Chapter 16 – Partnerships: Liquidation
16–11
E16-2 Multiple-Choice Questions on Partnership Liquidation
1.
a –
Casey
Dithers
Edwards
Profit and loss ratio
5
3
2
Beginning capital
80,000
90,000
70,000
Actual loss on assets
(15,000)
(9,000)
(6,000)
Potential loss on
other assets
(50,000)
(30,000)
(20,000)
Balances
15,000
51,000
44,000
Safe payments
(15,000)
(51,000)
(44,000)
2.
b –
3.
d –
Art
Blythe
Cooper
Profit and loss ratio
40%
40%
20%
Capital balances
37,000
65,000
48,000
Loss absorption potential
92,500
162,500
240,000
Loss to reduce C to B:
(77,500 x 0.20 = 15,500)
(77,500)
Balances
92,500
162,500
162,500
Loss to reduce B & C to A:
(B:70,000 x 0.40 = 28,000)
(70,000)
(C:70,000 x 0.20 = 14,000)
(70,000)
Balances
92,500
92,500
92,500
Cash of $20,000 after settlement of liabilities: Cooper receives first $15,500;
remaining $4,500 split 2/3 to Blythe and 1/3 to Cooper.
4.
d –
Cash of $17,000: Cooper receives first $15,500; remaining $1,500 split 2/3 to
Blythe and 1/3 to Cooper.
5.
a –
If all partners received cash after the second sale, then the remaining $12,000
is distributed in the loss ratio.
6.
a –
Arnie
Bart
Kurt
Profit and loss ratio
40%
30%
30%
Capital balances
40,000
180,000
30,000
Loss of $100,000
(40,000)
(30,000)
(30,000)
Remaining equities
-0-
150,000
-0-
Arnie will receive nothing; the entire $150,000 will be paid to Bart.
Chapter 16 – Partnerships: Liquidation
16–12
E16-3 Computing Alternative Cash Distributions to Partners
Capital Balances
Bracken
Louden
Menser
40%
30%
30%
a
Capital balances before sale of equipment
25,000
5,000
10,000
Equipment sold for $30,000;
allocation of $10,000 loss
(4,000)
(3,000)
(3,000)
Capital balances after sale
21,000
2,000
7,000
Final distribution of cash
(21,000)
(2,000)
(7,000)
b.
Capital balances before sale of equipment
25,000
5,000
10,000
Equipment sold for $21,000;
allocation of $19,000 loss
(7,600)
(5,700)
(5,700)
Capital balances after sale
17,400
(700)
4,300
Allocate capital deficit of Louden:
700
4/7 x $700
(400)
3/7 X $700
______
______
_ (300)
Capital balances after allocation of Louden’s deficit
17,000
____-0-
_4,000
Final distribution of cash
(17,000)
_-0-
(4,000)
c.
Capital balances before sale of equipment
25,000
5,000
10,000
Equipment sold for $7,000;
allocation of $33,000 loss
(13,200)
(9,900)
(9,900)
Capital balances after sale
11,800
(4,900)
100
Allocate capital deficit of Louden:
4,900
4/7 x $4,900
(2,800)
3/7 X $4,900
______
______
(2,100)
Capital balances after allocation of Louden’s deficit
9,000
-0-
(2,000)
Allocate capital deficit of Menser:
2,000
4/4 x $2,000
(2,000)
_____
_____
Capital balances after allocation of Menser’s deficit
7,000
___-0-
___-0-
Final distribution of cash
(7,000)
-0-
-0-
Chapter 16 – Partnerships: Liquidation
16–13
E16-4 Lump-Sum Liquidation
a.
BG Land Development Company
Statement of Partnership Realization and Liquidation
Lump-Sum Distribution
Capital Balances
Noncash
Accounts
Mitchell,
Matthews
Mitchell
Michaels
Cash +
Assets =
Payable +
Loan +
50% +
30% +
20%
Balances
20,000
150,000
30,000
10,000
80,000
36,000
14,000
Sale of assets at a
$40,000 loss
110,000
(150,000)
(20,000)
(12,000)
(8,000)
130,000
-0-
30,000
10,000
60,000
24,000
6,000
Payment to creditors
Outside Creditors
(30,000)
(30,000)
Mitchell
(10,000)
(10,000)
90,000
-0-
-0-
-0-
60,000
24,000
6,000
Payment to partners
(90,000)
(60,000)
(24,000)
(6,000)
Balances
-0-
-0-
-0-
-0-
-0-
-0-
-0-
Chapter 16 – Partnerships: Liquidation
16–14
E16-4 (continued)
b.
(1)
Cash
110,000
Matthews, Capital
20,000
Mitchell, Capital
12,000
Michaels, Capital
8,000
Noncash Assets
150,000
Sell noncash assets at a loss of $40,000.
(2)
Accounts Payable
30,000
Mitchell, Loan
10,000
Cash
40,000
Pay creditors, including Mitchell.
(3)
Matthews, Capital
60,000
Mitchell, Capital
24,000
Michaels, Capital
6,000
Cash
90,000
Final lump-sum distribution to partners.
E16-5 Schedule of Safe Payments
Based on strict observance of UPA 1997
Kitchens Just For You
Schedule of Safe Payments to Partners
Terry
Phyllis
Connie
_ (30%)_
__(50%)_
__(20%)_
Capital balances, September 1, 20X9
12,000
36,000
54,000
Write-off of $28,000 in goodwill
(8,400)
(14,000)
(5,600)
Write-off of $12,000 of receivables
(3,600)
(6,000)
(2,400)
Loss of $4,000 on sale of $24,000 of
inventory (one-half of $48,000 book value)
(1,200)
(2,000)
(800)
Capital balances, September 30, 20X9 (* = deficit)
(1,200)*
14,000
45,200
Possible loss of $19,000 for remaining
receivables (including $9,000 receivable from Terry)
and $24,000 for remaining inventory
(12,900)
(21,500)
(8,600)
Possible liquidation costs of $6,000
(1,800)
(3,000)
(1,200)
Balances (* = potential deficit)
(15,900)*
(10,500)*
35,400
Distribute Terry’s and Phyllis’ potential deficits to
Connie, the only partner with a capital credit
15,900
10,500
(26,400)
Safe payments to partners, September 30, 20X9
-0-
-0-
9,000
Chapter 16 – Partnerships: Liquidation
16–15
E16-5 (continued)
Based on practical approach:
Kitchens Just For You
Schedule of Safe Payments to Partners
Terry
Phyllis
Connie
_ (30%)_
__(50%)_
__(20%)_
Capital balances, September 1, 20X9
12,000
36,000
54,000
Loans to (from) partner
(9,000)
15,000
Total
3,000
36,000
69,000
Write-off of $28,000 in goodwill
(8,400)
(14,000)
(5,600)
Write-off of $12,000 of receivables
(3,600)
(6,000)
(2,400)
Loss of $4,000 on sale of $24,000 of
inventory (one-half of $48,000 book value)
(1,200)
(2,000)
(800)
Capital balances, September 30, 20X9 (* = deficit)
(10,200)*
14,000
60,200
Possible loss of $19,000 for remaining
receivables (including $9,000 receivable from Terry)
and $24,000 for remaining inventory
(12,900)
(21,500)
(8,600)
Possible liquidation costs of $6,000
(1,800)
(3,000)
(1,200)
Balances (* = potential deficit)
(24,900)*
(10,500)*
50,400
Distribute Terry’s and Phyllis’ potential deficits to
Connie, the only partner with a capital credit
24,900
10,500
(35,400)
Safe payments to partners, September 30, 20X9
-0-
-0-
15,000
Chapter 16 – Partnerships: Liquidation
16–16
E16-6 Schedule of Safe Payments to Partners
Maness and Joiner Partnership
Combined Statement of Realization and Schedule of Safe Payments
Capital
Accounts
Maness
Joiner
Cash +
Inventory=
Payable+
80% +
20%
Balances
25,000
120,000
15,000
65,000
65,000
Sale of inventory
40,000
(60,000)
(16,000)
(4,000)
Payment to creditors
(10,000)
(10,000)
55,000
60,000
5,000
49,000
61,000
Payments to partners
(Schedule 1)
(50,000)
(1,000)
(49,000)
5,000
60,000
5,000
48,000
12,000
Sale of inventory
30,000
(60,000)
(24,000)
(6,000)
Payment to creditors
(5,000)
(5,000)
30,000
-0-
-0-
24,000
6,000
Payments to partners
(30,000)
______
(24,000)
(6,000)
Balances
-0-
-0-
-0-
-0-
-0-
Schedule 1 Safe payments at end of first month:
Maness
Joiner
80%
20%
Capital balances
49,000
61,000
Potential loss of $60,000 on remaining inventory
(48,000)
(12,000)
Safe payments to partners
1,000
49,000
Chapter 16 – Partnerships: Liquidation
16–17
E16-7 Alternative Profit and Loss Sharing Ratios in a Partnership Liquidation
Nelson
Osman
Peters
Quincy
Capital balances at beginning of liquidation
15,000
75,000
75,000
30,000
a.
Partnership ratio of 3:3:2:2 equals percentages of:
30%
30%
20%
20%
Allocation of $90,000 loss on sale of noncash assets
(27,000)
(27,000)
(18,000)
(18,000)
Capital balances after allocation of loss
(12,000)
48,000
57,000
12,000
Distribution of deficit of insolvent partner:
12,000
Osman: 30/70 X $12,000
(5,143)
Peters: 20/70 x $12,000
(3,428)
Quincy: 20/70 x $12,000
(3,429)
Capital balances after distribution of Nelson deficit
-0-
42,857
53,572
8,571
Payment to partners
-0-
(42,857)
(53,572)
(8,571)
b.
Partnership ratio of 3:1:3:3 equals percentages of:
30%
10%
30%
30%
Allocation of $90,000 loss on sale of noncash assets
(27,000)
(9,000)
(27,000)
(27,000)
Capital balances after allocation of loss
(12,000)
66,000
48,000
3,000
Distribution of deficit of insolvent partner:
12,000
Osman: 10/70 X $12,000
(1,714)
Peters: 30/70 x $12,000
(5,143)
Quincy: 30/70 x $12,000
(5,143)
Capital balances after distribution of Nelson deficit
-0-
64,286
42,857
(2,143)
Distribution of deficit of insolvent partner:
2,143
Osman: 10/40 x $2,143
(536)
Peters: 30/40 x $2,143
(1,607)
Capital balances after distribution of Quincy deficit
-0-
63,750
41,250
-0-
Payment to partners
-0-
(63,750)
(41,250)
-0-
c.
Partnership ratio of 3:1:2:4 equals percentages of:
30%
10%
20%
40%
Allocation of $90,000 loss on sale of noncash assets
(27,000)
(9,000)
(18,000)
(36,000)
Capital balances after allocation of loss
(12,000)
66,000
57,000
(6,000)
Distribution of deficits of two insolvent partners:
12,000
6,000
Osman: 10/30 X $18,000
(6,000)
Peters: 20/30 x $18,000
(12,000)
Capital balances after distribution of capital deficits
-0-
60,000
45,000
-0-
Payment to partners
-0-
(60,000)
(45,000)
-0-
Chapter 16 – Partnerships: Liquidation
In case c. both Nelson and Quincy are personally insolvent so their capital deficits resulting
from the allocation of the loss can be added together and distributed to the two solvent
partners. However, if Quincy had been personally solvent, then he would be required to
remedy any capital deficit, including one that was distributed to him because of the insolvency
of another partner, as from the distribution of Nelson’s capital deficit in case b.
16–19
E16-8 Cash Distribution Plan
Based on strict observance of UPA 1997:
APB Partnership
Cash Distribution Plan
Loss Absorption
Potential
Capital Accounts
Adams
Peters
Blake
Adams
Peters
Blake
Profit and loss
percentages
20%
30%
50%
Preliquidation capital
balances
55,000
75,000
70,000
Loss absorption
potential
(Capital balances /
Loss percentage)
275,000
250,000
140,000
Decrease highest LAP
to next highest:
Adams
($25,000 x 0.20)
(25,000)
(5,000)
250,000
250,000
140,000
50,000
75,000
70,000
Decrease LAPs
to next highest:
Adams
($110,000 x 0.20)
(110,000)
(22,000)
Peters
($110,000 x 0.30)
(110,000)
(33,000)
140,000
140,000
140,000
28,000
42,000
70,000
Summary of Cash Distribution Plan
Adams
Peters
Blake
First $50,000 to creditors
Next $5,000
100%
Next $55,000
40%
60%
Any additional
20%
30%
50%
Note that the receivable from Adams is not included in the Cash Distribution Plan. The UPA 1997
does not include any offsets of receivables from partners against capital accounts. Thus, the
partnership should treat the receivable from Adams as any other partnership asset.
Chapter 16 – Partnerships: Liquidation
16–20