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633
634
Ch. 14Exercises
EXERCISES
EXERCISE 14-1
(1)
Inventory...................................................................................
Accounts Receivable ..........................................................
Warranty Obligations ..........................................................
Pearson, Capital .................................................................
Murphy, Capital...................................................................
To adjust book values to market values.
58,000
Cash .........................................................................................
Goodwill....................................................................................
Pearson, Capital .................................................................
Murphy, Capital...................................................................
Warner, Capital...................................................................
To record admission of Warner and recognition of goodwill.
If Warner contributes $84,000 for a 30% interest in capital,
this suggests a total new partnership value of $280,000.
84,000
56,000
18,000
10,000
18,000
12,000
33,600
22,400
84,000
(2) If the $56,000 of goodwill proved to be worthless, Warner would be charged 35% of
$56,000, or $19,600. However, the real harm to Warner would be that of having paid more
to enter the partnership than he/she should have. If the goodwill did not exist, then the adjusted assets of the previous partners would have been $140,000 ($45,000 + $65,000 +
$30,000), which represents 70% of a total partnership value of $200,000. In that case,
Warner would have only paid $60,000 for a 30% interest in capital. Therefore, Warner
would have paid an extra $24,000 ($84,000 versus $60,000) for the goodwill that proved to
be worthless.
EXERCISE 14-2
Date:
To:
My client
With respect to the questions you had regarding the above referenced matter, please consider
the following responses which correspond to your questions (1) through (7).
(1) It is correct that a corporation cannot record goodwill unless it has been purchased through
the acquisition of another company. However, in the case of a partnership, when a new
partner invests in the partnership or the partnership acquires the interest of an existing
partner the transaction may be recorded under either the bonus method or the goodwill
method. Under the goodwill method, goodwill is recognized on the partnership financial
statements in order to reflect the economic goodwill suggested by the consideration conveyed in the transaction.
635
Ch. 14Exercises
636
Ch. 14Exercises
EXERCISE 14-3
(1) Both methods recognize asset write-downs. The recognition of such write-downs would
normally be recognized even outside of the area of accounting for partnerships. Current
examples of write-downs relate to measuring inventory at lower of cost or market and recognizing the impairment of value on long-lived assets. However, only the goodwill method
allows write-ups that would otherwise not be recognized by generally accepted accounting
principles (GAAP).
(2) Under the bonus method, goodwill traceable to the original partnership is accounted for by
crediting the original partners capital balances. This credit, in substance, recognizes that
their equity in the partnership is increased by virtue of the goodwill. However, these credits
do not reflect the entire amount of the goodwill due to the fact that the bonus method does
not allow for the write-up of assets.
(3) If a new incoming partner contributes net assets, both tangible and intangible, it is possible
that his/her capital balance may be more than the value contributed. This would occur under the bonus method when intangibles, including goodwill, are traceable to the new incoming partner.
(4) Use of the goodwill method will always result in a greater amount of total partnership capital
due to the recognition of write-ups. This would suggest that resulting interest on invested
capital would also be higher under this method.
(5) A risk associated with the goodwill method is that the amortization and/or write-off of goodwill may occur using a profit and loss percentage that is different from an original partners
interest in profits and losses. For example, assume that goodwill traceable to the original
partners, A and B, was allocated among them 40% to A and 60% to B. If the goodwill is
subsequently written off and As new interest in profits and losses is different from 40%, the
resulting capital balance will be different than if the bonus method had originally been used.
A similar result may occur when a new partners interest in profits is different from his/her
initial interest in capital.
637
Ch. 14Exercises
EXERCISE 14-4
(1) The note payable has a market value greater than the book value that will reduce the net
asset value of the partnership by $15,000. However, the assets whose market values differ
from their book values will result in a $24,000 increase in the net asset value of the partnership. The total net increase in the value is $9,000 ($24,000 less $15,000). Petersens
interest in this net increase is $4,500 (50% $9,000), resulting in a suggested value for his
interest in the partnership of $104,500.
(2) If the value of Petersens interest before consideration of goodwill is $104,500 as set forth
above, then the difference between $130,000 and $104,500, or $25,500, represents Petersens 50% interest in the value of goodwill. Therefore, the suggested value of goodwill is
$51,000.
(3) Both Jacobsen and Olsen would be acquiring equal interests in the net asset values associated with Petersens interest; therefore, one would expect them to value these assets at
equal amounts. The critical factor relates to the voting interests acquired by each of the
remaining partners. If Jacobsen were to acquire half of Petersens interest along with half of
his voting rights, then Jacobsen would have a controlling voting interest in the partnership.
This may result in Jacobsen being motivated to pay more for her one-half than Olsen would
be willing to pay. All things being equal, having a controlling interest represents a control
premium, which is typically reflected in transaction prices.
(4) Based on the $104,500 value in item (1) above, a half interest in that would be $52,250.
Therefore, selling a half interest for $60,000 suggests that $7,750 represents Petersens
25% (one-half of a total 50% interest) interest in goodwill with an imputed total goodwill value of $31,000. Prior to sale, Petersens capital balance would be increased by $4,500 per
item (1) above plus the $7,750 goodwill traceable to the partial sale resulting in a total of
$112,250. After the sale for $60,000, Petersens capital balance would be reduced to
$52,250 ($112,250 less $60,000).
(5) In either case, Petersen should sell his interest for the same price. However, the ability for
him to collect the sales price may be a factor. The partnership itself may have a greater
ability to pay the sales price. The partnership may have a greater ability to borrow the necessary funds for the purchase price due to its collateral position and operating cash flows.
Obviously, Petersen would be most interested in maximizing the value of his interest and
receiving a cash payment in the most timely and secure manner. The ability of a buyer to
pay, whether it is the partnership or an individual, is a critical factor to be considered. If the
partnership were to acquire Petersens interest, then Jacobsen could achieve a controlling
interest in the remaining partnership without using her personal funds.
638
Ch. 14Exercises
EXERCISE 14-5
(1)
Partnership
$ 500,000
$ 600,000
$ 800,000
(369,500)
$ 130,500
(50,000)
$ 80,500
(410,000)
$ 190,000
125,000
$ 315,000
(558,000)
$ 242,000
50,000
$ 292,000
(f)
(g)
30%
70%
(b)
(h)
(j)
20%
80%
$ 115,000
80,500
$ 420,000
315,000
$ 365,000
292,000
$ 34,500
$ 105,000
$ 73,000
(2)
(h)
(i)
25%
75%
Partnership
Amount of consideration to be conveyed:
Value of land .....................................
Value of cash ....................................
Total consideration............................
Fair value of new partnership
suggested by the fair value of the
new partners investment [(h) (c)]
Fair value of the original
partnership .....................................
Investment of new partner.................
Adjusted value of new partnership
excluding goodwill [(d) + (h)] ..........
If (i) exceeds (j), goodwill is
traceable to ....................................
In the amount of [(i) (j)]...................
If (j) exceeds (i), goodwill is
traceable to ....................................
In the amount of [(e) (j)]..................
$ 50,000
4,000
$ 54,000
$ 50,000
60,000
$ 110,000
$ 50,000
15,000
$ 65,000
$ 180,000
$ 440,000
$ 325,000
$ 80,500
54,000
$ 315,000
110,000
$ 292,000
65,000
$ 134,500
$ 425,000
$ 357,000
Original
Partners
$ 45,500
Original
Partners
$ 15,000
New
Partner
$ 8,000
639
Ch. 14Exercises
Proof:
Book value of original partnership.....
Asset appreciation (depreciation)......
Goodwill traceable to original
partnership .....................................
Goodwill traceable to new partner.....
(h) Investment of new partner.................
Total capital of new partnership ........
(c) New partners interest in capital ........
New partners capital balance ...........
(a)
$130,500
(50,000)
45,500
54,000
$180,000
30%
$ 54,000
$190,000
125,000
$242,000
50,000
15,000
110,000
$440,000
25%
$110,000
8,000
65,000
$365,000
20%
$ 73,000
EXERCISE 14-6
1.
Cash
Noncash
Assets
Liabilities
Combined Capital
and Loan Balances
A (50%) B (30%) C (20%)
2.
Cash
Noncash
Assets
Liabilities
Combined Capital
and Loan Balances
A (50%) B (30%) C (20%)
640
Ch. 14Exercises
Cash
Liabilities
Combined Capital
and Loan Balances
A (50%) B (30%) C (20%)
EXERCISE 14-7
Given the adjustment of selected assets to net realizable value, the result is net assets of
$90,000. It is assumed that the net assets can be disposed of at book value. As a result of the
adjustment, Crawford has developed a deficit of $15,000 (see Schedule A). If Crawford is personally solvent to the extent of the deficit, then it would contribute the $15,000 to the partnership
and net assets would be liquidated and distributed. This would result in Crawford and Meyer
receiving $0 and $73,000, respectively. However, if Crawford were unable to contribute the full
amount of the deficit, then Meyer and Jensen would have to absorb Crawfords remaining deficit
balance. In the worst case, the entire $15,000 deficit would be absorbed by Meyer and Jensen
in the amount of $9,000 and $6,000, respectively. This would cause Meyer to have a capital
balance of $64,000. I would advise Meyer to take Jensens offer for several reasons. First,
Crawfords ability to cover the deficit may be at issue. Second, the Jensen offer is not significantly less than the $73,000 they would receive if Crawford were able to fully cover the deficit.
Finally, there are no guarantees that the net assets could actually net the amounts suggested.
After all, the company is in a distressed condition, and there would likely be transaction costs
associated with the liquidation.
Schedule A
Partial Liquidation
Assets
Crawford
50%
$ 230,000
(140,000)
$ 90,000
$ 55,000
(70,000)
$ (15,000)
641
Meyer
30%
$115,000
(42,000)
$ 73,000
Jensen
20%
$ 60,000
(28,000)
$ 32,000
Ch. 14Exercises
EXERCISE 14-8
(1) Allocation of typical profits under the original partnerships agreement:
Salaries.................................
Bonus to A*...........................
Remaining profits..................
Total......................................
A
$30,000
12,000
10,000
$52,000
B
$30,000
C
$40,000
4,000
$34,000
6,000
$46,000
Cumulative
Total
$100,000
112,000
132,000
Salaries.......................................
Remaining profits* ......................
Bonus to Dawson**.....................
Total............................................
A
$30,000
42,000
B
$30,000
14,000
C
$40,000
42,000
$72,000
$44,000
$82,000
D
$30,000
42,000
20,000
$92,000
Cumulative
Total
$130,000
270,000
290,000
*In order for Bower to increase his allocation by $10,000, he would need to receive a
$14,000 allocation based on the profit percentage. Therefore, the total amount of profit
subject to this allocation would be $140,000 ($14,000 divided by 10%).
**If the cumulative total of income allocated before the bonus to Dawson is $270,000, then
Dawson would be entitled to the $20,000 bonus under the revised partnership agreement.
(2) The fair value of the net assets of the original partnership is $56,000 ($530,000
$474,000). If Dawson acquires a 30% interest in the capital of the partnership, this would
mean that the fair value traceable to the original partnership would represent 70% of the
new partnerships total capital. Therefore, the total capital of the new partnership would be
$80,000 ($56,000 70%), and Dawson would have to pay $24,000 ($80,000 $56,000) for
a 30% interest in the new partnership.
642
Ch. 14Exercises
Noncash
Offset Capital Balances
Cash
Assets Liabilities
Arnold
Bower
Chambers
$
0 $ 680,000 $ 430,000 $ 50,000 $140,000 $ 60,000
4,000
(2,000)
(800)
(1,200)
(20,000)
(2,500)
(16,000)*
(1,500)
515,000 (660,000)
(72,500)
(29,000)
(43,500)
(434,000)
(434,000)
$ 81,000 $
0 $
0 $ (27,000) $ 94,200 $ 13,800
12,000
12,000
15,000
(6,000)
(9,000)
0 $
0 $
0 $ 88,200 $ 4,800
$ 93,000 $
*$15,000 fair value + (20% $5,000 book value vs. fair value) = $16,000
643
Ch. 14Exercises
EXERCISE 14-9
Installment Liquidation Schedule
Date
Circumstance
Cash
Noncash
Capital and Loan Balance
Assets Liabilities Coleman
Moore
Ramsey
$ 8,000
$ 3,000
(2,000)
$ 1,000
$ 1,000
600
$ 1,600
2,800
$ 4,400
(24,600)
(200) (3,200)
$ 3,600 $ 1,200 $ 1,200
Schedule A
Schedule of Safe Payments
Coleman
Profit and loss percentages ...........................
60%
Combined capital and loan balance
before distribution .............................
Maximum loss possible............................
Safe payments .........................................
644
$28,200
(3,600)
$24,600
Moore
Ramsey
20%
20%
July Distribution
$ 1,400
(1,200)
$ 200
$ 4,400
(1,200)
$ 3,200
Total
100%
$34,000
(6,000)
$28,000
Ch. 14Exercises
EXERCISE 14-10
(1) None of the cash would be distributed to Partner A because the outside creditors claims
must be satisfied before any distributions to partners occur. Even after the sale, there is
only $32,000 of cash available to service the liabilities of $35,000.
(2) Partner A would receive $5,000 determined as follows:
Cash
Beginning balance .......................
Sale of assets ..............................
Payment of liabilities....................
Balance........................................
Assume assets are worthless......
Balance........................................
$ 12,000
70,000
(35,000)
$ 47,000
$ 47,000
Noncash
Assets
Liabilities
Partners Loan
and Capital Balance
A
B
C
(3) If Partner B received $27,000 from the first safe payment, then he/she would need to receive another $52,000 to reach the target of $79,000 in total. If his/her capital balance after
the first sale of assets and the distribution of $27,000 is $37,000 ($64,000 $27,000), then
his/her share of a gain on the sale of the remaining assets would have to bring the capital
balance to the desired amount of $52,000. The necessary share of the gain is $15,000
($52,000 $37,000), which represents 30% of a total gain of $50,000. Therefore, the remaining assets would have to sell for $160,000 in order to produce a gain of $50,000.
Cash
Beginning balance .......................
Sale of assets ..............................
Payment of liabilities....................
Balance........................................
Assume assets are worthless......
Balance........................................
Absorb deficit balance .................
Absorb deficit balance .................
Balance........................................
$ 12,000
50,000
(35,000)
$ 27,000
$ 27,000
$ 27,000
645
Noncash
Assets
Liabilities
Partners Loan
and Capital Balance
A
B
C
Ch. 14Problems
PROBLEMS
PROBLEM 14-1
Carlton
$ 120,000
Weber
$ 70,000
100,000
(120,000)
$ 100,000
87,500
(90,000)
$ 67,500
(12,500)
40,000
(60,000)
$ 80,000
(8,000)
35,000
(45,000)
$ 45,000
(6,000)
36,500
(20,000)
$ 88,500
36,500
(20,000)
$ 55,500
Capital Balances
Stansbury
Laidlaw
$ 80,000
(80,000)
$ 80,000
Wilson
112,500
(90,000)
$102,500
(37,500)
270,000
45,000
(45,000)
$ 65,000
(65,000)
Total
$270,000
190,000
144,000
$ 96,000
140,000
(120,000)
$ 108,500
140,000
(120,000)
$ 75,500
85,000
(60,000)
$ 133,500
85,000
(60,000)
$ 100,500
26,500
(160,000)
$
0
140,000
(120,000)
$ 116,000
300,000
85,000
(60,000)
$ 141,000
375,000
26,500
$ 127,000
646
26,500
$
$ 167,500
294,500
Ch. 14Problems
Salary .....................................
Bonus (Note A).......................
Subtotal ..................................
Remaining profit (loss) ...........
Total .......................................
Carlton
$120,000
$120,000
(20,000)
$100,000
Weber
$ 90,000
12,500
$102,500
(15,000)
$ 87,500
Laidlaw
$ 90,000
37,500
$127,500
(15,000)
$112,500
$ 45,000
15,000
$ 60,000
(15,000)
$ 45,000
Wilson
Total
$300,000
50,000
$350,000
(50,000)
$300,000
1st 6 mos.
2016 Salary .....................................
Bonus (Note B).......................
Subtotal ..................................
Remaining profit (loss) ...........
Total .......................................
$ 60,000
(20,000)
$ 40,000
$ 45,000
5,000
$ 50,000
(15,000)
$ 35,000
2nd 6 mos.
2016 Per profit and loss
percentages......................
$ 36,500
$ 36,500
140,000
140,000
$140,000
420,000
1st 6 mos.
2018 Per profit and loss
percentages......................
85,000
85,000
85,000
255,000
2017
$ 60,000
Note A:
Note B:
647
$150,000
20,000
$170,000
(50,000)
$120,000
$ 73,000
Ch. 14Problems
PROBLEM 14-2
(1) The net assets of the partnership have a book value of $200,000 and a fair value of
$108,000 ($437,000 less $329,000). The decline in value of $92,000 ($200,000 vs.
$108,000) would be allocated to Rowe in the amount of $36,800 (40% of $92,000). Therefore, Rowes adjusted capital balance at fair value would be $43,200 ($80,000 less
$36,800), or $21,600 for a half interest.
(2) The fair value of the original partnership is $108,000. This amount would represent 60% of
the new partnerships total capital of $180,000 ($108,000 divided by 60%). Therefore, a
new partner would have to convey assets with a value of $72,000 ($180,000 less
$108,000).
(3) Rowes capital = $80,000 $36,800 $2,880 = $40,320 based on the following entries:
Capital, Kravitz ...................................................................
Capital, Rowe .....................................................................
Net Assets ....................................................................
To recognize write-down of net assets.
55,200
36,800
Cash ...................................................................................
Capital, Kravitz ...................................................................
Capital, Rowe .....................................................................
Capital, New Partner.....................................................
To recognize investment of new partner.
60,000
4,320
2,880
92,000
67,200*
648
Ch. 14Problems
PROBLEM 14-3
(1)
Pre-sale capital balance ........................
Sale to Grossman..................................
Post-sale capital balance.......................
(2)
Pre-sale capital balance ........................
Recognize only decreases in the
value of existing assets .....................
Sale to Grossman..................................
Post-sale capital balance.......................
(3)
Pre-sale capital balance ........................
Recognize only decreases in the
value of existing assets .....................
Sale to partnership ................................
Post-sale capital balance.......................
(4)
Pre-sale capital balance ........................
Recognize only decreases in the
value of existing assets .....................
Recognition of Zeigler's goodwill ...........
Sale to partnership ................................
Post-sale capital balance.......................
(5)
Pre-sale capital balance ........................
Recognize only decreases in the
value of existing assets .....................
Recognition of all suggested goodwill ...
Sale to partnership ................................
Post-sale capital balance.......................
(6)
Pre-sale capital balance ........................
Recognize all changes in the
value of existing assets .....................
Recognition of all suggested goodwill ...
Sale to partnership ................................
Post-sale capital balance.......................
Grossman
Casper
$125,000
150,000
$275,000
$200,000
$200,000
Grossman
Casper
Ziegler
Total
$125,000
$200,000
$ 150,000
$ 475,000
(15,750)
Ziegler
Total
$ 150,000 $ 475,000
(150,000)
$
$ 475,000
(12,250)
143,000
$255,750
(7,000)
(35,000)
(143,000)
$
$ 440,000
$184,250
Grossman
Casper
Ziegler
Total
$125,000
$200,000
$ 150,000
$ 475,000
(14,000)
(8,500)
$102,500
(14,000)
(7,000)
(35,000)
(8,500) (143,000) (160,000)
$177,500 $
$ 280,000
Grossman
Casper
Ziegler
Total
$125,000
$200,000
$ 150,000
$ 475,000
(14,000)
(14,000)
(7,000)
(35,000)
17,000
17,000
(160,000) (160,000)
$
$ 297,000
$111,000
$186,000
Grossman
Casper
Ziegler
Total
$125,000
$200,000
$ 150,000
$ 475,000
(14,000)
34,000
(14,000)
34,000
(7,000)
(35,000)
17,000
85,000
(160,000) (160,000)
$
$ 365,000
$145,000
$220,000
Grossman
Casper
Ziegler
Total
$125,000
$200,000
$ 150,000
$ 475,000
8,000
12,000
8,000
12,000
$145,000
$220,000
4,000
20,000
6,000
30,000
(160,000) (160,000)
$
$ 365,000
Note: This problem provides an opportunity to discuss which of the above alternatives, if any, is
most appropriate. Consideration should be given to what is currently allowed by generally accepted accounting principles.
649
Ch. 14Problems
PROBLEM 14-4
(1)
Capital Balances
Murray
Clay
Rayburn
Davis
Balances as of
December 31, 2013................
Distribution of Clays 2013 bonus
(see Schedule A)....................
Distribution of 2013 other income
(see Schedule A; 80%
$144,000) ...............................
Allocation of 2014 income* (see
Schedule A)............................
Quarterly distributions ..................
Balances as of
December 31, 2014................
Admission of Rayburn (see
Schedule B)............................
Distribution of Clays 2014 bonus
(see Schedule A)....................
Distribution of 2014 other income
(see Schedule A; 80%
$24,000) .................................
Allocation of 2015 income* (see
Schedule A)............................
Subtotal ........................................
Withdrawal of Davis**...................
Balances as of
December 31, 2015................
Distribution of Clays 2015 bonus
(see Schedule A)....................
Distribution of 2015 other income
(see Schedule A)....................
Allocation of 2016 income* (see
Schedule A)............................
Balances as of June 30, 2016......
$ 50,000
$ 80,000
Total
$ 70,000
(36,000)
(38,400)
(38,400)
(38,400)
108,000
(100,000)
108,000
(100,000)
84,000
(70,000)
$ 19,600
(3,300)
$ 49,600
(3,300)
$ 9,600
(3,300)
$ 78,800
$ 68,900
(6,000)
(6,400)
(6,400)
(6,400)
50,000
50,000
$ 59,900 $ 89,900
4,500
(59,900)
36,100
$ 30,000
4,500
5,900
$ 74,800
1,500
$ 34,500
$ 76,300
$ 94,400
205,200
(1,100)
0
0
40,948
$ 135,348
40,948
$ 74,348
28,104
$104,404
314,100
650
Ch. 14Problems
Davis
33.3%
Murray
33.3%
$100,000
$100,000
48,000
$148,000
48,000
$148,000
$100,000
$100,000
8,000
$108,000
Clay
33.3%
Rayburn
Cumulative
Total
$ 70,000
36,000
48,000
$154,000
$270,000
306,000
450,000
8,000
$108,000
$70,000
6,000
8,000
$84,000
270,000
276,000
300,000
$50,000
$50,000
$35,000
0
$50,000
0
$50,000
1,100
0
$36,100
$ 5,900
0
0
40,948
$40,948
Note A:
Note B:
Note C:
651
40,948
$40,948
0
5,900
0
7,630
20,474
$28,104
135,000
140,900
142,000
142,000
0
7,630
110,000
Ch. 14Problems
$ 78,800
59,000
$137,800
68,900
$ 68,900
59,000
$ 9,900
Cash
$ 277,000
(84,000)
(183,000)
$ 10,000
Liabilities
Murray
Clay
Rayburn
$112,908
$112,908
$1,908
$1,908
$68,184
$68,184
$84,000
$84,000
Schedule C
Partial Liquidation Schedule
Note D:
Noncash
Loan from
Capital Balances
Cash
Assets Liabilities Murray
Murray
Clay
Rayburn
$ 15,000 $433,100 $84,000 $50,000 $135,348 $74,348 $104,404
180,000 (220,000)
(16,000) (16,000)
(8,000)
82,000
(70,000)
4,800
4,800
2,400
$277,000 $143,100 $84,000 $50,000 $124,148 $63,148 $ 98,804
652
Murray
40%
$174,148
(4,000)
(57,240)
$112,908
Clay
Rayburn
40%
20%
$ 63,148
(4,000)
(57,240)
$ 1,908
Total
100%
$ 98,804 $ 336,100
(2,000)
(10,000)
(28,620) (143,100)
$ 68,184 $ 183,000
Ch. 14Problems
PROBLEM 14-5
If the partnership is liquidated, Jacobs capital balance and resulting distribution will be as follows:
Cash
Profit and loss percentages ....................
Beginning balances.................................
Discovery of liabilities..............................
Sale of assets .........................................
Payment of liabilities ...............................
Liquidation expenses ..............................
Payment of Williams loan.......................
Balances .................................................
Contribution by Harrington ......................
Absorb Harrington's deficit ......................
Payment of Williams loan.......................
$ (15,000)
232,000
(172,000)
(18,000)
(25,000)
$ 2,000
13,000
$ 15,000
Noncash
Assets
$ 322,000
Liabilities
$ 160,000
12,000
(322,000)
30%
$ 65,000
(3,600)
(27,000)
40%
$ 30,000
(4,800)
(36,000)
(172,000)
(5,400)
$
$ 16,000
(5,400)
(25,000)
$ 4,000
(2,500)
$ 13,500
(2,500)
1,500
(7,200)
$ (18,000)
13,000
5,000
$
If the partnership is liquidated, Jacobs will receive $13,500 of cash and a claim against Harrington for $2,500. The claim against Harrington will appear to be of questionable collectibility.
If the offer by Williams is accepted, the amount received by Jacobs will be determined as follows:
Cash
Profit and loss percentages ....................
Beginning balances.................................
Adjustment for uncertainties ...................
Balances .................................................
$ (15,000)
$ (15,000)
Noncash
Assets
$ 322,000
(70,000)
$ 252,000
653
Liabilities
$ 160,000
$ 160,000
30%
$ 65,000
(21,000)
$ 44,000
40%
$ 30,000
(28,000)
$ 2,000
Ch. 14Problems
31,000
50%
15,500
(3,100)
12,400
24
516.67
516.67
24
0.50%
$11,657.48
$15,500.00
$ 12,400
11,657.48
742.52
$14,757.48
Even after imputing interest on the installment receivable, it will appear that Jacobs is better off
to accept the offer from Williams. Not only does Jacobs avoid the uncertainty associated with
the claim against Harrington, but she is also able to avoid the uncertainties associated with
questionable liquidation assumptions. Having said this, Jacobs should also evaluate the collectibility of the installment payments from Williams.
654
Ch. 14Problems
PROBLEM 14-6
Capital Balances
Reinartz
Hepburn
Murphy
2016
2017
2018
2019
Balance as of
December 31, 2015 ...........
Allocation of profits
(see Note A).......................
Distributions ...........................
Year-end balance...................
$ 54,000
$ 76,000
127,600
102,400
(100,000) (100,000)
$ 81,600 $ 78,400
Beginning balance..................
Admission of Hepburn
(see Note C) ......................
Allocation of profits
(see Note A).......................
Distributions ...........................
Year-end balance...................
$ 81,600
$ 78,400
30,000
20,000
Pioso
Total
$ 130,000
230,000
(200,000)
$ 160,000
$ 160,000
$ 70,000
120,000
145,250
98,875
(80,000)
(80,000)
$ 176,850 $ 117,275
85,875
(80,000)
$ 75,875
330,000
(240,000)
$ 370,000
Beginning balance..................
Sale of interest to Reinartz .....
Allocation of profits
(see Note A).......................
Distributions ...........................
Year-end balance...................
$ 176,850 $ 117,275
(176,850)
176,850
$ 75,875
Beginning balance..................
Adjustment of net assets........
Recognition of Reinartz
goodwill (see Note C) ........
Sale of interest by Reinartz ....
Subtotal ..................................
Admission of Pioso
(see Note C) ......................
Ending balance ......................
100,000
(60,000)
$ 334,125
100,000
(80,000)
$ 95,875
$ 334,125
(5,000)
$ 95,875
(5,000)
$ 90,875
21,625
$112,500
75,000
$ 75,000
20,875
(350,000)
$
$ 370,000
200,000
(140,000)
$ 430,000
$ 430,000
(10,000)
20,875
(350,000)
$ 90,875
96,625
$ 187,500
Note A:
2016 Allocation Profit
Profit and loss percentages .............................
Salary ..............................................................
Bonus (see Note B) .........................................
Balance............................................................
Totals...............................................................
655
Murphy
40%
$ 80,000
46,000
1,600
$127,600
Reinartz
60%
$100,000
2,400
$102,400
Cumulative
Total
$180,000
226,000
230,000
Ch. 14Problems
2017 Allocation
Profit and loss percentages ..
Salary ...................................
Bonus (see Note B) ..............
Balance.................................
Totals....................................
2018 Allocation
Profit and loss percentages ..
Balance.................................
Totals....................................
Note B:
Partner
Murphy
Murphy
30%
$ 80,000
66,000
(750)
$145,250
Murphy
Reinartz
45%
$100,000
(1,125)
$ 98,875
Reinartz
50%
$100,000
$100,000
Hepburn
25%
$70,000
16,500
(625)
$85,875
Hepburn
50%
$100,000
$100,000
Cumulative
Total
$250,000
332,500
330,000
Cumulative
Total
$200,000
2016 Bonus
Percent of
Income
20%
Income
$230,000
Bonus
$46,000
2017 Bonus
Partner
Murphy
Hepburn
Note C:
Percent of
Income
20%
5%
Income
$330,000
330,000
Bonus
$66,000
16,500
$82,500
Admission of Hepburn: If Hepburn paid $70,000 for a 25% interest in capital, this
would suggest that the new partnership had a value of $280,000. This value exceeds
the capital of the old partnership ($160,000) plus the investment of the new partner
($70,000). Therefore, goodwill of $50,000 [$280,000 ($160,000 + $70,000)] is traceable to the original partnership. The goodwill is allocated to the original partners per
their profit percentages.
Sale of Reinartz Interest: If Reinartz's capital balance has a book value of $329,125
after the adjustment of net assets, a sale to the partnership for $350,000 suggests
goodwill of $20,875 as being traceable to Reinartz.
Admission of Pioso: If Pioso paid $75,000 for a 40% interest in capital, this would
suggest that the new partnership had a value of $187,500. This value exceeds the
capital of the old partnership ($90,875) plus the investment of the new partner
($75,000). Therefore, goodwill of $21,625 [$187,500 ($90,875 + $75,000)] is traceable to the original partnership. The goodwill is allocated to the original partners per
their profit percentages (in this case, Hepburn gets 100%).
656
Ch. 14Problems
PROBLEM 14-7
If the partnership were liquidated on March 31, 2016, Klaproth would receive $48,750, determined as
follows:
Event/Circumstance
Noncash
Assets
Cash
Liabilities
$ 77,500 $
(77,500)
$
$
30%
35%
$110,000
(42,000)
17,500
$ 20,000
(36,000)
15,000
$ 90,000
(42,000)
17,500
(21,000)
(18,000)
(21,000)
(7,500)
$ (26,500)
12,500
14,000
$
(8,750)
$ 35,750
(8,750)
$ 55,750
(7,000)
$ 48,750
(48,750)
$
(7,000)
$ 28,750
(28,750)
$
If Klaproth continued in the partnership until March 31, 2018, he would receive draws of $20,000 and
a final payment of $117,040 (110% of final capital balance of $106,400) less an investment of
$50,000, determined as follows:
Event/Circumstance
Cash
Noncash
Assets
Liabilities
(80,000)
80,000
120,000
32,000
(20,000)
50,000
35%
$ 90,000
46,000
(40,000)
30,000
42,000
(20,000)
200,000
56,900
(60,000)
62,200
(40,000)
$ 78,200
80,900
(20,000)
$ 172,900
(350,000)
(122,500)
$ 60,000 $1,470,000 $1,400,000 $ 106,400
(105,000)
$ (26,800)
(122,500)
$ 50,400
657
30%
$ 20,000
Ch. 14Problems
Klaproth
35%
$100,000
30,000
(98,000)
$ 32,000
Stone
30%
$130,000
(84,000)
$ 46,000
Jackson
35%
$ 90,000
50,000
(98,000)
$ 42,000
Cumulative
Total
$320,000
400,000
120,000
Note B
Allocation of 2017 income:
Profit and loss percentages .......
Salary .........................................
Bonus as a percent of sales.......
Balance ......................................
Totals .........................................
Klaproth
35%
$100,000
36,000
(79,100)
$ 56,900
Stone
30%
$130,000
(67,800)
$ 62,200
Jackson
35%
$ 90,000
70,000
(79,100)
$ 80,900
Cumulative
Total
$320,000
426,000
200,000
It appears that Klaproth would be well advised to continue in the partnership if forecasted results are
realized. Even if the cash flows from the two alternatives were expressed as present values, continuing in the partnership appears to be the best alternative.
658
Ch. 14Problems
PROBLEM 14-8
(1)
Cash
Noncash
Assets
Liabilities
30%
30%
40%
$ 15,000
$ 722,000 $ 613,000
$ 20,000
$ 87,000
$ 17,000
90,000
10,000
$115,000
(80,000)
$ 35,000
(130,000)
(12,000)
$ 580,000 $ 613,000
(80,000)
$ 580,000 $ 533,000
(25,000)
(12,000)
(600)
$ 7,400
(12,000)
(600)
$ 74,400
(16,000)
(800)
$
200
$ 7,400
(9,500)
$ 74,400
(1,500)
(83,000)
$ 520,000 $ 450,000
(2,100)
12,000
$ 7,800
(2,100)
12,000
$ 82,800
(2,800)
16,000
$ (600)
$ 520,000 $ 450,000
(150,000)
(20,000)
(350,000) (450,000)
$
0 $
0
$ 7,800
(9,000)
(4,500)
6,000
$
300
(18,000)
$ 64,800
(9,000)
(4,500)
6,000
$ 57,300
28,000
(43,000)
$ 20,000
(18,000)
2,000
120,000
5,000
(80,000)
$ 47,000
10,000
$
(35,000)
(300)
(57,000)
$
0
659
0 $
(300)
(57,000)
$
0
200
(14,000)
(600)
(12,000)
(6,000)
8,000
$ (10,600)
10,000
600
$
Ch. 14Problems
Dvorak
Kelsen
Morgan
30%
30%
40%
$ 7,800 $ 82,800 $ (600)
(600)
(600)
(800)
(21,000)
$ (13,800)
13,800
$
0
(21,000)
$ 61,200
(43,200)
$ 18,000
(28,000)
$ (29,400)
29,400
$
0
(2) The distributions of the equipment and vehicles were not safe. First of all, distributions
should not be made unless all liabilities have been settled. Furthermore, if a schedule of
safe payments had been made at that time, the partners would not have had adequate capital balances to absorb potential losses.
(3) Solvent partners will have a legal claim against those partners who are not able to satisfy
their deficit balance. The ultimate collectability of these amounts is dependent upon the
insolvent partner(s) subsequently becoming solvent.
660
Ch. 14Problems
PROBLEM 14-9
Other
Assets
Cash
Profit and loss percentages ....................
Beginning balances.................................
June 30 sale of assets ............................
Balances .................................................
Contribution of assets .............................
Payment of liabilities ...............................
Balances .................................................
July 28 sale of assets..............................
Balances .................................................
Contribution of assets .............................
Payment of liabilities ...............................
Balances .................................................
Adams contribution .................................
Payment of liabilities ...............................
Balances .................................................
Chenery contribution...............................
Payment of liabilities ...............................
Balances .................................................
Allocation of Beyer deficit (3:4) ...............
Balances .................................................
Allocation of Chenery deficit ...................
Balances .................................................
$ 25,000
120,000
$ 145,000
6,000
(131,000)
$ 20,000
10,000
$ 30,000
24,000
(54,000)
$
12,000
(12,000)
$
3,000
(3,000)
$
$ 240,000
(160,000)
$ 80,000
$ 80,000
(80,000)
$
Liabilities
$ 200,000
$ 200,000
(131,000)
$ 69,000
$ 69,000
(54,000)
$ 15,000
(12,000)
3,000
(3,000)
661
30%
$ (10,000)
(12,000)
$ (22,000)
6,000
40%
$ 25,000
(16,000)
$ 9,000
$ 38,000
(21,000)
$ 17,000
$ (16,000)
(21,000)
$ (37,000)
5,000
$ 17,000
12,000
$ (32,000)
$ 29,000
$ (32,000)
3,000
$ 29,000
(13,714)
$ 15,286
(15,286)
$
$ (32,000)
32,000
$
9,000
(28,000)
$ (19,000)
19,000
3,000
(18,286)
$ (15,286)
15,286
$
Ch. 14Problems
$22,500
15,000
$37,500
$12,000
$27,000
3,000
$30,000
$3,000
60%
40
100%
90%
10
100%
(Note: The $30,000 of assets is $49,000 less the $19,000 previously contributed to the partnership.)
662
Ch. 14Problems
PROBLEM 14-10
Installment Liquidation Schedule
Event/Circumstance
Profit and loss percentages........
Beginning balance......................
Additional adjustment.................
Conveyance of vehicles .............
Sale of assets.............................
Balance ......................................
Payment of liabilities ..................
Balance ......................................
Sale of assets.............................
Payment of subcontractor ..........
Bill customer for subcontractor ..
Balance ......................................
Payment of liabilities (see Note A)
Balance ......................................
Payment to partners
(see Schedule A) .................
Balance ......................................
Conveyance of vehicles .............
Settle liabilities ...........................
Collect receivables .....................
Balance ......................................
Payment to partners
(see Schedule A) .................
Final sale of assets ....................
Payment of professional fees.....
Balance ......................................
Contribution of capital ................
Payment to partners...................
Balance ......................................
Cash
Noncash
Assets
$ 12,000
$228,000
70,000
$ 82,000
(82,000)
$
0
92,000
(15,000)
$ 77,000
(42,400)
$ 34,600
(16,600)
$ 18,000
(10,000)
20,000
$ 28,000
(28,000)
24,000
(6,000)
$ 18,000
9,720
(27,720)
$
0
(14,000)
(90,000)
$124,000
$124,000
(80,000)
20,000
$ 64,000
$ 64,000
$ 64,000
(8,000)
Liabilities
$120,000
17,400
$137,400
(82,000)
$ 55,400
$ 55,400
(42,400)
$ 13,000
$ 13,000
(13,000)
(20,000)
$ 36,000
(36,000)
$
663
Partners Loan
and Capital Balance
Ziegler
Nolan
Petersen
30%
30%
40%
$ 20,000
$ 50,000
$ 50,000
(5,220)
(5,220)
(6,960)
(20,300)
2,700
3,600
(6,000)
(6,000)
(8,000)
$(11,520)
$ 41,480
$ 38,640
$(11,520)
3,600
(4,500)
6,000
$ (6,420)
$ 41,480
3,600
(4,500)
6,000
$ 46,580
$ 38,640
4,800
(6,000)
8,000
$ 45,440
$ (6,420)
$ 46,580
$ 45,440
0
$ (6,420)
1,200
900
(14,257)
$ 32,323
1,200
900
(2,343)
$ 43,097
(10,400)
1,200
$ (4,320)
$ 34,423
$ 33,897
0
(3,600)
(1,800)
$ (9,720)
9,720
(17,143)
(3,600)
(1,800)
$ 11,880
(10,857)
(4,800)
(2,400)
$ 15,840
(11,880)
$
0
(15,840)
$
0
Ch. 14Problems
Ziegler
30%
Nolan
30%
Petersen
40%
July 15 Distribution
Combined capital and loan balance..................................
Cash retained/expenses anticipated.................................
Maximum loss possible.....................................................
Balance .............................................................................
Allocation of deficits ..........................................................
Safe payments ..................................................................
$ (6,420)
(1,500)
(19,200)
$(27,120)
27,120
$
0
$ 46,580
(1,500)
(19,200)
$ 25,880
(11,623)
$ 14,257
$ 45,440
(2,000)
(25,600)
$ 17,840
(15,497)
$ 2,343
August 1 Distribution
Combined capital and loan balance..................................
Cash retained/expenses anticipated.................................
Maximum loss possible.....................................................
Balance .............................................................................
Allocation of deficits ..........................................................
Safe payments ..................................................................
$ (4,320)
0
(10,800)
$(15,120)
15,120
$
0
$ 34,423
0
(10,800)
$ 23,623
(6,480)
$ 17,143
$ 33,897
0
(14,400)
$ 19,497
(8,640)
$ 10,857
664