chapter 03, modern advanced accounting-review q & exr

CHAPTER 3PARTNERSHIP LIQUIDATION AND

INCORPORATION; JOINT VENTURES

The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 3–1 Doris, Elsie & Frances Partnership (20 minutes, easy)

Journal entries for liquidation of an insolvent general partnership having a partner who is unable to pay entire capital deficit to the partnership.

Pr. 3–2 Olmo, Perez & Quinto LLP (20 minutes, easy)

Journal entries for liquidation of a solvent limited liability partnership having an almost insolvent partner who cannot pay entire loan from partnership or capital deficit.

Pr. 3–3 Hal, Ian, Jay & Kay LLP (20 minutes, easy)

Preparation of cash distribution program for a liquidating limited liability partnership.

Pr. 3–4 Carson & Worden LLP (20 minutes, easy)

Cash distribution program for liquidation of a limited liability partnership, and journal entries for realization of assets and distributions of cash to creditors and partners.

Pr. 3–5 Luke, Mayo & Nomura LLP (20 minutes, easy)

Given the statement of realization and liquidation for a limited liability partnership, prepare journal entries for the liquidation.

Pr. 3–6 Luna, Nava & Ruby LLP (30 minutes, easy)

Compute total loss from liquidation of a limited liability partnership, prepare a statement of realization and liquidation, and prepare journal entries for the liquidation.

Pr. 3–7 Haye & Lee LLP (20 minutes, easy)

Partners accept bonds in exchange for certain limited liability partnership assets and withdraw noncash assets during liquidation. Journal entries for transactions completed in carrying out liquidation of the partnership.

Pr. 3–8 Adams, Barna & Coleman LLP (30 minutes, easy)

A limited liability partnership is insolvent, as is one of the three partners. Given a balance sheet of the partnership and a summary of the financial status of partners, prepare a statement of realization and liquidation and determine the amount of cash that would have to be generated from the realization of partnership assets to enable the insolvent partner to pay personal creditors in full. Prepare journal entries for the liquidation.

Pr. 3–9 Smith, Jones & Webb LLP (30 minutes, easy)

Installment liquidation of a limited liability partnership over a period of three months. Statement of realization and liquidation with supporting analysis.

Pr. 3–10 Denson, Eastin & Feller LLP (45 minutes, medium)

Priorities among limited liability partners as to eligibility to receive cash payments in an installment liquidation. Consists of a series of independent questions as to the circumstances under which a partner would be entitled to receive a specified amount of cash.

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 3 114

Pr. 3–11 Lord & Lee LLP; Lord-Lee Corporation (50 minutes, medium)

Incorporation of a limited liability partnership. Journal entries for the partnership and the corporation. Preparation of beginning balance sheet for the corporation.

ANSWERS TO REVIEW QUESTIONS

1. Because of the right of offset, Alo probably will not have any priority or advantage solely because a portion of Alo’s investment in the partnership is recognized as a loan rather than as an increase in Alo’s capital account balance. The right of offset means that a partner's loan account may be offset against a debit balance (or potential debit balance) in that partner's capital account during the liquidation of the LLP.

2. Assuming that the partner with a debit balance has no loan account or that the balance of the partner’s loan account is insufficient to eliminate the debit balance of the partner’s capital account when the right of offset is exercised, the partner is obligated to pay sufficient cash to the LLP to eliminate the capital deficit. If the partner is unable to do so, the capital deficit must be absorbed by the other partners as an additional loss to be shared in the same proportion as they previously have shared net income and loss among themselves.

3. The cash of $32,500 may be distributed without delay to Cor and to Don. The cash payment should be divided between Cor and Don to leave a sufficient credit balance in the capital account of each to absorb any additional loss if Ell fails to pay the $5,000 capital deficit to the LLP. The appropriate payments are $21,875 to Cor and $10,625 to Don. The possible additional loss of $5,000 is divided between Cor and Don in a 5:3 ratio.

4. Fin's position cannot be supported; Fin is responsible for all unpaid liabilities of the general partnership. Partnership creditors may demand payment in full from any partner and are not concerned with the status of a partner's capital account or with the terms of the partnership contract for sharing net income or losses.

The capital account of Han has a debit balance of $30,000 ($16,000 + $2,000 + $12,000 = $30,000). If Fin pays the partnership creditors all or part of their claims, the journal entry of the partnership will be to debit Trade Accounts Payable and credit Fin's capital account for the amount of the payment.

5. The salary authorized for Ile as general manager is recorded by a debit to Partner's Salary Expense and a credit to Ile, Capital. Thus, the "unpaid salary" is not a liability. The salary provision in the partnership contract was a form of remuneration to Ile that increases Ile’s equity in net assets of the partnership.

6. The income-sharing ratio should govern. The contract with respect to sharing of net income and losses is an unqualified agreement. Because the contract is not expressly limited to operating income or losses, application of any such limitation would not be in accord with the contract. The LLP is not dissolved by the decision to discontinue operations, and the agreement concerning the division of net income and losses is still in effect.

All losses represent a loss of capital invested in a limited liability partnership. The net income or losses from operations that previously have been divided are periodic estimates. The ultimate (lifetime) income or loss of the partnership is not determinable until the partnership is liquidated. The loss or gain on realization of assets is a correction of all previous periodic income estimates, and it also should be divided in the income-sharing ratio.

The McGraw-Hill Companies, Inc., 2006115 Modern Advanced Accounting, 10/e

7. If cash is distributed to partners as it becomes available during a prolonged limited liability partnership liquidation, each payment should be made as if no more cash would be forthcoming from either realization of assets or collection of capital deficits from partners. Under these assumptions, the liquidator will authorize a payment to a partner only to the extent that the credit balance of the partner's capital account (or in the capital and loan accounts combined) is in excess of the partner's share of the maximum possible loss that may be incurred. A partner's share of the maximum possible loss reflects the possibility that all remaining noncash assets may prove worthless and that the partner may be charged with additional losses if the other partners are unable to pay to the partnership any deficit that may occur in their capital accounts.

8. No journal entries are entered in the LLP’s accounting records for possible losses from future realization of partnership assets. The computation of the estimated loss and its division among the partners is a working paper item; journal entries are prepared for actual transactions or events only.

9. The total amount of cash received by each partner in an installment liquidation should be the same as if the liquidator had retained all cash until all noncash assets were realized and liabilities paid and then had made a single cash payment to the partners. One exception might be that if the liquidator were able to earn interest on the cash retained during the course of the liquidation, the interest would increase the amount of cash to be distributed to partners.

10. Cash received from realization of limited liability partnership noncash assets during an installment liquidation may be distributed in the income-sharing ratio if the balances of the partners' equities in the partnership are in the income-sharing ratio.

11. The $7,000 note receivable from San should be deducted from San's capital account balance to compute San's capacity to absorb losses. The possible loss if all other noncash assets should prove to be worthless would be $54,000 ($30,000 + $25,000 + $21,000 – $7,000 – $15,000 = $54,000), to be charged against the partners' capital account balances in the amount of $18,000 to each. The cash of $18,000 now available should be divided $13,000 to Rab, $1,000 to San, and $4,000 to Tay. This will leave each partner with a capital account balance of $18,000, which is sufficient to absorb each partner's share of the maximum possible additional loss.

12. Partner Urb may have received less cash than the other partners who had smaller capital account balances for one or more of the following reasons:

(1) Urb's share of net income or loss was the largest, and substantial losses were incurred in the realization of partnership noncash assets; or Urb's share was the smallest, and substantial gains were realized from the partnership noncash assets.

(2) The assets of the partnership may have included a loan receivable from Urb that was offset against Urb's capital account balance.

(3) Van and Woo may have had loan accounts that, when combined with their capital accounts, gave them larger partnership equities than Urb's.

(4) Urb may have withdrawn noncash assets from the partnership during the liquidation.

13. The carrying amounts of the LLP’s assets should be increased to current fair value on the date of incorporation because Yang-Zee Corporation is a new legal entity and accounting entity separate from its owners. Even though all the capital stock of Yang-Zee has been issued in equal amounts to the former partners, the corporation may later obtain authorization for additional capital stock to be issued to outsiders. In this event, Yang and Zee will suffer if the partnership asset values are not revised upward on the date of incorporation because of the understatement of their investments in Yang-Zee Corporation as compared with the investments of other shareholders. Also, in obtaining credit or bank financing, Yang-Zee Corporation may be handicapped by the understatement of assets and understatement of stockholders' equity.


14. A joint venture differs from a partnership in that it is a temporary association of individuals or business enterprises that combine resources for the purpose of carrying out a specific project, such as exploration for petroleum in a foreign country. A joint venture has many of the characteristics of a partnership, but it terminates on the completion of the specific project for which it was formed. The life of a joint venture is more likely to be measured in months than in years.

15. Corporate joint ventures are corporations owned and operated by a small group of joint venturers for the benefit of all the venturers. The ownership of a corporate joint venture seldom changes, and its common stock generally is not traded publicly.

The APB, in Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock," concluded that the equity method of accounting should be used by venturers (investors) to account for investments in common stock of corporate joint ventures. Under the equity method, the Investment in Corporate Joint Venture ledger account is debited in the accounting records of each venturer for amounts invested and for the pro rata share of net income reported by the venture; the account is credited for dividends received from the corporate joint venture and for the pro rata share of net losses incurred by the venture.

16. Under the equity method of accounting for an investment in an unincorporated joint venture, each investor records its share of the venture's net income or losses in the investment ledger account and reduces the balance of the investment account by the amount of cash or other assets received from the venture. In the investor's balance sheet the investment in the joint venture is displayed as one amount, and in the investor's income statement the investor's share of net income or net loss of the venture is displayed as a single amount.

In contrast, under the proportionate share method of accounting for an investment in an unincorporated joint venture, each investor recognizes in its accounting records its share of each asset, liability, revenue, gain, expense, and loss of the venture. Thus the assets, liabilities, revenue, and expenses of the investor in its financial statements include the investor's share of the related items of the joint venture.

SOLUTIONS TO EXERCISES

Ex. 3–1 1. d 8. b2. c 9. b 3. b 10. b4. a 11. c5. c [($21,000 + $39,000) – $30,000 share of loss = $30,000] 12. b6. a 13. b7. a

Ex. 3–2 Journal entry for Pon, Quan & Ron LLP, Jan. 31, 2005:

Quan, Capital 3,500Ron, Capital 11,500

Cash 15,000To record payment of cash to partners, as follows:

Quan RonCapital account balances prior to cash

payment $8,000 $16,000Potential loss from uncollectible capital

deficit of Pon ($9,000 shared equally) (4,500) (4,500)Cash payment $3,500 $11,500


Ex. 3–3 Computation of amount of cash to be distributed to partners Archer and Bender:Archer Bender

Capital account balances after payment of liabilities $40,000 $22,000Less: Maximum possible loss on realization of noncash assets

($42,000), divided in 60:40 ratio 25,20

0 16,800Distribution of $20,000 cash to partners $14,800 $ 5,200

Ex. 3–4 a. Computation of total loss incurred on liquidation of Carlo & Dodge LLP:

Capital account balances before liquidation ($23,000 + $13,500) $36,500Add: Unpaid liabilities ($33,000 – $18,000) 15,000Total loss on liquidation $51,500

b. Journal entry for Carlo & Dodge LLP:Liabilities ($33,000 – $18,000) 15,000

Carlo, Capital [$23,000 – ($51,500 x 0.55)] 5,325Dodge, Capital [$13,500 – ($51,500 x 0.45)] 9,675

To record Carlo’s payment to partnership creditors and to close partners’ capital accounts.

Ex. 3–5 Journal entries for Rich, Stowe & Thorpe LLP, Sept. 24, 2005:Cash 300,000Rich, Capital ($60,000 x 0.40) 24,000Stowe, Capital ($60,000 x 0.40) 24,000Thorpe, Capital ($60,000 x 0.20) 12,000

Other Assets 360,000To record realization of assets and division of $60,000 loss among partners in 40%:40%:20% ratio.

Liabilities 240,000Rich, Capital 8,000Stowe, Capital 48,000Thorpe, Capital 24,000

Cash 320,000To record payment to creditors, and first installment to partners, as follows:

Rich Stowe ThorpeCapital per balance sheet $80,000 $120,000 $60,000Realization loss (24,000) (24,000) (12,000)Potential loss on $120,000 other assets (48,000 ) (48,000 ) (24,000 )

Payments $ 8,000 $ 48,000 $24,000

Ex. 3–6 Journal entry for Ace, Bay & Cap LLP, June 3, 2005:

Liabilities 50,000Ace, Capital 30,000

Cash 80,000To record payment to creditors, and first installment to partner. Ace receives $30,000 available cash because, assuming no cash to be realized on other assets of $100,000, allocation of the resultant potential loss $37,500 to Bay and $50,000 to Cap, and $15,000 of Cap's resultant capital deficit of $20,000 to Bay, would cause a capital deficit of $12,500 to Bay.


Ex. 3–7 Computation of amount of cash to be distributed to partners Ed, Flo, and Gus:

Ed Flo GusCapital account balances before payment of

liabilities $33,000 $40,000 $42,000Less: Maximum possible loss on realization of

noncash assets ($78,000), divided in 5:3:2 ratio 39,000 23,400 15,600Balances $ (6,000) $16,600 $26,400Allocation of potential capital deficit of Ed in

3:2 ratio 6,000 (3,600) (2,400)Distribution of $37,000 cash to partners after

payment of $5,000 of creditors’ claims ($42,000 – $5,000 = $37,000) $ 0 $13,000 $24,000

Ex. 3–8 Computation of amount of cash to be distributed to partners Hale and Ian:

Hale IanCapital balances before payment of liabilities and liquidation

costs $71,000 $ 54,000Less: Maximum possible loss on realization of noncash assets

($110,000) and liquidation costs ($10,000), divided in 4:6 ratio $48,000 72,000Balances $23,000 $(18,000)Allocation of potential deficit of Ian (18,000) 18,000Distribution of $5,000 cash to Hale after payment of $20,000

liabilities and withholding of $10,000 cash for liquidation costs ($35,000 – $20,000 – $10,000 = $5,000) $ 5,000 $ 0

Ex. 3–9 a. JONES, KELL & LAMB LLPComputation of Cash to Be Paid to Partners in First Installment

March 31, 2005

Jones (40%)

Kell (40%)

Lamb (20%)

Balances of capital accounts before liquidation $ 40,000 $65,000 $48,000

Realization of assets at loss of $40,000 (16,000) (16,000) (8,000)Maximum potential loss on realization of

remaining assets of $90,000 (36,000) (36,000) (18,000)Balances $(12,000) $13,000 $22,000Eliminate potential capital deficit of Jones 12,000 (8,000) (4,000)Cash payablefirst installment($25,000+ $50,000 – $52,000= $23,000) $ 0 $ 5,000 $18,000

Note to Instructor: A cash distribution program may be prepared that would show that Lamb would receive the first $15,500 and that Kell and Lamb would receive any amount over $15,500, but not in excess of $37,500, in a 2:1 ratio. Because $23,000 is available,

Lamb receives $15,500 plus $2,500 ($7,500 x = $2,500), or $18,000, and Kell

receives $5,000 ($7,500 x = $5,000).


b. The $3,000 cash withheld represents an additional possible loss that would be absorbed by Kell and Lamb in a 2:1 ratio. Thus, using the result in a, Kell would receive $3,000 and Lamb would receive $17,000, or a total of $20,000 ($23,000 – $3,000 = $20,000).

c. Because each partner received some cash in the second distribution, additional payments may be made to the partners in the income-sharing ratio of 2:2:1. Thus, the $14,000 would be paid as follows: Jones and Kell, $5,600 each; Lamb, $2,800.

Ex. 3–10 a. MAY, NONA & OLIVE LLPCash Distribution Program

November 10, 2005

Creditors May Nona OliveFirst $20,000 100%Next (2 x 3,500) 7,000 100%

Next (2 x 4,000) + (1 x 4,000) 12,000

All over $39,000

MAY, NONA & OLIVE LLPWorking Paper for Cash Distributions to Partners during Liquidation

November 10, 2005

May Nona OliveCapital account balances before liquidation $20,000 $25,000 $9,000Income-sharing ratio 4 2 1Capital per unit of income (loss) sharing $ 5,000 $12,500 $9,000Reduce Nona’s balance to equal Olive’s balance (3,500)Reduce balances of Nona and Olive to equal May’s balance (4,000 ) (4,000 )Capital per unit of income (loss) sharing $ 5,000 $ 5,000 $5,000

b. $26,000 If May received $4,000, Nona received $2,000 and Olive received $1,000 (fourth step in a), a total of $7,000. Before May received any cash, however, Nona and Olive would have received $19,000, as shown in the second and third distributions in the program developed in a.

c. $ 7,250 If May received $13,000, Olive received $3,250 (fourth step in a); however, Olive previously would have received $4,000 (third step in a); therefore, Olive received $3,250 + $4,000 = $7,250. Alternatively, when May received $13,000, May's loss from realization of assets was $7,000 ($20,000 –

$13,000 = $7,000) and Olive's loss was $1,750 ($7,000 x = $1,750);

therefore, $9,000 – $1,750 = $7,250.

d. $41,000 According to the cash distribution program developed in a, Nona received $11,000, Olive received $2,000, and May received nothing. Thus, May lost $20,000, Nona lost $14,000 ($25,000 – $11,000 = $14,000), and Olive lost $7,000 ($9,000 – $2,000 = $7,000), or a total loss of $41,000, on the realization of assets. Alternatively, because the partners received only $13,000 for their equities of $54,000, they must have sustained a loss of $41,000 on the realization of assets ($54,000 – $13,000 = $41,000).


Ex. 3–11 PAUL & QUINN LLPCash Payments in Liquidation.

June through August, 2005

Paul Quinn

Total

June $2,000 $ 2,000July $ 7,200 5,300 12,500August 13,500 9,000 22,500

Quinn receives $2,500 before Paul receives any cash; any amount paid to partners in excess of $2,500 is divided in the income-sharing ratio, 60% to Paul and 40% to Quinn.

Ex. 3–12 ORVILLE, PAULA & QUINCY LLPCash Distribution Program

September 26, 2005

Creditors Orville Paula QuincyFirst $ 80,000 100%Next (3 x 8,000) + (2 x 8,000) 40,000 60% 40%All over $120,000 30% 50% 20%

ORVILLE, PAULA & QUINCY LLPWorking Paper for Cash Distributions to Partners during Liquidation

September 26, 2005

Orville Paula QuincyCapital account balances before liquidation $120,000 $160,000 $80,000Income-sharing ratio 3 5 2Capital per unit of income (loss) sharing $ 40,000 $ 32,000 $40,000Reduce Orville’s and Quincy’s balances to equal

Paula’s balance (8,000 ) (8,000 ) Capital per unit of income (loss) sharing $32,000 $ 32,000 $32,000

Ex. 3–13 Journal entry for Ang, Bel & Capp LLP, Jan. 21, 2005:

Trade Accounts Payable 20,000

Loan Payable to Ang ($7,000 x )5,000

Cap, Capital $6,000 + ($7,000 x )8,000

Cash 33,000To record payment to creditors, and first installment to partners.


Ex. 3–14 RUIZ, SALVO, THOMAS & URWIG LLPCash Distribution Program

May 5, 2005

Creditors Ruiz Salvo Thomas Urwig

First $15,000 100%Next (3 x 3,900) 11,700 100%Next (3 x 4,100) + (4 x 4,100) 28,700Next (3 + 4 + 2 ) x 4,100 36,900

All over $92,300

RUIZ, SALVO, THOMAS & URWIG LLPWorking Paper for Cash Distributions to Partners during Liquidation

May 5, 2005

Ruiz Salvo Thomas UrwigCapital account balances before

liquidation $36,000 $32,400 $8,000 $(100)Income-sharing ratio 3 4 2 1Capital per unit of income (loss)

sharing $12,000 $ 8,100 $4,000 $(100)Reduce Ruiz’s balance to next

highest balance of Salvo (3,900 )Capital per unit of income (loss)

sharing $ 8,100 $ 8,100 $4,000 $(100)Reduce balances of Ruiz and Salvo

to next highest balance of Thomas (4,100 ) (4,100 )Capital per unit of income (loss)

sharing $ 4,000 $ 4,000 $4,000 $(100)Reduce balances of Ruiz, Salvo,

and Thomas to lowest balance of Urwig (4,100 ) (4,100 ) (4,100 )

Capital per unit of income (loss) sharing $ (100 ) $ (100 ) $ (100 ) $(100 )


Ex. 3–15 ALLEN, BROWN & COX LLPCash Distribution Program

September 30, 2005

Creditors Allen Brown CoxFirst $ 53,000 100%Next (2 x 333) 666 100%Next (3 + 2) x 19,067 95,335 60% 40%All over $149,001 50% 30% 20%

ALLEN, BROWN & COX LLPWorking Paper for Cash Distributions to Partners during Liquidation

September 30, 2005

Allen Brown CoxCapital account balances before liquidation $88,000 $110,000 $74,000Income-sharing ratio 5 3 2Capital per unit of income (loss) sharing $17,600 $ 36,667 $37,000Reduce Cox’s balance to next highest balance of

Brown (333 )Capital per unit of income (loss) sharing $17,600 $ 36,667 $36,667Reduce Brown’s and Cox’s balances to lowest

balance of Allen (19,067 ) (19,067 )Capital per unit of income (loss) sharing $17,600 $ 17,600 $17,600

Ex. 3–16 Journal entries for Davis, Evans & Fagin LLP, Sept. 30, 2005:

Cash 100,000Davis, Capital 16,000Evans, Capital 8,000Fagin, Capital 16,000

Other Assets 140,000To record realization of assets and division of $40,000 loss among partners in 4:2:4 ratio.

Liabilities 50,000Cash 50,000

To record payment to creditors.

Evans, Capital [$34,000 + ($36,000 x )]46,000

Fagin, Capital ($36,000 x )24,000

Cash 70,000To record payments to partners in accordance with cash distribution program.


Ex. 3–17 VENWIG CORPORATIONBalance Sheet

October 1, 2005Assets

Current Assets:Cash $ 10,500Trade accounts receivable $15,900Less: Allowance for doubtful accounts 1,200 14,700Inventories, at current fair value 48,000Short-term prepayments 800

Total current assets $ 74,000Equipment, at current fair value 72,000

Total assets $146,000Liabilities & Stockholders’ Equity

Current liabilities:Trade accounts payable $ 16,400Accrued liabilities 750

Total current liabilities $ 17,150Stockholders’ equity:

Common stock, $5 par, authorized 50,000 shares, issued and outstanding 10,000 shares $50,000Additional paid-in capital 78,850 128,850

Total liabilities & stockholders’ equity $146,000

Ex. 3–18 Journal entries for Yale Corporation:

a. 2005Jan. 2 Investment in Y-Z Company (Joint Venture) 500,000

Cash 500,000To record investment in joint venture.

Dec. 31 Investment in Y-Z Company (Joint Venture) 100,000Investment Income 100,000

To record share of Y-Z Company net income [($800,000 – $600,000) x 0.50 = $100,000].

b. 2005Dec. 31 Current Assets ($600,000 x 0.50) 300,000

Plant Assets ($1,500,000 x 0.50) 750,000Costs and Expenses ($600,000 x 0.50) 300,000Investment Income 100,000

Current Liabilities ($300,000 x 0.50) 150,000Long-Term Debt ($600,000 x 0.50) 300,000Revenue ($800,000 x 0.50) 400,000Investment in Y-Z Company (Joint Venture) 600,000

To record proportionate share of joint venture's assets, liabilities, revenue, and expenses.


CASES

Case 3–1 Those who believe that the limited liability partnership (LLP) form does damage the mutual agency characteristic of a general partnership might point out that an LLP provides a type of screen between and among partners. Knowing that he or she is responsible only for his or her acts and the acts of employees being supervised, a partner of an LLP might be somewhat oblivious to the conduct and acts of other partners. The feeling of "all for one and one for all" might be lost. Conversely, those who argue to the contrary might allege that, knowing he or she is not liable for the acts of another partner, a partner of an LLP might be less inclined to "look over the shoulders" of fellow partners and thus less apprehensive about the possibility of misconduct by other partners. Thus, the partner may have a more collegial relationshipone contributory to mutual agencywith other partners.

Case 3–2 In order to prepare a cash distribution program for the liquidating Nance, Olson, & Peale LLP, Nancy Lane must estimate the amount of the partnership's unrecorded trade accounts payable and other unrecorded liabilities. Methods for such estimating include reviewing unpaid invoices and statements from vendors and other suppliers of goods and services; requesting current statements from vendors and suppliers for whom such documents are not available at the partnership; controlling incoming mail and screening it for invoices and statements from vendors and suppliers; determining if all required payroll taxes and sales taxes, as well as other taxes, have been paid; and inquiring of the partners, after they review lists of unpaid liabilities developed through the foregoing procedures, if they know of any other unpaid liabilities. After developing an estimate of total unrecorded liabilities by means of the foregoing procedures, Lane may withhold cash in that amount during the installment liquidation of the partnership.

Case 3–3 a. The creditors of the partnership have total claims of $46,000 ($21,000 + $55,000 – $30,000 = $46,000, the net debit balance of the three capital accounts). They may collect their claims in full from Berg, who has net assets of $65,000 ($110,000 – $45,000 = $65,000), or they may collect in part from Loomis, who has $10,000 ($55,000 – $45,000 = $10,000) of net assets, and collect the remainder from Berg.

b. The creditors of Berg and Loomis may collect in full, because both are solvent; the creditors of Hancock may collect only $20,000, the amount of her assets. This represents only 50% of their claims. They can collect nothing from the partnership, because the partnership has no cash and Hancock has no equity in the partnership.

c. Because Hancock is insolvent, her $21,000 capital deficit represents an additional loss to be divided equally between Berg and Loomis. After allocation of this loss, Berg will have an equity of $19,500 ($30,000 – $10,500 = $19,500), and Loomis's debit balance will increase to $65,500 ($55,000 + $10,500 = $65,500). If the creditors of the partnership have collected their total claims from Berg, his equity will have risen to $65,500 ($19,500 + $46,000 = $65,500), but he will be able to collect from Loomis only $10,000, the excess of Loomis's personal resources over the claims of his personal creditors. Berg's ultimate loss would have been the same, that is, $66,000 ($30,000 + $46,000 – $10,000 = $66,000) if Loomis had used some of his resources to pay partnership creditors, because this act would have reduced the need for such payments by Berg and would have reduced the amount Berg collected from Loomis.


Case 3–4 a. The liquidation procedures followed by Lois Allen were not entirely appropriate. The partners had agreed to share net income and losses equally, and this 50:50 ratio was applicable not only during the operation of the partnership but also to gains and losses from liquidation. By dividing the gains and losses from realization of noncash assets in a 40:60 ratio, Allen caused Barbara Brett to bear an inappropriate portion of the loss (or to receive an inappropriate portion of the gain). Allen also erred in treating Brett's loan as payable in full, regardless of the amount of loss to be deducted from the partners' capital accounts. Because of the right of offset, no priority attaches to a partner's loan account in liquidation.

b. Brett's capital account balance prior to liquidation was $60,000. If she received $24,000 in settlement of her capital account in addition to full payment of her loan account, she incurred a loss of $36,000 ($60,000 – $24,000 = $36,000) in the liquidation. Under the procedure followed by Allen in the liquidation, the $36,000 loss to Brett was 60% of the total loss of $60,000 ($36,000 0.60 = $60,000).

If the liquidation had been handled properly, the total loss of $60,000 would have been divided equally between the partners. Allen would have received $10,000 ($40,000 – $30,000 = $10,000) cash in settlement of her equity, and Brett would have received $40,000 including her loan account ($70,000 – $30,000 = $40,000). The improper methods used by Allen resulted in an overpayment to her and an underpayment to Brett of $6,000.

A question also might be raised as to whether Allen exceeded her authority by realizing the assets without approval by Brett of the amounts to be accepted.

Case 3–5 Because many of the questions raised by the partners of the Wells, Conner & Zola Partnership involve provisions of the Uniform Partnership Act, in effect in most states, and the U.S. Bankruptcy Code, it is advisable for the partnership's accountant to request that the partners retain an independent attorney, other than their personal attorneys, to provide counsel on legal issues. Apart from that, the partnership's accountant may respond to accounting-type questions as follows:

(1) Because the goodwill was recognized when Zola was admitted to the partnership, it most likely is impaired and thus should be written off. However, the write-off should be absorbed by the partners in their income-sharing ratio because the events causing the goodwill to become worthless occurred after the formation of the present partnership. In any event, in view of Zola's personal bankruptcy and capital deficit in the partnership, it would make no sense to charge the entire goodwill write-off to Zola's capital.

(2) Pending legal advice to the contrary, the note and interest payable to partner Wells may not be paid prior to determination of the amounts to be realized from the partnership's office equipment and library, because if losses on realization caused Wells's capital account to have a debit balance, he would have to repay the partnership part or all of the amount he had received for the note and interest.

Because both Wells and Conner intend to continue the practice of public accounting, the accountant for the dissolving and liquidating Wells, Conner & Zola Partnership might advise Wells and Conner to consider reestablishing the previous Wells & Conner Partnership and merely transfer their interests in the liquidating partnership to it. Alternatively, if Wells and Conner decide to go their separate ways, they might consider receiving the noncash assets in some appropriate split, and any cash remaining after trade accounts payable of $140,000 have been paid, as their residual equity in the liquidating partnership. This course of action would avoid the necessity of incurring possible substantial losses on the realization of the noncash assets.

Case 3–6 If Anne Sanchez is not satisfied that a change to the equity method of accounting from the proportionate share method is justified in terms of being preferable for accounting for the Kane & Grant Partnership's investment in KG/WM Company, she should refuse the request


of Jane Kane and Lloyd Grant to make the change. It appears that Kane is interested in "window dressing" the prospective corporation's opening balance sheet; that objective does not constitute justification for the change. However, given that the Financial Accounting Standards Board has not yet established accounting standards for investments in unincorporated joint ventures, and that presently two methods of accounting for such investments are used in practice, Sanchez should consider other possible reasons for justification of the accounting change. One reason might be that other venturers in ventures such as KG/WM Company are using the equity method of accounting for their investments; consistency among venturers might then provide justification for a change in the Kane & Grant Partnership's accounting for its investment in KG/WM Company.

Case 3–7 An argument in favor of a single accounting method for investments in both corporate and unincorporated joint ventures is the desire for consistency in accounting practices for all business enterprises, regardless of their legal form. Typically, the difference between a corporate joint venture and an unincorporated joint venture is one of legal form; therefore, no justification exists for different accounting methods for investments in joint ventures, whether incorporated or unincorporated. Accompanying the argument for consistency is the argument for comparability; users of financial statements issued by investors in joint ventures should not have to deal with more than one method of accounting for such investments.

The choice of a single accounting method for investments in joint ventures is a difficult one. Presumably, because investors in corporate joint ventures do not have unlimited liability for debts of the venture (unless they have guaranteed payment of such debts), the proportionate share method of accounting is inappropriate. However, the opposing argument in favor of the proportionate share method of accounting for investments in unincorporated joint ventures emphasizes that "off-balance-sheet financing" is avoided by use of the method, and that the Financial Accounting Standards Board in recent years has attempted to eliminate that abuse wherever possible. A rebuttal to that argument is that recognition of parts of an unincorporated joint venture's nonmonetary assets in the balance sheet of a venturer is difficult to justify from a theoretical or a practical point of view.

Perhaps, because of the different legal statuses of corporate and unincorporated joint ventures, one method of accounting should be established for investments in corporate joint ventures and another method for investments in unincorporated joint ventures. This would be a compromise that would accord recognition to the different obligations for unpaid liabilities of the ventures by investors therein; however, it would place undue emphasis on the legal form of the two types of joint ventures.

To sanction more than one type of accounting for investments in both corporate and unincorporated joint ventures is difficult to justify. Accounting standards setters have for decades attempted to narrow differences in accounting treatments for like transactions and events; allowing more than the presently required equity method of accounting for investments in corporate joint ventures would be contradictory to that effort.


20 minutes, EasyDoris, Elsie & Frances Partnership Pr. 3–1

Doris, Elsie & Frances Partnership

Journal Entries

20 05

Jan 17 Cash 9 0 0 0 0

Elsie, Capital ($280,000 – $200,000) 8 0 0 0 0

Frances, Capital ($250,000 – $240,000) 1 0 0 0 0To record additional investments by Elsie and by Frances inFrances in partial settlement of their capital deficits.

17 Trade Accounts Payable 6 0 0 0 0

Doris, Capital 3 0 0 0 0

Cash 9 0 0 0 0

To record payment of liabilities, with remaining cash to

Doris in partial settlement of equity in partnership.

17 Doris, Capital ($120,000 – $30,000) 9 0 0 0 0

Elsie, Capital ($160,000 – $80,000) 8 0 0 0 0

Frances, Capital ($20,000 – $10,000) 1 0 0 0 0

To write off capital deficits of Elsie and Frances

against equity of Doris, and to complete liquidation of

partnership.


20 Minutes, EasyOlmo, Perez & Quinto LLP Pr. 3–2

Olmo, Perez & Quinto LLPJournal Entries

20 05

Feb 1 Cash 1 4 0 0 0 0

Olmo, Capital ($40,000 x 0.40) 1 6 0 0 0

Perez, Capital ($40,000 x 0.40) 1 6 0 0 0

Quinto, Capital ($40,000 x 0.20) 8 0 0 0

Other Assets 1 8 0 0 0 0

To record realization of assets at a loss of $40,000

($180,000 – $140,000 = $40,000).


Loan Payable to Olmo [$40,000 + ($20,000 x 2/3)] 5 3 3 3 3

Quinto, Capital ($20,000 x 1/3) 6 6 6 7

Cash ($10,000 + $140,000) 1 5 0 0 0 0

To record payment of liabilities and distribution of cash

to partners (see Exhibit 1 on page 130).

4 Cash 5 0 0 0 0

Olmo, Capital ($10,000 x 0.40) 4 0 0 0

Perez, Capital ($10,000 x 0.40) 4 0 0 0

Quinto, Capital ($10,000 x 0.20) 2 0 0 0

Other Assets 6 0 0 0 0

To record realization of remaining assets at a loss of

$10,000 ($60,000 – $50,000 = $10,000).

4 Loan Payable to Olmo ($60,000 – $53,333) 6 6 6 7

Olmo, Capital [($50,000 x 2/3) – $6,667] 2 6 6 6 6

Quinto, Capital ($50,000 x 1/3) 1 6 6 6 7

Cash 5 0 0 0 0

To record distribution of cash to partners (see Exhibit 1

on page 130).

5 Cash 3 0 0 0 0

Loan Receivable from Perez 3 0 0 0 0

To record partial payment of loan to Perez.

5 Olmo, Capital ($110,000 x 2/3) 7 3 3 3 3

Quinto, Capital (S110,000 x 1/3) 3 6 6 6 7

Loan Receivable from Perez ($50,000 –

$30,000) 2 0 0 0 0

Perez, Capital ($70,000 + $16,000 + $4,000) 9 0 0 0 0

To write off uncollectible amounts receivable from

Perez.

5 Olmo, Capital ($140,000 – $16,000 – $4,000 –

$26,666 – $73,333) 2 0 0 0 1

Quinto, Capital ($80,000 – $8,000 – $6,667 – $2,000 –

$16,667 – $36,667) 9 9 9 9

Cash 3 0 0 0 0

To record distribution of cash to partners and

completion of liquidation of partnership.


Olmo, Perez & Quinto LLP (concluded) Pr. 3–2

Exhibit 1 Olmo, Perez & Quinto LLP

Cash Distribution Program

January 31, 2005

Creditors Olmo Perez Quinto

First $ 90,000 1 0 0 %

Next 40,000 (1 x 40,000) 1 0 0 %

Next 420,000 (4+2) x (70,000) 2 / 3 1 / 3

All over $550,000 4 0 % 4 0 % 2 0 %

Olmo, Perez & Quinto LLP

Working Paper for Cash Distributions to Partners during Liquidation

January 31, 2005

Olmo Perez Quinto

Capital account balances before liquidation $ 2 0 0 0 0 0 $( 1 2 0 0 0 0 ) $ 8 0 0 0 0Income–sharing ratio 4 4 2

Capital per unit of income (loss) sharing $ 5 0 0 0 0 $ ( 3 0 0 0 0 ) $ 4 0 0 0 0

Reduce Olmo’s balance to Quinto’s balance ( 1 0 0 0 0 )

Capital per unit of income (loss) sharing $ 4 0 0 0 0 $ ( 3 0 0 0 0 ) $ 4 0 0 0 0

Reduce balances of Olmo and Quinto to Perez’s

balance ( 7 0 0 0 0 ) ( 7 0 0 0 0 )

Capital per unit of income (loss) sharing $ ( 3 0 0 0 0 ) $ ( 3 0 0 0 0 ) $ ( 3 0 0 0 0 )

Note to Instructor: The loan payable to Olmo is not paid in full in the second journal entry on February 1, 2005, because of the

right of offset.


20 minutes, EasyHal, Ian, Jay & Kay LLP Pr. 3–3

Hal, Ian, Jay & Kay LLP


September 25, 2005

Creditors Hal Ian Jay Kay

First $80,000 1 0 0 %

Next 30,000 (20 x 1,500) 1 0 0 %

Next 75,000 (75 x 1,000) 4 / 1 5 6 / 1 5 5 / 1 5

All over $185,000 2 0 % 2 5 % 3 0 % 2 5 %

Hal, Ian, Jay & Kay LLP


September 25, 2005


Hal Ian Jay Kay

Capital account balance before

liquidation $ 7 0 0 0 0 $ 2 5 0 0 0 $ 6 0 0 0 0 $ 5 0 0 0 0

Income-sharing ratio 2 0 2 5 3 0 2 5

Capital per unit of income (loss)

sharing $ 3 5 0 0 $ 1 0 0 0 $ 2 0 0 0 $ 2 0 0 0

Reduce Hal’s balance to balances

of Jay and Kay ( 1 5 0 0 )


sharing $ 2 0 0 0 $ 1 0 0 0 $ 2 0 0 0 $ 2 0 0 0

Reduce balances of Hal, Jay, and

Kay to balance of Ian ( 1 0 0 0 ) ( 1 0 0 0 ) ( 1 0 0 0 )


sharing $ 1 0 0 0 $ 1 0 0 0 $ 1 0 0 0 $ 1 0 0 0


20 Minutes, EasyCarson & Worden LLP Pr. 3–4

a. Carson & Worden LLP


September 23, 2005

Creditors Carson Worden

First $15,000 1 0 0 %

Next 40,000 1 0 0 %

All over $55,000 4 0 % 6 0 %

Carson & Worden LLP

Working Paper for Cash Distribution to Partners during Liquidation

September 23, 2005

Capital account balances before liquidation (including

$10,000 loan payable to Worden) $ 6 0 0 0 0 $ 3 0 0 0 0

Income-sharing ratio 2 3

Capital per unit of income (loss) sharing $ 3 0 0 0 0 $ 1 0 0 0 0

Reduce Carson’s balance to Worden’s balance;

Carson receives $40,000 ($20,000 x 2) ( 2 0 0 0 0 )

Capital per unit of income (loss) sharing $ 1 0 0 0 0 $ 1 0 0 0 0


Carson & Worden LLP (concluded) Pr. 3–4

b. Carson & Worden LLP

Journal Entries

20 05

Sept 23 Cash 6 0 0 0 0

Carson, Capital ($10,000 x 0.40) 4 0 0 0

Worden, Capital ($10,000 x 0.60) 6 0 0 0


To record realization of other assets at a loss of

$10,000, divided between Carson and Worden in 2:3

ratio.


Loan Payable to Worden 5 4 0 0

Carson, Capital 4 3 6 0 0

Cash 6 4 0 0 0

To record distribution of cash to creditors, and to

partners as below:

Carson Worden

First $40,000 to Carson $40,000

Balance of $9,000 to Carson

and Worden in 2:3 ratio 3,600 $5,400

Totals $43,600 $5,400

Oct 1 Cash 1 8 0 0 0

Carson, Capital ($12,000 x 0.40) 4 8 0 0

Worden, Capital ($12,000 x 0.60) 7 2 0 0


To record realization of remaining other assets at a

loss of $12,000, divided between Carson and Worden

in 2:3 ratio.

1 Loan Payable to Worden ($10,000 – $5,400) 4 6 0 0

Carson, Capital (balance of capital account) 7 6 0 0

Worden, Capital (balance of capital account) 6 8 0 0

Cash 1 9 0 0 0

To record distribution of cash to partners.


20 minutes, EasyLuke, Mayo & Nomura LLP Pr. 3–5

Luke, Mayo & Nomura LLP

Journal Entries

20 05

May 9 Cash 8 0 0 0 0

Luke, Capital 4 0 0 0 0

Mayo, Capital 4 0 0 0 0

Nomura, Capital 4 0 0 0 0


To record realization of assets and division of

$120,000 loss equally among partners.

12 Liabilities 1 0 0 0 0 0

Cash 1 0 0 0 0 0


18 Liabilities 2 0 0 0 0


To record Luke’s payment to creditors.

25 Cash 2 0 0 0 0


Mayo, Capital 1 0 0 0 0

To record partners’ investments.

June 1 Nomura, Capital 2 0 0 0 0

Cash 2 0 0 0 0

To record payment to Nomura and completion of

liquidation.


30 Minutes, EasyLuna, Nava & Ruby LLP Pr. 3–6

a. Luna, Nava & Ruby LLP

Computation of Loss from Liquidation

December 31, 2005

Net capital balance of Ruby ($108,000 – $9,000) $ 9 9 0 0 0

Less: Amount received by Ruby on liquidation of partnership 8 3 2 5 0

Ruby’s share of loss on realization of assets (20%) $ 1 5 7 5 0

Total loss from liquidation ($15,750 0.20) $ 7 8 7 5 0

b. Luna, Nava & Ruby LLP

Statement of Realization and Liquidation

December 31, 2005

Assets Partners’ Capital (net of drawings)

Cash Other Liabilities Luna (50%) Nava (30%) Ruby (20%)

Balances before liquidation (net) $ 5 2 5 0 0 $ 4 2 6 0 0 0 $ 1 5 0 0 0 0 $ 9 9 0 0 0 $ 1 3 0 5 0 0 $ 9 9 0 0 0

Realization of assets and distribution of loss

of $78,750 (see a) 3 4 7 2 5 0 ( 4 2 6 0 0 0 ) ( 3 9 3 7 5 ) ( 2 3 6 2 5 ) ( 1 5 7 5 0 )

Balances $ 3 9 9 7 5 0 $ 1 5 0 0 0 0 $ 5 9 6 2 5 $ 1 0 6 8 7 5 $ 8 3 2 5 0

Payment to creditors ( 1 5 0 0 0 0 ) ( 1 5 0 0 0 0 )

Balances $ 2 4 9 7 5 0 $ 5 9 6 2 5 $ 1 0 6 8 7 5 $ 8 3 2 5 0

Payment to partners ( 2 4 9 7 5 0 ) ( 5 9 6 2 5 ) ( 1 0 6 8 7 5 ) ( 8 3 2 5 0 )


Luna, Nava & Ruby LLP (concluded) Pr. 3–6

c. Luna, Nava & Ruby LLP

Journal Entries

20 05

Dec. 31 Cash 3 4 7 2 5 0

Luna, Capital ($78,750 x 0.50) 3 9 3 7 5

Nava, Capital ($78,750 x 0.30) 2 3 6 2 5

Ruby, Capital ($78,750 x 0.20) 1 5 7 5 0



$78,750.

31 Liabilities 1 5 0 0 0 0

Cash 1 5 0 0 0 0


31 Luna, Capital 2 4 0 0 0

Ruby, Capital 9 0 0 0

Luna, Drawing 2 4 0 0 0

Ruby, Drawing 9 0 0 0

To close partners’ drawing accounts to capital

accounts.

31 Luna, Capital 5 9 6 2 5

Loan payable to Nava 3 0 0 0 0

Nava, Capital 7 6 8 7 5

Ruby, Capital 8 3 2 5 0

Cash 2 4 9 7 5 0

To record payments to partners and to complete

liquidation.


20 Minutes, EasyHaye & Lee LLP Pr. 3–7

Haye & Lee LLPJournal Entries

20 05

Apr 1 Haye, Capital 4 4 0 0 0

Accumulated Other Comprehensive Income 2 4 0 0 0

Investments in Marketable Equity Securities 4 4 0 0 0

Haye, Capital ($24,000 x 0.75) 1 8 0 0 0

Lee, Capital ($24,000 x 0.25) 6 0 0 0

To record withdrawal of investments in common stock

by Haye at current fair value of $44,000. The invest-

ment gain of $24,000 is divided between Haye and

Lee in 3:1 ratio.

3 Investment in Wong Products 12% bonds 1 8 0 0 0 0


Haye, Capital ($80,000 x 0.75) 6 0 0 0 0

Lee, Capital ($80,000 x 0.25) 2 0 0 0 0

To record realization of other assets and trade name,

with investment gain of $80,000 divided in 3:1 ratio

between Haye and Lee.

7 Cash 3 5 6 0 0

Haye, Capital ($400 x 0.75) 3 0 0

Lee, Capital ($400 x 0.25) 1 0 0

Investment in Wong Products 12% bonds

($40,000 x 0.90) 3 6 0 0 0

To record realization of $40,000 face amount 12%

bonds, with investment loss of $400 divided in 3:1

ratio between Haye and Lee.


Cash 2 7 0 0 0

To record payment of liabilities.

10 Haye, Capital ($100,000 x 0.90) 9 0 0 0 0

Lee, Capital ($60,000 x 0.90) 5 4 0 0 0

Investment in Wong Products 12% bonds

($160,000 x 0.90) 1 4 4 0 0 0

To record distribution of Wong Products 12% bonds at

carrying amount, equal to 90% of face amount.

15 Haye, Capital 1 5 7 0 0 (1)

Lee, Capital 2 9 0 0 (2)

Cash 1 8 6 0 0 (3)

To record payment of cash to Haye and to Lee, based

on balances of their respective capital amounts, to

complete the liquidation of the partnership.

(1) $72,000 – $44,000 + $18,000 + $60,000 – $300 –

$90,000 = $15,700

(2) $31,000 + $6,000 + $20,000 – $100 – $54,000 =

$2,900

(3) $10,000 + $35,600 – $27,000 = $18,600


30 Minutes, Easy

Adams, Barna & Coleman LLP Pr. 3–8

a. Adams, Barna & Coleman LLP


June 4, 2005

Assets Partners’ Capital

Cash Other Liabilities Adams (40%) Barna (40%) Coleman (20%)

Balances before liquidation (including loan

payable to Barna, $4,000) $ 6 0 0 0 $ 9 4 0 0 0 $ 2 0 0 0 0 $ 2 7 0 0 0 $ 4 3 0 0 0 $ 1 0 0 0 0

Realization of assets at loss of $63,300 3 0 7 0 0 ( 9 4 0 0 0 ) ( 2 5 3 2 0 ) ( 2 5 3 2 0 ) ( 1 2 6 6 0 )

Balances $ 3 6 7 0 0 $ 2 0 0 0 0 $ 1 6 8 0 $ 1 7 6 8 0 $ ( 2 6 6 0 )

Unrecorded trade account payable 5 0 0 ( 2 0 0 ) ( 2 0 0 ) ( 1 0 0 )

Balances $ 3 6 7 0 0 $ 2 0 5 0 0 $ 1 4 8 0 $ 1 7 4 8 0 $ ( 2 7 6 0 )

Payment to creditors ( 2 0 5 0 0 ) ( 2 0 5 0 0 )

Balances $ 1 6 2 0 0 $ 1 4 8 0 $ 1 7 4 8 0 $ ( 2 7 6 0 )Eliminate Coleman’s capital deficit ( 1 3 8 0 ) ( 1 3 8 0 ) 2 7 6 0

Balances $ 1 6 2 0 0 $ 1 0 0 1 6 1 0 0

Payment to partners ( 1 6 2 0 0 ) ( 1 0 0 ) ( 1 6 1 0 0 )


Adams, Barna & Coleman LLP (concluded) Pr. 3–8

b. Adams, Barna & Coleman LLP

Journal Entries

20 05

June 4 Cash 3 0 7 0 0

Adams, Capital ($63,300 x 0.40) 2 5 3 2 0

Barna, Capital ($63,300 x 0.40) 2 5 3 2 0

Coleman, Capital ($63,300 x 0.20) 1 2 6 6 0



$63,300.

4 Adams, Capital ($500 x 0.40) 2 0 0

Barna, Capital ($500 x 0.40) 2 0 0

Coleman, Capital ($500 x 0.20) 1 0 0

Liabilities 5 0 0

To record trade account payable.


Cash 2 0 5 0 0


4 Adams, Capital 1 3 8 0

Barna, Capital 1 3 8 0

Coleman, Capital 2 7 6 0

To eliminate Coleman’s capital deficit.

4 Adams, Capital 1 0 0

Loan Payable to Barna 4 0 0 0

Barna, Capital 1 2 1 0 0

Cash 1 6 2 0 0

To record payments to partners and to complete

liquidation.

c. Coleman’s loss must be limited to $5,000, or $25,000

for the partnership ($5,000 0.20 = $25,000). Because

the liquidation of liabilities results in a loss of $500,

only $24,500 may be lost on the realization of other

assets. This requires that other assets realize $69,500

($94,000 – $24,500 = $69,500) to enable Coleman

to receive $5,000 from the partnership to pay personal

creditors in full.


30 Minutes, Easy

Smith, Jones & Webb LLP Pr. 3–9

Smith, Jones & Webb LLP


May through July, 2005

Assets Partners’ Capital

Cash Other Liabilities Smith (1/3) Jones (1/3) Webb (1/3)

Balances before liquidation $ 2 0 0 0 0 $ 2 8 0 0 0 0 $ 8 0 0 0 0 $ 6 0 0 0 0 $ 7 0 0 0 0 $ 9 0 0 0 0

May—Realization of assets at loss of $30,000 7 5 0 0 0 ( 1 0 5 0 0 0 ) ( 1 0 0 0 0 ) ( 1 0 0 0 0 ) ( 1 0 0 0 0 )

Balances $ 9 5 0 0 0 $ 1 7 5 0 0 0 $ 8 0 0 0 0 $ 5 0 0 0 0 $ 6 0 0 0 0 $ 8 0 0 0 0

Payment to creditors ( 8 0 0 0 0 ) ( 8 0 0 0 0 )

Balances $ 1 5 0 0 0 $ 1 7 5 0 0 0 $ 5 0 0 0 0 $ 6 0 0 0 0 $ 8 0 0 0 0

Payment to Webb (Exhibit 1, p. 141) ( 1 5 0 0 0 ) ( 1 5 0 0 0 )

Balances $ - 0 - $ 1 7 5 0 0 0 $ 5 0 0 0 0 $ 6 0 0 0 0 $ 6 5 0 0 0June—Realization of assets at loss of $36,000 2 5 0 0 0 ( 6 1 0 0 0 ) ( 1 2 0 0 0 ) ( 1 2 0 0 0 ) ( 1 2 0 0 0 )

Balances $ 2 5 0 0 0 $ 1 1 4 0 0 0 $ 3 8 0 0 0 $ 4 8 0 0 0 $ 5 3 0 0 0

Payments to partners (Exhibit 1, p. 141) ( 2 5 0 0 0 ) ( 1 0 0 0 0 ) ( 1 5 0 0 0 )

Balances $ - 0 - $ 1 1 4 0 0 0 $ 3 8 0 0 0 $ 3 8 0 0 0 $ 3 8 0 0 0

July—Realization of remaining assets at loss of

$30,000 8 4 0 0 0 ( 1 1 4 0 0 0 ) ( 1 0 0 0 0 ) ( 1 0 0 0 0 ) ( 1 0 0 0 0 )

Balances $ 8 4 0 0 0 $ 2 8 0 0 0 $ 2 8 0 0 0 $ 2 8 0 0 0

Payment to partners ( 8 4 0 0 0 ) ( 2 8 0 0 0 ) ( 2 8 0 0 0 ) ( 2 8 0 0 0


Smith, Jones & Webb LLP (concluded) Pr. 3–9

Exhibit 1 Smith, Jones & Webb LLP


April 30, 2005

Creditors Smith Jones Webb

First $80,000 1 0 0 %

Next 20,000 1 0 0 %

Next 20,000 5 0 % 5 0 %

All over $120,000 1 / 3 1 / 3 1 / 3

Smith, Jones & Webb


April 30, 2005

Smith Jones Webb

Capital account balances before liquidation $ 6 0 0 0 0 $ 7 0 0 0 0 $ 9 0 0 0 0

Income-sharing ratio 1 1 1

Divide capital account balances by income-

sharing ratio $ 6 0 0 0 0 $ 7 0 0 0 0 $ 9 0 0 0 0

Required reduction to bring capital balance of

Webb to equal the next highest balance of

Jones ( 2 0 0 0 0 )

Capital per unit of income (loss) sharing $ 6 0 0 0 0 $ 7 0 0 0 0 $ 7 0 0 0 0

Required reduction to bring the capital balances

of Jones and Webb to equal the capital balance

of Smith ( 1 0 0 0 0 ) ( 1 0 0 0 0 )

Capital per unit of income (loss) sharing $ 6 0 0 0 0 $ 6 0 0 0 0 $ 6 0 0 0 0


45 Minutes, MediumDensen, Eastin & Feller LLP Pr. 3–10

Densen, Eastin & Feller LLP


December 31, 2005

Creditors Denson Eastin Feller

First $20,000 1 0 0 %

Next 2,400 (3 x 800) 1 0 0 %

Next 5,500 (2 + 3) x (1,100) 6 0 % 4 0 %

All over $27,900 5 0 % 3 0 % 2 0 %

Densen, Eastin & Feller LLP


December 31, 2005

Denson Eastin Feller

Capital account balances before liquidation

(including $10,000 loan payable to Denson) $ 3 2 0 0 0 $ 2 4 9 0 0 $ 1 5 0 0 0

Income-sharing ratio 5 3 2

Divide capital account balances by income-

sharing ratio $ 6 4 0 0 $ 8 3 0 0 $ 7 5 0 0

Required reduction to bring capital per unit of

income sharing for Eastin down to equal the

next highest balance for Feller ( 8 0 0 )

Capital per unit of income (loss) sharing $ 6 4 0 0 $ 7 5 0 0 $ 7 5 0 0

Required reduction to bring capital per unit of

income sharing for Eastin and Feller to equal the

balance for Denson ( 1 1 0 0 ) ( 1 1 0 0 )

Capital per unit of income (loss) sharing $ 6 4 0 0 $ 64

4 0 0 $ 6 4 0 0

a. Denson and Feller would receive nothing if

Eastin received only $2,000 on the first

distribution because Eastin is entitled to 100% of

the first $2,400 of any cash distributed after

creditors are paid.


Denson, Eastin & Feller LLP (concluded) Pr. 3–10

b. If Denson received $20,000 as a result of the liquidation, the total cash distributed must have been $67,900, consisting of $6,000 of cash on hand and $61,900 realized from noncash assets. In reaching this conclusion, one may use the priorities indicated in a on page 142 and prepare the following programof cash payments:

Partners’ Capital

Cash Liabilities Denson (5) Eastin (3) Feller (2)

First $20,000 to creditors $ 2 0 0 0 0 $ 2 0 0 0 0

Next $2,400 to Eastin 2 4 0 0 $ 2 4 0 0

Next $5,500 to Eastin and Feller in 3:2 ratio 5 5 0 0 3 3 0 0 $ 2 2 0 0

Any amount over $27,900 in 5:3:2 ratio 4 0 0 0 0 $ 2 0 0 0 0 1 2 0 0 0 8 0 0 0

Totals $ 6 7 9 0 0 $ 2 0 0 0 0 $ 2 0 0 0 0 $ 1 7 7 0 0 $ 1 0 2 0 0

A short-cut approach to the answer is based on the following: If Denson received $20,000, Denson incurred a loss of $12,000 on a total equity of $32,000.

Because Denson’s income-sharing ratio is 50%, the total loss must be $24,000 ($12,000 0.50 = $24,000). A loss of $24,000 would mean that the noncash

assets, which have a carrying amount of $85,900 ($91,900 – $6,000 cash = $85,900), must have realized $61,900 ($85,900 – $24,000 = $61,900).

c. If Feller received $6,200 in the first distribution of cash, Denson must have received $10,000. The reason, as shown in a on page 142, is that Feller is entitled to

receive $2,200 ($5,500 x 0.40 = $2,200) before Denson gets anything. Feller then received the additional $4,000 as a 20% share of the next $20,000 and

Denson received 50% of $20,000, or $10,000.


50 Minutes, MediumLord & Lee Partnership; Lord-Lee Corporation Pr. 3–11

a. Lord & Lee PartnershipJournal Entries

20 05

Dec 31 Short-Term Prepayments 1 5 0 0

Land ($45,000 – $28,000) 1 7 0 0 0

Inventories ($75,000 – $56,000) 1 9 0 0 0

Accrued Liabilities 7 5 0

Allowance for Doubtful Accounts 1 2 0 0 0

Lord, Capital ($24,750 x 0.40) 9 9 0 0

Lee, Capital ($24,750 x 0.60) 1 4 8 5 0

To adjust assets and liabilities and to divide net gain

of $24,750 in the income-sharing ratio of 40:60

between Lord and Lee.

31 Lord, Capital 9 0 0

Lee, Capital 1 0 5 0

Cash 1 9 5 0

To record withdrawal of cash by partners to avoid need

for issuance of fractional shares of common stock. (See

(See Jan 2, 2006, journal entry below.)

31 Receivable from Lord-Lee Corporation 1 9 6 8 0 0

Accumulated Depreciation of Buildings 1 7 0 0 0



Trade Accounts Payable 1 0 0 0 0

Cash 3 5 0 5 0

Trade Accounts Receivable 3 0 0 0 0

Inventories 7 5 0 0 0

Short-Term Prepayments 1 5 0 0

Land 4 5 0 0 0

Buildings 5 0 0 0 0

To record transfer of assets and liabilities to Lord-Lee

Corporation.

31 Common Stock of Lord-Lee Corporation (12,300 x $16) 1 9 6 8 0 0

Receivable from Lord-Lee Corporation 1 9 6 8 0 0

To record receipt of 12,300 shares of $10 par common

stock issued at $16 a share in payment for net assets

transferred to Lord-Lee Corporation.

20 06

Jan 2 Lord, Capital (4,500 x $16) 7 2 0 0 0

Lee, Capital (7,800 x $16) 1 2 4 8 0 0

Common Stock of Lord-Lee Corporation 1 9 6 8 0 0

To record distribution of common stock of Lord-Lee

Corporation to partners: 4,500 shares to Lord and

7,800 shares to Lee.

Shares allocated as follows:

Lord [($63,000 + $9,900 – $900) $16] 4,500

Lee [($111,000 + $14,850 – $1,050) $16] 7,800

Total 12,300


Lord & Lee Partnership; Lord-Lee Corporation (continued) Pr. 3–11

b. Lord-Lee Corporation

Journal Entries

20 06

Jan 2 Memorandum entry: Received authorization to issue

150,000 shares of $10 par common stock.

2 Cash 3 2 0 0 0 0

Common Stock, $10 par (20,000 x $10) 2 0 0 0 0 0

Paid-In Capital in Excess of Par 1 2 0 0 0 0To record issuance of 20,000 shares of common stockTat at $16 a share to public investors.

2 Cash 3 5 0 5 0

Trade Accounts Receivable 3 0 0 0 0

Inventories 7 5 0 0 0

Short-Term Prepayments 1 5 0 0

Land 4 5 0 0 0

Buildings ($50,000 – $17,000) 3 3 0 0 0



Trade Accounts Payable 1 0 0 0 0

Payable to Lord & Lee Partnership 1 9 6 8 0 0

To record acquisition of net assets of Lord & Lee

Partnership.

2 Payable to Lord & Lee Partnership 1 9 6 8 0 0

Common Stock, $10 par (12,300 x $10) 1 2 3 0 0 0

Paid-In Capital in Excess of Par 7 3 8 0 0

To record issuance of 12,300 shares of $10 par

common stock at $16 a share in payment for net

assets acquired from Lord & Lee Partnership.


Lord & Lee Partnership; Lord-Lee Corporation (concluded) Pr. 3–11

Lord-Lee Corporation

Balance Sheet

January 2, 2006

Assets

Current assets:

Cash $ 3 5 5 0 5 0

Trade accounts receivable $ 3 0 0 0 0

Less: Allowance for doubtful accounts 1 2 0 0 0 1 8 0 0 0

Inventories, at replacement cost 7 5 0 0 0

Short-term prepayments 1 5 0 0

Total current assets $ 4 4 9 5 5 0

Plant assets:

Land, at current fair value $ 4 5 0 0 0

Buildings (net) 3 3 0 0 0 7 8 0 0 0

Total assets $ 5 2 7 5 5 0

Liabilities & Stockholders’ Equity

Current liabilities:

Trade accounts payable $ 1 0 0 0 0

Accrued liabilities 7 5 0

Total current liabilities $ 1 0 7 5 0

Stockholders’ equity:

Common stock, $10 par, authorized 150,000 shares, issued

and outstanding 32,300 shares $ 3 2 3 0 0 0

Additional paid-in capital 1 9 3 8 0 0 5 1 6 8 0 0

Total liabilities & stockholders’ equity $ 5 2 7 5 5 0


chapter 03, modern advanced accounting-review q & exr

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