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31. (50 minutes) (Prepare a predistribution plan and journal entries for a
partnership liquidation)
Part A Preparation of Predistribution Plan
Schedule 1
Maximum Loss
Capital Balance/ That Can Be
Partner Loss Allocation Absorbed
Wingler $120,000/30% $400,000
Schedule 2
Maximum Loss
Capital Balance/ That Can Be
Partner Loss Allocation Absorbed
Wingler $75,000/(30/60) $150,000 (most vulnerable to loss)
Schedule 3
Maximum Loss
Capital Balance/ That Can Be
Partner Loss Allocation Absorbed
31. (continued)
Schedule 4
Rodgers,
Wingler, Norris, Loan and Guthrie,
Capital Capital Capital Capital
Beginning balances ............... $120,000 $88,000 $109,000 $60,000
Loss of $150,000 assumed (al-
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
PREDISTRIBUTION PLAN
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).
31. (continued)
Part B Journal Entries
1. Cash ............................................................................. 65,600
Wingler, Capital (30% of $16,400 loss) ..................... 4,920
2. Cash ............................................................................. 150,000
Wingler, Capital (30% of $103,000 loss) ................... 30,900
Norris, Capital (10%) .................................................. 10,300
3. Wingler, Capital .......................................................... 31,800
Norris, Capital ............................................................. 58,600
Rodgers extinguishes the loan made to the
partnership.
First $90,000 is held to pay liabilities ($74,000) and estimated liquidation
expenses ($16,000); $140,600 is paid to partners.
31.b. (continued)
4. No journal entry is currently required by Guthrie's insolvency.
5. Liabilities .......................................................... 74,000
Cash ....................................................... 74,000
All liabilities are paid.
6. Cash .................................................................. 71,000
Inventory................................................. 101,000
Inventory is sold with loss allocated to partners.
7. Wingler, Capital................................................. 35,500
Norris, Capital................................................... 11,833
Rodgers, Capital............................................... 23,667
Cash........................................................ 71,000
Distribution of available cash according to predistribution plan.
Although $87,000 in cash is held by the partnership, $16,000 must
8. Wingler, Capital (30% of expenses)................ 3,300
Norris, Capital (10%)........................................ 1,100
9.a. Wingler, Capital (30/60 of deficit).................... 2,080
31.b. (continued)
CAPITAL ACCOUNT BALANCES
Rodgers,
Wingler, Norris, Loan and Guthrie,
Capital Capital Capital Capital
Beginning balances................. $120,000 $88,000 $109,000 $60,000
Loss on accounts receivable. (4,920) (1,640) (3,280) (6,560)
Loss on land, building, and
9.b. Wingler, Capital................................................. 2,500
Norris, Capital................................................... 834
Chapter 15 Develop Your Skills
Research Case
1. Students often seem to believe that definitive answers can be found for all
2. Several questions can be raised that may impact the ultimate resolution:
In what state will the court case be handled? Different states have
somewhat different laws as to the potential liabilities incurred by partners
and different courts seem to have varying ways of interpreting those laws.
The answers to such questions as these can have a huge impact on the extent of
the liability of the other doctors.
Here are several quotes from The Wall Street Journal article mentioned in the
case that might pertain to the issue at hand:
“Concerns are growing among Andersen's roughly 1,750 U.S. partners that even
“The limited-liability partnership is a comparatively new corporate structure,
untested by the kind of stress now besetting Andersen. But that testing appears
“Because it is unclear how much protection the LLP structure will provide
Andersen partners, partnership and bankruptcy lawyers are expected to be
“The limited-liability partnership was invented about a decade ago in the wake of
"‘There is a strong legal tradition that you don't pierce the corporate veil and go
after individual partners except under extraordinary circumstances,’ said Lynn
“In 1990, prior to the advent of limited-liability partnerships, the accounting firm
of Laventhol & Horwath filed for Chapter 11 bankruptcy-court protection, in part
due to lawsuits over questionable accounting. The firm's assets were insufficient
Analysis Case
1. In looking at the financial statements of a partnership, a number of obvious
differences can be spotted in comparison to the financial statements of a
corporation. For example, in looking at this set of statements, the following
differences can be noted:
The balance sheet shows “partners’ (deficiency) capital” rather than
stockholders’ equity.
2. There is a considerable amount of information provided in the notes to the
financial statements about the unique characteristics of a limited partnership:
Note 1 – Organization and Summary of Significant Accounting Policies
discusses the creation and structure of this limited partnership under the
heading “Organization.”
In addition, in Item 5 (page 5), which precedes the financial statements,
disclosures are provided related to the market for partnership interests. Because
the partnership’s “shares” are not publicly traded, an individual investor may not
be able to sell his/her limited partner interest in the partnership.
Communication Case
The bankruptcy of Laventhol & Horwath was one of the main reasons for the
creation of the limited liability partnership business structure. As a general
partnership, the litigation losses of this partnership that arose from poor
accounting and auditing practices fell on all partners and not just on those
involved. Partners were required to make contributions from their own personal
Excel Case
There are a number of different ways that a spreadsheet could be created to solve
this particular problem. Here is one possible approach:
—Create Column Headings:
In Cell A1, enter label text “Partner”.
In Cell B1, enter label text “Capital Balance”.
—Enter Account Information for each partner:
In Cell A2, enter label text “Wilson.” In Cell B2, enter Wilson’s Capital Balance of
$200,000 and, in Cell C2, enter 40% as share of profit and loss.
—Enter the amounts on which to base the calculations for each partner:
—Calculate Initial Loss Share:
B9 respectively and the reference to Cell C2 will change to C3 and C4 respectively
in order to adjust for the new cell position. The change to C3 and C4 is correct
because those are the individual profit and loss percentages. No change, though,
—Calculate the Partners’ Share of any Subsequent Losses:
—Calculate the Remaining Capital Balance:
To calculate the Remaining Capital Balance, the beginning Capital Balance must
be reduced by the Initial Loss Share and Subsequent Loss Share.
100%.
Spreadsheet to Determine the Remaining Capital Balances for
Wilson, Cho, and Arrington
A B C D E F
1
Partner
Capital
Balance
Share
P/L
Initial
Loss
Share
Subsequent
Loss Share
Remaining
Balance
2
Wilson $200,000 40% $20,000 $40,000 $140,000
6
7 Losses during
liquidation
50,000
8Final losses 100,000
