Chapter 16 PARTNERSHIP LIQUIDATION Answers to Questions Dissolution of a partnership terminates the partnership as a legal entity, but the partnership business may continue under a new agreement When a partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity Thus, a partnership may be dissolved without liquidation, but it may not be liquidated without dissolution A simple partnership liquidation is the liquidation of a solvent partnership in which all partners have equity capital and all gains and losses are realized and recognized before any distributions are made to the partners In simple partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances The priority ranking for the distribution of assets in liquidation pursuant to RUPA is Rank I Rank II Amounts owed to creditors other than partners and amounts owed to partners other than for capital and profits Amounts due to partners after all assets have been liquidated and liabilities paid The distribution of assets for capital interests (Rank III) prior to the payment of loan balances to the partners (Rank II) is not in accordance with the Revised Uniform Partnership Act But the partners may agree to distribute cash or other assets for capital interests before all losses on liquidation are known With agreement among all partners, distributions to the partners would be based on each partner’s equity (combined capital and loan balances) in relation to his share of possible future losses A partner with sufficient equity to absorb his share of possible future losses would be included in distributions, but a partner with loans to the partnership would not be included in distributions until his equity was sufficient to absorb his share of possible future losses The assumptions for determining distributions to partners prior to recognition of all gains and losses on liquidation are (1) all partners are personally bankrupt such that no partner could contribute personal assets into the partnership and (2) all noncash assets are possible losses and should be considered actual losses for purposes of determining amounts to be distributed In addition, liquidation expenses and probable loss contingencies should be estimated and assumed to be actual losses for purposes of determining advance distributions Capital balances represent one factor in determining a partner’s equity, but loans and advances payable to and receivable from the partnership are factors that must also be considered in calculating safe payments Partner equities, rather than capital balances, are used in safe payment schedules in order to avoid making distributions to partners that may end up with debit capital balances; i.e., owing money to the partnership Safe payment computations per se not affect ledger account balances Actual cash distributions based on safe payments computations reduce partnership assets and equities and require recognition in ledger accounts ©2009 Pearson Education, Inc publishing as Prentice Hall 16-2 Partnership Liquidation A statement of partnership liquidation is a summary of transactions and balances for a partnership during its liquidation stage Such statements provide continuous records of liquidation events Interim liquidation statements are particularly helpful in showing the progress that has been made toward liquidation to date and in identifying remaining assets to be liquidated and liabilities to be paid Interim liquidation statements are helpful to partners and creditors in providing a basis for current decisions as well as future planning Liquidation statements are important legal documents for partnership liquidations that come under the jurisdiction of a court Available cash may be distributed to partners according to their profit and loss sharing ratios only when nonpartner liabilities have been satisfied and partner equities (capital and loan balances combined) are aligned with the relative profit and loss sharing ratios of the partners In the absence of loans or advances payable to or receivables from individual partners, cash can be distributed to partners in their profit and loss sharing ratios when capital balances are in the relative profit and loss sharing ratios of the partners and all nonpartner liabilities have been paid 10 Vulnerability ranks are an ordering of partners on the basis of the adequacy of their equities in the partnership to absorb possible partnership losses The ordering is typically from the most vulnerable to the least vulnerable Vulnerability ranks are used in the preparation of assumed loss absorption schedules, which, in turn, are used in the construction of cash distribution plans 11 Partnership insolvency occurs when partnership liabilities exceed partnership assets In this case, all available cash is distributed to partnership creditors Individual partners will be called upon to use their personal assets to satisfy the remaining claims of the partnership creditors 12 Partners with credit capital balances after all partnership assets have been distributed in liquidation have a claim against partners with debit capital balances If the partners with debit balances are personally solvent, they should pay amounts equal to their debit balances into the partnership so that partners with credit balances can receive their partnership claims in full If partners with debit capital balances are insolvent, the partners with credit balances will absorb the losses of the insolvent partners with debit capital balances in relation to their relative profit and loss sharing ratios ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-3 SOLUTIONS TO EXERCISES Solution E16-1 Schedule of Capital Balances Capital balances January 1, 2008 January losses: Lumber $15,000 ($40,000 book value- $25,000 sales price) Receivables 4,000 ($25,000 - $21,000 collection) Capital balances before distribution 60% Folly $40,000 (9,000) 40% Frill $20,000 (6,000) (2,400) (1,600) $28,600 Cash distribution: Accounts payable Folly Frill Total cash $12,400 $15,000 28,600 12,400 $56,000 Cash balance: Beginning balance, $10,000 + $25,000 + $21,000 = $56,000 Solution E16-2 Sale of inventory Cash $10,000 Inventory To record sale of inventory items Distribution of cash Accounts payable Cash To record payment to creditors $10,000 $ 5,000 $ 5,000 Mike capital $12,600 Nancy capital 6,200 Okey capital 25,200 Cash $44,000 To record distribution of available cash to partners computed as follows: Capital Possible Loss from Balance Unsold Inventory = Balance Mike capital $15,000 $2,400 $12,600 Nancy capital 8,000 1,800 6,200 Okey capital 27,000 1,800 25,200 Totals $50,000 $6,000 $44,000 Solution E16-3 January balances Contingency fund of $10,000 Possible losses on 30% Fred $85,000 (3,000) 30% Ethel $25,000 (3,000) 40% Lucy $90,000 (4,000) ©2009 Pearson Education, Inc publishing as Prentice Hall 16-4 Partnership Liquidation asset disposal ($120,000) Loss on Ethel’s possible defaulta divided 3/7 and 4/7 Available cash is distributed a Notice that contingencies determine how balances must (36,000) 46,000 (36,000) (14,000) (48,000) 38,000 (6,000) 40,000 14,000 (8,000) 30,000 Ethel would have a debit balance in her capital account if the occurred and if the assets were a total loss In order to much cash is available for distribution, Fred and Lucy’s absorb Ethel’s debit balance ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-5 Solution E16-4 Beginning balances Offset Kim’s loan Loss on sale of assets ($180,000 - $120,000) Additional liability Distribute Kim’s debit balance 5/7, 2/7 Cash distribution Creditors $60,000 50% Jan $59,000 30% Kim $29,000 (20,000) 20% Lee $52,000 5,000 65,000 (30,000) (2,500) 26,500 (18,000) (1,500) (10,500) (12,000) (1,000) 39,000 $65,000 (7,500) $19,000 10,500 (3,000) $36,000 Kim owes $7,500 to Jan and $3,000 to Lee Solution E16-5 Schedule to Correct Capital Accounts December 31, 2008 balance Overvalued inventory Corrected balances $10,000 Anita Capital (50%) $40,000 (5,000) $35,000 Bernice Capital (30%) $35,000 (3,000) $32,000 Colleen Capital (20%) $25,000 (2,000) $23,000 The capital balances are adjusted for the error in computing net income in the partners’ residual equity ratios Solution E16-6 Schedule to Correct Capital Accounts December 31, 2008 balance Undervalued inventory Corrected balances ($15,000) Ali Capital (40%) $60,000 6,000 $66,000 Bart Capital (20%) $25,000 3,000 $28,000 Carrie Capital (40%) $65,000 6,000 $71,000 The capital balances are adjusted for the error in computing net income in the partners’ residual equity ratios ©2009 Pearson Education, Inc publishing as Prentice Hall 16-6 Partnership Liquidation Solution E16-7 Evers, Freda, and Grace Partnership Safe Payment Schedule Partner equities Loss on sale of assets Possible lossesa Allocate Evers’ loss a 40% Evers $100,000 (52,000) 48,000 (84,000) (36,000) 36,000 40% Freda $250,000 (52,000) 198,000 (84,000) 114,000 (24,000) $ 90,000 20% Grace $170,000 (26,000) 144,000 (42,000) 102,000 (12,000) $ 90,000 Total $520,000 (130,000) 390,000 (210,000) 180,000 $180,000 Remaining noncash assets of $200,000 plus contingency fund of $10,000 equals $210,000 possible losses Cash to distribute: Beginning cash balance of $100,000 plus $170,000 from sale of assets less $10,000 contingency fund equals $260,000 Distribution of cash: Accounts payable Freda Grace $ 80,000 90,000 90,000 $260,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-7 Solution E16-8 Jerry, Joan, and Jill Partnership Statement of Partnership Liquidation at November 30, 2008 Balances Nov 30 Cash Noncash Assets $8,000 $27,000 Liab 40% Jerry Capital 50% Joan Capital 10% Jill Capital $8,000 $10,800 $13,200 $3,000 Offset receivable from Jerry (3,000) (3,000) Write-off patent (8,000) (3,200) (4,000) 4,600 9,200 2,200 $ 4,600 $ 9,200 $2,200 Balances after adjustments Cash distribution: Creditors Partners Balances 8,000 16,000 (4,000) (4,000) 8,000 (800) (4,000) (4,000) $16,000 (This solution assumes that Joan agrees to a distribution of amounts that can be distributed safely If she does not agree, no distribution can be made to either Joan or Jill.) Jerry, Joan, and Jill Partnership Safe Payments Schedule at November 30, 2008 Possible Losses Partners’ equities Possible inventory losses Allocate Jerry’s deficit Safe payments to partners $16,000 40% Jerry Equity 50% Joan Equity 10% Jill Equity $ 4,600 (6,400) (1,800) 1,800 $13,200 (8,000) 5,200 (1,500) $ 3,700 $ 2,200 (1,600) 600 (300) $ 300 ©2009 Pearson Education, Inc publishing as Prentice Hall 16-8 Partnership Liquidation Solution E16-9 Schedule for Phase-out of the Partnership 30% Alice $ 20,000 Capital balances Creditors’ recovery from Betty Partnership recovery from Alice 30% Carle $ 70,000 Total $(30,000) 30,000 20,000 30,000 (90,000) 70,000 20,000 (35,000) (15,000) 20,000 (70,000) 70,000 70,000 (35,000) 35,000 Partnership recovery from Betty a Write-off of Betty’s deficit 40% Betty $(120,000) 20,000 20,000 20,000 10,000 (5,000) 5,000 10,000 35,000 30,000 Write-off of Alice’s deficit (5,000) 30,000 30,000 Cash distribution to Carle (30,000) (30,000) 0 a Betty’s personal net assets after partnership creditor recovery are $80,000 personal assets - $60,000 personal liabilities = $20,000 Solution E16-10 Daniel, Eric, and Fred Partnership Schedule for Phaseout of Partnership Capital balances Fred’s payment to creditors 40% Daniel Capital $10,000 30% Eric Capital $60,000 10,000 60,000 30% Fred Capital $(90,000) 20,000 (70,000) 10,000 60,000 40,000 (30,000) 40,000 40,000 (17,143) (7,143) (12,857) 47,143 30,000 40,000 5,000 (2,143) 47,143 Fred’s payment to the partnershipa Write-off of Fred’s deficit in the relative profit sharing ratio of Daniel and Eric 4/7:3/7 Daniel’s payment to the partnership for his deficit Write off of Daniel’s deficit to Eric Payment to Eric a 2,143 (2,143) 45,000 (45,000) Total $(20,000) 20,000 5,000 45,000 (45,000) Fred’s personal assets of $100,000 less the $40,000 owed to his personal creditors, and less the $20,000 paid to partnership creditors, equals $40,000 available for his debit capital account balance ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-9 Solution E16-11 Ace, Ben, Cid, and Don Statement of Partnership Liquidation for the period June 30 to July 31, 2008 Ace (50%) Balances June 30, 2008 July 1, 2008 Investment of Ace July 1, 2008 Payment of liabilities Balances July 1, 2008 July 15, 2008 Investment of Cid Investment of Don Cash Liabilities Capital Ben (20%) Capital $200,000 $400,000 $ 40,000 $10,000 200,000 400,000 400,000 200,000 240,000 10,000 (170,000) (80,000) (400,000) (400,000) 240,000 10,000 (170,000) (80,000) 0 100,000 80,000 180,000 240,000 (50,000) a Loss on Ben’s insolvency July 31, 2008 Final distribution Don (10%) Capital Capital $(170,000) $(80,000) 100,000 Loss on Cid’s Insolvency Cid (20%) 180,000 190,000 180,000 (10,000) 180,000 (180,000) () Debit capital balance or deduct a 10,000 (70,000) (20,000 ) (10,000 ) 70,000 80,000 0 10,000 (180,000) Allocating Cid’s insolvency to Ace & Ben: 70,000*2/7 = 20,000 Ben 70,000*5/7 = 50,000 Ace, Solution E16-12 Denver, Elsie, Fannie and George Partnership Safe Payment Schedule January 31, 2008 Possible Losses Partner’s equity at 1/1 January profit/loss transactions: Inventory sale Land sale Partner’s equity at 1/31 $395,000 Possible losses — noncash Possible losses — contingent 20,000 Possible losses — Fannie Denver (20%) $170,000 Elsie (10%) $80,000 Fannie (50%) $140,000 George (20%) $78,000 (6,000) 20,000 $164,000 (79,000) (4,000) $ 81,000 (13,000) $ 68,000 (3,000) 10,000 $87,000 (39,500) (2,000) $45,500 (6,500) $39,000 (15,000) 50,000 $175,000 (197,500) (10,000) $(32,500) 32,500 $ (6,000) 20,000 $92,000 (79,000) (4,000) $ 9,000 (13,000) $(4,000) ©2009 Pearson Education, Inc publishing as Prentice Hall 16-10 Partnership Liquidation Possible losses — George (2,667) (1,333) $ 65,333 $37,667 ©2009 Pearson Education, Inc publishing as Prentice Hall $ 4,000 16-14 Partnership Liquidation SOLUTIONS TO PROBLEMS Solution P16-1 Journal entry to distribute available cash on January Barney capital $25,000 Cash $25,000 To distribute available cash to Barney computed as follows: Safe Payments Schedule January 1, 2008 Possible Losses Barney Betty Partners’ capital balances Allocation of possible losses Allocate deficits to Barney Safe payments to Barney $90,000 Rubble $72,000 $28,000 $15,000 (30,000) 42,000 (30,000) (2,000) (30,000) (15,000) (17,000) 2,000 15,000 0 $25,000 Journal entry to record sale of assets on February Cash $81,000 Barney capital 3,000 Betty capital 3,000 Rubble capital 3,000 Inventory $72,000 Supplies 18,000 To record sale of inventory items and supplies and recognize gain or loss Journal entry to distribute cash on February 10 Barney capital $44,000 Betty capital 25,000 Rubble capital 12,000 Cash $81,000 To distribute cash to partners in final liquidation [Amounts are equal to final capital account balances.] ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-15 Solution P16-2 Chan, Dickerson, and Grunther Partnership Cash Distribution Plan Vulnerability ranks Equity $ 80,000 210,000 205,000 Chan Dickerson Grunther ÷ ÷ ÷ Profit and Loss Ratio 20% 30 50 Loss Absorption $400,000 700,000 410,000 Vulnerability Rank Schedule of assumed loss absorption Chan $80,000 (80,000) Equities Loss to absorb Chan Loss to absorb Grunther ($5,000 ÷ 5/8) Dickerson $210,000 (120,000) 90,000 Grunther $205,000 (200,000) 5,000 Total $495,000 (400,000) 95,000 (3,000) $ 87,000 (5,000) (8,000) $ 87,000 Chan Capital Dickerson Capital Grunther Capital 20% 100% 3/8 30% 5/8 50% Cash distribution plan First $90,000 Second $50,000 Third $37,000 Fourth $8,000 Remainder Priority Creditors 100% Loan from Dickerson 100% ©2009 Pearson Education, Inc publishing as Prentice Hall 16-16 Partnership Liquidation Solution P16-3 Fred, Flint, and Wilma Partnership Cash Distribution Plan Vulnerability Ranking Partnership Equity Fred $75,000 Flint 20,000 Wilma 60,000 ÷ ÷ ÷ Profit and Loss Ratio 30% 20% 50% Schedule of Assumed Loss Absorption 30% Fred Predistribution equity $75,000 Assumed loss to absorb Flint (30,000) $20,000 ÷ 20% 45,000 Assumed loss to absorb Wilma (6,000) $10,000 ÷ 5/8 $39,000 Loss Absorption Potential $250,000 100,000 120,000 Vulnerability Ranking 20% Flint $20,000 50% Wilma $60,000 Total $155,000 (20,000) (50,000) 10,000 (100,000) 55,000 (10,000) (16,000) $ 39,000 30% Fred 20% Flint 50% Wilma 100% 3/8 30% 20% 5/8 50% Cash Distribution Plan First $20,000 Next $39,000 Next $16,000 Remainder Priority Creditors 100% ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-17 Solution P16-4 Gary, Henry, Ian, and Joseph Partnership Cash Predistribution Plan Schedule of Vulnerability Ranks: Capital Loan to Partner Divided ratio balance Henry equity by profit Loss absorption potential Vulnerability ranks Gary Equity Henry Equity Ian Equity Joseph Equity $300,000 $100,000 $ 110,000 $300,000 $320,000 (20,000) $300,000 $100,000 $ 110,000 40% 30% 20% 10% $750,000 $1,000,000 $500,000 $1,100,000 Gary $300,000 Henry $300,000 Ian $100,000 Joseph $110,000 (200,000) 100,000 (150,000) 150,000 (100,000) (100,000) (75,000) 75,000 (25,000) 35,000 (75,000) (25,000) $ 10,000 Schedule of Assumed Loss Absorption: Equities Loss to absorb Ian’s equity Loss to absorb Gary’s equity Loss to absorb Henry’s equity (50,000) 60,000 Cash Distribution Plan: First $100,000 Next $50,000 Next $10,000 Next $100,000 Next $200,000 Remainder Priority Liabilities 100% Contingency Fund Gary Henry Joseph 100% 100% 3/4 1/4 1/2 3/8 1/8 40% 30% 20% 10% (Profit and loss sharing ratios) Available cash to distribute ($200,000 + $100,000) First $100,000 Next 50,000 Next 10,000 Next 100,000 Next 40,000 Distribution to Ian Priority Contingency Liabilities Fund $100,000 $50,000 Gary Henry 20,000 75,000 $15,000 $300,000 Ian ©2009 Pearson Education, Inc publishing as Prentice Hall Joseph $10,000 25,000 5,000 16-18 Partnership Liquidation partners $20,000 $90,000 ©2009 Pearson Education, Inc publishing as Prentice Hall $40,000 Chapter 16 16-19 Solution P16-5 Eli, Joe, and Ned, Consultants Statement of Partnership Liquidation for the month ended August 31, 2008 July 31 balances Receivables: Collections Assumption Write-off Liabilities paid Expenses paid Furniture: Sold to Joe Donated Predistribution balances To partners Noncash Assets $47,000 Cash $13,000 8,000 Accounts Payable $6,000 (8,000) (3,000) (1,000) (6,000) (3,000) 15,000 20% Eli Capital $24,000 30% Joe Capital $15,000 50% Ned Capital $15,000 (200) (300) (3,000) (500) (600) (900) (1,500) (2,000) (5,000) (600) (1,200) (3,000) (1,000) (900) (1,800) 19,400 (19,400) 7,100 (7,100) 500 (500) (6,000) (25,000) (4,000) (6,000) 27,000 (27,000) 0 (1,500) (3,000) Solution P16-6 Jones, Smith, and Tandy Partnership Statement of Partnership Liquidation for the liquidation period January 1, 2008 to March 31, 2008 Cash Balances $ 15,000 January 2008 Inventories sold 20,000 Receivables collections 14,000 Predistribution balance 49,000 Cash distribution to creditors 40,000* Balances January 31 February 2008 Land sold Land and buildings sold Receivables collections Balances February 28 March 2008 Write-off of furniture and fixtures Predistribution balance Cash distribution: Creditors Partners Balances March 31 9,000 Noncash Assets $215,000 65,000* 14,000* 136,000 20% Jones Capital $40,000 30% Smith Capital $60,000 50% Tandy Capital $50,000 9,000* 13,500* 22,500* 31,000 46,500 27,500 40,000 31,000 46,500 27,500 6,000 9,000* 900* 42,600 10,000 15,000* 1,500* 21,000 Accounts Payable $80,000 80,000 40,000* 136,000 60,000 40,000 3,000 112,000 40,000* 70,000* 6,000* 20,000 40,000 4,000 6,000* 600* 28,400 112,000 20,000* 40,000 4,000* 24,400 6,000* 36,600 10,000* 11,000 24,400* 36,600* 11,000* 40,000* 72,000* 40,000* ©2009 Pearson Education, Inc publishing as Prentice Hall 16-20 Partnership Liquidation Solution P16-7 Cash distribution plan for Lin, Mary, and Nell partnership Vulnerability ranks Profit Loss Capital Equity in and Loss Absorption Vulnerability Balances Partnership Ratio Potential Ranking Lin Mary Nell $55,000 12,000 20,000 $80,000 $55,000 12,000 20,000 $87,000 Schedule of assumed loss absorption Lin Predistribution equities $55,000 Assumed loss to absorb Mary’s equity 50/30/20 20,000 35,000 Assumed loss to absorb Nell’s equity 50/20 30,000 $ 5,000 50% 30 20 $110,000 40,000 100,000 Mary $12,000 Nell $20,000 Total $87,000 12,000 8,000 12,000 40,000 47,000 12,000 42,000 $ 5,000 Cash distribution plan Priority Creditors 100% First $55,000 Next $5,000 Next $42,000 Remainder Lin Mary Nell 100% 5/7 50% 30% 2/7 20% Cash of $25,000 is realized from inventories and receivables with a $45,000 book value Cash balance December 31, 2008 Realized during 2009 $47,000 25,000 72,000 (10,000) $62,000 Less: Amount reserved for contingencies Cash available for distribution Lin, Mary, and Nell Partnership Schedule of January 2009 Cash Distribution Cash Available Priority Creditors Lin Mary Nell Total Cash to be distributed $62,000 Payments to creditors Remainder To Lin (for loan balance) (55,000) $55,000 $55,000 7,000 (5,000) $5,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 5,000 Chapter 16 16-21 Remainder To Lin (5/7) and Nell (2/7) Cash distribution 2,000 (2,000) 1,429 $55,000 $6,429 $ 571 2,000 $ 571 $62,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 16-22 Partnership Liquidation Solution P16-8 Jason, Kelly, and Becky Partnership Statement of Partnership Liquidation for the period January 1, 2008 through February 28, 2008 Balances January Offset loan to Jason Collection of receivables Liquidation expenses Predistribution balances Cash distribution: Creditors Partners — Schedule A Balances January 31 Liability discovered Liquidation expenses Sale of remaining assets Predistribution balances Cash distribution: Creditors Partners — Schedule B Balances February 28 Cash $ 16,500 25,000 2,000* 39,500 Noncash Assets $163,500 14,000* Priority Liabilities $21,000 28,000* 121,500 21,000* 13,500* 5,000 111,000 1,500* 1,000* 21,000 20% Becky Capital $43,000 900* 600* 600* 400* 52,500 45,500 42,000 52,500 1,500* 1,000* 1,100* 44,400 900* 600* 12,400* 29,600 600* 400* 6,750* 4,050* 2,700* 21,000* 121,500 2,000* 108,000 50% 30% Jason Kelly Capital Capital $69,000 $47,000 14,000* 3,000 121,500* 3,000 108,000* 3,000 3,000* 43,250 38,850 25,900 $43,250 38,850* 25,900* Schedule A Possible Losses Partners’ equity January 31 Allocate possible losses $126,500 Allocate Jason’s deficit Safe payments to partners January 31 50% Jason Equity $52,500 (63,250) (10,750) 10,750 30% Kelly Equity $45,500 (37,950) 7,550 (6,450) 20% Becky Equity $42,000 (25,300) 16,700 (4,300) $ 1,100 $12,400 $43,250 $43,250 $38,850 $38,850 $25,900 $25,900 Schedule B Partners’ equity February 28 Safe payments to partners February 28 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-23 Solution P16-9 Roger, Susan, and Tom Partnership Statement of Partnership Liquidation for the period January 1, 2008 through February 28, 2008 Balances January Offset loan to Susan Sale of assets Predistribution balances Cash distribution: Creditors Partners — Schedule A Balances January 31 Sale of remaining assets Offset loan to Roger capital Predistribution balances Cash distribution: Partners — Schedule B Balances February 28 Priority Liabilities $40,100 Roger Loan $5,000 30% Roger Capital $ 9,900 40,000 Noncash Assets $140,000 10,000* 40,000* 60,000 90,000 40,100 5,000 9,900 35,000 5,000 9,900 2,814* 17,086* 32,186 42,914 Cash $20,000 40,100* 60,000 40,100* 19,900* 90,000 21,000 90,000* 20,700* 5,000* 21,000 30% 40% Susan Tom Capital Capital $45,000 $60,000 10,000* 27,600* 11,486 15,314 5,000 21,000* 20,700* 5,800* $ 9,000* 12,000* 5,800* $ 2,486 $ 3,314 Note: Roger owes Susan $2,486 and Tom $3,314 These balances remain on the partnership books until it is determined if Roger is personally solvent and able to pay $5,800 to the other partners Schedule A Possible Losses Partners’ equity January Allocate possible losses $90,000 Allocate Roger’s deficit Safe payments to partners January 31 30% Roger Equity 30% Susan Equity 40% Tom Equity $14,900 (27,000) (12,100) 12,100 $35,000 (27,000) 8,000 (5,186) $60,000 (36,000) 24,000 (6,914) $ 2,814 $17,086 $11,486 (2,486) $ 9,000 $15,314 (3,314) $12,000 Schedule B Partners’ equity February 28 Allocate Roger’s deficit Safe payments to partners February 28 $(5,800) 5,800 Note: Since cash was distributed to Susan and Tom in January and since Roger has negative equity, the distribution in February is necessarily in the 3/7 and 4/7 relative profit and loss sharing ratio of Susan and Tom ©2009 Pearson Education, Inc publishing as Prentice Hall 16-24 Partnership Liquidation Solution P16-10 Cash $21,000 Balances October Write-off Rob’s loan against capital Collected accounts receivable 40,000 Sale of inventory 50,000 Sale of equipment 60,000 Payment of bank loan and accrued interest (50,600) Payment of accounts payable (80,000) Liquidation expenses (2,000) Predistribution balances 38,400 October 31 distribution 33,400 Balance November 5,000 Sale of equipment 38,000 Accounts receivable 10,000 Inventory to Val Write-off remaining inventory Liquidation expenses (800) Predistribution balances 52,200 Cash distributed (52,200) Balances - Noncash Assets $348,000 30% Rob Liabilities Capital $130,000 $43,600 50% Tom Capital $150,000 20% Val Capital $45,400 (15,000) (15,000) (44,000) (60,000) (55,000) (1,200) (3,000) 1,500 (2,000) (5,000) 2,500 (800) (2,000) 1,000 (180) (300) (120) (600) (1,000) (400) (50,000) (80,000) 174,000 - 25,120 144,200 43,080 174,000 (95,000) (19,000) (20,000) 25,120 (17,100) (2,700) (3,000) (33,400) 110,800 43,080 (28,500) (11,400) (4,500) (1,800) (5,000) (12,000) (40,000) (12,000) (240) (20,000) (400) (8,000) (160) (9,920) 52,400 (45,314) 7,086 9,720 (6,886) 2,834 - (9,920) Schedule of Safe Payments 30% Rob October 31 Partners’ equity October 31, 2008 Possible losses Possible loss on contingency fund Possible loss from Rob allocated 5/7 and 2/7 (rounded) Possible loss from Val Cash distribution November 30 Partners’ equity November 30 Possible loss from Rob’s debit balance 5/7 and 2/7 Cash distribution $174,000 5,000 50% Tom 20% Val $25,120 (52,200) $144,200 (87,000) $43,080 (34,800) (1,500) (28,580) (2,500) 54,700 (1,000) 7,280 28,580 (20,414) 34,286 (886) 33,400 (8,166) (886) 886 $(9,920) $ 52,400 $ 9,720 9,920 (7,086) $ 45,314 (2,834) $ 6,886 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-25 Solution P16-11 Closing entry Revenue Jee capital Moore capital Olsen capital Expenses $200,000 25,000 75,000 100,000 $400,000 To close revenue and expense items and distribute loss to partners as follows: Net Loss 20% Jee 40% Moore 40% Olsen $(200,000) Salaries (50,000) $ 25,000 $ 25,000 Loss to divide (250,000) Divided 20:40:40 250,000 (50,000) (100,000) $(100,000) Loss allocated $(25,000) $(75,000) $(100,000) Cash distribution plan Vulnerability ranks Jee: $250,000 balance - $25,000 loss Moore: $450,000 balance - $75,000 loss Olsen: $370,000 balance - $100,000 loss Equity Loss Absorption Vulnerability Rank $225,000/20% $1,125,000 $375,000/40% 937,500 $270,000/40% 675,000 Assumed loss absorption Predistribution equities Loss to absorb Olsen Jee Moore Olsen Total $ 225,000 (135,000) 90,000 $375,000 (270,000) 105,000 $270,000 (270,000) $870,000 (675,000) 195,000 (52,500) 37,500 (105,000) Loss to absorb Moore $105,000 ÷ 40/60 $ (157,500) $ 37,500 Cash distribution plan Priority Creditors 100% First $80,000 Second $37,500 Third $157,500 Remainder Jee Moore Olsen 100% 2/6 20% 4/6 40% 40% Jee Moore Olsen Cash distribution schedule First $ 80,000 Priority Creditors $80,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 16-26 Partnership Liquidation Second Third 37,500 18,000 $135,500 $80,000 $37,500 6,000 $43,500 $12,000 $12,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-27 Solution P16-12 Beams, Plank, and Timbers Partnership Statement of Partnership Liquidation for the period January 1, 2009 to March 31, 2009 Cash Balances January $120,000 Collection of receivables 100,000 Sale of inventory 100,000 Predistribution balances 320,000 January distribution (schedule 1) Creditors 250,000* Plank 60,000* Balances February 10,000 Plant assets to Beams and loss distribution Sale of inventory 60,000 Liquidation expenses paid 2,000* Liability discovered Predistribution balances 68,000 February distribution (schedule 2) Creditors 8,000* Plank 30,000* Timbers 20,000* Balances March 10,000 Sale of plant assets and write-off 110,000 Liquidation expenses paid 5,000* Predistribution balances 115,000 March distribution 115,000* Liquidation completed March 31 Noncash Assets $560,000 Liabilities $250,000 100,000* 80,000* 380,000 250,000 50% Beams Capital $170,000 30% Plank Capital $180,000 20% Timbers Capital $ 80,000 10,000 6,000 4,000 180,000 186,000 84,000 60,000* 126,000 84,000 250,000* 380,000 60,000* 120,000* 8,000 200,000 8,000 180,000 50,000* 5,000* 30,000* 1,000* 4,000* 90,000 8,000* 200,000 200,000* 0 3,000* 18,000* 2,000* 12,000* 600* 2,400* 400* 1,600* 102,000 30,000* 68,000 90,000 72,000 20,000* 48,000 45,000* 27,000* 18,000* 2,500* 1,500* 1,000* 42,500 42,500* 43,500 43,500* 29,000 29,000* 0 ©2009 Pearson Education, Inc publishing as Prentice Hall 16-28 Partnership Liquidation Solution 16-12 (continued) Schedule Beams, Plank, and Timbers Partnership Schedule of Safe Payments to Partners January Distribution Noncash assets Contingency reserve Possible losses Distribution 50:30:20 Possible Losses Beams Capital Plank Capital Timbers Capital $380,000 10,000 390,000 390,000* $180,000 $186,000 $84,000 Distribution of Beams’ deficit 60:40 Safe payment to Plank 195,000* 15,000* 117,000* 69,000 78,000* 6,000 15,000 9,000* $ 60,000 6,000* Schedule Beams, Plank, and Timbers Partnership Schedule of Safe Payments to Partners February Distribution Noncash assets Contingency reserve Possible losses Distribution 50:30:20 Distribution of Beams’ deficit 60:40 Safe payment to Plank and Timbers * Possible Losses Beams Capital Plank Capital Timbers Capital $200,000 10,000 210,000 210,000* $ 90,000 $102,000 $68,000 105,000* 15,000* 63,000* 39,000 42,000* 26,000 15,000 9,000* 6,000* $ 30,000 $20,000 Deduct or deficit ©2009 Pearson Education, Inc publishing as Prentice Hall ... sharing ratios ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 16 16-3 SOLUTIONS TO EXERCISES Solution E16-1 Schedule of Capital Balances Capital balances January 1, 2008 January... ©2009 Pearson Education, Inc publishing as Prentice Hall 16-14 Partnership Liquidation SOLUTIONS TO PROBLEMS Solution P16-1 Journal entry to distribute available cash on January Barney capital $25,000... 16 16-17 Solution P16-4 Gary, Henry, Ian, and Joseph Partnership Cash Predistribution Plan Schedule of Vulnerability Ranks: Capital Loan to Partner Divided ratio balance Henry equity by profit