hoyle chapter 10 advanced acct solutions

CHAPTER 15PARTNERSHIPS: TERMINATION AND LIQUIDATION

Answers to Questions

1. A dissolution refers to the cessation of a partnership. In many cases, this process is simply a preliminary step in the transfer of business property to a newly formed partnership. Therefore, a dissolution does not necessarily affect the operations of the business. In a liquidation, however, actual business activities must cease. Partnership property is sold with the remaining cash distributed to creditors and to any partners with positive capital balances. Dissolution refers to changes in the composition of a partnership whereas liquidation is the selling of a partnership's assets.

2. Many reasons can exist that would lead to the termination and liquidation of a partnership. The business might simply have failed to generate sufficient profits or the partners may elect to enter other lines of work. Liquidation can also be required by the death, retirement, or withdrawal of one of the partners. In such cases, liquidation is often necessary to settle the partner's interest in the business. The bankruptcy of an individual partner can also force the termination of the business as can the bankruptcy of the partnership itself.

3. During the liquidation process, monitoring the balance of the partners' capital accounts becomes of paramount importance. 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. Consequently, all liquidation gains and losses are recorded directly as changes to these capital balances. Such recording enhances the informational value of the accounts. As an additional factor, the computation of a net income figure is of diminished importance since normal operations have ceased.

4. Final distributions made to the various partners are based solely on their ending capital account balances unless the partners have agreed otherwise. If any partner has a deficit balance, an additional contribution should be made to offset the negative amount. In some situations, a question may arise as to whether compensation for a deficit will ever be forthcoming from the responsible party. 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.

5. A schedule of liquidation provides financial data about the liquidation process as it has progressed to date. Information to be presented includes the balances of all remaining assets, the liability total, and the capital account of each partner. In addition, the allocation of all gains and losses incurred in the liquidation process as well as the payment of expenses should be evident.

6. From a legal viewpoint, any partner who incurs a negative (or deficit) capital balance is obligated to make an additional contribution to offset that amount.

7. A safe capital balance is the amount of a partner's capital account that exceeds all possible needs of a partnership as it goes through liquidation. A partner should, therefore, be able to receive this balance immediately without endangering the future amount to be received by any other party connected with the liquidation. Safe capital balances are computed by projecting a series of assumptions whereby the partnership undergoes maximum losses during the remainder of the liquidation process. All noncash assets are assumed to have no resale value, liquidation expenses are set at the largest possible estimation, and all partners are viewed as personally insolvent. Any capital balance that would remain after this series of anticipated events can be distributed to the partners immediately without incurring any risk.

8. The marshaling of assets doctrine is a provision within the Uniform Partnership Act that indicates the priority of claims when a partner becomes personally insolvent. By providing a ranking of these claims, an orderly and fair distribution of available property can be made. The marshaling of assets provision states:

Where a partner has become bankrupt or his estate is insolvent, the claims against his separate property shall rank in the following order:(I) Those owing to separate creditors,(II) Those owing to partnership creditors,(III)Those owing to partners by way of contributions.

9. A partner's personal creditors do have a limited claim against partnership assets. Recovery is possible but only if payment of all partnership debts is assured and the insolvent partner has a positive capital balance.

10. For distribution purposes, the Uniform Partnership Act states that loans from partners rank ahead of the partners’ capital balances. Thus, the handling of loans in a liquidation would seem to be obvious: When money becomes available for the partners, all loans from partners should be repaid before any amount is given to a partner because of a safe capital balance.

A problem arises, though, in the above solution if a partner (especially if the partner is currently insolvent) has made a loan to a partnership but has a potentially negative capital balance. The final capital balance may require a contribution to the partnership that the partner may be unable or unwilling to make. If the Uniform Partnership Act is followed precisely, a partner could collect money on a loan while still having an obligation to the partnership because of a negative capital balance.

To avoid this problem, in practice a partner’s loan balance is usually merged with that partner’s capital balance to minimize the chance of a negative capital balance occurring. This particular partner may get less money from the liquidation because of this treatment but the other partners are better protected.

11. A proposed schedule of liquidation is used by the accountant to determine the allocation of any cash balances generated during the early stages of liquidation. Often, sufficient cash will be collected to pay all liabilities as well as potential liquidation expenses. Additional cash should then be distributed to the partners to allow them immediate use of their funds. A proposed schedule of liquidation can be produced to determine the allocation of this available cash. The statement is based on anticipating a series of assumed losses from the current day forward: all remaining noncash assets are scrapped, maximum liquidation expenses are incurred, and each partner is personally insolvent. The ending balances that would result from these simulated transactions represent safe capital balances. This amount of cash can be distributed presently and the partners will still retain enough capital to absorb all future losses.

12. A predistribution plan is produced based on an assumed series of losses. Each loss is calculated to eliminate in turn the capital balance of one of the partners. In this manner, the accountant can determine the vulnerability to losses exhibited by each capital account. When the last balance is eliminated, the accountant will have established a series of losses that exactly offsets each balance. The predistribution plan is then developed by measuring the effects that are created if the losses do not occur. In effect, the accountant works backwards through the assumed losses to create a pattern of available cash, the predistribution plan.

Answers to Problems

1. C

2. A

3. D

4. B

5. B Angela, Capital Woodrow, Capital Cassidy, Capital

Reported balances $19,000 $18,000 $(12,000)Potential loss from

Cassidy deficit (split 5/8:3/8) (7 , 500 ) (4,500) 12,000

Cash distributions $11,500 $13,500 -0-

6. B Bell Hardy Dennard SuddathReported balances $50,000 $56,000 $14,000 $80,000Loss on sale of assets ($110,000)

split on a 4:3:2:1 basis (44,000) (33,000) (22,000) (11,000)Adjusted balances $ 6,000 $23,000 $(8,000) $69,000Potential loss from Dennard

deficit (split 4:3:1) (4,000) (3,000) 8,000 (1,000)Minimum cash distributions $2,000 $20,000 $ -0- $68,000

7. A

8. A Art Raymond DarbyReported balances .................................... $18,000 $25,000 $26,000Loss on sale of assets ($22,000) split on a 4:3:3 basis ....................................... (8,800) (6,600) (6,600)Adjusted balances .................................... $ 9,200 $18,400 $19,400Anticipated liquidation expenses ($12,000) split on a 4:3:3 basis ............................... (4,800) (3,600) (3,600)Anticipated maximum loss on inventory ($31,000) split on a 4:3:3 basis .............. (12,400) (9,300) (9,300)Potential balances ..................................... $(8,000) $ 5,500 $ 6,500Potential loss from Art deficit (split 3:3) . 8,000 (4,000) (4,000)Current cash distribution ......................... $ -0- $ 1,500 $ 2,500

9. D Since the partnership currently has total capital of $400,000, the $30,000 that is available would indicate maximum potential losses of $370,000.

A B CReported balances $100,000 $120,000 $180,000Anticipated loss ($370,000) split on

a 2:3:5 basis (74,000) (111,000) (185,000)Potential balances $ 26,000 $ 9,000 $ (5,000)Potential loss from C's deficit (split 2:3) (2,000) (3,000) 5,000Current cash distribution $ 24,000 $ 6,000 $ -0-

10.C A predistribution plan should be created.

Maximum Losses That Can Be Absorbed

Kevin $59,000/40% $147,500Michael $39,000/30% 130,000 (most vulnerable to losses)Brendan $34,000/10% 340,000Jonathan $34,000/20% 170,000

The assumption is made that a $130,000 loss occurs.

Kevin Michael Brendan JonathanReported balances ..........................$59,000 $39,000 $34,000 $34,000Assumed loss ($130,000) split on

a 4:3:1:2 basis ............................(52,000) (39,000) (13,000) (26,000)Adjusted balances ...........................$ 7,000 $ -0- $21,000 $ 8,000

Maximum Losses That Can Now Be AbsorbedKevin $7,000/4/7 $12,250 (most vulnerable to losses)Brendan $21,000/1/7 147,000 Jonathan $8,000/2/7 28,000

Kevin Brendan JonathanReported balances ......................................$7,000 $21,000 $8,000Assumed loss ($12,250) split on a

4:1:2 basis ...............................................(7,000) (1,750) (3,500)Adjusted balances $ -0- $19,250 $4,500

Maximum Losses That Can Now Be Absorbed

Brendan $19,250/1/3 $57,750Jonathan $4,500/2/3 6,750 (most vulnerable to losses)


Brendan JonathanReported balances............................................. $19,250 $4,500Assumed loss ($6,750) split on a 1:2 basis .... (2,250) (4,500)Adjusted balances ............................................ $17,000 $ -0-

11.C To work this problem, a predistribution schedule is necessary. That schedule, which is computed below, is as follows:

First $3,000 goes to Menton Next $15,000 goes to Menton (2/3) and Hoehn (1/3) Next $42,000 goes to Carney (4/7), Menton (2/7), and Hoehn (1/7) All remaining cash goes to Carney (4/10), Pierce (3/10), Menton (2/10),

and Hoehn (1/10)

Carney Pierce Menton HoehnBeginning balances $60,000 $27,000 $43,000 $20,000Assumed loss of $90,000 (see

Schedule 1)(4:3:2:1) (36,000) (27,000) (18,000) (9,000)Step one balances $24,000 $ -0- $25,000 $11,000Assumed loss of $42,000 (see

Schedule 2) (allocated ona 4:0:2:1 basis) (24,000) $ - 0 - (12,000) (6,000)

Step two balances $ -0- $ -0- $13,000 $ 5,000Assumed loss of $15,000 (see

Schedule 3) (allocated on a0:0:2:1 basis) - 0 - - 0 - (10,000) (5,000)

Step three balances $ - 0 - $ - 0 - $ 3,000 $ - 0 -

Schedule 1Maximum Loss

Capital Balance/ That CanPartner Loss Allocation Be Absorbed Carney $60,000/40% $150,000Pierce $27,000/30% $ 90,000 (most vulnerable)Menton $43,000/20% $215,000Hoehn $20,000/10% $200,000


Capital Balance/ That Can Partner Loss Allocation Be Absorbed Carney $24,000/(4/7) $ 42,000 (most vulnerable)Menton $25,000/(2/7) $ 87,500Hoehn $11,000/(1/7) $ 77,000


Capital Balance/ That Can Partner Loss Allocation Be Absorbed Menton $13,000/(2/3) $ 19,500Hoehn $ 5,000/(1/3) $ 15,000 (most vulnerable)

12.C The $16,000 available cash can be distributed but should be done under the assumption that all deficit balances will be total losses. After offsetting

Jones' loan, the two deficits total $4,000. Fuller and Rogers, the two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a 60%:40% ratio). Fuller would absorb $2,400 of the potential loss with Rogers being allocated $1,600. The remaining capital balances ($10,600 and $5,400) are safe capital balances and those amounts can be immediately distributed.

13.(8 Minutes) (Payment of safe capital balances)

$6,800 to Cleveland and $1,200 to Pierce

Since the partnership currently has total capital of $350,000, the $8,000 that is available would indicate maximum potential losses of $342,000.

Nixon Cleveland Pierce

Reported balances ............................. $170,000 $110,000 $70,000Anticipated loss ($342,000) split

on a 5:3:2 basis ............................. (171,000) (102,600) (68,400)Potential balances .............................. $ (1,000) $ 7,400 $ 1,600Potential loss from Nixon's deficit (split 3:2) 1,000 (600 ) (400)Current cash distribution ................... $ -0- $6,800 $ 1,200

14. (20 Minutes) (Final settlement of a partnership being liquidated)

Part a. Brown gets $21,000, Fish gets $12,000, and Stone gets $2,000.

Brown Fish StoneReported balances ..................................... $25,000 $15,000 $5,000Loss on sale of land ($10,000) split

on a 4:3:3 basis...................................... (4,000) (3,000) (3,000)Cash distribution ........................................ $21,000 $12,000 $2,000

Part b. Brown gets $16,429 and Fish gets $8,571

Brown Fish StoneReported balances ..................................... $25,000 $15,000 $5,000Loss on sale of land ($20,000) split on

a 4:3:3 basis............................................ (8,000) (6,000) (6,000)Adjusted balances ...................................... $17,000 $ 9,000 $(1,000)Potential loss from Stone's deficit (split 4:3) (571) (429) 1,000Cash distribution ........................................ $16,429 $ 8,571 $ -0-

Part c. Brown gets $10,714 and Fish gets $4,286

Brown Fish StoneReported balances ..................................... $25,000 $15,000 $5,000Loss on sale of land ($30,000) split on

a 4:3:3 basis............................................ (12,000) (9,000) (9,000)Adjusted balances ...................................... $13,000 $ 6,000 $(4,000)Potential loss from Stone's deficit (split 4:3) (2,286) (1,714) 4,000Cash distribution ........................................ $10,714 $ 4,286 $ -0-

15.(10 Minutes) (Distribution made of contribution made by partner with deficit balance)

The entire $20,000 goes to Atkinson.

Atkinson Kaporale Dennsmore Rasputin

Reported balances $60,000 $20,000 $(30,000) $(50,000)Capital contribution -0- -0- -0- 20,000Adjusted balances $60,000 $20,000 $(30,000) $(30,000)Potential loss from Dennsmore

and Rasputin ($60,000) spliton a 4:3 basis (34,286) (25,714) 30,000 30,000

Adjusted balances $25,714 $(5,714) $ -0- $ -0-Potential loss from Kaporale

($5,714) (5,714) 5,714 -0- -0-Cash distribution $20,000 $ -0- $ -0- $ -0-

16. (8 Minutes) (Determine safe capital balances)

Ball gets $143, Eaton gets $1,429, and Lake gets $3,428.

Ace Ball Eaton LakeReported balances ....................... $25,000 $28,000 $20,000 $22,000Maximum losses on land and building ($85,000) split on a 3:3:2:2 basis (25,500) (25,500) (17,000) (17,000)Estimated liquidation expenses ($5,000) split 3:3:2:2................... (1,500) (1,500) (1,000) (1,000)Potential balances ....................... $(2,000) $ 1,000 $ 2,000 $ 4,000Potential loss from Ace ($2,000) split on a 3:2:2 basis .......................... 2,000 (857) (571) (572)Cash distributions ....................... $ 0 $ 143 $ 1,429 $ 3,428

17.(15 Minutes) (Prepare a proposed schedule of liquidation)

HARDWICK, SAUNDERS, AND FERRIS

Proposed Schedule of Liquidation

Hardwick, Ferris,Other Accounts Loan and Saunders, Loan &

Cash Assets Payable Capital Capital Capital Beginning

balances 90,000 820,000 210,000 270,000 200,000 230,000Sold assets 200,000 (328,000) (51,200) (38,400) (38,400)Assumed: loss

on remainingassets (492,000) (196,800) (147,600) (147,600)

Paid liabilities (210,000) (210,000 ) Safe balances 80,000 0 0 22,000 14,000 44,000

Of the available $80,000, $22,000 will go to Hardwick, $14,000 to Saunders, and $44,000 to Ferris.

18.(7 Minutes) (Amount of cash needed to assure payments to all partners)

Watson is the partner most vulnerable to a loss. A loss of only $50,000 would completely eliminate Watson's capital balance:

Miller $50,000/60% = $ 83,333 loss to eliminate capital Tyson $50,000/20% = $250,000 loss to eliminate capital Watson $10,000/20% = $ 50,000 loss to eliminate capital

Thus, if the loss on disposal is less than $50,000, all partners will retain positive capital balances and receive some cash in liquidation. Because of this, since "other assets" are $140,000, they must be sold for any amount over $90,000 for all partners to get cash.

19.(5 Minutes) (Determine safe capital balances)

Maximum potential losses are $128,000, $8,000 in liquidation expenses and a complete $120,000 loss on the noncash assets. Such a loss would reduce the capital balances to: Babb $8,800, Whitaker ($5,600), and Edwards ($1,200). Babb must retain sufficient capital ($6,800) to be able to absorb the possible losses of Whitaker and Edwards. The remaining $2,000 is a safe capital balance for Babb.

20.(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 $15,000. Absorption by the other partners of these losses would be as follows (on a 30:10:20 basis):

Partner Share of Loss New Capital Balance

Black 30/60 x $15,000 = $7,500 $ (4,500)Green 10/60 x $15,000 = $2,500 $ (5,500)Brown 20/60 x $15,000 = $5,000 $10,000

Black, who is also insolvent, now has a deficit capital of $4,500 that would have to be absorbed by Brown and Green (on a 10:20 basis):

Partner Share of Loss New Capital Balance Green 10/30 x $4,500 = $1,500 $ (7,000)Brown 20/30 x $4,500 = $3,000 $ 7,000

Thus, Green must contribute $7,000 that will go to Brown.

21.(50 Minutes) (Compute effects of a liquidation under a variety of circumstances)

a. Dobbs receives the entire $10,000.

Maximum potential losses of $250,000 on noncash assets would be allocated as follows:


Adams 2/10 x $250,000 = $50,000 $ 30,000 Baker 3/10 x $250,000 = $75,000 $(45,000) Carvil 3/10 x $250,000 = $75,000 $(15,000) Dobbs 2/10 x $250,000 = $50,000 $ 40,000

Maximum total potential losses of $60,000 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 = $30,000 -0-Dobbs 2/4 x $60,000 = $30,000 $ 10,000

Absorbing the final loss would leave Dobbs with a safe capital balance of $10,000.

b. Adams receives the entire $10,000.

Maximum potential losses of $250,000 on noncash assets would be allocated as follows:


Adams 2/10 x $250,000 = $50,000 $ 30,000 Baker 2/10 x $250,000 = $50,000 $(20,000) Carvil 3/10 x $250,000 = $75,000 $(15,000) Dobbs 3/10 x $250,000 = $75,000 $ 15,000

Maximum total potential losses of $35,000 to be absorbed from Baker and Carvil above would be allocated as follows on a 2:3 basis:

Adams 2/5 x $35,000 = $14,000 $ 16,000Dobbs 3/5 x $35,000 = $21,000 $ (6,000)

Absorbing the final $6,000 loss from Dobbs would leave Adams with a safe capital balance of $10,000.

c. Adams receives $57,500 and Dobbs gets $22,500.

The $50,000 loss on sale of the building would be allocated as follows:


Adams 10% x $50,000 = $5,000 $ 75,000 Baker 30% x $50,000 = $15,000 $ 15,000Carvil 30% x $50,000 = $15,000 $ 45,000Dobbs 30% x $50,000 = $15,000 $ 75,000

21.c. (continued)

Maximum potential loss of $130,000 on the land would be allocated as follows:


Adams 10% x $130,000 = $13,000 $ 62,000 Baker 30% x $130,000 = $39,000 $ (24,000)Carvil 30% x $130,000 = $39,000 $ 6,000Dobbs 30% x $130,000 = $39,000 $ 36,000

Maximum potential loss of $24,000 to be absorbed from Baker would be allocated as follows on a 1:3:3 basis:

Adams 1/7 x $24,000 = $3,428 $ 58,572 Carvil 3/7 x $24,000 = $10,286 $ (4,286) Dobbs 3/7 x $24,000 = $10,286 $ 25,714

Maximum potential loss of $4,286 to be absorbed from Carvil would be allocated as follows on a 1:3 basis:

Adams 1/4 x $4,286 = $1,072 $57,500Dobbs 3/4 x $4,286 = $3,214 $22,500

These amounts represent safe capital balances for distribution purposes.

d. The land and building must be sold for over $115,000 to ensure that Carvil will receive some cash.

Adams Baker Carvil DobbsBeginning balances $ 80,000 $ 30,000 $ 60,000 $ 90,000Assumed loss of $100,000 (see

Schedule 1) (1:3:4:2) (10,000) (30,000) (40,000) (20,000)Step One balances $ 70,000 $ -0- $ 20,000 $ 70,000Assumed loss of $35,000 (see

Schedule 2) (allocated on a1:0:4:2 basis) (5,000) - 0 - (20,000) (10,000)

Step Two balances $ 65,000 $ -0- $ -0- $ 60,000Assumed loss of $90,000 (see

Schedule 3) (allocated on a1:0:0:2 basis) (30,000) - 0 - - 0 - (60,000)

Step Three balances $ 35,000 $ - 0 - $ - 0 - $ - 0 -

21.d. (continued)

PREDISTRIBUTION PLAN

The first $35,000 available goes to Adams. Next $90,000 is split between Adams and Dobbs on a 1:2 basis. Next $35,000 is split between Adams, Carvil, and Dobbs on a 1:4:2 basis. All remaining cash is split between Adams, Baker, Carvil, and Dobbs on the original profit and loss ratio.

Total cash of $125,000 ($35,000 + $90,000) has to be available before Carvil will receive any cash. Since the partnership already has $10,000 cash in excess of its liabilities, the land and building must be sold for over $115,000 to ensure Carvil of receiving some amount.

As another approach to the problem, Carvil's capital balance is eliminated through the $100,000 Step One loss and the $35,000 Step Two loss. Thus, avoiding a complete $135,000 loss ensures that Carvil will receive cash. Since the land and buildings have a book value of $250,000, such losses would be avoided by receiving over $115,000.


Capital Balance/ That CanPartner Loss Allocation Be Absorbed

Adams $80,000/10% $800,000Baker $30,000/30% $100,000 (most vulnerable)Carvil $60,000/40% $150,000Dobbs $90,000/20% $450,000



Adams $70,000/(1/7) $490,000Carvil $20,000/(4/7) $ 35,000 (most vulnerable)Dobbs $70,000/(2/7) $245,000



Adams $65,000/(1/3) $195,000Dobbs $60,000/(2/3) $ 90,000 (most vulnerable)

22. (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 HarrisonBeginning balances $ 15,000 $ 60,000 $ 75,000 $ 41,250Assumed loss of $75,000 (see

Schedule 1) (allocated on a2:3:2:3 basis) (15,000) (22,500) (15,000) (22,500)

Step One balances $ -0- $ 37,500 $ 60,000 $ 18,750Assumed loss of $50,000 (see

Schedule 2) (allocated on a0:3:2:3 basis) - 0 - (18,750) (12,500) (18,750)

Step Two balances $ -0- $ 18,750 $ 47,500 $ -0-Assumed loss of $31,250 (see

Schedule 3) (allocated on a0:3:2:0 basis) -0- (18,750) (12,500) -0-

Step Three balances $ -0- $ -0- $ 35,000 $ -0-

PREDISTRIBUTION PLAN First $55,000 goes to pay liabilities ($47,000) and liquidation expenses

(estimated at $8,000). Next $35,000 available goes to Spencer. Next $31,250 is split between Norris and Spencer on a 3:2 basis. Next $50,000 is split among Norris, Spencer, and Harrison on a 3:2:3 basis. All remaining cash is split among Larson, Norris, Spencer, and Harrison on

the original profit and loss ratio.


Capital Balance/ That CanPartner Loss Allocation Be Absorbed Larson $15,000/20% $ 75,000 (most vulnerable)Norris $60,000/30% $200,000Spencer $75,000/20% $375,000Harrison $41,250/30% $137,500


Capital Balance/ That CanPartner Loss Allocation Be Absorbed Norris $37,500/(3/8) $100,000Spencer $60,000/(2/8) $240,000Harrison $18,750/(3/8) $ 50,000 (most vulnerable)


Capital Balance/ That CanPartner Loss Allocation Be Absorbed Norris $18,750/(3/5) $ 31,250 (most vulnerable)Spencer $47,500/(2/5) $118,750

23. (20 Minutes) (Prepare and use a predistribution plan)

Part a.


Able* $50,000/.2 $250,000Moon $60,000/.3 200,000Yerkl $50,000/.5 100,000 (most vulnerable to losses)

*Able's balance includes capital and the loan to the partnership.


Able Moon YerklReported balances $50,000 $60,000 $50,000Assumed loss ($100,000) split on a 2:3:5 basis (20,000) (30,000) (50,000)Adjusted balances $30,000 $30,000 $ 0


Able $30,000/.4 $75,000Moon $30,000/.6 50,000 (most vulnerable to losses)


Able MoonReported balances $30,000 $30,000Assumed loss ($50,000) split on a 2:3 basis (20,000) (30,000)Adjusted balances $10,000 $ 0


The first $62,000 will go to pay liquidation expenses ($12,000) and liabilities ($50,000).

The next $10,000 goes entirely to Able (to pay off loan). The next $50,000 is split between Able and Moon based on a 2:3 basis,

respectively. All remaining cash will be divided among the partners according to their

profit and loss ratio.

Part b.

After this sale, the partnership has $76,000 in cash. The first $62,000 should be held for the liabilities and the liquidation expenses. The next $10,000 goes to Able. The remaining $4,000 is divided between Able ($1,600 or 40%) and Moon ($2,400 or 60%).

24. (25 Minutes) (Produce a predistribution plan for a partnership liquidation)


Simpson $18,000/20% $ 90,000 (most vulnerable to losses)Hart $40,000/40% 100,000Bobb $48,000/20% 240,000Reidl $135,000/20% 675,000


Simpson Hart Bobb ReidlReported balances $18,000 $40,000 $48,000 $135,000Assumed loss ($90,000) split on a 2:4:2:2 basis (18,000) (36,000) (18,000) (18,000)Adjusted balances $ 0 $ 4,000 $30,000 $117,000


Hart $4,000/4/8 $ 8,000 (most vulnerable to losses)Bobb $30,000/2/8 120,000Reidl $117,000/2/8 468,000

The assumption is made that an $8,000 loss occurs.Hart Bobb Reidl

Reported balances $4,000 $30,000 $117,000Assumed loss ($8,000) split on a 4:2:2 basis(4,000) (2,000) (2,000)Adjusted balances $ 0 $28,000 $115,000


Bobb $28,000/2/4 56,000 (most vulnerable to losses)Reidl $115,000/2/4 230,000


Bobb ReidlReported balances $28,000 $115,000Assumed loss ($56,000) split on a 2:2 basis (28,000) (28,000)Adjusted balances $ 0 $ 87,000


The first $59,000 goes to pay liabilities and expected liquidation expenses. The next $87,000 goes entirely to Reidl. The next $56,000 is split evenly between Bobb and Reidl. The next $8,000 is split among Hart (4/8), Bobb (2/8), and Reidl (2/8).

All remaining cash is split among the partners according to their original profit and loss ratio.

25.(30 Minutes) (Determine the ramifications of a variety of liquidation situations)

Part A.(a) $48,000. Maximum losses of $100,000 on the noncash assets would

increase Milburn's deficit balance by $40,000 (or 40%). Maximum losses would not create any other deficit balances.

(b) All $19,000 should go to Thomas. As Ross and Thomas view the current situation, maximum potential losses total $108,000: $100,000 on the noncash assets and $8,000 on Milburn's deficit balance. In determining safe capital balances, these assumed losses would be allocated on a 4:2 basis or $72,000 to Ross and $36,000 to Thomas. Since such a loss would entirely eliminate Ross' capital account, only Thomas has a safe capital balance at the current time.

(c) The minimum cash payment to Thomas would be $35,667 ($19,000 + $16,667). As shown in (b) above, the available $19,000 is distributed to Thomas, thus reducing that partner's capital balance to $39,000. A loss of $59,000 on the noncash assets would further reduce this partner's balance by $11,800 ($59,000 x 20%) to $27,200. That same loss would reduce Ross' capital to $45,400 and Milburn's deficit to ($31,600). The minimum cash amount would be caused by Milburn's failure to contribute this $31,600 so that it has to be absorbed by Ross (4/6 or $21,067) and Thomas (2/6 or $10,533). The remaining safe capital balance of $16,667 would be paid to Thomas.

Part B.(a) Carton will have to contribute $7,429. The $29,000 in deficits will have to be

absorbed by Sampson and Carton on a 4:3 basis. Thus, Carton will be allocated $12,429 of this amount which creates a deficit of $7,429.

(b) Klingon will have to contribute $19,667 [$17,000 + (20/90 x $12,000)] that will be distributed as follows:

Creditors $15,000Sampson $ 3,667Carton $ 1,000

Since Romulan is insolvent, the remaining partners will have to absorb the $12,000 deficit on a 4:2:3 basis. This allocation increases Klingon's deficit by 2/9 of $12,000 or $2,667. Klingon must contribute an amount equal to the new deficit balance of $19,667. The first $15,000 will go to the creditors that remain after the $9,000 in partnership cash is distributed. The remaining $4,667 is distributed to the two partners in accordance with their remaining positive capital balances after absorbing Romulan's loss, 4/9 to Sampson and 3/9 to Carton. Sampson has a postive capital balance of $3,667 [$9,000

– ($12,000 x 4/9)] and Carton has a positive capital balance of $1,000 [$5,000 – ($12,000 x 3/9)].

25. (continued)

(c) Sampson should receive $500. If Klingon is insolvent, the $17,000 deficit balance will have to be absorbed by the remaining three partners on a 4:3:1 basis. This loss would decrease Sampson's capital balance by $8,500 (4/8) to $500.

26. (25 Minutes) (Prepare journal entries for a partnership liquidation)

JOURNAL ENTRIESa. Cash ............................................................................ 56,000

March, Capital (2/6 of loss) ....................................... 6,000April, Capital (3/6) ...................................................... 9,000May, Capital (1/6) ....................................................... 3,000

Inventory ............................................................... 74,000

b. March, Capital (2/6 of expenses) ............................. 2,500April, Capital (3/6) ...................................................... 3,750May, Capital (1/6) ....................................................... 1,250

Cash ...................................................................... 7,500

c. Liabilities .................................................................... 40,000Cash ...................................................................... 40,000

d. Cash ............................................................................ 45,000Accounts Receivable ........................................... 45,000

e. Current Capital Share of PotentialPartner Adjusted Maximum Loss* Capital March $16,500 2/6 x $77,000 = $25,667 $ (9,167)April $62,250 3/6 x $77,000 = $38,500 $23,750May $41,750 1/6 x $77,000 = $12,833 $28,917

*Maximum losses could be suffered on the remaining $39,000 in accounts receivable and the $38,000 in land, building, and equipment.

Based on the above potential losses, March would have a deficit capital balance of $9,167 which in turn has to be allocated to the two partners having positive capital balances:

Potential Capital Share of PotentialPartner (above) March's Deficit Capital April $23,750 3/4 x $9,167 = $6,875 $16,875May $28,917 1/4 x $9,167 = $2,292 $26,625

26. (continued)

As the above amounts represent safe capital balances, payments can be presently made to these two partners.

April, Capital .............................................................. 16,875May, Capital ............................................................... 26,625

Cash ...................................................................... 43,500

f. Cash (30%) ................................................................. 11,700March, Capital (2/6 of loss) ....................................... 9,100April, Capital (3/6)....................................................... 13,650May, Capital (1/6)........................................................ 4,550

Accounts Receivable ........................................... 39,000

g. Cash ........................................................................... 17,000March, Capital (2/6 of loss) ....................................... 7,000April, Capital (3/6) ...................................................... 10,500May, Capital (1/6) ....................................................... 3,500

Land, Building and Equipment ........................... 38,000

h. Liabilities .................................................................... 21,000Cash ...................................................................... 21,000

i. Since $28,700 cash remains and each partner has a positive capital balance, the money left can be distributed based on these ending totals.

March, Capital ............................................................ 400April, Capital .............................................................. 21,225May, Capital ............................................................... 7,075

Cash ...................................................................... 28,700

27.(30 Minutes) (Determine liquidation proceeds necessary to give partner a specified amount)

The other assets must be sold for at least $50,000.

For this creditor to get $5,000 from Z's portion of partnership property, $27,000 in cash above the current level must first be generated for creditors and liquidation expenses. Based on the predistribution schedule below, the next $10,000 is received solely by Y. A third $8,000 would be split evenly between Y and Z (giving Z $4,000 of the $5,000 needed). Z needs $1,000 from the next cash generated in order to satisfy this personal claim. Since the next level (Step Two balances) is split on a 3:1:1 basis, Z is entitled to 1/5 of the proceeds. Thus, $5,000 must be collected for Z to receive $1,000. For Z's creditor to get $5,000, the other assets have to be sold for $50,000 ($27,000 + $10,000 + $8,000 + $5,000).

A predistribution plan must be developed to generate this information:

W X Y Z Beginning capital $ 60,000 $ 78,000 $ 40,000 $ 30,000Assumed loss of $120,000 (see

Schedule 1) (5:3:1:1) (60,000) (36,000) (12,000) (12,000)Step One balances $ - 0 - $ 42,000 $ 28,000 $ 18,000Assumed loss of $70,000 (see

Schedule 2) (allocated on a0:3:1:1 basis) - 0 - (42,000) (14,000) (14,000)

Step Two balances $ - 0 - $ - 0 - $ 14,000 $ 4,000Assumed loss of $8,000 (see

Schedule 3) (allocated on a0:0:1:1 basis) - 0 - - 0 - (4,000) (4,000)

Step Three balances $ - 0 - $ - 0 - $ 10,000 $ - 0 -


Current cash of $30,000 goes to creditors. Next $27,000 generated goes to remaining creditors ($12,000) and to pay

liquidation expenses estimated at ($15,000). Next $10,000 goes to Y. Next $8,000 goes to Y and Z on a 1:1 basis. Next $70,000 goes to X, Y, and Z on a 3:1:1 basis. Any remaining cash is split among all four partners based on a 5:3:1:1

basis.

27. (continued)

Schedule 1Capital Balance/ Maximum Loss to

Partner Loss Allocation Be Absorbed W $60,000/50% $120,000 (most vulnerable)X $78,000/30% $260,000Y $40,000/10% $400,000Z $30,000/10% $300,000


Partner Loss Allocation Be Absorbed X $42,000/(3/5) $ 70,000 (most vulnerable)Y $28,000/(1/5) $140,000Z $18,000/(1/5) $ 90,000


Partner Loss Allocation Be Absorbed Y $14,000/(1/2) $ 28,000Z $ 4,000/(1/2) $ 8,000 (most vulnerable)

28. (35 Minutes) (Determine monthly safe capital payments)

VAN, BAKEL, AND COX PARTNERSHIPSafe Installment Payments to Partners

January 31, 2009

Total Van Bakel CoxProfit and loss ratio 100% 50% 30% 20%

Preliquidation capital balances $282,000 $118,000 $ 90,000 $74,000Add (deduct) loans (10,000) (30,000) 20,000 -0-

272,000 88,000 110,000 74,000January losses (Schedule 1) (28,000) (14,000) (8,400 ) (5,600)Equity of partnership—

January 31, 2009 244,000 74,000 101,600 68,400Potential losses (Schedule 1) (199,000) (99,500) (59,700) (39,800)

45,000 (25,500) 41,900 28,600Potential loss—Van's deficit balance

(Bakel 3/5; Cox 2/5) -0- 25,500 (15,300) (10,200)Safe payments to partners $45,000 $ -0- $ 26,600 $18,400

Schedule 1Computation of Actual and Potential Liquidation Losses

January 2009Actual Potential

Losses LossesCollection of accounts receivable ($66,000 – $51,000) $15,000Sale of inventory ($52,000 – $38,000) ........................... 14,000Liquidation expenses ..................................................... 2,000Gain resulting from January credit memorandum

reducing liability to creditors ................................... (3,000)Machinery and equipment, net ...................................... $189,000Potential unrecorded liabilities and anticipated expenses 10,000

Totals .......................................................................... $ 28,000 $199,000

28. (continued)


February 28, 2009

Total Van Bakel CoxEquity of partnership –

January 31, 2009 (above) .. $244,000 $74,000 $101,600$68,400Safe payments (above) .......... (45,000) -0- (26,600) (18,400)February liquidation expenses (3,000) (1,500) (900) (600)Equity of partnership –

February 28, 2009 .............. 196,000 72,500 74,100 49,400Potential liabilities and expenses (6,000) (3,000) (1,800) (1,200)Potential loss on machinery and

equipment .......................... (189,000) (94,500) (56,700) (37,800)1,000 (25,000) 15,600 10,400

Potential loss—Van's deficit balance(Bakel 3/5; Cox 2/5) ........... - 0 - 25,000 (15,000 ) (10,000 )

Safe payments to partners .... $ 1,000 $ -0- $ 600 $ 400


March 31, 2009

Total Van Bakel CoxEquity of partnership—

February 28, 2009 (above)... $196,000 $72,500 $74,100 $49,400Safe payments (above).............. (1,000) -0- (600) (400)Loss on sale of machinery and

equipment ($189,000 – $146,000) (43,000) (21,500) (12,900) (8,600)Liquidation expenses (5,000) (2,500) (1,500) (1,000)Safe payments to partners $147,000 $48,500 $59,100 $39,400

29.(35 Minutes) (Determine cash distributions for four different partnership liquidations)

Haynes,Part A Simon, Loan and Jackson,

Capital Capital CapitalBeginning balances $16,000 $ 4,000 ($12,000)Contribution by Jackson - 0 - - 0 - 3,000Capital balances $16,000 $ 4,000 ($ 9,000)Elimination of Jackson's deficit (40:20 basis) (6,000) (3,000) 9,000Final distribution $10,000 $ 1,000 $ - 0 -

Hough, Luck,Part B Loan and Loan and Cummings,

Capital Capital CapitalBeginning balances $82,000 $40,000 $20,000$82,000 loss on disposal (allocated on a 50:40:10 basis) (41,000) (32,800) (8,200)Liquidation expenses (50:40:10 basis) (10,500) (8,400) (2,100)Capital balances 30,500 (1,200) 9,700Allocation of Luck's deficit (50:10 basis) (1,000) 1,200 (200)Final distribution $29,500 $ - 0 - $ 9,500

Hough, Luck,Part C Loan and Loan and Cummings,

Capital Capital CapitalBeginning balances $82,000 $40,000 $20,000$82,000 loss on disposal (allocated on a

2:4:4 basis) (16,400) (32,800) (32,800)Liquidation expenses (2:4:4 basis) (1,200) (2,400) (2,400)Capital balances $64,400 $ 4,800 ($15,200)Allocation of Cummings' deficit balance

(2:4 basis) (5,067) (10,133) 15,200Capital balances $59,333 ($ 5,333) -0-Allocation of Luck's deficit balance (5,333) 5,333 - 0 - Final distribution $54,000 $ - 0 - $ - 0 -

29. (continued)

Part D Redmond,Loan and Ledbetter, Watson, Sandridge,

Capital Capital Capital Capital

Beginning balances ($16,000) ($30,000) $ 3,000 $15,000Allocation of Redmond's

deficit balance (10:30:40basis) 16,000 (2,000) (6,000) (8,000)

Capital balances -0- ($32,000) ($3,000) $ 7,000$32,000 contribution by

Ledbetter and $3,000 con-tribution by Watson - 0 - 32,000 3,000 - 0 -

Final distribution* $ - 0 - $ - 0 - $ - 0 - $ 7,000

*Remaining $28,000 is used to pay liabilities.

30.(40 Minutes) (Produce a schedule of liquidation)

FRICK, WILSON, AND CLARKESchedule of Partnership Liquidation

Final Balances

CashNoncashAssets Liabilities

Frick,Capital (60%)

Wilson,Capital (20%)

Clarke,Capital (20%)

Beginning balances $48,000 $177,000 $35,000 $101,000 $28,000 $61,000Distribution of $4,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan – Schedule 1

(4,000 ) (4,000 ) Updated balances $44,000 $177,000 $35,000 $101,000 $28,000 $57,000Noncash assets sold 48,000 (80,000 ) (19,200 ) (6,400 ) (6,400 ) Updated balances $92,000 $97,000 $35,000 $81,800 $21,600 $50,600All liabilities are paid (35,000 ) (35,000 ) Updated balances $57,000 $97,000 $-0- $81,800 $21,600 $50,600Distribution of $48,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan – Schedule 1:

First $23,333 (remainder of first distribution) (23,333) (23,333)Next $22,667 (22,667) (17,000) (5,667)Next $2,000 (2,000 ) (1,200 ) (400 ) (400 )

Updated balances $9,000 $97,000 $-0- $63,600 $21,200 $21,200Noncash assets sold 44,000 (97,000 ) (31,800 ) (10,600 ) (10,600 )

Updated balances $53,000 $-0- $-0- $31,800 $10,600 $10,600Paid liquidation expenses (7,000 ) (4,200 ) (1,400 ) (1,400 ) Updated balances $46,000 $-0- $-0- $27,600 $9,200 $9,200Final distribution based on ending

capital account balances (46,000 ) (27,600 ) (9,200 ) (9,200 ) Ending balance $-0- $-0- $-0- $-0- $-0- $-0-

30. (continued)

Schedule 1Development of Predistribution Schedule

Frick, Wilson, Clarke, Capital Capital Capital

Beginning balances ............................... $101,000 $28,000 $61,000Loss of $140,000 assumed—Schedule 2

(allocated on a 60:20:20 basis) ........... (84,000) (28,000) (28,000)Step One balances ................................. $ 17,000 $ -0- $33,000Loss of $22,667 assumed—Schedule 3

(allocated on a 60:20 basis) ................ (17,000) - 0 - (5,667)Step Two balances ................................. $ - 0 - $ - 0 - $27,333


Payment of liabilities and liquidation expenses must be assured. Next $27,333 goes to Clarke.

Next $22,667 is split between Frick and Clarke on a 60:20 basis. Any further cash is split among Frick, Wilson, and Clarke on a 60:20:20

basis.

Schedule 2

Maximum LossCapital Balance/ That Can

Partner Loss Allocation Be Absorbed Frick $101,000/60% $168,333Wilson $ 28,000/20% $140,000 (most vulnerable to loss)Clarke $ 61,000/20% $305,000

Schedule 3

Maximum LossCapital Balance/ That Can

Partner Loss Allocation Be Absorbed Frick $17,000/(60/80) $ 22,667 (most vulnerable to loss)Clarke $33,000/(20/80) $132,000

31.(50 Minutes) (Produce a predistribution plan and journal entries for a partnership liquidation)

Rodgers,Part A Wingler, Norris, Loan and Guthrie,

Capital Capital Capital CapitalBeginning balances .............. $120,000 $88,000 $109,000 $60,000Loss of $150,000 assumed (al-

located on a 30:10:20:40basis) see Schedule 1 ........ (45,000) (15,000) (30,000) (60,000)

Step One balances ................. $ 75,000 $73,000 $ 79,000 $ -0-Loss of $150,000 assumed (al-

located on a 30:10:20 basis)see Schedule 2 ..................... (75,000) (25,000) (50,000) -0-

Step Two balances ................. $ -0- $48,000 $ 29,000 $ -0-Loss of $43,500 assumed

(allocated on a 10:20 basis) seeSchedule 3 ........................... -0- (14,500) (29,000) -0-

Step Three balances .............. $ -0- $33,500 $ -0- $ -0-


Payment of all liabilities and liquidation expenses must be assured. Next $33,500 goes entirely to Norris. Next $43,500 is allocated to Norris (10/30) and Rodgers (20/30). Next $150,000 is allocated to Wingler (30/60), Norris (10/60), and Rodgers

(20/60). Any further cash distributions are divided on the original profit and loss

ratio:Wingler (30%), Norris (10%), Rodgers (20%), and Guthrie (40%).

Schedule 1

Maximum LossCapital Balance/ That Can Be

Partner Loss Allocation Absorbed

Wingler $120,000/30% $400,000Norris $ 88,000/10% $880,000Rodgers $109,000/20% $545,000Guthrie $ 60,000/40% $150,000 (most vulnerable to loss)

31. a. (continued)Schedule 2


Partner Loss Allocation Absorbed Wingler $75,000/(30/60) $150,000 (most vulnerable to loss)Norris $73,000/(10/60) $438,000Rodgers $79,000/(20/60) $237,000

Schedule 3


Partner Loss Allocation Absorbed Norris $48,000/(10/30) $144,000Rodgers $29,000/(20/30) $ 43,500 (most vulnerable to loss)

31. (continued) Part B

Cash ........................................................................... 65,600Wingler, Capital (30% of $16,400 loss) ............... 4,920Norris, Capital (10%) ............................................ 1,640Rodgers, Capital (20%) ........................................ 3,280Guthrie, Capital (40%) .......................................... 6,560

Accounts Receivable ..................................... 82,000Receivables are collected with losses allocated to partners.

Cash ...................................................................... 150,000Wingler, Capital (30% of $103,000 loss) ............ 30,900Norris, Capital (10%) ........................................... 10,300Rodgers, Capital (20%) ....................................... 20,600Guthrie, Capital (40%) ......................................... 41,200

Land ................................................................ 85,000Building and Equipment ............................... 168,000

Land, building and equipment are sold with losses allocated to partners.

Wingler, Capital ................................................... 31,800Norris, Capital ..................................................... 58,600Rodgers, Loan .................................................... 35,000Rodgers, Capital ................................................. 15,200

Cash ................................................................. 140,600Above entry distributes safe capital balances as shown below (see predistribution plan in part A) based on a current cash balance of $230,600.

First $90,000 is held to pay liabilities ($74,000) and estimated liquidation expenses ($16,000).

Next $33,500 goes entirely to Norris. Next $43,500 is split between Norris ($14,500) and Rodgers ($29,000). Remaining $63,600 is allocated to Wingler ($31,800), Norris ($10,600)

and Rodgers ($21,200).

No journal entry is currently required by Guthrie's insolvency.

Liabilities .................................................. 74,000Cash ...................................................... 74,000

All liabilities are paid.

31.b. (continued)

Cash ................................................................. 71,000Wingler, Capital (30% of $30,000 loss) ......... 9,000Norris, Capital (10%) ...................................... 3,000Rodgers, Capital (20%) .................................. 6,000Guthrie, Capital (40%) .................................... 12,000

Inventory.................................................... 101,000 Inventory is sold with loss allocated to partners.

Wingler, Capital................................................ 35,500Norris, Capital.................................................. 11,833Rodgers, Capital.............................................. 23,667

Cash........................................................... 71,000Above entry distributes available cash according to predistribution plan. Although $87,000 in cash is being held, $16,000 must be retained to pay liquidation expenses. The remaining $71,000 is divided among Wingler, Norris, and Rodgers on a 30:10:20 basis. According to the predistribution plan, a total of $150,000 must be divided on this ratio but only $63,600 was allocated in this manner in the first distribution above. Therefore, all $71,000 (making a total of $134,600) is paid out on this 30:10:20 basis.

Wingler, Capital (30% of expenses)............... 3,300Norris, Capital (10%)........................................ 1,100Rodgers, Capital (20%)................................... 2,200Guthrie, Capital (40%)..................................... 4,400

Cash........................................................... 11,000Liquidation expenses are paid.

Wingler, Capital (30/60 of deficit)................... 2,080Norris, Capital (10/60)...................................... 693Rodgers, Capital (20/60).................................. 1,387

Guthrie, Capital......................................... 4,160To eliminate the deficit balance of insolvent partner as computed on the next page.

31.b. (continued)

CAPITAL ACCOUNT BALANCESRodgers,

Wingler, Norris, Loan and Guthrie,Capital Capital Capital Capital

Beginning balances................ $120,000 $88,000 $109,000 $60,000Loss on accounts receivable. (4,920) (1,640) (3,280) (6,560)Loss on land, building, and

equipment ............................. (30,900) (10,300) (20,600) (41,200)Cash distribution..................... (31,800) (58,600) (50,200) -0-Loss on inventory................... (9,000) (3,000) (6,000) (12,000)Cash distribution..................... (35,500) (11,833) (23,667) -0-Liquidation expenses.............. (3,300 ) (1,100 ) (2,200 ) (4,400 )

Subtotal ............................. 4,580 1,527 3,053 (4,160)Guthrie insolvent..................... (2,080 ) (693 ) (1,387 ) 4,160Current balances..................... $2,500 $ 834 $1,666 $ -0-

Wingler, Capital.......................................................... 2,500Norris, Capital............................................................. 834Rodgers, Capital......................................................... 1,666

Cash ................................................................ 5,000To distribute remaining cash based on final capital balances.

hoyle chapter 10 advanced acct solutions

Documents

uniform partnership

00020 maximum

positive capital

positive capital

safe capital

estimated

safe capital

maximum potential