 (12.000 $ 78. Z needs $1.000 ($27.000 . Next $27.0- Y $ 40. Based on the predistribution schedule below.000 of the $5.000 goes to X.0.000) $ 18.000 $ (60.0(42.000) and to pay liquidation expenses estimated at ($15.000) $ 14.0. Since the next level (Step Two balances) is split on a 3:1:1 basis.000) (36.000) $ 4.000 (4.000 Z $ 30.000) $ . McGraw-Hill/Irwin 15-24 © The McGraw-Hill Companies.0.000 (4. Next $70.

000/(1/5) Maximum Loss to Be Absorbed $ 70.000/(3/5) $28.000 Capital Balance/ Loss Allocation $60.000/10% $30.27.000/50% $78.000/(1/2) $ 4.000 McGraw-Hill/Irwin Hoyle. Schaefer.000/(1/5) $18. 2009 15-25 ..000 (most vulnerable) $140. Advanced Accounting.000 (most vulnerable) Capital Balance/ Loss Allocation $42.000 $ 8.000 $300.000 $ 90.000 $400. (continued) Schedule 1 Partner W X Y Z Schedule 2 Partner X Y Z Schedule 3 Partner Y Z Capital Balance/ Loss Allocation $14.000/30% $40.000/10% Maximum Loss to Be Absorbed $120. 9/e © The McGraw-Hill Companies.000 (most vulnerable) $260. Doupnik. Inc.000/(1/2) Maximum Loss to Be Absorbed $ 28.

2........000 -074. Cox 2/5) -0Safe payments to partners $45....300) $ 26.600 (10.200) $18.500 $ -0Bakel 30% $ 90.......400 (39..... 2009 Profit and loss ratio Total 100% Van 50% $118....500) 25.....000 Potential loss—Van's deficit balance (Bakel 3/5.......400) 101...000) 272... net .........000) Machinery and equipment.............000 (14... 2009 Solutions Manual ... (3....000) $15.. BAKEL.000) 45..000 $199... $189...000 Sale of inventory ($52.....000) Equity of partnership— January 31...000 Gain resulting from January credit memorandum reducing liability to creditors .....000 – $38..900 (15....... AND COX PARTNERSHIP Safe Installment Payments to Partners January 31.........000) 74....000 Potential losses (Schedule 1) (199.600) 68........000 Potential unrecorded liabilities and anticipated expenses 10....000 (8....28.................000 20.000 (30......000 (99.... 14.......000 Totals ........000 Add (deduct) loans (10...... Inc.....000 January losses (Schedule 1) (28.000 – $51.....600 (59.000 Schedule 1 Computation of Actual and Potential Liquidation Losses January 2009 Actual Potential Losses Losses Collection of accounts receivable ($66.000 (5.......000) 88........... (35 Minutes) (Determine monthly safe capital payments) VAN........000 110....800) 28...000 McGraw-Hill/Irwin 15-26 © The McGraw-Hill Companies.....000) ....700) 41..400 Preliquidation capital balances $282....000 Liquidation expenses . 2009 244......500) (25................600 Cox 20% $74....... $ 28...

...... $244...800) 10....400 (18.500) $59..... 2009 15-27 .000) Equity of partnership – February 28.000) Potential loss on machinery and equipment .. ..000 $ -0Bakel $101.0Safe payments to partners . AND COX PARTNERSHIP Safe Installment Payments to Partners March 31.500 (3.200) (37.000) February liquidation expenses (3... Cox 2/5) ..600) (900) 74...100 (1.28.. 9/e © The McGraw-Hill Companies..500) $48.. BAKEL.000 – $146. Inc..600 (26...800) (56.000 Potential liabilities and expenses (6...100 Cox $49. Schaefer. (continued) VAN.. 196...... 2009 ... 2009 (above)... Doupnik.400 (400) (8... 2009 (above) ..000) $39..500) 72...600) (1.000) (43..000 Safe payments (above)....000 Safe payments (above) . $ 1..400 (10.500 -0(21. (1.100 (600) (12. $196.000) 25. BAKEL.. AND COX PARTNERSHIP Safe Installment Payments to Partners February 28...000) (94.000) $ 400 VAN....... (189..400) (600) 49....000 Van $72... (45.000) Loss on sale of machinery and equipment ($189..400 (1..700) 15.000) $ 600 Cox $68..000) Liquidation expenses (5..500) (25.000 Van $74..000) Safe payments to partners $147. 2009 Total Equity of partnership – January 31.500 Bakel $74....000 Potential loss—Van's deficit balance (Bakel 3/5...600 (15.900) (1... 2009 Total Equity of partnership— February 28.400 McGraw-Hill/Irwin Hoyle. Advanced Accounting.500) (2..000 -0(1.000) 1.

500 Hough.400) ($15.000) $ 1.400 (5.500) 30.400) (1.0$ .000 .000) $10.133) ($ 5.0(8.0$16.000 (41.000 (3.000 $20.000 Haynes.100) 9.000 Jackson. Capital Capital $40. Loan and Capital $82.000) $ 9. Loan and Cummings. Loan and Capital $82. (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 Simon. Loan and Cummings.0(32. 2009 Solutions Manual .333) $54.000 .000 $20.800) (2. Capital ($12.400) $ 4.200 -0. Capital Capital $40.200) 15.500 (1.000 ($ 9.000) (10. Loan and Capital $ 4.000 Hough.29.400) (1.200) (2.0- Part B Beginning balances $82..000) 3.000) $29.800) (8.000 (32.800) (2.000 (32.000 (6.0$ 4.200 $ .067) $59.700 (200) $ 9.200) 1.0- McGraw-Hill/Irwin 15-28 © The McGraw-Hill Companies. Inc.333) 5.500 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 Luck.200) $64.333 (5.000 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 Luck.333 $ .800 (10. Capital $16.000 (16.000 .

0$ .000) ($32.0$ 7.0Sandridge..000 $ .000 contribution by Watson Final distribution* ($16. Loan and Ledbetter.0(2.000) ($3. Capital $15.000 *Remaining $28. Doupnik.000 $ .000) 3.000 (6. (continued) Part D Redmond.000 -0.000 (8. 9/e © The McGraw-Hill Companies. Capital Capital Beginning balances Allocation of Redmond's deficit balance (10:30:40 basis) Capital balances $32. Advanced Accounting.000) 16.29. Schaefer.000) 32.000) $ 7. Capital $ 3.000) ($30.000 contribution by Ledbetter and $3. Inc.000 . 2009 15-29 .0Watson. McGraw-Hill/Irwin Hoyle.000 is used to pay liabilities.

600) $10.000 $97. 2009 15-31 .000 (46. Capital (20%) $28.000 (4.400) $50.400) $9.333) (5. Capital (60%) $101.000) $-0- Distribution of $4.000 (19. AND CLARKE Schedule of Partnership Liquidation Final Balances Noncash Assets $177.667) (400) $21.600) $10.000 $177.000 (6.000 48.000 (97.000 (80.200) $-0- Beginning balances Updated balances Noncash assets sold Updated balances All liabilities are paid Updated balances First $23.200) $-0- McGraw-Hill/Irwin Hoyle.000) $97.600) $-0- (400) $21.200 (9.000) $57.800 Wilson.000) $9.000) (1.000 (7.000 Updated balances Noncash assets sold Updated balances Paid liquidation expenses Updated balances Final distribution based on ending capital account balances Ending balance Cash $48.200) $27.000 44.667) (2. Capital (20%) $61.000 $35. (40 Minutes) (Produce a schedule of liquidation) FRICK. Doupnik.000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan – Schedule 1 Distribution of $48.800 $81.000 (35. Advanced Accounting.30.600 (27.000 $53. Inc.600 (1.200 (10.600 $21..000) $57.667 Next $2.000 $92.800 (4.333 (remainder of first distribution) Next $22.800) $31.000) $46.600 (31.000 $35.000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan – Schedule 1: $97.000) $44. WILSON.600 (23.200 (10.000) $-0$-0$-0- $-0$-0$-0$-0- (17.400) $21.000 (23. Schaefer.000) $-0- Liabilities $35.333) (22.000 (4.200 (9.600 (1.400) $9.000 Frick.000 $28. 9/e © The McGraw-Hill Companies.000 (35.000 (6.600 Clarke.200) $63.000 $101.600 $50.200) $81.

.... Loss of $140..000/(20/80) Maximum Loss That Can Be Absorbed $ 22..0Clarke.000 (most vulnerable to loss) $305........333 goes to Clarke.000) $ 17.000 (84............ Capital $61...000/20% $ 61.... Next $27.......000 (28. Capital $28.000/60% $ 28..000 Partner Frick Clarke McGraw-Hill/Irwin 15-32 © The McGraw-Hill Companies.000/20% Maximum Loss That Can Be Absorbed $168.667 assumed—Schedule 3 (allocated on a 60:20 basis) ...30... Schedule 2 Capital Balance/ Loss Allocation $101.667 is split between Frick and Clarke on a 60:20 basis........... Step Two balances ...000/(60/80) $33.....000 $ (17...333 $140.. 2009 Solutions Manual .... and Clarke on a 60:20:20 basis....0........... Step One balances ... Capital $101.....000) $33......000) $ -0$ .000 (28...........000 Partner Frick Wilson Clarke Schedule 3 Capital Balance/ Loss Allocation $17. Next $22.. (continued) Schedule 1 Development of Predistribution Schedule Frick...333 Beginning balances ....000 assumed—Schedule 2 (allocated on a 60:20:20 basis) .....667 (most vulnerable to loss) $132.000) ... PREDISTRIBUTION PLAN • • • Payment of liabilities and liquidation expenses must be assured...667) $27.0Wilson. Loss of $22.... Any further cash is split among Frick.. Wilson. Inc........000 (5...

.... $ -0$33...000 $ 79... Norris (10%).. $ 75....500 assumed (allocated on a 10:20 basis) see Schedule 3 .000) -0Step Two balances .. Schedule 1 Capital Balance/ Loss Allocation $120....000/30% $ 88....000) (60. Norris..000 $ -0Loss of $150.. Inc... (50 Minutes) (Produce a predistribution plan and journal entries for a partnership liquidation) Rodgers.. (45.000) (15..500 $ -0$ -0PREDISTRIBUTION PLAN • • • • • Payment of all liabilities and liquidation expenses must be assured.500) (29..000 $73........... and Rodgers (20/60)... and Guthrie (40%).... Next $150.......000 $60.000/40% Maximum Loss That Can Be Absorbed $400.000 $150.31.000 $88.000/10% $109...000 (most vulnerable to loss) Partner Wingler Norris Rodgers Guthrie McGraw-Hill/Irwin Hoyle..000) Step One balances .000 Loss of $150.........000 assumed (allocated on a 30:10:20 basis) see Schedule 2 ... 9/e © The McGraw-Hill Companies.000) (30... $120....000) -0Step Three balances .000) (50....... Loan and Guthrie...... Doupnik...500 is allocated to Norris (10/30) and Rodgers (20/30).....000 $880. Next $33.000 is allocated to Wingler (30/60)..500 goes entirely to Norris.000 $ -0Loss of $43.......... Rodgers (20%).... -0(14..... Next $43.. (75.000) (25. Capital Capital Capital Capital Beginning balances ... $ -0$48. Schaefer......... 2009 15-33 . Norris (10/60).000 assumed (allocated on a 30:10:20:40 basis) see Schedule 1 ..000 $109. Part A Wingler..000/20% $ 60...000 $ 29..000 $545.. Any further cash distributions are divided on the original profit and loss ratio: Wingler (30%). Advanced Accounting.

000/(20/60) Maximum Loss That Can Be Absorbed $150. 2009 Solutions Manual . (continued) Schedule 2 Capital Balance/ Loss Allocation $75.000/(30/60) $73.000 (most vulnerable to loss) $438.000/(10/30) $29.31.000/(20/30) Maximum Loss That Can Be Absorbed $144. Inc.000/(10/60) $79.000 $237..500 (most vulnerable to loss) Partner Norris Rodgers McGraw-Hill/Irwin 15-34 © The McGraw-Hill Companies.000 $ 43.000 Partner Wingler Norris Rodgers Schedule 3 Capital Balance/ Loss Allocation $48. a.

....200 Land ... Capital ......600 is allocated to Wingler ($31..31....600 Above entry distributes safe capital balances as shown below (see predistribution plan in part A) based on a current cash balance of $230.....................000 Land............................................................ Capital (40%) .. 1.............................. 65...................640 Rodgers. building and equipment are sold with losses allocated to partners......... Capital (40%) ..... Norris ($10.. 20..000)........500 is split between Norris ($14................. 150........................... 15.. Capital ...........000 Wingler...........200 Cash ....600) and Rodgers ($21....................... Liabilities .........................600. Inc..................................... Capital (20%) .......... Schaefer.. 2009 15-35 ........................................................................ Loan .200)... 140........................................000 No journal entry is currently required by Guthrie's insolvency..000) and estimated liquidation expenses ($16........ Next $33....500) and Rodgers ($29................ 30.......................000 loss) ......... Capital (30% of $103..... 4.... All liabilities are paid....500 goes entirely to Norris..000 74................. 85........ 9/e © The McGraw-Hill Companies...000 Rodgers............... 74....600 Rodgers........... 6..... (continued) Part B Cash .....................................600 Guthrie.............................. Doupnik. 31.................. Capital (30% of $16...................................800)...................... 41..... Next $43. 168...... Capital ..................................000 Building and Equipment ....... 10..920 Norris.. 35...600 Wingler.. Wingler............ Receivables are collected with losses allocated to partners...... McGraw-Hill/Irwin Hoyle.000 Cash ......... Capital (20%) ........000 is held to pay liabilities ($74..... Remaining $63....... Cash ..........................................300 Rodgers................... Capital (10%) .......... 3............ • • • • First $90... 82....900 Norris......000). Advanced Accounting.................. 58..800 Norris.....400 loss) .................280 Guthrie.......560 Accounts Receivable .... Capital (10%) ....

.. 23....... Capital (40%) .............. Capital (10%) .............................. 3...300 1....100 2..... 11.......833 Rodgers........................................... Capital (30/60 of deficit).... Cash..... 1. 6....000 Wingler.................400 11.. Capital (20/60)............ Liquidation expenses are paid.... Capital (40%)........ Capital (10/60)... 9....500 Norris........................... Wingler.......... 693 Rodgers.. and Rodgers on a 30:10:20 basis................31. all $71.600) is paid out on this 30:10:20 basis......... 71... Norris........ McGraw-Hill/Irwin 15-36 © The McGraw-Hill Companies............................................................................ 35.......000 Norris....... 3........... 101...000 loss) .................... 4..000 must be retained to pay liquidation expenses......200 4... (continued) Cash .....................................000 Inventory... a total of $150..................000 Guthrie................ Inventory is sold with loss allocated to partners...... Therefore....... According to the predistribution plan.. Capital (30% of expenses)..... Capital (10%).. Capital........................ 2................................. Capital....... Capital (30% of $30...600 was allocated in this manner in the first distribution above.. Norris...000 must be divided on this ratio but only $63....667 Cash..... 12..000 Wingler... Capital (20%) ......000 in cash is being held................................... 71.... Although $87........... b.....160 To eliminate the deficit balance of insolvent partner as computed on the next page..................387 Guthrie......000 Rodgers.... Capital......... Rodgers......000 (making a total of $134...... $16........ Capital.. 2009 Solutions Manual .......000 Wingler. Capital (20%)................................................000 is divided among Wingler......000 Above entry distributes available cash according to predistribution plan...080 Norris...... Inc............. Guthrie.................. The remaining $71.................................

.............. Loss on accounts receivable.... Loss on land............................200) 3.....300) 4..... Subtotal ...............600) (3...387) $1..... Capital........000 (4.......000) (11...........640) (10......... Guthrie insolvent.280) (6.....666 (41.......300) (58..... and equipment .. Schaefer........ Loan and Guthrie....000 (1..... Advanced Accounting...500 Norris. (continued) CAPITAL ACCOUNT BALANCES Wingler.000 $60....560) (20. Capital Capital $109.100) 1. Capital $120.............. Cash distribution... To distribute remaining cash based on final capital balances........... Capital $88... 1.. Cash distribution.833) (1.160) 4...... Liquidation expenses....................920) (30..... Capital.. Wingler.... 2...400) (4................31........200) -0(12......... Inc.................666 Cash ......900) (31.. Current balances......... Loss on inventory.......000) (35........ Capital.....580 (2....160 $ -0- Beginning balances........053 (1.........667) (2..500) (3...500 Norris................. 9/e © The McGraw-Hill Companies......................000 McGraw-Hill/Irwin Hoyle............................................. Doupnik............... building.....600) (50.200) (6.527 (693) $ 834 Rodgers............080) $2... b... 834 Rodgers.........800) (9........ 5. 2009 15-37 ..000 (3.000) (23..000) -0(4..

Answers to Develop Your Skills Cases Research Case a. Inc. Worried about what protection the limited-liability partnership provides them. many are now consulting lawyers for advice.S. However. could eventually face personal liability stemming from the botched audit. was it an extremely risky surgery where death might have been anticipated under any conditions? How much did the other doctors know about this doctor’s ability to do this particular surgery? Did they have any reason to believe that such work should not be undertaken? What is meant in the case by the term “very poor judgment?” How serious was the mistake made by the doctor?   The answers to such questions as these can have a huge impact on the extent of the liability of the other doctors. there simply may be no easy answer to the question as to the amount of liability that the other six doctors in this case are facing. ‘As far as I know.” “Because it is unclear how much protection the LLP structure will provide Andersen partners. But that testing appears to be just around the corner as Enron creditors. How difficult was the surgery that was performed? Should the doctor have been able to perform the work without accident? Or. 2009 Solutions Manual .. partners that even those who had nothing to do with the firm's work for Enron Corp.” “The limited-liability partnership is a comparatively new corporate structure. untested by the kind of stress now besetting Andersen. perhaps. Students often seem to believe that definitive answers can be discovered for all accounting and legal questions if a serious enough investigation is performed. a law professor at George Mason University. b. there has never been a litigation test of the extent of the LLP shield. Here are several quotes from The Wall Street Journal article mentioned in the case that might pertain to the issue at hand: “Concerns are growing among Andersen's roughly 1. and there have been very few LLP cases about liability at all. partnership and bankruptcy lawyers are expected to be following the matter closely. Several questions can be raised that may impact the ultimate resolution:   In what state will the court case be handled? Different states have somewhat different laws as to the potential liabilities incurred by partners and different courts seem to have varying ways of interpreting those laws.” McGraw-Hill/Irwin 15-38 © The McGraw-Hill Companies. shareholders and employees seek to recover the billions of dollars they have lost from someone.750 U. here.’ said Larry Ribstein.

“The limited-liability partnership was invented about a decade ago in the wake of the savings-and-loan debacle to protect members of partnerships from being wiped out by claims against their firms.” "‘There is a strong legal tradition that you don't pierce the corporate veil and go after individual partners except under extraordinary circumstances. in looking at this set of statements. Doupnik. ‘But the law is very vague and lets the courts do what they feel appropriate. the 360 partners and former partners who had spent time at the firm since 1984 were required to dig into their own pockets to share a $46 million liability. In looking at the financial statements of a partnership. For example. Under a plan negotiated with the firm's creditors.. a number of obvious differences can be spotted in comparison to the statements of a corporation. prior to the advent of limited-liability partnerships. no partner is supposed to lose more than what he or she has invested in the firm. In theory.  Note 4 – Transactions with Affiliated Parties describes the obligation of the partnership to the General Partner. The firm's assets were insufficient to cover the claims of creditors and litigants.  Note 2 – Investments in and Advances to Local Partnerships provides information about the entity’s investment in other limited partnerships.  A “statement of changes in partners’ (deficiency) capital” is presented rather than a statement of changes in stockholders’ equity. 9/e © The McGraw-Hill Companies. Advanced Accounting. 2009 15-39 .” Analysis Case a. A potential investor in this partnership would become one of the “limited partners.” This statement also reports “net loss per limited partnership interest” rather than earnings/loss per share. in part due to lawsuits over questionable accounting. McGraw-Hill/Irwin Hoyle. capital invested by partners into the firm is fair game for creditors.’” “In 1990.  The income statement (statement of operations) reports “net loss allocated to general partner” and “net loss allocated to limited partners.’ said Lynn LoPucki. There is a considerable amount of information provided in the notes to the financial statements about the unique characteristics of a limited partnership:  Note 1 – Organization and Summary of Significant Accounting Policies discusses the creation and structure of this limited partnership. a professor at the University of California Los Angeles law school. Under the structure. Inc. Schaefer. the following differences can be noted:  The balance sheet shows “partners’ (deficiency) capital” rather than stockholders’ equity. b. It is very case specific and fact intensive.  Note 5 – Income Taxes describes the manner in which individual partners are taxed on their share of partnership income. the accounting firm of Laventhol & Horwath filed for Chapter 11 bankruptcy-court protection.” whose aggregate capital is disclosed in the balance sheet.

the partners in a general partnership would still seem to have the same risk that the partners of Laventhol & Horwath faced. However. disclosures are provided related to the market for partnership interests. McGraw-Hill/Irwin 15-40 © The McGraw-Hill Companies. As a limited partnership. Inc. Today. these articles on Laventhol & Horwath may be educational in showing why such alternatives have been created and why they have become so popular.. As a general partnership. Thus. the alternatives such as a limited liability partnership or a Subchapter S corporation would place fewer individuals in this precarious position. potential investors (other than the general partner) would probably view an investment in NTCI II as being fairly similar to that of holding shares in a corporation. more than anything else. the litigation losses of this partnership that arose from poor accounting and auditing practices fell on all partners and not just on those involved. Partners were required to make contributions from their own personal funds. The major difference relates to the possible inability to sell a limited partner interest in the company. Because the partnership’s “shares” are not publicly traded. in Item 5 (page 7). which precedes the financial statements. Communication Case The bankruptcy of Laventhol & Horwath was one of the main reasons for the creation of the limited liability partnership business structure. an individual investor may not be able to sell his/her limited partner interest in the partnership.In addition. often in amounts of up to several hundred thousand dollars to pay off the debts of the partnership after its failure. A number of the partners eventually went bankrupt as a result of the litigation that arose. 2009 Solutions Manual .

enter label text “Final Losses” and. The resulting formula in Cell D3 will be =$B$7*C3 and in Cell D4 it will McGraw-Hill/Irwin Hoyle. enter label text “Partner”. In Cell A4.000. Here is one possible approach: —Create Column Headings: In Cell A1.” In Cell B2. we need to create what is known as an “ABSOLUTE” reference..000 and.” In Cell B4. though. enter Wilson’s Capital Balance of $200.000 and. —Calculate Initial Loss Share: Multiply the “Losses during liquidation” amount by the percentage of “Share P/L” for each partner. enter label text “Share P/L”. which are cell references that always refer to cells in a specific location. To calculate the Initial Share Loss for Wilson. Inc. Advanced Accounting. enter label text “Wilson. In Cell A3. change the formula to read =$B$7*C2. In order to “hold” the reference to Cell B7 when it is copied. In Cell F1. Doupnik. We need to also use this same general formula for both Cho and Arrington. create the following formula in Cell D2: =+B7*C2. enter 40% as share of profit and loss. Absolute references. In Cell E1. in Cell C3. enter Arrington’s Capital Balance of $110. However. enter label text “Cho. enter the amount of $50. Schaefer. In Cell C1.Excel Case There are a number of different ways that a spreadsheet could be created to solve this particular problem. in Cell B7. can be created by placing a $ symbol before the Column letter and/or the Row number. enter label text “Losses during liquidation” and. if we drag the fill handle in Cell D2 into Cell D3 and D4. —Enter Account Information for each partner: In Cell A2.000. In Cell A8. In Cell D1. enter label text “Subsequent Loss Share”. enter Cho’s Capital Balance of $180. 2009 15-41 . and then copy this formula to cells D3 and D4. should be made to the reference to B7 because that is the overall loss in question. The change to C3 and C4 is correct because those are the individual profit and loss percentages. —Enter the amounts on which to base the calculations for each partner: In Cell A7. In Cell B1. 9/e © The McGraw-Hill Companies. No change. in Cell D2.” In Cell B3. enter label text “Remaining Balance”. enter 40% as share of profit and loss. the reference to Cell B7 will automatically change to B8 and B9 respectively and the reference to Cell C2 will change to C3 and C4 respectively in order to adjust for the new cell position. enter the amount of $100. enter label text “Arrington. enter label text “Initial Loss Share”.000 and. in Cell C2. Thus. in Cell C4. enter label text “Capital Balance”. in Cell B8. enter 20% as share of profit and loss.

The location of the reference to Cell B7 does not change due to the $ symbol in front of the B and in front of the 7. There are eight variables that can be changed: B2. it is important to note that the losses should be added together and then subtracted in total from the beginning capital balance. B7. any of the variables may be changed and the results will adjust automatically. —Calculate the Remaining Capital Balance: To calculate the Remaining Capital Balance. Therefore. Inc. B8. creating a formula in Cell E2 as follows: =+ $B$8*C2 Copy this formula to Cells E3 and E4. In creating this last formula. Once this spreadsheet has been created.be =$B$7*C4.. C3. McGraw-Hill/Irwin 15-42 © The McGraw-Hill Companies. Note that the use of the $ is not used here because we do want B2. and C4. B3. enter the following function in Cell F2: =+B2-(D2+E2). C3.and C4 must always add to 100%. Copy this formula to Cells F3 and F4 to complete the worksheet. The computation inside the parenthesis is performed first and then subtracted from the beginning capital balance (B2). —Calculate the Partners’ Share of any Subsequent Losses: Repeat the same process as above. C2. and E2 to adjust to the new position when copied. the beginning Capital Balance must be reduced by the Initial Loss Share and Subsequent Loss Share. 2009 Solutions Manual . D2. C2. B4.

and Arrington A 1 Partner 2 Wilson 3 Cho 4 Arrington 5 6 7 Losses during liquidation 8 Final losses 110.000 $40.000 50.000 $200.000 20.000 $50.000 40% 100% 20. Advanced Accounting.000 180. Schaefer.000 100.000 150.000 40% $20.000 $140. 9/e © The McGraw-Hill Companies.000 40.Spreadsheet to Determine the Remaining Capital Balances for Wilson. Doupnik.000 $100. 2009 15-43 .000 20% 10.000 $340.000 $490. Cho.000 Capital Balance Share P/L B C D Initial Loss Share E Subsequent Loss Share F Remaining Balance McGraw-Hill/Irwin Hoyle. Inc.000 50..