Partnerships: Termination and Liquidation: Chapter Outline

Chapter 15 - Partnerships: Termination and Liquidation
CHAPTER 15
PARTNERSHIPS: TERMINATION AND LIQUIDATION
Chapter Outline
I.
The termination of a partnership and liquidation of its property may take place for a number
of reasons.
A. The death, withdrawal, or retirement of a partner can lead to cessation of business
activity.
B. The bankruptcy of either an individual partner or the partnership as a whole can
necessitate termination and liquidation.
II. Because of the importance of liquidating and distributing assets fairly, all parties look to the
accountant to play an important role in the process.
A. The accountant provides timely financial information.
B. The accountant works to ensure an equitable settlement of all claims.
III. The statement of liquidation
A. The liquidation process usually involves the disposal of noncash assets, payment of
liabilities and liquidation expenses, and distribution of any remaining cash to the
partners based on their final capital balances.
B. A statement of liquidation should be produced periodically by the accountant to disclose
losses and gains that have been incurred, remaining assets and liabilities, and current
capital balances.
IV. Deficit capital balances
A. By the end of, or even during, the liquidation process, one or more partners may have a
negative (or deficit) capital balance often as a result of losses incurred in disposing of
assets.
B. The Uniform Partnership Act indicates that any deficit capital balance should be
eliminated by having that partner contribute enough additional assets to offset the
negative balance.
C. If this contribution is not immediately received, the remaining partners may request a
preliminary distribution of any partnership cash that is available.
1. Safe payments of cash to individual partners are determined based on safe capital
balances, the amounts that will remain in the individual capital accounts even if all
deficits and other assets prove to be complete losses that must be absorbed by the
remaining partners.
2. If a portion (or all) of a deficit is subsequently recovered from a partner, a further
distribution to the other partners is made based on newly computed safe capital
balances.
3. Any deficit that is not recovered from a partner must be charged to the remaining
partners based on their relative profit and loss ratio.
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Education.
V. Treatment of partners loan to partnership

A. The Uniform Partnership Act states that, in a liquidation, partnership assets should be
used to first settle claims of partnership creditors, including claims of partners who are
creditors.
1. This implies that the partnership would first repay partners loans before distributing
any cash to partners based on their capital balances.
B. However, in practice, to avoid making a cash distribution to a partner who subsequently
develops a deficit capital balance, partners loan accounts typically are combined with
partners capital accounts and funds are distributed accordingly. This text uses this
practice.
Vl. Preliminary distribution of assets to the partners
A. The liquidation process can extend over a lengthy period of time as business activities
wind down and property is sold.
B. When the partnership terminates activity, or during the course of the liquidation, more
cash may be available than the amount needed to extinguish all potential liabilities and
liquidation expenses.
C. If possible, the distribution of excess cash amounts should be made as quickly as
possible to enable the partners to make use of their funds.
1. The accountant may choose to produce a proposed schedule of liquidation at such
times to determine the equitable distribution of cash amounts that become available.
2. The proposed schedule of liquidation is developed based upon simulating the
accounting recognition that would be required by a possible series of transactions:
assets are sold, expenses are paid, etc.
a. These events are simulated with the anticipation of maximum losses in each
case.
b. Noncash assets are assumed to have no resale value; maximum possible
liquidation expenses are included; all partners are considered personally
insolvent; etc.
3. Ending potential capital balances that remain on a proposed schedule of liquidation
are safe capital balances, the amounts that could be immediately paid to each
partner without jeopardizing future payments. Safe capital balances indicate that the
partner will still have a sufficient interest in the partnership to absorb all potential
losses even after a preliminary distribution.
Vll. Predistribution plan
A. The proposed schedule of liquidation (described above) can be used to determine safe
payments based on safe capital balances but a newly revised schedule must be
prepared each time a distribution of cash to partners is contemplated.
B. Accountants often prefer to produce a single predistribution plan at the start of a
liquidation to provide guidance for all payments made to the partners throughout this
process.
C. Information for the predistribution plan is generated by assuming the occurrence of a
series of losses, each just large enough to eliminate one partner's claim to any
partnership property.
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D. Once a series of losses has been simulated that would eliminate the capital balances of
all partners, the actual plan is developed by measuring the effects that occur if the
losses do not materialize.
E. By working backwards through this series of possible losses, a predistribution plan can
be produced that serves as a guide for all payments made during the liquidation.
Answer to Discussion Question: What Happens if a Partner Becomes Insolvent?

This case demonstrates one of the nightmares of a partnership: the apparent insolvency of a
partner is threatening the future of a successful business. The problem is especially acute to
Wilkinson and Walker since this partnership was created solely for convenience; the partners
share the facilities but do not actually work together. Therefore, the presence of Rogers is not
essential to the other partners except that he pays a portion of the business's expenses.
However, the claim that has been filed could lead to the actual liquidation of the entire
business.
Obviously, the partners should take no immediate action until they have spoken with Rogers.
The entire issue may prove to be a mistake. Conversely, numerous other claims against Rogers
may also be outstanding with the initial claim simply being the first to be filed. Because of the
various possibilities, Wilkinson and Walker should consult with an attorney to learn of the
partnership laws that apply in their state. They should also begin considering possible
alternatives to salvage their business if Rogers is indeed insolvent.
One alternative is for Wilkinson and Walker to buy out Rogers partnership interest. Rogers
would receive his money and the remaining partnership could be left intact. However, they
would have to provefor legal reasonsthat a fair price was being paid, and they would need
to come up with a significant amount of cash in a short period of time. Finally, Wilkinson and
Walker would have a building that was apparently larger than their needs. Unless they could
utilize the space in some manner, they might have no way of recouping their additional
investment.
As a second possibility, a new dentist could be brought in to acquire Rogers interest in the
partnership. Again, the money is conveyed to Rogers but now the original partners are not
forced to make the payment. The building would continue to be fully utilized so that the
partners' expenses would not escalate. In this case, though, a new partner may have to be
identified in a short period of time. Furthermore, since the partners are sharing space,
Wilkinson and Walker will probably want to ensure that the new partner is someone with whom
they can work comfortably. Because of time considerations, they may not have the opportunity
of getting the new partner they would like.
Finally, the partnership can be liquidated. Wilkinson and Walker could then take their share of
the proceeds and buy a new building for the continuation of their practices. Unfortunately, in
liquidation, assets do not always bring fair market value. Thus, the partners may be forced to
absorb significant losses as a result of Rogers' insolvency. In addition, the moving of any
business can disrupt service and have a possible adverse impact on profitability.
Although Wilkinson and Walker have several possible actions that can be taken, none of these
is without problems. Therefore, partners should always include agreements within their Articles
of Partnership to specify actions that will be taken in such cases. The insolvency of a partner is
not a particularly unusual event. Hence, the partners (or their attorneys and accountants)
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should have the forethought to arrange the resolution of the business if insolvency of a partner
does occur.
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Answers to Questions
1. A dissolution refers to the cessation of a partnership. In many cases, this process is simply
a preliminary step in the transfer of business property to a newly formed partnership.
Therefore, a dissolution does not necessarily affect the operations of the business or the
sale of assets. In a liquidation, actual business activities cease. Partnership property is sold
with the remaining cash distributed to creditors and to any partners with positive capital
balances. Dissolution refers to changes in the composition of a partnership whereas
liquidation is the selling of a partnership's assets.
2. Many reasons can exist that would lead to the termination and liquidation of a partnership.
The business might simply have failed to generate sufficient profits or the partners may
elect to enter other lines of work. Liquidation can also be required by the death, retirement,
or withdrawal of one of the partners. In such cases, liquidation is often necessary to settle
the partner's interest in the business. The bankruptcy of an individual partner can also force
the termination of the business as can the bankruptcy of the partnership itself.
3. During the liquidation process, monitoring the balance of the partners' capital accounts
becomes of paramount importance. That amount will eventually indicate either the cash to
be received by the partners as final distributions or the additional contributions that they are
required to pay to the partnership. Consequently, all liquidation gains and losses are
recorded directly as changes to the partners capital balances. Such recording enhances
the informational value of the accounts. As an additional factor, the computation of a net
income figure is of diminished importance since normal operations have ceased.
4. Final distributions made to the various partners are based solely on their ending capital
account balances unless the partners have agreed otherwise. If any partner has a deficit
balance, that partner should make an additional contribution to the partnership to offset the
negative capital balance. In some situations, a question may arise as to whether
compensation for a deficit will ever be forthcoming from the responsible party. The
remaining partners may choose to allocate the available cash immediately based on the
assumption that the deficit balance eventually will prove to be a total loss.
5. A statement of liquidation summarizes the financial effect of the liquidation process as it has
progressed to date. Information to be presented includes the balances of all remaining
assets, the liability total, and the capital account of each partner. In addition, the allocation
of all gains and losses incurred in the liquidation process as well as the payment of
liquidation expenses should be reflected in the statement.
6. From a legal viewpoint, any partner who incurs a negative (or deficit) capital balance is
obligated to make an additional contribution to offset that amount.
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7. A safe capital balance is the amount of a partner's capital account that exceeds all possible
needs of a partnership as it goes through liquidation. A partner should, therefore, be able to
receive this balance immediately without endangering the future amount to be received by
any other party connected with the liquidation. Safe capital balances are computed by
making a series of assumptions whereby the partnership undergoes maximum losses
during the remainder of the liquidation process: all noncash assets are assumed to have no
resale value, liquidation expenses are set at the largest possible estimation, and all
partners are viewed as personally insolvent. Any capital balance that would remain after this
series of anticipated events can be distributed to the partners immediately without incurring
any risk.
8. Although the Uniform Partnership Act states that loans from partners rank ahead of the
partners capital balances in the distribution of partnership assets, in practice a partners
loan balance is usually merged with that partners capital balance to minimize the chance of
a negative capital balance arising during the liquidation. This particular partner may get less
money from the liquidation because of this treatment but the other partners are better
protected.
9. A proposed schedule of liquidation is prepared by the accountant to determine the
allocation of any cash available in the early stages of a liquidation that exceeds the amount
needed to pay all liabilities and estimated liquidation expenses. The schedule is based on
anticipating a series of assumed losses from the current day forward: all remaining noncash
assets are scrapped, maximum liquidation expenses are incurred, and each partner is
personally insolvent. The ending balances that would result from these simulated
transactions represent safe capital balances. The amounts calculated as safe capital
balances can be distributed as safe payments to individual partners and the partnership will
still retain enough capital to absorb all future losses.
10. A predistribution plan is produced based on an assumed series of losses. Each loss is
calculated to eliminate in turn the capital balance of one of the partners. In this manner, the
accountant can determine the vulnerability to losses exhibited by each capital account.
When the last balance is eliminated, the accountant will have established a series of losses
that exactly offsets each balance. The predistribution plan is then developed by measuring
the effects that are created if the losses do not occur. In effect, the accountant works
backwards through the assumed losses to create a pattern of available cash, the
predistribution plan.
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Answers to Problems
1. C
2. A
3. D
4. B (Partner with deficit capital balance)
Reported balances
Potential loss from
Cassidy deficit
(split 5/8:3/8)
Cash distributions
Angela, Capital
$19,000
Woodrow, Capital
$18,000
(7,500)
$11,500
Cassidy, Capital
$(12,000)
(4,500)
$13,500
12,000
-0-
5. B (Insolvent partner)
Bell
Reported balances
$50,000
Loss on sale of assets ($110,000)
split on a 4:3:2:1 basis
(44,000)
Adjusted balances
$ 6,000
Potential loss from Dennard
deficit (split 4:3:1)
(4,000)
Minimum cash distributions
$2,000
Hardy
$56,000
Dennard
$14,000
Suddath
$80,000
(33,000)
$23,000
(22,000)
$(8,000)
(11,000)
$69,000
(3,000)
$20,000
8,000
$ -0-
(1,000)
$68,000
6. A (Predistribution plan)
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7. A (Proposed schedule of liquidation to determine safe payments before the

liquidation begins; partner has deficit)
Reported balances .....................................
Loss on sale of assets ($22,000) split
on a 4:3:3 basis ........................................
Adjusted balances .....................................
Anticipated liquidation expenses ($12,000)
split on a 4:3:3 basis ...............................
Anticipated maximum loss on inventory
($31,000) split on a 4:3:3 basis ...............
Potential balances .....................................
Potential loss from Art deficit (split 3:3) .
Safe payments ............................................
Art
$18,000
Raymond
$25,000
Darby
$26,000
(8,800)
$ 9,200
(6,600)
$18,400
(6,600)
$19,400
(4,800)
(3,600)
(3,600)
(12,400)
$(8,000)
8,000
$ -0-
(9,300)
$ 5,500
(4,000)
$ 1,500
(9,300)
$ 6,500
(4,000)
$ 2,500
8. D (Proposed schedule of liquidation; partner has deficit)

Since the partnership currently has total capital of $400,000, the $30,000
that is available would indicate maximum potential losses of $370,000.
A
Reported balances
$100,000
Anticipated loss ($370,000) split on
a 2:3:5 basis
(74,000)
Potential balances
$ 26,000
Potential loss from C's deficit (split 2:3)
(2,000)
Current cash distribution
$ 24,000
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B
$120,000
(111,000)
$ 9,000
(3,000)
$ 6,000
C
$180,000
(185,000)
$ (5,000)
5,000
$
-0-
Education.
9. C (Predistribution plan)
To solve this problem a predistribution plan should be created.
Maximum Losses That Can Be Absorbed
Kevin
Michael
Brendan
Jonathan
$59,000/40%
$39,000/30%
$34,000/10%
$34,000/20%
$147,500
130,000
340,000
170,000
(most vulnerable to losses)
The assumption is made that a $130,000 loss occurs:

Kevin
Reported balances .....................$59,000
Assumed loss ($130,000) split
on a 4:3:1:2 basis ..................(52,000)
Adjusted balances ......................$ 7,000
Michael Brendan
$39,000
$34,000
(39,000)
$
-0-
Jonathan
$34,000
(13,000)
$21,000
(26,000)
$ 8,000
Maximum Losses That Now Can Be Absorbed

Kevin
$7,000 / 4/7
$12,250 (most vulnerable to losses)
Brendan
$21,000 / 1/7
147,000
Jonathan
$8,000 / 2/7
28,000
Kevin
Reported balances ..................................$7,000
on a 4:1:2 basis ..................................(7,000)
Adjusted balances
$ -0-
Brendan
$21,000
Jonathan
$8,000
(1,750)
$19,250
(3,500)
$4,500

Brendan
Jonathan
$19,250/1/3
$4,500/2/3
$57,750
6,750
(most vulnerable to losses)

Reported balances..............................................
Assumed loss ($6,750) split on a 1:2 basis ....
Adjusted balances .............................................
Brendan
$19,250
(2,250)
$17,000
Jonathan
$4,500
(4,500)
$ -0-
Brendan will receive a $17,000 distribution from the partnership before any
of the other partners collect any cash.
10. C (Predistribution plan)
To solve this problem, the following predistribution plan is created:
First $3,000 goes to Menton

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Next $15,000 goes to Menton (2/3) and Hoehn (1/3)

Next $42,000 goes to Carney (4/7), Menton (2/7), and Hoehn (1/7)
All remaining cash goes to Carney (4/10), Pierce (3/10), Menton (2/10),
and Hoehn (1/10)
Beginning balances
Assumed loss of $90,000 (see
Schedule 1) (4:3:2:1 basis)
Step one balances
Step two balances
Step three balances
Carney
Pierce
$60,000 $27,000
Menton
$43,000
(36,000) (27,000)
$24,000
$ -0-
(18,000)
(9,000)
$25,000 $11,000
(24,000)
$ -0-
$ - 0$ -0-
(12,000)
$13,000
(6,000)
$ 5,000
- 0$ - 0-
(10,000)
$ 3,000
(5,000)
$ - 0-
- 0$ - 0-
Hoehn
$20,000
Partner
Carney
Pierce
Menton
Hoehn
Schedule 1
Maximum Loss
Capital Balance/
That Can
Loss Allocation
Be Absorbed
$60,000/40%
$150,000
$27,000/30%
$ 90,000 (most vulnerable)
$43,000/20%
$215,000
$20,000/10%
$200,000
Partner
Carney
Menton
Hoehn
Schedule 2
Maximum Loss
Capital Balance/
That Can
Loss Allocation
Be Absorbed
$24,000/(4/7)
$25,000/(2/7)
$ 87,500
$11,000/(1/7)
$ 77,000
Partner
Menton
Hoehn
Schedule 3
Maximum Loss
Capital Balance/
That Can
Loss Allocation
Be Absorbed
$13,000/(2/3)
$ 19,500
$ 5,000/(1/3)
11. C (Partners with deficit capital balances; proposed schedule of liquidation;

safe capital balances)
The $16,000 available cash can be distributed but should be done under the
assumption that all deficit balances will be total losses. After offsetting
Jones' loan against his deficit capital balance, both Jones and Wayman
have deficits of $2,000; total $4,000. Fuller and Rogers, the two partners
with positive capital balances, share profits in a 30:20 relationship (the
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equivalent of a 60%:40% ratio). Fuller would absorb $2,400 of the potential

$4,000 loss with Rogers being allocated $1,600. The remaining capital
balances ($10,600 and $5,400) are safe capital balances and those amounts
can be immediately distributed.
Reported balances
Potential losses from Wayman
and Jones split on a 3:2 basis
Adjusted balances
Wayman
(30%)
$(2,000)
$
2,000
-0-
Jones
(20%)
$(2,000)
Fuller
(30%)
$13,000
2,000
-0-
(2,400)
$10,600
Rogers
(20%)
$7,000
(1,600)
$5,400
12. (8 minutes) (Determine safe payments; partner has deficit)

Cleveland receives $6,800 and Pierce receives $1,200
Since the partnership currently has total capital of $350,000, the $8,000 that is
available would indicate maximum potential losses of $342,000.
Nixon
Reported balances ..............................
$170,000
Anticipated loss ($342,000) split
on a 5:3:2 basis ..............................
(171,000)
Potential balances ...............................
$ (1,000)
Potential loss from Nixon's deficit (split 3:2) 1,000
Safe payments .....................................
$
-0-
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Cleveland
Pierce
$110,000
$70,000
(102,600)
$ 7,400
(600)
$6,800
(68,400)
$ 1,600
(400)
$ 1,200
Education.
13. (20 minutes) (Final settlement of a partnership being liquidated; various

amounts of loss on sale of assets)
Part a.
Brown gets $21,000, Fish gets $12,000, and Stone gets $2,000.
Reported balances ......................................

Loss on sale of land ($10,000) split
on a 4:3:3 basis.......................................
Cash distribution .........................................
Part b.
Brown
$25,000
Fish
$15,000
Stone
$5,000
(4,000)
$21,000
(3,000)
$12,000
(3,000)
$2,000
Fish
$15,000
Stone
$5,000
Brown gets $16,429 and Fish gets $8,571
Brown
$25,000
Loss on sale of land ($20,000) split on
a 4:3:3 basis............................................
(8,000)
Adjusted balances .......................................
$17,000
Potential loss from Stone's deficit (split 4:3)
(571)
$16,429
Part c.
(6,000)
$ 9,000
(429)
$ 8,571
(6,000)
$(1,000)
1,000
$
-0-
Brown gets $10,714 and Fish gets $4,286
Brown
$25,000
Loss on sale of land ($30,000) split on
a 4:3:3 basis............................................
(12,000)
Adjusted balances .......................................
$13,000
Potential loss from Stone's deficit (split 4:3)
(2,286)
$10,714
Fish
$15,000
(9,000)
$ 6,000
(1,714)
$ 4,286
Stone
$5,000
(9,000)
$(4,000)
4,000
$
-0-
14. (10 minutes) (Distribute cash contributed by partner with deficit balance)
The entire $20,000 goes to Atkinson.
Atkinson
Reported balances
Capital contribution
Adjusted balances
Potential loss from Dennsmore
and Rasputin ($80,000) split
on a 4:3 basis
Adjusted balances
Potential loss from Kaporale
($4,286)
Cash distribution
Kaporale Dennsmore
$70,000
-0$70,000
$30,000
-0$30,000
$(42,000)
-0$(42,000)
(45,714)
$24,286
(34,286)
$(4,286)
42,000
$
-0-
4,286
-0-
-0$ -0-
(4,286)
$20,000
Rasputin
$(58,000)
20,000
$(38,000)
38,000
-0-0$ -0-
15. (8 minutes) (Determine safe payments)

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Ball gets $143, Eaton gets $1,429, and Lake gets $3,428.
Ace
Reported balances .......................
$25,000
Maximum losses on land and building
($85,000) split on a 3:3:2:2 basis
(25,500)
Estimated liquidation expenses
($5,000) split 3:3:2:2....................
(1,500)
Potential balances ........................
$(2,000)
Potential loss from Ace ($2,000) split
on a 3:2:2 basis ..........................
2,000
Safe payments ..............................
$
0
Ball
$28,000
Eaton
$20,000
Lake
$22,000
(25,500)
(17,000)
(17,000)
(1,500)
$ 1,000
(1,000)
$ 2,000
(1,000)
$ 4,000
(857)
143
(571)
$ 1,429
(572)
$ 3,428
Saunders,
Capital
Ferris,
Loan &
Capital
16. (15 minutes) (Prepare a proposed schedule of liquidation)

HARDWICK, SAUNDERS, AND FERRIS
Proposed Schedule of Liquidation
Other
Assets
Hardwick,
Accounts Loan and
Payable
Capital
Cash
Beginning
balances
90,000 820,000 (210,000) (270,000)
Sold assets
200,000 (328,000)
51,200
Assumed: loss
on remaining
assets
(492,000)
196,800
Paid liabilities (210,000)
(210,000)
Safe balances
80,000
0
0
(22,000)
(200,000) (230,000)
38,400
38,400
147,600
147,600
(14,000)
(44,000)
Of the available $80,000 in cash, $22,000 can be paid safely to Hardwick, $14,000
to Saunders, and $44,000 to Ferris.
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17. (7 minutes) (Determine amount of cash needed to assure payments to all

partners)
Watson is the partner most vulnerable to a loss. A loss of only $100,000 would
completely eliminate Watson's capital balance:
Miller
Tyson
Watson
$69,000/60% = $115,000 loss to eliminate capital

Thus, if the loss on disposal is less than $100,000, all partners will retain
positive capital balances and receive some cash in liquidation. Because of
this, since "other assets" are $150,000, they must be sold for any amount over
$50,000 for all partners to get cash.
18. (5 minutes) (Determine safe capital balances and safe payments)
Maximum potential losses are $128,000: $8,000 in liquidation expenses and a
complete $120,000 loss on the noncash assets. Such a loss would reduce the
capital balances to: Babb $8,800, Whitaker ($5,600), and Edwards ($1,200).
Babb must retain capital of $6,800 ($5,600 + $1,200) to be able to absorb the
possible losses of Whitaker and Edwards. The remaining $2,000 ($8,800 $6,800) is a safe capital balance for Babb, and a safe payment of $2,000 can be
made to this partner.
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19. (10 minutes) (Determine amount to be contributed by partner with a deficit

capital balance)
White and Blue are both insolvent and have negative capital balances (after
offsetting the loan from White) totaling $15,000 (White, $3,000; Blue, $12,000).
Absorption by the other partners of these losses would be as follows (on a
30:10:20 basis):
Partner
Black
Green
Brown
Current
Capital Balance
$ 3,000
$ (3,000)
$15,000
Share of Loss
30/60 x $15,000 = $7,500
10/60 x $15,000 = $2,500
20/60 x $15,000 = $5,000
Adjusted
Capital Balance
$ (4,500)
$ (5,500)
$10,000
Black, who is also insolvent, now has a deficit capital balance of $4,500 that
would have to be absorbed by Brown and Green (on a 10:20 basis):
Partner
Green
Brown
Current
Capital Balance
$ (5,500)
$10,000
Share of Loss
1/3 x $4,500 = $1,500
2/3 x $4,500 = $3,000
Adjusted
Capital Balance
$(7,000)
$ 7,000
Thus, Green must contribute $7,000 that will go to Brown.
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20. (50 minutes) (Determine payments under a variety of circumstances; safe

capital balances; predistribution plan)
a. Dobbs receives the entire $10,000.
Maximum potential losses of $250,000 on noncash assets would be allocated
as follows:
Partner
Share of Loss
New Capital Balance
Adams
2/10 x $250,000 = $50,000
$ 30,000
Baker
3/10 x $250,000 = $75,000
$(45,000)
Carvil
3/10 x $250,000 = $75,000
$(15,000)
Dobbs
2/10 x $250,000 = $50,000
$ 40,000
Maximum total potential losses of $60,000 to be absorbed from Baker and
Carvil above would then be allocated to Adams and Dobbs as follows on a 2:2
basis:
Partner
Share of Loss
New Capital Balance
Adams
2/4 x $60,000 = $30,000
-0Dobbs
2/4 x $60,000 = $30,000
$ 10,000
Absorbing this potential loss would leave Dobbs with a safe capital balance of
$10,000.
b. Adams receives the entire $10,000.
Maximum potential losses of $250,000 on noncash assets would be allocated
as follows:
Partner
Adams
Baker
Carvil
Dobbs
Share of Loss
New Capital Balance
2/10 x $250,000 = $50,000
$ 30,000
2/10 x $250,000 = $50,000
$(20,000)
3/10 x $250,000 = $75,000
$(15,000)
3/10 x $250,000 = $75,000
$ 15,000
Maximum total potential losses of $35,000 to be absorbed from Baker and

Carvil above would be allocated to Adams and Dobbs as follows on a 2:3
basis:
Partner
Adams
Dobbs
Share of Loss
2/5 x $35,000 = $14,000
3/5 x $35,000 = $21,000
New Capital Balance

$ 16,000
$ (6,000)
Absorbing the final $6,000 loss from Dobbs would leave Adams with a safe
capital balance of $10,000.
15-16
Education.
20. (continued)
c. Adams receives $57,500 and Dobbs gets $22,500.
The $50,000 loss on sale of the building would be allocated as follows:
Partner
Adams
Baker
Carvil
Dobbs
Share of Loss
10% x $50,000 = $5,000
30% x $50,000 = $15,000
30% x $50,000 = $15,000
30% x $50,000 = $15,000
New Capital Balance

$ 75,000
$ 15,000
$ 45,000
$ 75,000
Maximum potential loss of $130,000 on the land would be allocated as follows:

Partner
Share of Loss
New Capital Balance
Adams
Baker
Carvil
Dobbs
10% x $130,000 = $13,000

30% x $130,000 = $39,000
30% x $130,000 = $39,000
30% x $130,000 = $39,000
$ 62,000
$ (24,000)
$ 6,000
$ 36,000
Maximum potential loss of $24,000 to be absorbed from Baker would be

allocated as follows on a 1:3:3 basis:
Partner
Adams
Carvil
Dobbs
Share of Loss
1/7 x $24,000 = $3,428
3/7 x $24,000 = $10,286
3/7 x $24,000 = $10,286
New Capital Balance

$ 58,572
$ (4,286)
$ 25,714
Maximum potential loss of $4,286 to be absorbed from Carvil would be

allocated as follows on a 1:3 basis:
Partner
Adams
Dobbs
Share of Loss
1/4 x $4,286 = $1,072
3/4 x $4,286 = $3,214
New Capital Balance

$57,500
$22,500
These amounts represent safe capital balances for distribution purposes.
15-17
Education.
20. (continued)
d. The land and building must be sold for over $115,000 to ensure that Carvil will
receive some cash.
This can be determined by preparing a predistribution plan as follows:
Beginning balances
Assumed loss of $100,000
(Schedule 1) (1:3:4:2 basis)
Step One balances
(Schedule 2) (1:0:4:2)
Step Two balances
(Schedule 3) (1:0:0:2)
Step Three balances
Adams
$ 80,000
Baker
$ 30,000
(10,000)
$ 70,000
(5,000)
$ 65,000
- 0-0-
(30,000)
$ 35,000
- 0- 0-
(30,000)
-0-
Schedule 1
Partner
Adams
Baker
Carvil
Dobbs
Capital Balance/
Loss Allocation
$80,000/10%
$30,000/30%
$60,000/40%
$90,000/20%
Schedule 2
Partner
Adams
Carvil
Dobbs
Capital Balance/
Loss Allocation
$70,000/(1/7)
$20,000/(4/7)
$70,000/(2/7)
Schedule 3
Partner
Adams
Dobbs
Capital Balance/
Loss Allocation
$65,000/(1/3)
$60,000/(2/3)
15-18
Carvil
$ 60,000
Dobbs
$ 90,000
(40,000)
$ 20,000
(20,000)
$ 70,000
(20,000)
-0-
(10,000)
$ 60,000
- 0- 0-
(60,000)
$
- 0-
Maximum Loss
That Can
Be Absorbed
$800,000
$100,000 (most vulnerable)
$150,000
$450,000
Maximum Loss
That Can
Be Absorbed
$490,000
$245,000
Maximum Loss
That Can
Be Absorbed
$195,000
Education.
20. d. (continued)
PREDISTRIBUTION PLAN
The first $35,000 available goes to Adams. Next $90,000 is split between
Adams and Dobbs on a 1:2 basis. Next $35,000 is split between Adams, Carvil,
and Dobbs on a 1:4:2 basis. All remaining cash is split between Adams, Baker,
Carvil, and Dobbs on the original profit and loss ratio.
Total cash of $125,000 ($35,000 + $90,000) has to be available before Carvil will
receive any cash. Since the partnership already has $10,000 cash in excess of
its liabilities, the land and building must be sold for over $115,000 to ensure
Carvil of receiving some amount.
As another approach to the problem, Carvil's capital balance is eliminated
through the $100,000 Step One loss and the $35,000 Step Two loss. Thus,
avoiding a complete $135,000 loss ensures that Carvil will receive cash. Since
the land and buildings have a book value of $250,000, such losses would be
avoided by receiving over $115,000.
15-19
Education.
21. (30 minutes) (Prepare journal entries for a partnership liquidation; prepare a
final statement of partnership liquidation)
Part A. Preparation of journal entries.
a. The partnership has $100,000 in cash, liabilities of $80,000 and estimated
liquidation expenses of $10,000. Thus, there is $10,000 that can be safely
paid to the partners before the liquidation of noncash assets. This amount
is allocated to the two partners on the basis of their potential capital
balances assuming that noncash assets are scrapped for a loss of $200,000
and liquidation expenses are $10,000:
Partner
Fred
$(26,000)
George
Current Capital
Balance
$100,000
$120,000
Share of
Potential
Maximum Loss*
Capital
60% x $210,000 = $126,000
40% x $210,000 = $84,000
$36,000
Because Fred has a potential deficit capital balance, the entire $10,000
currently available is distributed to George, which reduces this partners
capital balance to $110,000.
George, Capital............................................................
Cash .......................................................................
10,000
b. Liabilities .....................................................................
Cash .......................................................................
40,000
c. Cash..............................................................................
Fred, Capital (60% of gain) ..................................
George, Capital (40%)............................................
Noncash assets......................................................
220,000
10,000
40,000
12,000
8,000
200,000
Fred and George now have capital balances of $112,000 and $118,000,
respectively.
15-20
Education.
21. (continued)
d. To determine the safe payments to be made at this point in the liquidation,
the accountant prepares the following proposed schedule of liquidation:
Cash
Non-cash
Assets Liabilities
Fred,
Capital
(60%)
George,
Capital
(40%)
Beginning balances
Distribution to partners
Paid liabilities
Sold noncash assets
Updated balances
$100,000
(10,000)
(40,000)
220,000
270,000
$200,000
-0-0(200,000)
-0-
$(80,000) $(100,000) $(120,000)

-0-010,000
40,000
-0-0-0(12,000)
(8,000)
(40,000) (112,000) (118,000)
Maximum liabilities
Max. liquidation expenses
Safe balances
(40,000)
(10,000)
$220,000
-0-0-
40,000
-06,000
4,000
-0- $(106,000 ) $(114,000 )
Safe payments of $106,000 and $114,000 can be made to Fred and George,
respectively at this point in the liquidation.
Fred, Capital ................................................................
George, Capital ...........................................................
Cash .......................................................................
106,000
114,000
e. Liabilities .....................................................................
Cash .......................................................................
40,000
f. Fred, Capital (60% of expense) .................................

George, Capital (40%).................................................
Cash........................................................................
4,800
3,200
220,000
40,000
8,000
g. The statement of partnership liquidation presented on the next page shows

that $2,000 cash remains after paying liquidation expenses. The partners
have positive capital balances of $1,200 and $800, respectively, and the
remaining partnership cash can be distributed based on these ending
totals.
Fred, Capital ................................................................
George, Capital ...........................................................
Cash .......................................................................
15-21
1,200
800
2,000
Education.
21. (continued)
Part B. Prepare a final statement of partnership liquidation.
Fred and George Partnership
Statement of Partnership Liquidation
Beginning balances
Paid liabilities
Sold noncash assets
Updated balances
Updated balances
Paid liabilities
Paid liquidation expenses
Updated balances
Closing balances
Cash
Non-cash
Assets
Liabilities
$100,000
(10,000)
(40,000)
$200,000
-0-0-
$(80,000)
-040,000
220,000
270,000
(200,000)
-0-
-0(40,000)
(220,000)
-0-
-0-
50,000
(40,000)
-0-0-
(40,000)
40,000
(8,000)
-0-
-0-
2,000
-0-0-0- $
(2,000)
$
-0-
15-22
Fred,
Capital
(60%)
George,
Capital
(40%)
$(100,000) $(120,000)
-010,000
-0-0(12,000
(8,000
)
)
(112,000)
(118,000)
106,000
(6,000
)
-0-
114,000
(4,000
)
-0-
-0-
4,800
(1,200
)
3,200
(800
)
-0-0-
1,200
-0-
800
-0-
Education.
22. (30 minutes) (Prepare a predistributlon plan)

An assumed series of losses is simulated which eliminates each partner's
capital account in turn:
Larson
Norris
Spencer
Harrison
Beginning balances
$ 15,000
$ 60,000
$ 75,000
$ 41,250
(15,000)
(22,500)
(15,000)
(22,500)
Step One balances
$ -0$ 37,500
$ 60,000
$ 18,750
- 0(18,750)
(12,500)
(18,750)
Step Two balances
$
-0$ 18,750
$ 47,500
$
-0Assumed loss of $31,250
-0(18,750)
(12,500)
-0Step Three balances
$
-0$
-0$ 35,000
$
-0Schedule 1
Partner
Larson
Norris
Spencer
Harrison
Schedule 2
Partner
Norris
Spencer
Harrison
Schedule 3
Partner
Norris
Spencer
Capital Balance/
Loss Allocation
$15,000/20%
$60,000/30%
$75,000/20%
$41,250/30%
Capital Balance/
Loss Allocation
$37,500/(3/8)
$60,000/(2/8)
$18,750/(3/8)
Capital Balance/
Loss Allocation
$18,750/(3/5)
$47,500/(2/5)
Maximum Loss
That Can
Be Absorbed
$200,000
$375,000
$137,500
Maximum Loss
That Can
Be Absorbed
$100,000
$240,000
Maximum Loss
That Can
Be Absorbed
$118,750
First $55,000 goes to pay liabilities ($47,000) and liquidation expenses
(estimated at $8,000).
Next $35,000 available goes to Spencer.
Next $31,250 is split between Norris and Spencer on a 3:2 basis.
Next $50,000 is split among Norris, Spencer, and Harrison on a 3:2:3 basis.
All remaining cash is split among Larson, Norris, Spencer, and Harrison on
the original profit and loss ratio.
15-23
Education.
23. (20 minutes) (Prepare and use a predistribution plan)

Part a.
Able*
Moon
Yerkl
$50,000/.2
$60,000/.3
$50,000/.5
$250,000
200,000
100,000 (most vulnerable to losses)
*Able's balance includes capital and the loan to the partnership.

Able
Reported balances
$50,000
Assumed loss ($100,000) split on a 2:3:5 basis (20,000)
Adjusted balances
$30,000
Moon
$60,000
(30,000)
$30,000
Yerkl
$50,000
(50,000)
$
0

Able
Moon
$30,000/.4
$30,000/.6
$75,000

Reported balances
Assumed loss ($50,000) split on a 2:3 basis
Adjusted balances
Able
$30,000
(20,000)
$10,000
Moon
$30,000
(30,000)
$
0
The first $62,000 will go to pay liquidation expenses ($12,000) and liabilities
($50,000).
The next $10,000 goes entirely to Able.
The next $50,000 is split between Able and Moon based on a 2:3 basis,
respectively.
All remaining cash will be divided among the partners according to their
profit and loss ratio.
Part b.
After the sale of assets for $40,000, the partnership has $76,000 in cash. The
first $62,000 should be held for the liabilities and the liquidation expenses,
leaving $14,000 for immediate distribution to partners. The next $10,000 goes
to Able. The remaining $4,000 is divided between Able ($1,600 or 40%) and
Moon ($2,400 or 60%). Thus, Able receives $11,600 and Moon receives $2,400.
24. (25 minutes) (Prepare a predistribution plan for a partnership liquidation)
15-24
Education.
Simpson
Hart
Bobb
Reidl
$18,000/20%
$40,000/40%
$48,000/20%
$135,000/20%
$ 90,000 (most vulnerable to losses)

100,000
240,000
675,000

Simpson
Hart
Reported balances
$18,000
$40,000
on a 2:4:2:2 basis
(18,000)
(36,000)
Adjusted balances
$
0
$ 4,000
Bobb
$48,000
Reidl
$135,000
(18,000)
$30,000
(18,000)
$117,000

Hart
Bobb
Reidl
$4,000/4/8
$30,000/2/8
$117,000/2/8
$ 8,000 (most vulnerable to losses)

120,000
468,000
The assumption is made that an $8,000 loss occurs:

Hart
Reported balances
$4,000
Assumed loss ($8,000) split on a 4:2:2 basis (4,000)
Adjusted balances
$
0
Bobb
$30,000
(2,000)
$28,000
Reidl
$117,000
(2,000)
$115,000

Bobb
Reidl
$28,000/2/4
$115,000/2/4

230,000

Reported balances
Assumed loss ($56,000) split on a 2:2 basis
Adjusted balances
Bobb
$28,000
(28,000)
$
0
Reidl
$115,000
(28,000)
$ 87,000
The first $59,000 goes to pay liabilities and expected liquidation expenses.
The next $87,000 goes entirely to Reidl.
The next $56,000 is split evenly between Bobb and Reidl.
The next $8,000 is split among Hart (4/8), Bobb (2/8), and Reidl (2/8).
All remaining cash is split among the partners according to their original
profit and loss ratio.
15-25
Education.
25. (30 minutes) (Determine the ramifications of a variety of liquidation situations)

Part A. Partner with Deficit Capital Balance
(a) $48,000. Maximum losses of $100,000 on the noncash assets would
increase Milburn's deficit balance by $40,000 (40%).
(b) All $19,000 should go to Thomas. As Ross and Thomas view the current
situation, maximum potential losses total $108,000: $100,000 on the
noncash assets and $8,000 on Milburn's deficit balance. In determining safe
capital balances, these assumed losses would be allocated on a 4:2 basis
or $72,000 to Ross and $36,000 to Thomas. Since such a loss would entirely
eliminate Ross' capital account, only Thomas has a safe capital balance at
the current time.
(c) The minimum cash payment to Thomas would be $35,667.
A loss of $59,000 on the noncash assets would result in the following
capital balances:
Ross:
$ 45,400 = $69,000 (40% x $59,000)
Milburn: $(31,600) = $(8,000) (40% x $59,000)
Thomas: $ 46,200 = $58,000 (20% x $59,000)
Milburns deficit further reduces the remaining partner's balances as
follows:
Ross:
$24,333 = $45,400 (4/6 x $31,600)
Thomas: $35,667 = $46,200 (2/6 x $31,600)
15-26
Education.
25. (continued)
Part B. Partners with Deficit Capital Balances; Insolvent Partner
(a) Carton will have to contribute $7,429. The $29,000 in deficits will have to be
absorbed by Sampson and Carton on a 4:3 basis. Thus, Carton will be
allocated $12,429 of this amount which creates a deficit for this partner of
$7,429 ($5,000 - $12,429).
(b) Klingon will have to contribute $19,667 [$17,000 + (20/90 x $12,000)] that will
be distributed as follows:
Creditors
Sampson
Carton
$15,000
$ 3,667
$ 1,000
Since Romulan is insolvent, the remaining partners will have to absorb the
$12,000 deficit on a 4:2:3 basis. This allocation increases Klingon's deficit
by 2/9 of $12,000 or $2,667. Klingon must contribute an amount equal to the
new deficit balance of $19,667. The first $15,000 will go to the creditors that
remain after the $9,000 in partnership cash is distributed. The remaining
$4,667 is distributed to the two partners in accordance with their remaining
positive capital balances after absorbing Romulan's loss, 4/9 to Sampson
and 3/9 to Carton. Sampson has a postive capital balance of $3,667 [$9,000
($12,000 x 4/9)] and Carton has a positive capital balance of $1,000
[$5,000 ($12,000 x 3/9)].
(c) Sampson should receive $500. If Klingon is insolvent, the $17,000 deficit
balance will have to be absorbed by the remaining three partners on a 4:3:1
basis. This loss would decrease Sampson's capital balance by $8,500 (4/8 x
$17,000) to $500.
15-27
Education.
26. (25 minutes) (Prepare journal entries for a partnership liquidation)

JOURNAL ENTRIES
a. Cash .............................................................................
March, Capital (2/6 of loss) .......................................
April, Capital (3/6) .......................................................
May, Capital (1/6) ........................................................
Inventory ................................................................
56,000
6,000
9,000
3,000
74,000
b. March, Capital (2/6 of expenses) ..............................

April, Capital (3/6) .......................................................
May, Capital (1/6) ........................................................
Cash .......................................................................
2,500
3,750
1,250
c. Liabilities .....................................................................
Cash .......................................................................
40,000
d. Cash .............................................................................
Accounts Receivable ............................................
45,000
e.
Partner
March
April
May
Current Capital
Adjusted
$16,500
$62,250
$41,750
7,500
40,000
45,000
Share of
Potential
Maximum Loss*
Capital
2/6 x $77,000 = $25,667 $ (9,167)
3/6 x $77,000 = $38,500
$23,750
1/6 x $77,000 = $12,833
$28,917
*Maximum losses could be suffered on the remaining $39,000 in accounts

receivable and the $38,000 in land, building, and equipment.
Based on the above potential losses, March would have a deficit capital
balance of $9,167 which in turn has to be allocated to the two partners having
positive capital balances:
Partner
April
May
Potential Capital
(above)
$23,750
$28,917
Share of
March's Deficit
3/4 x $9,167 = $6,875
1/4 x $9,167 = $2,292
15-28
Potential
Capital
$16,875
$26,625
Education.
26. (continued)
As the above amounts represent safe capital balances, payments can be
presently made to these two partners.
April, Capital ...............................................................
16,875
May, Capital .................................................................
26,625
Cash .......................................................................
43,500
f. Cash (30%) ..................................................................
April, Capital (3/6)........................................................
May, Capital (1/6).........................................................
Accounts Receivable ............................................
11,700
9,100
13,650
4,550
g. Cash ............................................................................
April, Capital (3/6) .......................................................
May, Capital (1/6) ........................................................
Land, Building and Equipment ............................
17,000
7,000
10,500
3,500
h. Liabilities .....................................................................
Cash .......................................................................
21,000
39,000
38,000
21,000
i. Since $28,700 cash remains and each partner has a positive capital
balance, the money left can be distributed based on these ending totals.
March, Capital .............................................................
April, Capital ...............................................................
May, Capital .................................................................
Cash .......................................................................
15-29
400
21,225
7,075
28,700
Education.
27. (30 minutes) (Determine liquidation proceeds necessary to give partner a

specified amount; predistribution plan)
Answer: For Z to be able to pay his personal creditor $5,000 from the
distribution of partnership property, the partnerships other assets must be
sold for at least $50,000.
$27,000 in cash above the current level must first be generated for creditors
and liquidation expenses. Based on the predistribution schedule below, the
next $10,000 is received solely by Y. A third $8,000 would be split evenly
between Y and Z (giving Z $4,000 of the $5,000 needed). Z needs $1,000 from
the next cash generated in order to satisfy this personal claim. Since the next
level (Step Two balances) is split on a 3:1:1 basis, Z is entitled to 1/5 of the
proceeds. Thus, $5,000 must be collected for Z to receive $1,000. For Z's
creditor to get $5,000, the other assets have to be sold for $50,000 ($27,000 +
$10,000 + $8,000 + $5,000).
A predistribution plan must be developed to generate this information:
Beginning capital
Schedule 1) (5:3:1:1)
Step One balances
Schedule 2) (allocated on a
0:3:1:1 basis)
Step Two balances
Schedule 3) (allocated on a
0:0:1:1 basis)
Step Three balances
W
X
$ 60,000 $ 78,000
Y
$ 40,000
Z
$ 30,000
(60,000) (36,000)
$
-0- $ 42,000
(12,000)
$ 28,000
(12,000)
$ 18,000
(14,000)
$ 14,000
(14,000)
$ 4,000
(4,000)
$ 10,000
- 0- 0-
(42,000)
$
- 0-
- 0- 0-
- 0- 0-
(4,000)
- 0-
Schedule 1
Partner
W
X
Y
Z
Capital Balance/
Loss Allocation
$60,000/50%
$78,000/30%
$40,000/10%
$30,000/10%
Maximum Loss to
Be Absorbed
$120,000 (most vulnerable)
$260,000
$400,000
$300,000
Capital Balance/
Loss Allocation
Maximum Loss to
Be Absorbed
27. (continued)
Schedule 2
Partner
15-30
Education.
X
Y
Z
$42,000/(3/5)
$28,000/(1/5)
$18,000/(1/5)
$ 70,000
$140,000
$ 90,000
(most vulnerable)
Schedule 3
Partner
Y
Z
Capital Balance/
Loss Allocation
$14,000/(1/2)
$ 4,000/(1/2)
Maximum Loss to
Be Absorbed
$ 28,000
Current cash of $30,000 goes to creditors.

Next $27,000 generated goes to remaining creditors ($12,000) and to pay
liquidation expenses estimated at ($15,000).
Next $10,000 goes to Y.
Next $8,000 goes to Y and Z on a 1:1 basis.
Next $70,000 goes to X, Y, and Z on a 3:1:1 basis.
Any remaining cash is split among all four partners based on a 5:3:1:1
basis.
15-31
Education.
28. (35 minutes) (Determine monthly safe installment payments to partners)
15-32
Education.
28. (continued)
15-33
Education.
28. (continued)
15-34
Education.
29. (35 minutes) (Determine cash distributions for four different partnership
liquidations; insolvent partners)
Part A
Simon,
Capital
$16,000
- 0$16,000
Beginning balances
Contribution by Jackson
Capital balances
Elimination of Jackson's deficit
(40:20 basis)
Final distribution
(6,000)
$10,000
Part B
Beginning balances
$82,000 loss on disposal (allocated on a
50:40:10 basis)
Liquidation expenses (50:40:10 basis)
Capital balances
Allocation of Luck's deficit (50:10 basis)
Final distribution
Part C
Beginning balances
$82,000 loss on disposal (allocated on a
2:4:4 basis)
Liquidation expenses (2:4:4 basis)
Capital balances
Allocation of Cummings' deficit balance
(2:4 basis)
Capital balances
Allocation of Luck's deficit balance
Final distribution
15-35
Hough,
Loan and
Capital
$82,000
(41,000)
(10,500)
30,500
(1,000)
$29,500
Hough,
Loan and
Capital
$82,000
Haynes,
Loan and
Capital
$ 4,000
- 0$ 4,000
(3,000)
$ 1,000
Jackson,
Capital
($12,000)
3,000
($ 9,000)
$
9,000
- 0-
Luck,
Loan and Cummings,
Capital
Capital
$40,000
$20,000
(32,800)
(8,400)
(1,200)
1,200
$ - 0-
(8,200)
(2,100)
9,700
(200)
$ 9,500
Luck,
Loan and Cummings,
Capital
Capital
$40,000
$20,000
(16,400)
(1,200)
$64,400
(32,800)
(2,400)
$ 4,800
(32,800)
(2,400)
($15,200)
(5,067)
$59,333
(5,333)
$54,000
(10,133)
($ 5,333)
5,333
$ - 0-
15,200
-0- 0$ - 0-
Education.
29. (continued)
Part D
Beginning balances
Allocation of Redmond's
deficit balance (10:30:40
basis)
Capital balances
$32,000 contribution by
Ledbetter and $3,000 contribution by Watson
Final distribution*
Redmond,
Loan and
Capital
($16,000)
Ledbetter,
Capital
($30,000)
Watson,
Capital
$ 3,000
Sandridge,
Capital
$15,000
16,000
-0-
(2,000)
($32,000)
(6,000)
($3,000)
(8,000)
$ 7,000
- 0$ - 0-
32,000
$ - 0-
3,000
$ - 0-
- 0$ 7,000
*Remaining $28,000 is used to pay liabilities.
15-36
Education.
30. (60 minutes) (Prepare a predistribution plan, a final statement of liquidation,

and journal entries for a partnership liquidation)
Part A
Preparation of Predistribution Plan

Schedule 1
Partner
Frick
Wilson
Clarke
Capital Balance/
Loss Allocation
$129,000/60%
$ 35,000/20%
$ 75,000/20%
Maximum Loss
That Can
Be Absorbed
$215,000
$175,000 (most vulnerable to loss)
$375,000
Schedule 2
Partner
Frick
Clarke
Capital Balance/
Loss Allocation
$24,000/(60/80)
$40,000/(20/80)
Maximum Loss
That Can
Be Absorbed
$ 32,000 (most vulnerable to loss)
$160,000
Schedule 3
Beginning balances ................................

Loss of $175,000 assumedSchedule 1
(allocated on a 60:20:20 basis) ...........
Step One balances ..................................
Loss of $32,000 assumedSchedule 2
(allocated on a 60:20 basis) ................
Step Two balances ..................................
Loss of $32,000 assumed........................
Final balances...........................................
Frick,
Capital
$129,000
Wilson,
Capital
$35,000
Clarke,
Capital
$75,000
(105,000)
24,000
(35,000)
-0-
(35,000)
40,000
(24,000)
-0-0$
-0-
- 0-0-0-0-
(8,000)
32,000
(32,000)
$
-0-
First, payment of liabilities and liquidation expenses must be assured.

Next $32,000 goes to Clarke.
Next $32,000 is split between Frick and Clarke on a 60:20 basis.
Any further cash is split among Frick, Wilson, and Clarke on a 60:20:20
basis.
15-37
Education.
30.
(continued)
Part B Preparation of Final Statement of Partnership Liquidation
FRICK, WILSON, AND CLARKE
Statement of Partnership Liquidation
Final Balances
* $12,000 in cash is immediately available for distribution: Cash of $60,000 less Liabilities of $40,000 and Estimated
Liquidation Expenses of $8,000.
** $60,000 in cash is available for distribution: Cash of $68,000 less Estimated Liquidation Expenses of $8,000.
30. (continued)
Part C
1.
2.
3.
4.
5.
6.
7.
Journal Entries
Clarke, Capital ...................................................................
Cash .......................................................................
Cash payments are made to partners in accordance
with predistribution plan.
Cash .................................................................................
Frick, Capital (60% of $34,000 loss) ................................
Wilson, Capital (20%) ........................................................
Clarke, Capital (20%) ........................................................
Noncash Assets .....................................................
Noncash assets are sold with losses allocated to
partners.
12,000
12,000
60,000
20,400
6,800
6,800
94,000
Liabilities...........................................................................
Cash .......................................................................
All liabilities are paid.
40,000
Frick, Capital .....................................................................

Wilson, Capital ..................................................................
Clarke, Capital ...................................................................
Cash .......................................................................
Cash payments are made to partners in accordance
with predistribution plan.
28,800
1,600
29,600
40,000
60,000
Cash ...................................................................................
Frick, Capital (60% of $74,000 loss) ................................
Wilson, Capital (20%) ........................................................
Clarke, Capital (20%) ........................................................
Noncash Assets .....................................................
Noncash assets are sold with losses allocated to
partners.
51,000
44,400
14,800
14,800
Frick, Capital .....................................................................

Wilson, Capital ..................................................................
Clarke, Capital ...................................................................
Cash .......................................................................
Liquidation expenses are paid.
3,600
1,200
1,200
Frick, Capital .....................................................................

Wilson, Capital ..................................................................
Clarke, Capital ...................................................................
Cash .......................................................................
Final cash payments are made to partners based on
ending capital balances.
31,800
10,600
10,600
15-38
125,000
6,000
53,000
Education.
31. (50 minutes) (Prepare a predistribution plan and journal entries for a
partnership liquidation)
Part A
Preparation of Predistribution Plan

Schedule 1
Partner
Capital Balance/
Loss Allocation
Wingler
Norris
Rodgers
Guthrie
$120,000/30%
$ 88,000/10%
$109,000/20%
$ 60,000/40%
Maximum Loss
That Can Be
Absorbed
$400,000
$880,000
$545,000
Schedule 2
Partner
Wingler
Norris
Rodgers
Maximum Loss
That Can Be
Absorbed
$438,000
$237,000
Capital Balance/
Loss Allocation
$75,000/(30/60)
$73,000/(10/60)
$79,000/(20/60)
Schedule 3
Partner
Norris
Rodgers
Maximum Loss
That Can Be
Absorbed
$144,000
$ 43,500 (most vulnerable to loss)
Capital Balance/
Loss Allocation
$48,000/(10/30)
$29,000/(20/30)
15-39
Education.
31. (continued)
Schedule 4
Wingler,
Capital
$120,000
Beginning balances ...............

Loss of $150,000 assumed (allocated on a 30:10:20:40
basis) see Schedule 1 .........
(45,000)
Step One balances ..................
$ 75,000
Loss of $150,000 assumed (allocated on a 30:10:20 basis)
see Schedule 2 .....................
(75,000)
Step Two balances ..................
$
-0Loss of $43,500 assumed
(allocated on a 10:20 basis) see
Schedule 3 ...........................
-0Step Three balances ...............
$
-0-
Norris,
Capital
$88,000
Rodgers,
Loan and
Capital
$109,000
Guthrie,
Capital
$60,000
(15,000)
$73,000
(30,000)
$ 79,000
(60,000)
$
-0-
(25,000)
$48,000
(50,000)
$ 29,000
-0-0-
(14,500)
$33,500
(29,000)
$
-0-
-0-0-
Payment of all liabilities and liquidation expenses must be assured.

Next $33,500 goes entirely to Norris.
Next $43,500 is allocated to Norris (10/30) and Rodgers (20/30).
Next $150,000 is allocated to Wingler (30/60), Norris (10/60), and Rodgers
(20/60).
Any further cash distributions are divided on the original profit and loss
ratio:
Wingler (30%), Norris (10%), Rodgers (20%), and Guthrie (40%).
15-40
Education.
31. (continued)
Part B
1.
Journal Entries
Cash ............................................................................. 65,600
Wingler, Capital (30% of $16,400 loss) .....................
4,920
Norris, Capital (10%) ..................................................
1,640
Rodgers, Capital (20%) ..............................................
3,280
Guthrie, Capital (40%) ................................................
6,560
Accounts Receivable ......................................
Receivables are collected with losses allocated
to partners.
82,000
2.
Cash ............................................................................. 150,000

Wingler, Capital (30% of $103,000 loss) ................... 30,900
Norris, Capital (10%) .................................................. 10,300
Rodgers, Capital (20%) .............................................. 20,600
Guthrie, Capital (40%) ................................................ 41,200
Land .................................................................
85,000
Building and Equipment ................................
168,000
Land, building and equipment are sold with
losses allocated to partners.
3.
Wingler, Capital .......................................................... 31,800

Norris, Capital ............................................................. 58,600
Rodgers, loan ............................................................. 35,000
Rodgers, Capital ......................................................... 15,200
Cash ..................................................................
140,600
Payments made to partners in accordance with
the predistribution plan based on a current cash
balance of $230,600. The first $35,000 paid to
Rodgers extinguishes the loan made to the
partnership.
First $90,000 is held to pay liabilities ($74,000) and estimated liquidation

expenses ($16,000); $140,600 is paid to partners.
Next $33,500 goes entirely to Norris.
Next $43,500 is split between Norris ($14,500) and Rodgers ($29,000).
Remaining $63,600 is allocated to Wingler ($31,800), Norris ($10,600)
and Rodgers ($21,200).
Total payments: Norris, $58,600; Rodgers, $50,200; Wingler, $31,800.
31. b. (continued)
15-41
Education.
4.
No journal entry is currently required by Guthrie's insolvency.
5.
Liabilities ..........................................................
Cash .......................................................
All liabilities are paid.
6.
74,000
74,000
Cash ..................................................................
71,000
Wingler, Capital (30% of $30,000 loss) ..........
9,000
Norris, Capital (10%) .......................................
3,000
Rodgers, Capital (20%) ...................................
6,000
Guthrie, Capital (40%) .....................................
12,000
Inventory.................................................
Inventory is sold with loss allocated to partners.
101,000
7.
Wingler, Capital.................................................
35,500
Norris, Capital...................................................
11,833
Rodgers, Capital...............................................
23,667
Cash........................................................
71,000
Distribution of available cash according to predistribution plan.
Although $87,000 in cash is held by the partnership, $16,000 must
be retained to pay liquidation expenses. The remaining $71,000 is
divided among Wingler, Norris, and Rodgers on a 30:10:20 basis.
According to the predistribution plan, a total of $150,000 must be
divided on this ratio but only $63,600 was allocated in this manner
in the first distribution above. Therefore, all $71,000 (making a
total of $134,600) is paid out on this 30:10:20 basis.
8.
Wingler, Capital (30% of expenses)................

Norris, Capital (10%)........................................
Rodgers, Capital (20%)....................................
Guthrie, Capital (40%)......................................
Cash........................................................
Liquidation expenses are paid.
9.a.
3,300
1,100
2,200
4,400
11,000
Wingler, Capital (30/60 of deficit)....................

2,080
Norris, Capital (10/60)......................................
693
Rodgers, Capital (20/60)..................................
1,387
Guthrie, Capital..........................................
4,160
To eliminate the deficit balance of insolvent partner as computed
on the next page.
15-42
Education.
31. b. (continued)
CAPITAL ACCOUNT BALANCES
Beginning balances.................
Loss on accounts receivable.
Loss on land, building, and
equipment ..............................
Cash distribution.....................
Loss on inventory....................
Cash distribution.....................
Liquidation expenses..............
Subtotal ..............................
Guthrie insolvent......................
Current balances......................
9.b.
Wingler,
Capital
$120,000
(4,920)
Norris,
Capital
$88,000
(1,640)
(30,900)
(31,800)
(9,000)
(35,500)
(3,300)
4,580
(2,080)
$2,500
(10,300)
(58,600)
(3,000)
(11,833)
(1,100)
1,527
(693)
$ 834
Rodgers,
Loan and Guthrie,
Capital
Capital
$109,000
$60,000
(3,280)
(6,560)
(20,600)
(50,200)
(6,000)
(23,667)
(2,200)
3,053
(1,387)
$1,666
(41,200)
-0(12,000)
-0(4,400)
(4,160)
4,160
$ -0-
Wingler, Capital.................................................
2,500
Norris, Capital...................................................
834
Rodgers, Capital...............................................
1,666
Cash............................................................
5,000
To distribute remaining cash based on final capital balances.
15-43
Education.
Chapter 15 Develop Your Skills

Research Case
1. Students often seem to believe that definitive answers can be found for all
accounting and legal questions if a serious enough investigation is performed.
However, here, there simply may be no easy answer to the question as to the
amount of liability that the other six doctors in this case are facing.
2. Several questions can be raised that may impact the ultimate resolution:
In what state will the court case be handled? Different states have
somewhat different laws as to the potential liabilities incurred by partners
and different courts seem to have varying ways of interpreting those laws.
How difficult was the surgery that was performed? Should the doctor have
been able to perform the work without accident? Or, perhaps, was it an
extremely risky surgery where death might have been anticipated under any
conditions?
How much did the other doctors know about this doctors ability to do this
particular surgery? Did they have any reason to believe that such work
should not be undertaken?
What is meant in the case by the term very poor judgment? How serious
was the mistake made by the doctor?
The answers to such questions as these can have a huge impact on the extent of
the liability of the other doctors.
Here are several quotes from The Wall Street Journal article mentioned in the
case that might pertain to the issue at hand:
Concerns are growing among Andersen's roughly 1,750 U.S. partners that even
those who had nothing to do with the firm's work for Enron Corp. could eventually
face personal liability stemming from the botched audit. Worried about what
protection the limited-liability partnership provides them, many are now
consulting lawyers for advice.
The limited-liability partnership is a comparatively new corporate structure,
untested by the kind of stress now besetting Andersen. But that testing appears
to be just around the corner as Enron creditors, shareholders and employees
seek to recover the billions of dollars they have lost from someone.
Because it is unclear how much protection the LLP structure will provide
Andersen partners, partnership and bankruptcy lawyers are expected to be
following the matter closely. As far as I know, there has never been a litigation
test of the extent of the LLP shield, and there have been very few LLP cases about
liability at all, said Larry Ribstein, a law professor at George Mason University.
15-44
Education.
The limited-liability partnership was invented about a decade ago in the wake of
the savings-and-loan debacle to protect members of partnerships from being
wiped out by claims against their firms. Under the structure, capital invested by
partners into the firm is fair game for creditors. In theory, no partner is supposed
to lose more than what he or she has invested in the firm.
"There is a strong legal tradition that you don't pierce the corporate veil and go
after individual partners except under extraordinary circumstances, said Lynn
LoPucki, a professor at the University of California Los Angeles law school. But
the law is very vague and lets the courts do what they feel appropriate. It is very
case specific and fact intensive.
In 1990, prior to the advent of limited-liability partnerships, the accounting firm of
Laventhol & Horwath filed for Chapter 11 bankruptcy-court protection, in part due
to lawsuits over questionable accounting. The firm's assets were insufficient to
cover the claims of creditors and litigants. Under a plan negotiated with the firm's
creditors, the 360 partners and former partners who had spent time at the firm
since 1984 were required to dig into their own pockets to share a $46 million
liability.
15-45
Education.
Analysis Case
1. In looking at the financial statements of a partnership, a number of obvious
differences can be spotted in comparison to the financial statements of a
corporation. For example, in looking at this set of statements, the following
differences can be noted:
The balance sheet shows partners (deficiency) capital rather than
stockholders equity.
The income statement (statement of operations) reports net loss allocated
to general partner and net loss allocated to limited partners. This
statement also reports net loss per limited partnership interest rather
than earnings (loss) per share.
A statement of changes in partners (deficiency) capital is presented
rather than a statement of changes in stockholders equity.
A potential investor in this partnership would become one of the limited
partners, whose aggregate capital is disclosed in the balance sheet.
2. There is a considerable amount of information provided in the notes to the
financial statements about the unique characteristics of a limited partnership:
Note 1 Organization and Summary of Significant Accounting Policies
discusses the creation and structure of this limited partnership under the
heading Organization.
Note 2 Investments in and Advances to Local Partnerships provides
information about the entitys investment in other limited partnerships.
Note 5 Transactions with Affiliated Parties describes the obligation of the
partnership to the General Partner.
Note 6 Income Taxes describes the manner in which individual partners
are taxed on their share of partnership income.
In addition, in Item 5 (page 5), which precedes the financial statements,
disclosures are provided related to the market for partnership interests. Because
the partnerships shares are not publicly traded, an individual investor may not
be able to sell his/her limited partner interest in the partnership.
As a limited partnership, potential investors (other than the general partner)
would probably view an investment in NTCI II as being fairly similar to that of
holding shares in a corporation. The major difference relates to the possible
inability to sell a limited partner interest in the company.
15-46
Education.
Communication Case
The bankruptcy of Laventhol & Horwath was one of the main reasons for the
creation of the limited liability partnership business structure. As a general
partnership, the litigation losses of this partnership that arose from poor
accounting and auditing practices fell on all partners and not just on those
involved. Partners were required to make contributions from their own personal
funds, often in amounts of up to several hundred thousand dollars to pay off the
debts of the partnership after its failure. A number of the partners eventually went
bankrupt as a result of the litigation that arose.
Today, the partners in a general partnership would still seem to have the same
risk that the partners of Laventhol & Horwath faced.
However, the alternatives
such as a limited liability partnership or a Subchapter S corporation would place
fewer individuals in this precarious position. Thus, more than anything else,
these articles on Laventhol & Horwath may be educational in showing why such
alternatives have been created and why they have become so popular.
15-47
Education.
Excel Case
There are a number of different ways that a spreadsheet could be created to solve
this particular problem. Here is one possible approach:
Create Column Headings:
In Cell A1, enter label text Partner.
In Cell B1, enter label text Capital Balance.
In Cell C1, enter label text Share P/L.
In Cell D1, enter label text Initial Loss Share.
In Cell E1, enter label text Subsequent Loss Share.
In Cell F1, enter label text Remaining Balance.
Enter Account Information for each partner:
In Cell A2, enter label text Wilson. In Cell B2, enter Wilsons Capital Balance of
$200,000 and, in Cell C2, enter 40% as share of profit and loss.
In Cell A3, enter label text Cho. In Cell B3, enter Chos Capital Balance of
$180,000 and, in Cell C3, enter 20% as share of profit and loss.
In Cell A4, enter label text Arrington. In Cell B4, enter Arringtons Capital
Balance of $110,000 and, in Cell C4, enter 40% as share of profit and loss.
Enter the amounts on which to base the calculations for each partner:
In Cell A7, enter label text Losses during liquidation and, in Cell B7, enter the
amount of $50,000.
In Cell A8, enter label text Final Losses and, in Cell B8, enter the amount of
$100,000.
Calculate Initial Loss Share:
Multiply the Losses during liquidation amount by the percentage of Share P/L
for each partner. To calculate the Initial Share Loss for Wilson, create the
following formula in Cell D2: =+B7*C2. We need to also use this same general
formula for both Cho and Arrington. However, if we drag the fill handle in Cell D2
into Cell D3 and D4, the reference to Cell B7 will automatically change to B8 and
B9 respectively and the reference to Cell C2 will change to C3 and C4 respectively
in order to adjust for the new cell position. The change to C3 and C4 is correct
because those are the individual profit and loss percentages. No change, though,
should be made to the reference to B7 because that is the overall loss in
question. In order to hold the reference to Cell B7 when it is copied, we need to
create what is known as an ABSOLUTE reference. Absolute references, which
are cell references that always refer to cells in a specific location, can be created
by placing a $ symbol before the Column letter and/or the Row number. Thus, in
Cell D2, change the formula to read =$B$7*C2, and then copy this formula to cells
D3 and D4. The resulting formula in Cell D3 will be =$B$7*C3 and in Cell D4 it will
15-48
Education.
be =$B$7*C4. The location of the reference to Cell B7 does not change due to the
$ symbol in front of the B and in front of the 7.
Calculate the Partners Share of any Subsequent Losses:
Repeat the same process as above, creating a formula in Cell E2 as follows: =+
$B$8*C2
Copy this formula to Cells E3 and E4.
Calculate the Remaining Capital Balance:
To calculate the Remaining Capital Balance, the beginning Capital Balance must
be reduced by the Initial Loss Share and Subsequent Loss Share.
In creating this last formula, it is important to note that the losses should be
added together and then subtracted in total from the beginning capital balance.
Therefore, enter the following function in Cell F2:
=+B2-(D2+E2).
The
computation inside the parenthesis is performed first and then subtracted from
the beginning capital balance (B2). Copy this formula to Cells F3 and F4 to
complete the worksheet. Note that the use of the $ is not used here because we
do want B2, D2, and E2 to adjust to the new position when copied.
Once this spreadsheet has been created, any of the variables may be changed
and the results will adjust automatically. There are eight variables that can be
changed: B2, B3, B4, B7, B8, C2, C3, and C4. C2, C3,and C4 must always add to
100%.
15-49
Education.
Spreadsheet to Determine the Remaining Capital Balances for

Wilson, Cho, and Arrington
A
Partner
Capital
Balance
Share
P/L
Subsequent
Loss Share
Remaining
Balance
Wilson
$200,000
40%
$20,000
$40,000
$140,000
Cho
180,000
20%
10,000
20,000
150,000
Arrington
110,000
40%
20,000
40,000
50,000
$490,000
100%
$50,000
$100,000
$340,000
D
Initial
Loss
Share
2
3
4
5
6
7 Losses during
liquidation
8 Final losses
50,000
100,000
15-50
Education.

Partnerships: Termination and Liquidation: Chapter Outline

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Chapter 15 - Partnerships: Termination and Liquidation

Chapter 15 - Partnerships: Termination and Liquidation

V. Treatment of partners loan to partnership

Chapter 15 - Partnerships: Termination and Liquidation

Answer to Discussion Question: What Happens if a Partner Becomes Insolvent?

Chapter 15 - Partnerships: Termination and Liquidation

Chapter 15 - Partnerships: Termination and Liquidation

Chapter 15 - Partnerships: Termination and Liquidation

Chapter 15 - Partnerships: Termination and Liquidation

Chapter 15 - Partnerships: Termination and Liquidation

7. A (Proposed schedule of liquidation to determine safe payments before the

8. D (Proposed schedule of liquidation; partner has deficit)

Chapter 15 - Partnerships: Termination and Liquidation

(most vulnerable to losses)

The assumption is made that a $130,000 loss occurs:

Maximum Losses That Now Can Be Absorbed

Maximum Losses That Now Can Be Absorbed

(most vulnerable to losses)

The assumption is made that a $6,750 loss occurs:

First $3,000 goes to Menton

Chapter 15 - Partnerships: Termination and Liquidation

Next $15,000 goes to Menton (2/3) and Hoehn (1/3)

11. C (Partners with deficit capital balances; proposed schedule of liquidation;

Chapter 15 - Partnerships: Termination and Liquidation

equivalent of a 60%:40% ratio). Fuller would absorb $2,400 of the potential

12. (8 minutes) (Determine safe payments; partner has deficit)

Chapter 15 - Partnerships: Termination and Liquidation

13. (20 minutes) (Final settlement of a partnership being liquidated; various

Reported balances ......................................

Brown gets $16,429 and Fish gets $8,571

Brown gets $10,714 and Fish gets $4,286

15. (8 minutes) (Determine safe payments)

Chapter 15 - Partnerships: Termination and Liquidation

16. (15 minutes) (Prepare a proposed schedule of liquidation)

Chapter 15 - Partnerships: Termination and Liquidation

17. (7 minutes) (Determine amount of cash needed to assure payments to all

$69,000/60% = $115,000 loss to eliminate capital

Chapter 15 - Partnerships: Termination and Liquidation

19. (10 minutes) (Determine amount to be contributed by partner with a deficit

Thus, Green must contribute $7,000 that will go to Brown.

Chapter 15 - Partnerships: Termination and Liquidation

20. (50 minutes) (Determine payments under a variety of circumstances; safe

Maximum total potential losses of $35,000 to be absorbed from Baker and

New Capital Balance

Chapter 15 - Partnerships: Termination and Liquidation

New Capital Balance

Maximum potential loss of $130,000 on the land would be allocated as follows:

New Capital Balance

10% x $130,000 = $13,000

Maximum potential loss of $24,000 to be absorbed from Baker would be

New Capital Balance

Maximum potential loss of $4,286 to be absorbed from Carvil would be

New Capital Balance

These amounts represent safe capital balances for distribution purposes.

Chapter 15 - Partnerships: Termination and Liquidation

Chapter 15 - Partnerships: Termination and Liquidation

Chapter 15 - Partnerships: Termination and Liquidation

Chapter 15 - Partnerships: Termination and Liquidation

$(80,000) $(100,000) $(120,000)

f. Fred, Capital (60% of expense) .................................

g. The statement of partnership liquidation presented on the next page shows

Chapter 15 - Partnerships: Termination and Liquidation