Chapter 16
DISSOLUTION AND LIQUIDATION OF A PARTNERSHIP
Answers to Questions 1
Dissolution of a partnership terminates the partnership as a legal entity, but the partnership partnership business business may continue continue under a new agreement. 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. 2 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 recogni recognized zed before before any distribut distributions ions are made to the partners partners.. In simple simple partnership liquidations, only one cash distribution is made and the amounts distri dis tribute buted d to indivi individual dual partner partners s are equal equal to their their predis predistri tributi bution on capita capitall account balances. 3 The priority ranking for the distribution of assets in liquidation pursuant to
the Uniform Partnership Act is Rank Rank Rank Rank
I II III IV
Amounts owed to creditors other than partners Amounts owed to partners other than for capital and profits Amounts due to partners in respect to capital Amounts owing to partners in respect to profits
Since all profits and losses and drawings balances are closed to capital before distributions are made, Ranks III and IV may be considered together. 4 The distribution of assets for capital interests (Rank III) prior to the payment
of loan loan balan balance ces s to the the partn partner ers s (Rank (Rank II) II) is not not in acco accord rdanc ance e with with the the Unifor Uniform m Partne Partnersh rship ip Act. But the partner partners s may agree agree to dis distri tribute bute 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 based on each each part partner ner's 's equi equity ty (com (combi bine ned d capi capita tall and and loan loan balanc balances es)) in relation relation to his share of possible future losses. losses. A partner with sufficient sufficient equity equity to absorb his share of possible future losses would be included in distributions,
48
Dissolution and Liquidation of a Partnership 49 but but a par partner tner with ith loans oans to the part partne ners rshi hip p woul would d not not be incl includ uded ed in distri dis tributi butions ons until until his equity equity was sufficien sufficientt to absorb absorb his share of possibl possible e future losses.
5
The The assu assump mpti tions ons for for dete determ rmin inin ing g distr distrib ibuti utions ons to partn partner ers s prio priorr to reco recogni gniti tion on of all all gain gains s and loss losses es on liqui liquidat datio ion n are are (1) (1) all all partn partner ers s are 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 cons consid ider ered ed actu actual al loss losses es for for purp purpos oses es of dete determ rmin inin ing g amou amount nts s to be distributed. In addition, liquidation expenses and probable loss contingencies contingencies shou sh ould ld be esti estima mate ted d and and assu assume med d to be actu actual al loss losses es for for purp purpos oses es of determining advance distributions. 6 Capital balances represent one factor in determining a partner's equity, but
loans loans and adva advanc nces es payabl payable e to and rece receiv ivabl able e from from the the partn partner ershi ship p are are factors factors that must also be considered considered in calculati calculating ng safe payments. Partner 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. 7 Safe payment computations per se do not affect ledger account balances.
Actual cash distributions based on safe payments computations do reduce partnership assets and equities and require recognition in ledger accounts. 8
A statement of partnership liquidation is a summary of transactions and balanc balances es for a partner partnership ship during during its liq liquid uidatio ation n stage. stage. Such Such stateme statements nts prov provide ide cont contin inuo uous us reco record rds s of liqui liquidat datio ion n even events ts.. Inte Interi rim m liqui liquidat dation ion statem statement ents s are partic particular ularly ly helpful helpful in showin showing g the progre progress ss that has been been made toward liquidation to date and in identifying remaining assets to be liquidated and liabilities 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. planning. Liquidation Liquidation statements statements are importan importantt legal documents documents for partnership liquidations that come under the jurisdiction of a court. 9 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 relative profit and loss sharing sharing ratios ratios of the partners. In the absence of loans loans or advances payable to or receivables from individual partners, cash can be distri dis tribute buted d to partner partners s in their their profit profit and loss loss sharing sharing ratios ratios when when capital capital balances are in the relative profit and loss sharing ratios of the partners and all nonpartner liabilities have been paid. 10
Vuln Vu lner erabi abili lity ty rank ranks s are are an order orderin ing g of partn partner ers s on the the basis basis of the
Chapter 16
50 adequacy of their equities in the partnership to absorb possible partnership losse losses. s. The The order orderin ing g is typica typicall lly y from from the most most vulne vulnera rabl ble e to the least least vulnerable. vulnerable. Vulnerabil Vulnerability ity ranks are used in the preparation preparation of assumed assumed loss absorpt absorption ion schedu schedules les,, which, which, in turn, turn, are used in the construc constructio tion n of cash cash distribution plans. 11
Part Partne ners rshi hip p insol insolve venc ncy y occu occurs rs when when partn partner ershi ship p liabi liabili liti ties es exce exceed ed partnership assets. In this case, all available cash is distributed to partnership partnership creditors. creditors. Individual Individual partners partners will be called called upon to use their personal assets assets to satisfy the remaining claims of the partnership creditors.
12
Partne Partners rs with with credit credit capita capitall balanc balances es after after all partner partnership ship assets assets have have been distributed in liquidation have a claim against partners with debit capital balanc balances. es. If the partners partners with debit balance balances s are persona personally lly solvent solvent,, they they should pay amounts equal to their debit balances balances into the partnership partnership so that partners partners with credit credit balances can receiv receive e their partnership partnership claims claims in full. If partne partners rs with with debit debit capita capitall balance balances s are ins insolv olvent ent,, the partne partners rs with with credi creditt balances will absorb the losses of the insolvent partners with debit capital balances in relation to their relative profit and loss sharing ratios.
Dissolution and Liquidation of a Partnership
51 SOLUTIONS TO EXERCISES Solution E16-1
Schedule of Capital Balances
Capital balances January 1, 2003 January losses: Lumber $15,000 R ecei vable s 4,000 Capital balances before distribution
Cash distribution: distribution : Ac count s pay able Folly Frill Total cash
60 % Fol ly
40% Frill
$ 40,00 0 (9,000) (2,400) $ 28,60 0
$2 0,00 0 ( 6,00 0) ( 1,60 0) $1 2,40 0
$1 5,000 2 8,600 1 2,400 $5 6,000
Solution E16-2 Sale of inventory Ca sh Inve ntory
$ 10,0 00 $10 ,000
To record sale of inventory items. Distribution of cash Ac count s pay able Cash
$ 5,0 00 $ 5 ,000
To record payment to creditors. Mike capital Nancy capital Okey capital Cash
$ 12,6 00 6,2 00 25,2 00 $44 ,000
To record distribution of available cash to partners computed as follows: Capital Possible Loss from Balance Unsold Inventory = Balance Mike capital $ 15,00 0 $2,400 $1 2,60 0 Nancy capital 8,00 0 1,800 6,20 0 Okey capital 27,00 0 1,800 2 5,20 0 T otals
$ 50,00 0
$6,000
$4 4,00 0
Chapter 16
52
Solution E16-3
January 1 balances Contingency fund of $10,000 Possible losses on asset disposal ($120,000) Loss on Vivian's possible default divided 3/7 and 4/7 Available cash is distributed
30% Terry $85 ,000 (3,000)
30% Vivian $ 25,0 00 (3,000)
40% Walter $90 ,000 (4 ,000 )
(36 ,000) 46 ,000
( 36,0 00) (14,000)
(48 ,000 ) 38 ,000
(6,000) 40,000
14,000 0
(8 ,000 ) 30 ,000
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
C redit ors $60,0 00
50% Jan $59 ,000
30% Kim $ 29,0 00 ( 20,0 00)
20% Lee $52 ,000
5,000 65,000
(30 ,000) (2,500) 26 ,500
( 18,0 00) (1,500) (10,500)
(12 ,000 ) (1 ,000 ) 39 ,000
$65,0 00
(7,500) $19,000
10,500 0
(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 Corr ecte d bal ances
$ 10,00 0
An ita Cap ital
B erni ce C apit al
Col leen Cap ital
$40 ,000 (5,000) $35 ,000
$ 35,0 00 (3,000) $ 32,0 00
$25 ,000 (2 ,000 ) $23 ,000
The capital balances are adjusted for the error in computing net income in the partners' residual equity ratios.
Dissolution and Liquidation of a Partnership
53 Solution E16-6
Schedule to Correct Capital Accounts
December 31, 2003 balance Undervalued inventory Corr ecte d bal ances
($15,000)
Al i Cap ital
B art C apit al
Car rie Cap ital
$60 ,000 6,000 $66 ,000
$ 25,0 00 3,000 $ 28,0 00
$65 ,000 6 ,000 $71 ,000
The capital balances are adjusted for the error in computing net income in the partners' residual equity ratios.
Solution E16-7 Evers, Freda, and Grace Partnership Safe Payment Schedule .4 Evers
.4 Freda
.2 Grace
$100,000 (52,000)
$2 50,00 0 (52,000)
$170,000 (2 6,000 )
$520 ,000 (130 ,000)
Possible lossesa
48,000 (84, (84,00 000) 0)
1 98,00 0 (84, (84,00 000) 0)
144,000 (42, (42,00 000) 0)
390 ,000 (210, (210,00 000) 0)
1 14,00 0 (24,000)
102,000 (1 2,000 )
180 ,000
Allocate Evers' loss
(36,000) 36,000
Partner equities Loss on sale of assets
0
$ 90,000
$ 90,000
Total
$180,000
a
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:
Acc ount s pay able Freda Grace
$ 80, 000 90, 000 90, 000 $260,000
Chapter 16
54
Solution E16-8 Jerry, Joan, and Jill Partnership Statement of Partnership Liquidation at November 30, 2008
Balances Nov. 30
Cash
Noncash Assets
Priority Claims
40% Jerry Capital
Loan from Joan
50% Joan Capital
10% Jill Capital
$8,000
$27,000
$4,000
$10,800
$4,000
$13,200
$3,000
Offset receivable from Jerry
(3,000)
(3,000)
Write-off patent
(8,000)
(3,200)
Balances after adjustments Cash distribution: distribution: Creditors Partners Balances
8,000
16,000
(4,000) (4,000) 0
4,000
(4,000)
4,600
4,000
9,200
(800)
2,200
(4,000) (3,700) $16,000
0
$ 4,600
$
(300)
300
$ 9,200
$1,900
(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 Possible Losses Partners' equities Possible inventory losses Allocate Jerry's deficit Safe payments to partners
$16,000
40% Jerry Equity
50% Joan Equity
$ 4,60 0 (6,400)
$13,200 (8,000)
$2,2 00 (1,600)
(1,800) 1,80 0
5,200 (1,500)
600 (3 00)
0
$ 3,700
10% Jill Equity
$
3 00
Dissolution and Liquidation of a Partnership
55 Solution E16-9
Insolvent partnership and insolvent partner:
Cas h Liabilities over assets
Moe Capital
$ 7 0,000 (3 0,000 ) 40,000
$ (60, 000) 60,000 0
Cur ly Ca pita l
$ (20,0 00)
Capital balances January 1 Loss on Moe's insolvency Recovery from Curly
Larry Capital
$ 40,000 40,000 (2 0,000 ) $ 20,000
Loss on Curly's insolvency
$(3 0,00 0) (3 0,00 0) (6 0,00 0) 4 0,00 0 (2 0,00 0) 2 0,00 0 0
Larry can expect to receive $20,000 from the partnership liquidation.
Solution E16-10 Schedule for Phase-out of the Partnership
Capital balances Creditors' recovery from Betty
30% Alice
40% Betty
30% Carle
Total
$ 20,000
$(120,000)
$ 70,000
$(30,000)
20,000
30,000 (90,000)
70,000
20,000 (35,000) (15,000)
20,000 (70,000) 70,000 0
Partnership recovery from Betty Write-off of Betty's deficit Partnership recovery from Alice Write-off of Alice's deficit Cash distribution to Carle
10,000 (5,000) 5,000 0
70,000 (35,000) 35,000
35,000 (5,000) 30,000 (30,000) 0
30,000 0 20,000 20,000 20,000 10,000 30,000 30,000 (30,000) 0
Chapter 16
56
Solution E16-11 Daniel, Eric, and Fred Partnership Schedule for Phaseout of Partnership 40% Daniel Capital Capital balances
$10,000
30% Eric Capital $60,000
Fred's payment to creditors 60,000
Fred's payment to the partnershipa
Daniel's payment to the partnership for his deficit
Payment to Eric
a
(70,000)
20,0 00 0
40,0 00
(30,000)
(17,143)
(1 2,857 )
30 ,000
(7,143)
47 4 7,143
2,143 0
$( 20,0 00)
40,0 00
60,000
5,000
Total
40,000 10,000
(2,143) Write off of Daniel’s deficit to Eric
$(90,000) 20,000
10,000
Write-off of Fred's deficit in the relative profit sharing ratio of Daniel and Eric 4/7:3/7
30% Fred Capital
0
40,0 00 5,0 00
47,143 (2,143) 4 5,000 (4 5,000 ) 0
45,0 00 0 ( 45,0 00) 0
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.
Dissolution and Liquidation of a Partnership
57 Solution E16-12
Ace, Ben, Cid, and Don Statement of Partnership Liquidation for the period June 30 to July 31, 2003 Cash Balances June 30, 2003 July 1, 2003 Investment of Ace
Liabilities
$200,000
$400,000
200,000
Ace Capital
Ben Capital
Cid Capital
Don Capital
$ 40,000
$10,000
$(170,000)
$(80,000)
240,000
10,000
(170,000)
(80,000)
240,000
10,000
(170,000)
(80,000)
200,000
400,000
400,000
(400,000)
(400,000)
July 1, 2003
Payment of liabilities Balances July 1, 2003
0
0
July 15, 2003
Investment of Cid
100,000
Investment of Don
80,000 180,000
Loss on Cid's insolvency
80,000 240,000
10,000
(50,000) (20,000) 180,000
Loss on Ben's insolvency
July 31, 2003 Final distribution
100,000
190,000 (10,000)
180,000
180,000
(180,000)
(180,000)
0
(10,000)
(70,000)
0
70,000 0
10,000 0
0
() Debit capital balance or deduct.
Solution E16-13 Denver, Elsie, Fannie and George Partnership Safe Payment Schedule January 31, 2003 Possible Lo sses Denve r El sie Fannie Partner’s equity at 1/1 $150, 000 $8 0,000 $140,000 January profit/loss transactions: Inventory sale (6,000) ( 3,000 ) (15,000) Land sale 20,000 10,000 50,000 Partner’s equity at 1/31 $164, 000 $8 7,000 $175,000 Possible losses-noncash $395,000 (79, 000) (3 9,500 ) (197,500) Possible losses-contingent 20,000 (4,000) ( 2,000 ) (10,000) $81, 000 $4 5,500 $(32,500) Possible losses--Fannie (13,000) ( 6,500 ) 32,500 $68, 000 $3 9,000 $ 0 Possible losses--George (2,667) ( 1,333 ) $65, 333 $37,667
Ge orge $78 ,000 (6 ( 6 ,000) 20 ,000 $92 ,000 (79 ,000) (4 ,000) $9 ,000 (13 ,000) $(4 ,000) 4 ,000 $ 0
Payments of $103,000 can be safely made to Denver and Elsie in the amounts shown above. Check: Cash available $523,000 Accounts payable $(400,000)
Chapter 16 Contingencies (20,0 00) Available to partners $103,000
58
Dissolution and Liquidation of a Partnership
59 Solution E16-14
1
b
2
d
3
a
: Supporting computations computations:
See cash distribution plan that follows.
Vulnerability Rankings
Partners' Equities Quen Reed Stac
$45,000 $25,000 $25,000
÷ ÷ ÷
Loss Absorption Potential
Vulnerability Ranks
$150,000 50,000 125,000
3 1 2
30% 50% 20%
Schedule of Assumed Loss Absorption
Quen Predistribution equities Loss to absorb Reed Loss to absorb Stac $15,000/40% Balance
$ 45,000 (15,000) 30,000
Reed $ 25,000 (25,000) 0
(22,500) $ 7,500
Stac
Total
$ 25,000 (10,000) 15,000
$ 95,000 (50,000) 45,000
(15,000) 0
(37,500) $ 7,500
Cash Distribution Plan
Priority Creditors First $50,000 Next $7,500 Next $37,500 Remainder
Quen Capital
Reed Capital
Stac Loan
Stac Capital
100% 100% 60% 30%
26.667% 50%
13.333% 20%
Chapter 16
60
Solution E16-15 1
d
2
d
3
c
4
d
Answ Answer er b is is cor corre rect ct for for sit situa uati tion ons s in in whi which ch all all par partn tner ers s hav have e equity in partnership assets; in other words, credit capital balances.
The The debi debit t bal balan ance ce in Mari Maris' s's s cap capit ital al acco accoun unt t shou should ld be char charge ged d against the loan payable to Maris.
Net capital balances Possible loss on inventories
P ossib le Losses
50% Gwen Capital
25% Bill Capital
25% Sissy Capital
$ 100,0 00
$40 ,000 (50,000)
$45,000 (25,000)
$3 5,00 0 (2 5,00 0)
(10,000) 10,000
20,000 (5,000)
1 0,00 0 ( 5,00 0)
Gwen's debit balance 50:50 Distribution of cash after payment of accounts payable
5
0
$15,000
$ 5,00 0
c P ossib le Losses
Net capital balances Noncash assets: Accounts receivable Inventories Plant assets-net Contingency fund
$ 60,0 00 85,0 00 200,0 00 5,0 00 $ 350,0 00
Allocate Dick's possible deficit Distribution of cash after payment of $60,000 liabilities
20% Dick Capital
40% Frank Capital
40% Helen Capital
$50 ,000
$ 220, 000
$15 5,00 0
(70 ,000)
( 140, 000)
(14 0,00 0)
(20,000) 20,000
80,000 (10,000)
1 5,00 0 (1 0,00 0)
0
$ 70, 000
$
5,00 0
Dissolution and Liquidation of a Partnership
61 Solution E16-15 6
(continued)
c
Capital balances Wayne's contribution
30% Unsel Capital
30% Vance Capital
40% Wayne Capital
$9 0,000
$ (60, 000)
$(1 00,0 00) 70,0 00
90,000
(60,000)
(30,000)
Vance's personal net assets
39, 000 90,000
Vance's remaining deficit divided 3/7 to Unsel and 4/7 to Wayne
( 9,000 ) 81,000
Wayne's remaining personal net assets to offs offset et his his defi defici cit t capi capita tal l bala balanc nce e
Amount of Unsel's partnership equity that should be recoverable
(30,000)
21,000
( 12,0 00)
0
( 42,0 00) 40,0 40,000 00
81,000 Wayne's final deficit allocated to Unsel and uncollectible
(21,000)
( 2,000 ) $79,000
(2,000) 2,0 00 0
Chapter 16
62
Solution E16-16
[AICPA adapted]
1
d
The The Uni Unifo form rm Part Partne ners rshi hip p Act Act rank ranks s par partn tner ersh ship ip liab liabil ilit itie ies s fir first st (Rank I) in order of recovery from partnership assets.
2
d
Part Partne ners rshi hip p cred credit itor ors s can can seek seek reco recove very ry in full full or in part part from from any partner under the Uniform Partnership Act.
3
d
Compare the two situations:
Recovery from Q Capital balances Q pays creditors T's loss is allocated Capital balances S owes Q $30,000.
Q $ 15,00 0 25,00 0 ( 10,00 0) $ 30,00 0
R $10 ,000
S $ (20, 000)
(10,000) 0
(10,000) $(30,000)
Recovery from S Capital balances S pays creditors T's loss is allocated Capital balances S owes Q $5,000.
Q $ 15,00 0
R $10 ,000
( 10,00 0) $ 5,00 0
(10,000) 0
S $ (20, 000) 25, 000 (10,000) $ (5,000)
T $(3 0,00 0) 3 0,00 0 0
T $(3 0,00 0) 3 0,00 0 0
In either case, Q's loss is $10,000 and he receives $5,000 net cash. 4
c
Capital balances Loss on dissolution of partnership business
40% X $ 30,00 0 (12,000) 18,00 0
25% Y $15 ,000 (7 ,500) 7,500
35% Z $ 5,0 00
Total $50 ,000
( 10,5 00) (5,500)
(30 ,000 ) 20 ,000
Z will contribute $5,500 to cover his deficit balance. 5
a
Bala nces Loss on on sa sale of of other as assets ($65,000)
Smith Equity $17 5,000 (3 9,000 ) 136,000
Jone s Equity $ 155, 000 (26, 000) 129, 000
Dissolution and Liquidation of a Partnership
63 SOLUTIONS TO PROBLEMS Solution P16-1 1
Journal entry to distribute available cash on January 1 Barney capital Cash
$ 25,0 00 $25 ,000
To distribute available cash to Barney computed as follows: Safe Payments Schedule January 1, 2003 Possible Losses Barney Partners' capital balances
Betty
Rubble
$72,000
$28,000
$15 ,000
(30, 30,000)
(30,000 000)
(30,0 0,000)
Allocate deficits to Barney
42,000 (1 7,000 )
(2,000) 2,000
(15,000) 15 ,000
Safe payments to Barney
$25,000
Alloca ocation ion of possib sible losses ses
2
$90,000 000
0
0
Journal entry to record sale of assets on February 9 Ca sh Barney capital Betty capital Rubble capital Inve ntory Supplies
$ 81,0 00 3,0 00 3,0 00 3,0 00 $72 ,000 18 ,000
To record sale of inventory items and supplies and recognize gain or loss.
3
Journal entry to distribute cash on February 10 Barney capital Betty capital Rubble capital Cash
$ 44,0 00 25,0 00 12,0 00
To distribute cash to partners in final liquidation. are equal to final capital account balances.]
$81 ,000 [Amounts
Chapter 16
64
Solution P16-2 Chan, Dickerson, and Grunther Partnership Cash Distribution Plan
Vulnerability ranks
Profit and Loss Ratio
Equity Chan Dickerson Grunther
$ 80,000 210,000 205,000
Loss Absorption
20% 30 50
÷ ÷ ÷
Vulnerability Rank
$400,000 700,000 410,000
1 3 2
Schedule of assumed loss absorption
Equities Loss to absorb Chan
Chan
Dickerson
Grunther
$80,000 (80,000)
$210,000 (120,000)
$205,000 (200,000)
0 Loss to absorb Grunther ($5,000 ÷ 5/8)
90,000 (3,000) $ 87,000
5,000 (5,000) 0
Total $495,000 (400,000) 95,000 (8,000) $ 87,000
Cash distribution plan
Priority Creditors First $90,000 Second $50,000
Loan from Dickerson
Chan Capital
Dickerson Capital
Grunther Capital
100% 100%
Third $37,000
100%
Fourth $8,000
3/8
5/8
30%
50%
Remainder
20%
Dissolution and Liquidation of a Partnership
65 Solution P16-3
Fred, Flint, and Wilma Partnership Cash Distribution Plan Vulnerability Ranking
Partnership Equity Fred Flint Wilma
$
75,000 20,000 60,000
Profit and Loss Ratio ÷ ÷ ÷
Loss Absorption Potential
30% 20% 50%
Vulnerability Ranking
$250,000 100,000 120,000
3 1 2
Schedule of Assumed Loss Absorption
Predistribution equity Assumed loss to absorb Flint $20,000 ÷ 20% (100,000)
30% Fred
20% Flint
50% Wilma
$ 75,000
$ 20,000
$ 60,000
(30,000)
(20,000)
45,000 Assumed loss to absorb Wilma $10,000 ÷ 5/8 (16,000)
0
(6,000)
Total $155,000
(50,000) 10,000
55,000
(10,000)
$ 39,000
0
$ 39,000
Cash Distribution Plan
Priority Creditors
30%
Fred
20%
Flint
50%
Wilma First $20,000 Next $39,000 Next $16,000 Remainder
100% 100% 3/8 30%
20%
5/8 50%
Chapter 16
66
Solution P16-4 1
Gary, Henry, Illa, and Joseph Partnership Cash Predistribution Plan
Schedule of Vulnerability Ranks: Gary Equity
Henry Equity
Jo seph Equity
$32 0,000 (2 0,000 )
$ 100, 000
$11 0,00 0
Capital balance Loan to Henry Loan from Gary Partner equity Divided by profit ratio
100,0 00 $ 300,0 00 40%
$30 0,000 30%
$ 100, 000 20 %
$11 0,00 0 10%
Loss absorption potential
$ 750,0 00
$1, 000,0 00
$500,000
$1,1 00,0 00
1
4
Vulnerability ranks
$ 200,0 00
Illa Equity
2
3
Schedule of Assumed Loss Absorption: Gary Equi ties Loss to absorb Illa's eq uity Loss to absorb Gary's eq uity
Henry
Illa
Joseph
$ 300,0 00
$30 0,000
$ 100, 000
( 200,0 00) 100,000
(15 0,000 ) 150,000
(100,000) 0
(100,000) 0
(7 5,000 ) 75,000
(2 5,00 0) 3 5,00 0
(7 5,000 ) 0
(2 5,00 0) $ 1 0,00 0
Loss to absorb Henry's equity
$11 0,00 0 (5 0,00 0) 6 0,00 0
Cash Distribution Plan: Prio Priori rity ty Liabili Liabilities ties Firs t $1 00,00 0 Next $50,000 Next $10,000 Next $100,000 Next $200,000 Rema inde r
Cont Contin inge genc ncy y Fund
Gary
Henry Henry
Illa Illa
Joseph Joseph
100% 1 00% 100 % 3/4 1/4 1/2 3/8 1/8 40% 30% 20% 10% (Profit and loss sharing ratios)
Dissolution and Liquidation of a Partnership
67 Solution P16-4 2
(continued)
Available cash to distribute Prio Priori rity ty Liabili Liabilities ties
Firs t $1 00,00 0 Next
50,00 0
Next
10,00 0
Next
100,000
Next
40,00 0
($200,000 + $100,000)
Cont Contin inge genc ncy y Fund
Gary
Henry Henry
$300 ,000
Illa Illa
Joseph Joseph
$1 00,00 0 $50 ,000 $10, 000
Distribution to partners
75 ,000
25, 000
20,000
$15,000
5, 000
$20,000
$90,000
$40, 000
Solution P16-5 Eli, Joe, and Ned, Consultants Statement of Partnership Liquidation for the month ended August 31, 2006
July 31 balances Receivables: Collections Collections Assumption Assumption Write-off Liabilities Liabilities paid Expenses paid Furniture: Sold to Joe Donated Predistribution balances To Eli for loan To partners
Cash $13,000 8,000
Noncash Assets $47,000
Eli Loan $4,000
(8,000) (3,000) (1,000)
(6,000) (3,000) 15,000
Accounts Payable $ 6,000
30% Joe Capital $15,000
50% Ned Capital $15,000
(200)
(300)
(3,000) (500)
(600)
(900)
(1,500)
(2,000)
(3,000) (1,000) (900) (1,800)
(5,000)
(6,000)
(25,000) (4,000)
(600) (1,200)
(6,000) 27,000 (4,000) (23,000) 0
20% Eli Capital $20,000
0
0
4,000 (4,000) 0
(1,500) (3,000)
15,400
7,100
500
(15,400) 0
(7,100) 0
(500) 0
Chapter 16
68
Solution P16-6 Jones, Smith, and Tandy Partnership Statement of Partnership Liquidation for the liquidation period January 1, 2003 to March 31, 2003
Cash Balances
$ 15,000
January 2003 Inventories Inventories sold Receivables Receivables collections collections
20,000 14,000
Predistribution Predistribution balance
49,000
Noncash Assets
Accounts Payable
20% Jones Capital
30% Smith Capital
50% Tandy Capital
$215,000
$80,000
$40,000
$60,000
$50,000
65,000* 14,000* 136,000
9,000* 80,000
13,500*
22,500*
31,000
46,500
27,500
31,000
46,500
27,500
Cash distribution to creditors Balances January 31 February 2003 Land sold Land and buildings sold Receivables Receivables collections collections
Balances February 28
40,000* 9,000 60,000 40,000 40,000 3,000 112,000
40,000* 136,000
40,000
40,000* 70,000* 6,000* 20,000
4,000 6,000* 600* 40,000
28,400
6,000 9,000* 9,000* 900* 42,600
10,000 15,000* 1,500* 21,000
March 2003
Write-off of furniture and fixtures Predistribution Predistribution balance
20,000* 112,000
0
4,000* 40,000
6,000*
10,000*
24,400
36,600
11,000
24,400*
36,600*
11,000*
Cash distribution: distribution: Creditors Creditors Partners Balances March 31
40,000* 72,000* 0
40,000* 0
0
0
0
Dissolution and Liquidation of a Partnership
69 Solution P16-7 1
Cash distribution plan for Link, Mack, and Nell partnership
Vulnerability Vulnerability ranks
Capital Balances Link Mack Nell
$40,000 20,000 20,000 $80,000
Loan Balances + -
Equity in Partnership Partnership
$15,000 8,000
$55,000 12,000 20,000
$ 7,000
$87,000
Profit and Loss Ratio 50% 30 20
Loss Absorption Potential
Vulnerability Vulnerability Ranking
$110,000 40,000 100,000
3 1 2
Schedule of assumed loss absorption
Predistribution equities Assumed loss to absorb Mack's equity 50/30/20
Assumed loss to absorb Nell's equity 50/20
Link
Mack
Nell
Total
$55,000
$12,000
$20,000
$87,000
20,000
12,000
8,000
40,000
35,000
0
12,000
47,000
30,000
12,000
42,000
$ 5,000
0
$ 5,000
Cash distribution plan
Priority Creditors First $55,000 Next $5,000
Link
Mack
Nell
100% 100%
Next $42,000
5/7
Remainder
50%
2/7 30%
20%
Chapter 16 Solution P16-7 2
70 (continued)
Cash of $25,000 is realized from inventories and receivables with a $45,000 book value
Cash balance December 31, 2008
$47 ,000
Realized during 2009
25 ,000 72,000
Less :
Amount reserved for contingencies
(10 ,000)
Cash available for distribution
$62 ,000
Link, Mack, and Nell Partnership Schedule of January 2009 Cash Distribution Cash Available Cash to be distributed
$62,000
Payments to creditors
(55,000)
Remainder To Link (for loan balance) Remainder To Link (5/7) and Nell (2/7) Cash distribution distribution
Priority Creditors
Link
Mack
Nell
$55,000
Total
$55,000
7,000 (5,000)
$5,000
5,000
2,000
(2,000) 0
1,429 $55,000
$6,429
0
$
571
2,000
$
571
$62,000
Dissolution and Liquidation of a Partnership
71 Solution P16-8
Jason, Kelly, and Becky Partnership Statement of Partnership Liquidation for the period January 1, 2003 through February 28, 2003 Noncash Assets
Cash Balances January 1
$ 16,500
Offset loan to Jason Collection of receivables Liquidation expenses Predistribution balances
25,000
Priority Liabilities
$163,500
$21,000
Becky Loan
50% Jason Capital
30% Kelly Capital
20% Becky Capital
$9,500
$69,000
$47,000
$33,500
14,000*
14,000*
28,000*
1,500*
2,000* 39,500
1,000* 121,500
21,000
900* 600*
600* 400*
9,500
52,500
45,500
32,500
9,500* 0
52,500
1,100* 44,400
2,900* 29,600
1,500*
900*
600*
1,000*
60 600*
40 400*
6,750*
4,050*
2,700*
Cash distribution: Creditors Partners-Schedu le A Balances January 31
21,000* 13,500* 5,000
21,000* 121,500
0
Liability discovered Liquidation expenses
3,000 2,000*
Sale of remaining assets Predistribution balances
108,000 111,000
121,500* 0
3,000
0
43,250
38,850
25,900
38,850*
25,900*
Cash distribution: Creditors Partners-Schedul e B Balances February 28
3,000
3,000*
108,000*
$43,250
0
0
Schedule A
Possible Losses Partners' equity January 31 Allocate possible losses
$126,500
Allocate Jason's deficit Safe payments to partners January 31
0
0
50% Jason Equity
30% Kelly Equity
20% Becky Equity
$52,500 (63,250) (10,750) 10,750 0
$45,500 (37,950) 7,550 (6,450) $ 1,100
$42,000 (25,300) 16,700 (4,300) $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
Chapter 16
72
Solution P16-9 Roger, Susan, and Tom Partnership Statement of Partnership Liquidation for the period January 1, 2003 through February 28, 2003 Noncash Assets
Cash Balances January 1
$ 20,000
Offset loan to Susan
Priority Liabilities
$140,000
$40,100
Roger Loan
30% Roger Capital
30% Susan Capital
40% Tom Capital
$5,000
$ 9,900
$45,000
$60,000
10,000*
Sale of assets
40,000
40,000*
Predistribution balances
60,000
90,000
10,000*
40,100
5,000
9,900
35,000
60,000
5,000
9,900
2,814* 32,186
17,086* 42,914
20,700*
20,700*
27,600*
11,486
15,314
Cash distribution: Creditors Partners-Schedu le A Balances January 31
40,100* 19,900* 0
40,100* 90,000
21,000
90,000*
0
Sale of remaining assets Offset loan to Roger capital Predistribution balances
5,000* 21,000
0
5,000
0
5,800*
Cash distribution: Partners-Schedu le B Balances February 28
21,000*
9,000*
0
$ 5,800*
$ 2,486
12,000* $ 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 1 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 0
$35,000 (27,000) 8,000 (5,186) $ 2,814
$60,000 (36,000) 24,000 (6,914) $17,086
$(5,800) 5,800 0
$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
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.
Dissolution and Liquidation of a Partnership
73 Solution P16-10
Balances October 1 Write-off Ral's loan against capital Collected accounts receivable Sale of inventory Sale of equipment Payment of bank loan and accrued interest Payment of accounts payable Liquidation expenses Predistribution balances October 31 distribution Balance November 1 Sale of equipment Accounts receivable Inventory to Vic Write-off remaining inventory Liquidation expenses Predistribution balances Cash distributed Balances
Cash $ 21,000
Noncash Assets $348,000
Liabilities $130,000
(15,000) 40,000 50,000 60,000
(44,000) (60,000) (55,000) (50,000)
(80,000) (2,000)
(80,000)
33,400 5,000 38,000 10,000
174,000
---
20% Vic Capital $45,400
(1,200) (3,000) 1,500
(2,000) (5,000) 2,500
(80 0) (2,000) 1,000
(180)
(300)
(120)
(600)
(1,000)
(400)
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
(800) 52,200 (52,200) ---
---
(9,920)
Schedule of Safe Payments 30% Ral October 31 Partners' equity October 31, 2003 Possible losses Possible loss on contingency fund
50% Tom Capital $150,000
(15,000)
(50,600)
38,400
30% Ral Capital $43,600
$ 174,0 00
Possible loss from Ral allocated 5/7 and 2/7 (rounded) Possible loss from Vic Cash distribution November 30 Partners' equity Nov embe r 30 Possible loss from Ral's debit balance 5/7 and 2/7 Cash distribution
5,000
50% Tom
20% Vic
$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 0
(20,414) 34,286 (886) 33,400
(8 ,166 ) (886 ) 886 0
$(9 ,920) 9,920 0
$ 52, 400
$ 9 ,720
(7,086) $ 45, 314
(2 ,834 ) $ 6 ,886
Chapter 16
74
Solution P16-11 1
Tucker, Gilliam, and Simpson Partnership Safe Payments Schedule for Cash Distribution on January 1, 2004 Possible Losses
Partner equity on January 1 Possible loss on noncash assets
Equity of Tucker 20% $130,000
$370,000
Possible loss on cash withheld
10,000
$195,000
(74,000)
(111,000)
(185,000)
56,000
(11,000)
10,000
(2,000)
(4,000) 50,000
Possible loss on Simpson deficit Safe payment to Tucker
Equity of Simpson 50%
$100,000
54,000 Possible loss on Gilliam's deficit
Equity of Gilliam 30%
(3,000)
(5,000)
(14,000)
5,000
14,000
(10,000)
0
(5,000)
(5,000)
0
$ 45,000
0
() deduct or loss Distribution of available cash:
To creditors To Tucker for partnership capital Retained for contingencies
$ 6 5,00 0 4 5,00 0 1 0,00 0
Total cash on hand
$12 0,00 0
Dissolution and Liquidation of a Partnership
75 Solution P16-11 2
(continued)
Cash distribution plan
Vulnerability ranks
Profit and Loss Ratio
Equity in Partnership Tucker Gilliam Simpson
$130,000 100,000 195,000
÷ ÷ ÷
Loss Absorption Potential
Vulnerability Ranking
$650,000 333,333 390,000
3 1 2
20% 30 50
Schedule of assumed loss absorption
Predistribution equities Assumed loss to eliminate Gilliam
Tucker Equity
Gilliam Equity
Simpson Equity
Total
$130,000
$100,000
$195,000
$425,000
(100,000)
(166,667)
(333,333)
28,334
91,667
(28,334)
(39,667)
(66,667) 63,333
Assumed loss to eliminate Simpson
0
(11,333) $ 52,000
0
$ 52,000
Cash distribution plan
Creditors First $65,000
Tucker
Gilliam
Simpson
100%
Next $52,000
100%
Next $39,667
2/7
Remainder
20%
5/7 30%
50%
Chapter 16
76
Solution P16-12 1
Closing entry Re venue Jee capital Moore capital Olsen capital Expe nses
$ 200, 000 25, 000 75, 000 100, 000 $40 0,00 0
To close revenue and expense items and distribute loss to partners as follows: Net Loss 20% Jee 40% Moore 40% Olsen Salaries Loss to divide Divided 20:40:40
$(200,000) (50,000) (250,000) 250,000
Loss allocated
2
0
$ 25,000
$
25,000
(50,000)
(100,000)
$(100,000)
$(25,000)
$ (75,000)
$(100,000)
Cash distribution plan
Vulnerability ranks
Vulnerability Rank
Equity
Loss Absorption
Jee: $300,000 balance - $50,000 loan - $25,000 loss
$225,000/20%
$1,125,000
3
Moore: loss
$375,000/40%
937,500
2
$270,000/40%
675,000
1
$450,000 balance - $75,000
Olsen: $350,000 balance + $20,000 loan - $100,000 loss
Assumed loss absorption
Jee Predistribution equities Loss to absorb Olsen
$ 225,000 (135,000)
Loss to absorb Moore $105,000 ÷ 40/60 (157,500) $
Moore
Olsen
$ 375,000 (270,000)
90,000
105,000
(52,500)
(105,000)
37,500
0
Total
$ 270,000 (270,000)
$ 870,000 (675,000)
0
195,000
$
37,500
Dissolution and Liquidation of a Partnership
77 Solution P16-12
(continued)
Cash distribution plan
Priority Creditors First $80,000
Jee
Moore
Olsen
100%
Second $37,500
100%
Third $157,500
2/6
4/6
Remainder
20%
40%
40%
Moore
Olsen
3
Cash distribution schedule Priority Creditors
First
$ 80,000
Jee
$80,000
Second
37,500
$37,500
Third
18,000
6,000
$12,000
$43,500
$12,000
$135,500
$80,000
0
Chapter 16
78
Solution P16-13 Beams, Plank, and Timbers Partnership Statement of Partnership Liquidation for the period January 1, 2004 to March 31, 2004 Noncash Assets
Cash Balances January 1
$120,000
Charge Timbers' loan to Timbers' capital
Liabilities
$580,000
100,000
100,000*
Sale of inventory
100,000
80,000*
Predistribution balances
320,000
January distribution (schedule 1) Creditors Plank
250,000* 60,000* 10,000
Plant assets to Beams and loss distribution Sale of inventory Liquidation expenses paid
$170,000
Plank Loan $10,000
30% Plank Capital
20% Timbers Capital
$170,000
$100,000
20,000*
Collection of receivables
Balances February 1
$250,000
50% Beams Capital
380,000
20,000*
10,000 250,000
10,000
4,000
176,000
84,000
250,000* 10,000* 380,000
0
60,000* 60,000
180,000
6,000
120,000*
2,000*
Liability discovered
8,000
180,000
0
50,000* 126,000
84,000
50,000* 5,000*
3,000*
2,000*
30,000*
18,000*
12,000*
1,000*
600*
400*
4,000*
2,400*
1,600*
Predistribution balances
68,000
February distribution (schedule 2) Creditors Plank Timbers
8,000* 30,000* 20,000*
Balances March 1
10,000
200,000
8,000
90,000
102,000
68,000
8,000* 30,000* 20,000* 200,000
0
90,000
72,000
48,000
45,000*
27,000*
18,000*
2,500*
1,500*
1,000*
Sale of plant assets and write-off Liquidation expenses paid
110,000 5,000*
Predistribution balances
115,000
March distribution
115,000*
Liquidation completed March 31
200,000*
0
0
42,500
43,500
29,000
42,500*
43,500*
29,000*
0
0
0
Dissolution and Liquidation of a Partnership
79 Solution 16-13
(continued)
Schedule 1
Beams, Plank, and Timbers Partnership Schedule of Safe Payments to Partners January Distribution
Noncash assets Contingency reserve
Possible Losses
Beams Capital
Plank Capital and Loan
$380,000
$180,000
$186,000
Timbers Capital $ 84,000
10,000
Possible losses
390,000
Distribution 50:30:20
390,000* 0
195,000*
117,000*
78,000*
15,000*
69,000
6,000
Distribution of Beams' deficit 60:40
15,000
Safe payment to Plank
0
9,000* $ 60,000
6,000* 0
Schedule 2
Beams, Plank, and Timbers Partnership Schedule of Safe Payments to Partners February Distribution
Noncash assets Contingency reserve
Possible Losses
Beams Capital
Plank Capital
Timbers Capital
$200,000
$ 90,000
$102,000
$ 68,000
10,000
Possible losses
210,000
Distribution 50:30:20
210,000* 0
105,000* 15,000*
63,000*
42,000*
39,000
26,000
Distribution of Beams' deficit 60:40 Safe payment to Plank and Timbers *Deduct or deficit
15,000 0
9,000* $ 30,000
6,000* $ 20,000
