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19.(10 minutes) (Determine amount to be contributed by partner with a deficit
capital balance)
White and Blue are both insolvent and have negative capital balances (after
offsetting the loan from White) totaling $15,000 (White, $3,000; Blue, $12,000).
Absorption by the other partners of these losses would be as follows (on a
30:10:20 basis):
Current Adjusted
Partner Capital Balance Share of Loss Capital Balance
Black, who is also insolvent, now has a deficit capital balance of $4,500 that
would have to be absorbed by Brown and Green (on a 10:20 basis):
Current Adjusted
Partner Capital Balance Share of Loss Capital Balance
Thus, Green must contribute $7,000 that will go to Brown.
20.(50 minutes) (Determine payments under a variety of circumstances; safe
capital balances; predistribution plan)
a. Dobbs receives the entire $10,000.
Maximum potential losses of $250,000 on noncash assets would be allocated
as follows:
Partner Share of Loss New Capital Balance
Adams 2/10 x $250,000 = $50,000 $ 30,000
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 to Adams and Dobbs as follows on a 2:2
basis:
Partner Share of Loss New Capital Balance
b. Adams receives the entire $10,000.
Maximum potential losses of $250,000 on noncash assets would be allocated
as follows:
Partner Share of Loss New Capital Balance
Adams 2/10 x $250,000 = $50,000 $ 30,000
Maximum total potential losses of $35,000 to be absorbed from Baker and
Carvil above would be allocated to Adams and Dobbs as follows on a 2:3
basis:
Partner Share of Loss New Capital Balance
Absorbing the final $6,000 loss from Dobbs would leave Adams with a safe
capital balance of $10,000.
20. (continued)
c. Adams receives $57,500 and Dobbs gets $22,500.
The $50,000 loss on sale of the building would be allocated as follows:
Partner Share of Loss New Capital Balance
Adams 10% x $50,000 = $5,000 $ 75,000
Maximum potential loss of $130,000 on the land would be allocated as follows:
Partner Share of Loss New Capital Balance
Adams 10% x $130,000 = $13,000 $ 62,000
Maximum potential loss of $24,000 to be absorbed from Baker would be
allocated as follows on a 1:3:3 basis:
Partner Share of Loss New Capital Balance
Adams 1/7 x $24,000 = $3,428 $ 58,572
Maximum potential loss of $4,286 to be absorbed from Carvil would be
allocated as follows on a 1:3 basis:
Partner Share of Loss New Capital Balance
Adams 1/4 x $4,286 = $1,072 $57,500
20. (continued)
d. The land and building must be sold for over $115,000 to ensure that Carvil will
receive some cash.
This can be determined by preparing a predistribution plan as follows:
Adams Baker Carvil Dobbs
Beginning balances $ 80,000 $ 30,000 $ 60,000 $ 90,000
Assumed loss of $90,000
(Schedule 3) (1:0:0:2) (30 ,000) - 0 - - 0 - (60 ,000)
Step Three balances $ 35 ,000 $ - 0 - $ - 0 - $ - 0 -
Schedule 1
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Adams $80,000/10% $800,000
Schedule 2
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Schedule 3
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Adams $65,000/(1/3) $195,000
20.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.
21. (30 minutes) (Prepare journal entries for a partnership liquidation; prepare a
final statement of partnership liquidation)
Part A. Preparation of journal entries.
a. The partnership has $100,000 in cash, liabilities of $80,000 and estimated
liquidation expenses of $10,000. Thus, there is $10,000 that can be safely
paid to the partners before the liquidation of noncash assets. This amount
is allocated to the two partners on the basis of their potential capital
balances assuming that noncash assets are scrapped for a loss of
$200,000 and liquidation expenses are $10,000:
Current Capital Share of Potential
Partner Balance Maximum Loss* Capital
Because Fred has a potential deficit capital balance, the entire $10,000
currently available is distributed to George, which reduces this partner’s
capital balance to $110,000.
George, Capital............................................................ 10,000
Cash ....................................................................... 10,000
b. Liabilities ..................................................................... 40,000
21. (continued)
d. To determine the safe payments to be made at this point in the liquidation,
the accountant prepares the following proposed schedule of liquidation:
Fred, George,
Non-cash Capital Capital
Cash Assets Liabilities (60 %) (40 %)
Beginning balances $100,000 $200,000 $(80,000) $(100,000)
Sold noncash assets 220 ,000 (200 ,000) -0 - (12 ,000) (8 ,000)
Updated balances 270,000 -0- (40,000) (112,000)
(118,000)
Safe payments of $106,000 and $114,000 can be made to Fred and George,
respectively at this point in the liquidation.
Fred, Capital ................................................................ 106,000
George, Capital ........................................................... 114,000
Cash ....................................................................... 220,000
g. The statement of partnership liquidation presented on the next page shows
that $2,000 cash remains after paying liquidation expenses. The partners
have positive capital balances of $1,200 and $800, respectively, and the
remaining partnership cash can be distributed based on these ending
totals.
21. (continued)
Part B. Prepare a final statement of partnership liquidation.
Fred and George Partnership
Statement of Partnership Liquidation
Cash
Non-cash
Assets Liabilities
Fred,
Capital
(60%)
George,
Capital
(40%)
Beginning balances $100,000 $200,000 $(80,000) $(100,000) $(120,000)
Distribution to partners (10,000) -0- -0- -0- 10,000
Paid liabilities (40,000) -0- 40,000 -0- -0-
Paid liquidation expenses (8,000) -0- -0- 4,800 3,200
Updated balances 2,000 -0- -0- (1,200) (800)
Distribution to partners (2,000) -0- -0- 1,200 800
Closing balances $ -0- $ -0- $ -0- $ -0- $ -0-
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 Harrison
Beginning balances $ 15,000 $ 60,000 $ 75,000 $ 41,250
Assumed loss of $75,000
Assumed loss of $31,250
(Schedule 3) (0:3:2:0 basis) -0- (18 ,750) (12 ,500) -0-
Step Three balances $ -0- $ -0- $ 35 ,000 $ -0-
Schedule 1 Maximum Loss
Partner Loss Allocation Be Absorbed
Larson $15,000/20% $ 75,000
Schedule 2 Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Schedule 3 Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Norris $18,750/(3/5) $ 31,250 (most vulnerable)
Spencer $47,500/(2/5) $118,750
PREDISTRIBUTION PLAN
First $55,000 goes to pay liabilities ($47,000) and liquidation expenses
(estimated at $8,000).
23. (20 minutes) (Prepare and use a predistribution plan)
Part a.
Maximum Losses That Can Be Absorbed
*Able's balance includes capital and the loan to the partnership.
The assumption is made that a $100,000 loss occurs:
Able Moon Yerkl
Maximum Losses That Now Can Be Absorbed
Able $30,000/.4 $75,000
Moon $30,000/.6 50,000 (most vulnerable to losses)
The assumption is made that a $50,000 loss occurs:
Able Moon
PREDISTRIBUTION PLAN
The first $62,000 will go to pay liquidation expenses ($12,000) and liabilities
($50,000).
Part b.
After the sale of assets for $40,000, the partnership has $76,000 in cash. The
first $62,000 should be held for the liabilities and the liquidation expenses,
24. (25 minutes) (Prepare a predistribution plan for a partnership liquidation)
Maximum Losses That Can Be Absorbed
Simpson $18,000/20% $ 90,000 (most vulnerable to losses)
The assumption is made that a $90,000 loss occurs:
Simpson Hart Bobb Reidl
Reported balances $18,000 $40,000 $48,000 $135,000
Maximum Losses That Now Can Be Absorbed
Hart $4,000/4/8 $ 8,000 (most vulnerable to losses)
The assumption is made that an $8,000 loss occurs:
Hart Bobb Reidl
Reported balances $4,000 $30,000 $117,000
Maximum Losses That Now Can Be Absorbed
Bobb $28,000/2/4 56,000 (most vulnerable to losses)
Reidl $115,000/2/4 230,000
The assumption is made that a $56,000 loss occurs:
Bobb Reidl
Reported balances $28,000 $115,000
PREDISTRIBUTION PLAN
The first $59,000 goes to pay liabilities and expected liquidation expenses.
The next $87,000 goes entirely to Reidl.
25.(30 minutes) (Determine the ramifications of a variety of liquidation situations)
Part A. Partner with Deficit Capital Balance
increase Milburn's deficit balance by $40,000 (40%).
(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
(c) The minimum cash payment to Thomas would be $35,667.
A loss of $59,000 on the noncash assets would result in the following
capital balances:
Milburn’s deficit further reduces the remaining partner's balances as
follows:
25. (continued)
Part B. Partners with Deficit Capital Balances; Insolvent Partner
(a) Carton will have to contribute $7,429. The $29,000 in deficits will have to be
(b) Klingon will have to contribute $19,667 [$17,000 + (20/90 x $12,000)] that
will be distributed as follows:
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
[$5,000 – ($12,000 x 3/9)].
(c) Sampson should receive $500. If Klingon is insolvent, the $17,000 deficit
