26. (25 minutes) (Prepare journal entries for a partnership liquidation)
JOURNAL ENTRIES
a. Cash ………………..………..………..………..………………..…. 56,000
March, Capital (2/6 of loss) ……………………..………….. 6,000
April, Capital (3/6) …………..………..………..………….…... 9,000
May, Capital (1/6) ………..………..………….…..…..…..…... 3,000
Inventory ………..…………………..………..…………..….. 74,000
d. Cash ………………..………..………..………..………………..…. 45,000
Accounts Receivable ………….………..………..……… 45,000
e. Current Capital Share of Potential
Partner Adjusted Maximum Loss* Capital
March $16,500 2/6 x $77,000 = $25,667 $ (9,167)
*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 Potential
Partner (above) March’s Deficit Capital
26. (continued)
As the above amounts represent safe capital balances, payments can be
presently made to these two partners.
April, Capital ………….………..…………………..…..…..…... 16,875
f. Cash (30%) …………………..………..……………..…..…..….. 11,700
March, Capital (2/6 of loss) ……………………..………….. 9,100
April, Capital (3/6)……………………..………..………….…... 13,650
May, Capital (1/6)…………………..…………….…..…..…..… 4,550
Accounts Receivable ………….………..………..……… 39,000
h. Liabilities ………..………..………..………………………….….. 21,000
Cash ………………..………..……………..…..…..…..…..… 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.
27.(30 minutes) (Determine liquidation proceeds necessary to give partner a
specified amount; predistribution plan)
Answer: For Z to be able to pay his personal creditor $5,000 from the
distribution of partnership property, the partnership’s other assets must be
sold for at least $50,000.
$27,000 in cash above the current level must first be generated for creditors
and liquidation expenses. Based on the predistribution schedule below, the
A predistribution plan must be developed to generate this information:
W X Y Z
Beginning capital $ 60,000 $ 78,000 $ 40,000 $ 30,000
Assumed loss of $120,000 (see
Schedule 1) (5:3:1:1) (60 ,000) (36 ,000) (12 ,000) (12 ,000)
Schedule 1
Capital Balance/ Maximum Loss to
Partner Loss Allocation Be Absorbed
W $60,000/50% $120,000 (most vulnerable)
27. (continued)
Schedule 2
Capital Balance/ Maximum Loss to
Partner Loss Allocation Be Absorbed
X $42,000/(3/5) $ 70,000 (most vulnerable)
Schedule 3
Capital Balance/ Maximum Loss to
Partner Loss Allocation Be Absorbed
PREDISTRIBUTION PLAN
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).
28. (35 minutes) (Determine monthly safe installment payments to partners)
28. (continued)
29. (35 minutes) (Determine cash distributions for four different partnership
liquidations; insolvent partners)
Part A Haynes,
Simon, Loan and Jackson,
Capital Capital Capital
Beginning balances $16,000 $ 4,000 ($12,000)
Contribution by Jackson – 0 – – 0 – 3 ,000
Hough, Luck,
Part B Loan and Loan and Cummings,
Capital Capital Capital
Beginning balances $82,000 $40,000 $20,000
$82,000 loss on disposal (allocated on a
Final distribution $29 ,500 $ – 0 – $ 9 ,500
Hough, Luck,
Part C Loan and Loan and Cummings,
Capital Capital Capital
Beginning balances $82,000 $40,000 $20,000
$82,000 loss on disposal (allocated on a
Allocation of Cummings’ deficit balance
(2:4 basis) (5 ,067) (10 ,133) 15 ,200
Capital 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 $15,000
Allocation of Redmond’s
deficit balance (10:30:40
$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. (60 minutes) (Prepare a predistribution plan, a final statement of liquidation,
and journal entries for a partnership liquidation)
Part A Preparation of Predistribution Plan
Schedule 1
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Frick $129,000/60% $215,000
Schedule 2
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Schedule 3
Frick, Wilson, Clarke,
Capital Capital Capital
Beginning balances ……….….…..…..…..… $129,000 $35,000 $75,000
Loss of $175,000 assumed—Schedule 1
(allocated on a 60:20:20 basis) ........... (105 ,000) (35 ,000) (35 ,000)
Step One balances ………………..…..….….. 24,000 -0- 40,000
Loss of $32,000 assumed—Schedule 2
PREDISTRIBUTION PLAN
First, payment of liabilities and liquidation expenses must be assured.
Next $32,000 goes to Clarke.
30. (continued)
Part B Preparation of Final Statement of Partnership Liquidation
FRICK, WILSON, AND CLARKE
Statement of Partnership Liquidation
Final Balances
* $12,000 in cash is immediately available for distribution: Cash of $60,000 less
Liabilities of $40,000 and Estimated Liquidation Expenses of $8,000.
** $60,000 in cash is available for distribution: Cash of $68,000 less Estimated
Liquidation Expenses of $8,000.
30. (continued)
Part C Journal Entries
1. Clarke, Capital …………………………………………………………. 12,000
Cash ……………………………………………..……………… 12,000
Cash payments are made to partners in accordance
with predistribution plan.
2. Cash ……………………………………………………………………… 60,000
Frick, Capital (60% of $34,000 loss) …............................. 20,400
3. Liabilities……………………………………………………..…………. 40,000
Cash ……………………………………………..……………… 40,000
All liabilities are paid.
5. Cash ……………………………………………………………………..... 51,000
Frick, Capital (60% of $74,000 loss) …............................. 44,400
6. Frick, Capital …………………………………………….…………….. 3,600
Wilson, Capital …………………………………………….………….. 1,200
Clarke, Capital …………………………………………………………. 1,200
Cash ……………………………………………..……………… 6,000
Liquidation expenses are paid.
7. Frick, Capital …………………………………………….…………….. 31,800
Wilson, Capital …………………………………………….………….. 10,600