Chapter 16 DISSOLUTION AND LIQUIDATION OF A PARTNERSHIP Answers to Questions 1 Dissolution of a partnership terminates the partnership as a legal entity, but

the partnership business may continue under a new agreement. When a partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity. Thus, a partnership may be dissolved without liquidation, but it may not be liquidated without dissolution. 2 A simple partnership liquidation is the liquidation of a solvent partnership in which all partners have equity capital and all gains and losses are realized and recognized before any distributions are made to the partners. In simple partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances. 3 The priority ranking for the distribution of assets in liquidation pursuant to the Uniform Partnership Act is Rank Rank Rank Rank I II III IV Amounts owed to creditors other than partners Amounts owed to partners other than for capital and profits Amounts due to partners in respect to capital Amounts owing to partners in respect to profits

Since all profits and losses and drawings balances are closed to capital before distributions are made, Ranks III and IV may be considered together. 4 The distribution of assets for capital interests (Rank III) prior to the payment of loan balances to the partners (Rank II) is not in accordance with the Uniform Partnership Act. But the partners may agree to distribute cash or other assets for capital interests before all losses on liquidation are known. With agreement among all partners, distributions to the partners would be based on each partner's equity (combined capital and loan balances) in relation to his share of possible future losses. A partner with sufficient equity to absorb his share of possible future losses would be included in distributions,

48

Dissolution and Liquidation of a Partnership 49 but a partner with loans to the partnership would not be included in distributions until his equity was sufficient to absorb his share of possible future losses.

5 The assumptions for determining distributions to partners prior to recognition of all gains and losses on liquidation are (1) all partners are personally bankrupt such that no partner could contribute personal assets into the partnership and (2) all noncash assets are possible losses and should be considered actual losses for purposes of determining amounts to be distributed. In addition, liquidation expenses and probable loss contingencies should be estimated and assumed to be actual losses for purposes of determining advance distributions. 6 Capital balances represent one factor in determining a partner's equity, but loans and advances payable to and receivable from the partnership are factors that must also be considered in calculating safe payments. Partner equities, rather than capital balances, are used in safe payment schedules in order to avoid making distributions to partners that may end up with debit capital balances; i.e., owing money to the partnership. 7 Safe payment computations per se do not affect ledger account balances. Actual cash distributions based on safe payments computations do reduce partnership assets and equities and require recognition in ledger accounts. 8 A statement of partnership liquidation is a summary of transactions and balances for a partnership during its liquidation stage. Such statements provide continuous records of liquidation events. Interim liquidation statements are particularly helpful in showing the progress that has been made toward liquidation to date and in identifying remaining assets to be liquidated and liabilities to be paid. Interim liquidation statements are helpful to partners and creditors in providing a basis for current decisions as well as future planning. Liquidation statements are important legal documents for partnership liquidations that come under the jurisdiction of a court. 9 Available cash may be distributed to partners according to their profit and loss sharing ratios only when nonpartner liabilities have been satisfied and partner equities (capital and loan balances combined) are aligned with the relative profit and loss sharing ratios of the partners. In the absence of loans or advances payable to or receivables from individual partners, cash can be distributed to partners in their profit and loss sharing ratios when capital balances are in the relative profit and loss sharing ratios of the partners and all nonpartner liabilities have been paid. 10 Vulnerability ranks are an ordering of partners on the basis of the

50 adequacy of their equities in the partnership to absorb possible partnership losses. The ordering is typically from the most vulnerable to the least vulnerable. Vulnerability ranks are used in the preparation of assumed loss absorption schedules, which, in turn, are used in the construction of cash distribution plans.
Chapter 16

11 Partnership insolvency occurs when partnership liabilities exceed partnership assets. In this case, all available cash is distributed to partnership creditors. Individual partners will be called upon to use their personal assets to satisfy the remaining claims of the partnership creditors.

12 Partners with credit capital balances after all partnership assets have been distributed in liquidation have a claim against partners with debit capital balances. If the partners with debit balances are personally solvent, they should pay amounts equal to their debit balances into the partnership so that partners with credit balances can receive their partnership claims in full. If partners with debit capital balances are insolvent, the partners with credit balances will absorb the losses of the insolvent partners with debit capital balances in relation to their relative profit and loss sharing ratios.

51
SOLUTIONS TO EXERCISES Solution E16-1

Dissolution and Liquidation of a Partnership

Schedule of Capital Balances 60% Folly Capital balances January 1, 2003 January losses: Lumber $15,000 Receivables 4,000 Capital balances before distribution Cash distribution: Accounts payable Folly Frill Total cash $40,000 (9,000) (2,400) $28,600 40% Frill $20,000 (6,000) (1,600) $12,400

$15,000 28,600 12,400 $56,000

Solution E16-2 Sale of inventory Cash Inventory To record sale of inventory items. Distribution of cash Accounts payable Cash To record payment to creditors. Mike capital Nancy capital Okey capital Cash $12,600 6,200 25,200 $44,000 $ 5,000 $ 5,000 $10,000 $10,000

To record distribution of available cash to partners computed as follows: Capital Possible Loss from Balance Unsold Inventory = Balance Mike capital $15,000 $2,400 $12,600 Nancy capital 8,000 1,800 6,200 Okey capital 27,000 1,800 25,200 Totals $50,000 $6,000 $44,000

Chapter 16

52

Solution E16-3 January 1 balances Contingency fund of $10,000 Possible losses on asset disposal ($120,000) Loss on Vivian's possible default divided 3/7 and 4/7 Available cash is distributed 30% Terry $85,000 (3,000) (36,000) 46,000 (6,000) 40,000 30% Vivian $25,000 (3,000) (36,000) (14,000) 14,000 0 40% Walter $90,000 (4,000) (48,000) 38,000 (8,000) 30,000

Solution E16-4 Beginning balances Offset Kim's loan Loss on sale of assets ($180,000 - $120,000) Additional liability Distribute Kim's debit balance 5/7, 2/7 Cash distribution Creditors $60,000 50% Jan $59,000 (30,000) (2,500) 26,500 (7,500) $19,000 30% Kim $29,000 (20,000) (18,000) (1,500) (10,500) 10,500 0 20% Lee $52,000 (12,000) (1,000) 39,000 (3,000) $36,000

5,000 65,000 $65,000

Kim owes $7,500 to Jan and $3,000 to Lee. Solution E16-5 Schedule to Correct Capital Accounts Anita Capital December 31, 2008 balance Overvalued inventory Corrected balances $10,000 $40,000 (5,000) $35,000 Bernice Capital $35,000 (3,000) $32,000 Colleen Capital $25,000 (2,000) $23,000

The capital balances are adjusted for the error in computing net income in the partners' residual equity ratios.

53
Solution E16-6

Dissolution and Liquidation of a Partnership

Schedule to Correct Capital Accounts Ali Capital December 31, 2003 balance Undervalued inventory Corrected balances ($15,000) $60,000 6,000 $66,000 Bart Capital $25,000 3,000 $28,000 Carrie Capital $65,000 6,000 $71,000

The capital balances are adjusted for the error in computing net income in the partners' residual equity ratios.

Solution E16-7 Evers, Freda, and Grace Partnership Safe Payment Schedule .4 Evers Partner equities Loss on sale of assets Possible lossesa Allocate Evers' loss $100,000 (52,000) 48,000 (84,000) (36,000) 36,000 0
a

.4 Freda $250,000 (52,000) 198,000 (84,000) 114,000 (24,000) $ 90,000

.2 Grace $170,000 (26,000) 144,000 (42,000) 102,000 (12,000) $ 90,000

Total $520,000 (130,000) 390,000 (210,000) 180,000 $180,000

Remaining noncash assets of $200,000 plus contingency fund of $10,000 equals $210,000 possible losses. Cash to distribute: Beginning cash balance of $100,000 plus $170,000 from sale of assets less $10,000 contingency fund equals $260,000. Distribution of cash: Accounts payable Freda Grace $ 80,000 90,000 90,000 $260,000

Chapter 16

54

Solution E16-8 Jerry, Joan, and Jill Partnership Statement of Partnership Liquidation at November 30, 2008
Noncash Assets $27,000 (3,000) (8,000) 8,000 (4,000) (4,000) 0 $16,000 16,000 4,000 (4,000) (3,700) 0 $ 4,600 $ 300 $ 9,200 (300) $1,900 Priority Claims $4,000 40% Jerry Capital $10,800 (3,000) (3,200) 4,600 4,000 (4,000) 9,200 (800) 2,200 Loan from Joan $4,000 50% Joan Capital $13,200 10% Jill Capital $3,000

Cash Balances Nov. 30 Offset receivable from Jerry Write-off patent Balances after adjustments Cash distribution: Creditors Partners Balances $8,000

(This solution assumes that Joan agrees to a distribution of amounts that can be distributed safely. If she does not agree, no distribution can be made to either Joan or Jill.)

Jerry, Joan, and Jill Partnership Safe Payments Schedule at November 30, 2008 Possible Losses Partners' equities Possible inventory losses Allocate Jerry's deficit Safe payments to partners $16,000 40% Jerry Equity $ 4,600 (6,400) (1,800) 1,800 0 50% Joan Equity $13,200 (8,000) 5,200 (1,500) $ 3,700 $ 10% Jill Equity $2,200 (1,600) 600 (300) 300

55
Solution E16-9

Dissolution and Liquidation of a Partnership

Insolvent partnership and insolvent partner: Cash Liabilities over assets Capital balances January 1 Loss on Moe's insolvency Recovery from Curly Loss on Curly's insolvency $ 40,000 40,000 (20,000) $ 20,000 $(20,000) $ 70,000 (30,000) 40,000 $(60,000) 60,000 0 $(30,000) (30,000) (60,000) 40,000 (20,000) 20,000 0 Larry Capital Moe Capital Curly Capital

Larry can expect to receive $20,000 from the partnership liquidation.

Solution E16-10 Schedule for Phase-out of the Partnership 30% Alice Capital balances Creditors' recovery from Betty Partnership recovery from Betty Write-off of Betty's deficit Partnership recovery from Alice Write-off of Alice's deficit Cash distribution to Carle 20,000 (35,000) (15,000) 10,000 (5,000) 5,000 0 $ 20,000 20,000 40% Betty $(120,000) 30,000 (90,000) 20,000 (70,000) 70,000 0 30% Carle $ 70,000 70,000 70,000 (35,000) 35,000 35,000 (5,000) 30,000 (30,000) 0 Total $(30,000) 30,000 0 20,000 20,000 20,000 10,000 30,000 30,000 (30,000) 0

Chapter 16

56

Solution E16-11 Daniel, Eric, and Fred Partnership Schedule for Phaseout of Partnership 40% Daniel Capital Capital balances Fred's payment to creditors 10,000 Fred's payment to the partnershipa 10,000 Write-off of Fred's deficit in the relative profit sharing ratio of Daniel and Eric 4/7:3/7 Daniel's payment to the partnership for his deficit Write off of Daniels deficit to Eric Payment to Eric 60,000 60,000 $10,000 30% Eric Capital $60,000 30% Fred Capital $(90,000) 20,000 (70,000) 40,000 (30,000) Total $(20,000) 20,000 0 40,000 40,000

(17,143) (7,143) 5,000 (2,143) 2,143 0

(12,857) 47,143

30,000 0 40,000 5,000

47,143 (2,143) 45,000 (45,000) 0

45,000 0 (45,000) 0

Fred's personal assets of $100,000 less the $40,000 owed to his personal creditors, and less the $20,000 paid to partnership creditors, equals $40,000 available for his debit capital account balance.

57
Solution E16-12

Dissolution and Liquidation of a Partnership

Ace, Ben, Cid, and Don Statement of Partnership Liquidation for the period June 30 to July 31, 2003
Cash Balances June 30, 2003 July 1, 2003 Investment of Ace July 1, 2003 Payment of liabilities Balances July 1, 2003 July 15, 2003 Investment of Cid Investment of Don Loss on Cid's insolvency 180,000 Loss on Ben's insolvency 180,000 July 31, 2003 Final distribution (180,000) 0 () Debit capital balance or deduct. 100,000 80,000 180,000 240,000 190,000 (10,000) 180,000 (180,000) 0 10,000 (10,000) 10,000 0 (70,000) 70,000 0 (50,000) (20,000) 100,000 80,000 0 (400,000) 0 (400,000) 0 240,000 10,000 (170,000) (80,000) $200,000 200,000 400,000 400,000 Liabilities $400,000 Ace Capital $ 40,000 200,000 240,000 10,000 (170,000) (80,000) Ben Capital $10,000 Cid Capital $(170,000) Don Capital $(80,000)

Solution E16-13 Denver, Elsie, Fannie and George Partnership Safe Payment Schedule January 31, 2003 Possible Losses Denver Elsie Fannie Partners equity at 1/1 $150,000 $80,000 $140,000 January profit/loss transactions: Inventory sale (6,000) (3,000) (15,000) Land sale 20,000 10,000 50,000 Partners equity at 1/31 $164,000 $87,000 $175,000 Possible losses-noncash $395,000 (79,000) (39,500) (197,500) Possible losses-contingent 20,000 (4,000) (2,000) (10,000) $81,000 $45,500 $(32,500) Possible losses--Fannie (13,000) (6,500) 32,500 $68,000 $39,000 $ 0 Possible losses--George (2,667) (1,333) $65,333 $37,667

George $78,000 (6,000) 20,000 $92,000 (79,000) (4,000) $9,000 (13,000) $(4,000) 4,000 $ 0

Payments of $103,000 can be safely made to Denver and Elsie in the amounts shown above. Check: Cash available $523,000 Accounts payable $(400,000)

Chapter 16

58

Contingencies (20,000) Available to partners $103,000

59
Solution E16-14 1 2 3 b d a

Dissolution and Liquidation of a Partnership

Supporting computations: Vulnerability Rankings Partners' Equities Quen Reed Stac $45,000 $25,000 $25,000

See cash distribution plan that follows.

Loss Absorption Potential 30% 50% 20% $150,000 50,000 125,000

Vulnerability Ranks 3 1 2

Schedule of Assumed Loss Absorption Quen Predistribution equities Loss to absorb Reed Loss to absorb Stac $15,000/40% Balance Cash Distribution Plan Priority Creditors First $50,000 Next $7,500 Next $37,500 Remainder 100% 100% 60% 30% 26.667% 50% 13.333% 20% Quen Capital Reed Capital Stac Loan Stac Capital $ 45,000 (15,000) 30,000 $ (22,500) 7,500 Reed $ 25,000 (25,000) 0 Stac $ 25,000 (10,000) 15,000 (15,000) 0 Total $ 95,000 (50,000) 45,000 $ (37,500) 7,500

Chapter 16

60

Solution E16-15 1 d Answer b is correct for situations in which all partners have equity in partnership assets; in other words, credit capital balances.

2 3

d c The debit balance in Maris's capital account should be charged against the loan payable to Maris.

d Possible Losses 50% Gwen Capital $40,000 (50,000) (10,000) 10,000 0 25% Bill Capital $45,000 (25,000) 20,000 (5,000) $15,000 25% Sissy Capital $35,000 (25,000) 10,000 (5,000) $ 5,000

Net capital balances Possible loss on inventories Gwen's debit balance 50:50 Distribution of cash after payment of accounts payable

$100,000

c Possible Losses 20% Dick Capital $50,000 $ 60,000 85,000 200,000 5,000 $350,000 40% Frank Capital $220,000 40% Helen Capital $155,000

Net capital balances Noncash assets: Accounts receivable Inventories Plant assets-net Contingency fund

(70,000) (20,000) 20,000 0

(140,000) 80,000 (10,000) $ 70,000

(140,000) 15,000 (10,000) $ 5,000

Allocate Dick's possible deficit Distribution of cash after payment of $60,000 liabilities

61
Solution E16-15 6 c (continued)

Dissolution and Liquidation of a Partnership

30% Unsel Capital Capital balances Wayne's contribution Vance's personal net assets 90,000 Vance's remaining deficit divided 3/7 to Unsel and 4/7 to Wayne Wayne's remaining personal net assets to offset his deficit capital balance 81,000 Wayne's final deficit allocated to Unsel and uncollectible Amount of Unsel's partnership equity that should be recoverable (2,000) $79,000 (9,000) 81,000 $90,000 90,000

30% Vance Capital $(60,000) (60,000) 39,000 (21,000) 21,000 0

40% Wayne Capital $(100,000) 70,000 (30,000) (30,000) (12,000) (42,000) 40,000 (2,000) 2,000 0

Chapter 16

62
[AICPA adapted]

Solution E16-16 1 2 3 d d d

The Uniform Partnership Act ranks partnership liabilities first (Rank I) in order of recovery from partnership assets. Partnership creditors can seek recovery in full or in part from any partner under the Uniform Partnership Act. Compare the two situations: Q $15,000 25,000 (10,000) $30,000 Q $15,000 (10,000) $ 5,000 R $10,000 (10,000) 0 R $10,000 (10,000) 0 S $(20,000) (10,000) $(30,000) S $(20,000) 25,000 (10,000) $ (5,000) T $(30,000) 30,000 0 T $(30,000) 30,000 0

Recovery from Q Capital balances Q pays creditors T's loss is allocated Capital balances S owes Q $30,000. Recovery from S Capital balances S pays creditors T's loss is allocated Capital balances S owes Q $5,000.

In either case, Q's loss is $10,000 and he receives $5,000 net cash. 4 c 40% X $30,000 (12,000) 18,000 25% Y $15,000 (7,500) 7,500 35% Z $ 5,000 (10,500) (5,500) Total $50,000 (30,000) 20,000

Capital balances Loss on dissolution of partnership business

Z will contribute $5,500 to cover his deficit balance. 5 a Smith Equity $175,000 (39,000) 136,000 Jones Equity $155,000 (26,000) 129,000

Balances Loss on sale of other assets ($65,000)

63
SOLUTIONS TO PROBLEMS Solution P16-1 1

Dissolution and Liquidation of a Partnership

Journal entry to distribute available cash on January 1 Barney capital Cash $25,000 $25,000

To distribute available cash to Barney computed as follows: Safe Payments Schedule January 1, 2003 Possible Losses Barney Partners' capital balances Allocation of possible losses Allocate deficits to Barney Safe payments to Barney $90,000 $72,000 (30,000) 42,000 (17,000) $25,000

Betty $28,000 (30,000) (2,000) 2,000 0

Rubble $15,000 (30,000) (15,000) 15,000 0

Journal entry to record sale of assets on February 9 Cash Barney capital Betty capital Rubble capital Inventory Supplies $81,000 3,000 3,000 3,000 $72,000 18,000

To record sale of inventory items and supplies and recognize gain or loss. 3 Journal entry to distribute cash on February 10 Barney capital Betty capital Rubble capital Cash $44,000 25,000 12,000 $81,000 [Amounts

To distribute cash to partners in final liquidation. are equal to final capital account balances.]

Chapter 16

64

Solution P16-2 Chan, Dickerson, and Grunther Partnership Cash Distribution Plan Vulnerability ranks Equity Chan Dickerson Grunther $ 80,000 210,000 205,000 Profit and Loss Ratio 20% 30 50 Loss Absorption $400,000 700,000 410,000 Vulnerability Rank 1 3 2

Schedule of assumed loss absorption Chan Equities Loss to absorb Chan Loss to absorb Grunther ($5,000 5/8) $80,000 (80,000) 0 Dickerson $210,000 (120,000) 90,000 (3,000) $ 87,000 Cash distribution plan Priority Creditors First $90,000 Second $50,000 Third $37,000 Fourth $8,000 Remainder 20% 100% 100% 100% 3/8 30% 5/8 50% Loan from Dickerson Chan Capital Dickerson Capital Grunther Capital Grunther $205,000 (200,000) 5,000 (5,000) 0 Total $495,000 (400,000) 95,000 (8,000) $ 87,000

65
Solution P16-3

Dissolution and Liquidation of a Partnership

Fred, Flint, and Wilma Partnership Cash Distribution Plan Vulnerability Ranking Partnership Equity Fred Flint Wilma $ 75,000 20,000 60,000 Profit and Loss Ratio 30% 20% 50% Loss Absorption Potential $250,000 100,000 120,000 Vulnerability Ranking 3 1 2

Schedule of Assumed Loss Absorption 30% Fred Predistribution equity Assumed loss to absorb Flint $20,000 20% (100,000) Assumed loss to absorb Wilma $10,000 5/8 (16,000) Cash Distribution Plan Priority Creditors Wilma First $20,000 Next $39,000 Next $16,000 Remainder 100% 100% 3/8 30% 20% 5/8 50% 30% Fred 20% Flint 50% $ 75,000 (30,000) 45,000 (6,000) $ 39,000 20% Flint $ 20,000 (20,000) 0 50% Wilma $ 60,000 (50,000) 10,000 (10,000) 0 $ 39,000 55,000 Total $155,000

Chapter 16

66

Solution P16-4 1 Gary, Henry, Illa, and Joseph Partnership Cash Predistribution Plan

Schedule of Vulnerability Ranks: Gary Equity Capital balance Loan to Henry Loan from Gary Partner equity Divided by profit ratio Loss absorption potential Vulnerability ranks $200,000 100,000 $300,000 40% $750,000 2 Henry Equity $320,000 (20,000) $300,000 30% $1,000,000 3 Illa Equity $100,000 $100,000 20% $500,000 1 Joseph Equity $110,000 $110,000 10% $1,100,000 4

Schedule of Assumed Loss Absorption: Gary Equities Loss to absorb Illa's equity Loss to absorb Gary's equity Loss to absorb Henry's equity $300,000 (200,000) 100,000 (100,000) 0 Henry $300,000 (150,000) 150,000 (75,000) 75,000 (75,000) 0 Illa $100,000 (100,000) 0 Joseph $110,000 (50,000) 60,000 (25,000) 35,000 (25,000) $ 10,000

Cash Distribution Plan: Priority Liabilities First $100,000 Next $50,000 Next $10,000 Next $100,000 Next $200,000 Remainder 100% 100% 100% 3/4 1/4 1/2 3/8 1/8 40% 30% 20% 10% (Profit and loss sharing ratios) Contingency Fund Gary Henry Illa Joseph

67
Solution P16-4 2 (continued)

Dissolution and Liquidation of a Partnership

Available cash to distribute Priority Liabilities

($200,000 + $100,000) Gary Henry Illa

$300,000 Joseph

Contingency Fund

First $100,000 Next Next Next Next 50,000 10,000 100,000 40,000

$100,000 $50,000 $10,000 75,000 20,000 $20,000 $15,000 $90,000 25,000 5,000 $40,000

Distribution to partners

Solution P16-5 Eli, Joe, and Ned, Consultants Statement of Partnership Liquidation for the month ended August 31, 2006
Cash $13,000 8,000 (6,000) (3,000) 15,000 (25,000) (4,000) (6,000) 27,000 (4,000) (23,000) 0 0 0 4,000 (4,000) 0 Noncash Assets $47,000 (8,000) (3,000) (1,000) (6,000) (600) (2,000) (600) (1,200) 15,400 (15,400) 0 (900) (3,000) (1,000) (900) (1,800) 7,100 (7,100) 0 (1,500) (5,000) (1,500) (3,000) 500 (500) 0 Accounts Payable $ 6,000 Eli Loan $4,000 20% Eli Capital $20,000 30% Joe Capital $15,000 50% Ned Capital $15,000 (3,000) (500)

July 31 balances Receivables: Collections Assumption Write-off Liabilities paid Expenses paid Furniture: Sold to Joe Donated Predistribution balances To Eli for loan To partners

(200)

(300)

Chapter 16

68

Solution P16-6 Jones, Smith, and Tandy Partnership Statement of Partnership Liquidation for the liquidation period January 1, 2003 to March 31, 2003
Noncash Assets $215,000 65,000* 14,000* 136,000 80,000 40,000* 136,000 40,000* 70,000* 6,000* 20,000 40,000 40,000 31,000 4,000 6,000* 600* 28,400 46,500 6,000 9,000* 900* 42,600 27,500 10,000 15,000* 1,500* 21,000 Accounts Payable $80,000 20% Jones Capital $40,000 9,000* 31,000 30% Smith Capital $60,000 13,500* 46,500 50% Tandy Capital $50,000 22,500* 27,500

Cash Balances January 2003 Inventories sold Receivables collections Predistribution balance Cash distribution to creditors Balances January 31 February 2003 Land sold Land and buildings sold Receivables collections Balances February 28 March 2003 Write-off of furniture and fixtures Predistribution balance Cash distribution: Creditors Partners Balances March 31 40,000* 72,000* 0 112,000 40,000* 9,000 60,000 40,000 3,000 112,000 $ 15,000 20,000 14,000 49,000

20,000* 0 40,000 40,000*

4,000* 24,400

6,000* 36,600

10,000* 11,000

24,400* 0 0

36,600* 0

11,000* 0

69
Solution P16-7 1

Dissolution and Liquidation of a Partnership

Cash distribution plan for Link, Mack, and Nell partnership

Profit and Loss Ratio 50% 30 20 Loss Absorption Potential $110,000 40,000 100,000

Vulnerability ranks Capital Balances Link Mack Nell $40,000 20,000 20,000 $80,000 + Loan Balances $15,000 8,000 $ 7,000 Equity in Partnership $55,000 12,000 20,000 $87,000 Vulnerability Ranking 3 1 2

Schedule of assumed loss absorption Link Predistribution equities Assumed loss to absorb Mack's equity 50/30/20 Assumed loss to absorb Nell's equity 50/20 $55,000 20,000 35,000 30,000 $ 5,000 Mack $12,000 12,000 0 Nell $20,000 8,000 12,000 12,000 0 Total $87,000 40,000 47,000 42,000 $ 5,000

Cash distribution plan Priority Creditors First $55,000 Next $5,000 Next $42,000 Remainder 100% 100% 5/7 50% 30% 2/7 20% Link Mack Nell

Chapter 16

70
(continued)

Solution P16-7 2

Cash of $25,000 is realized from inventories and receivables with a $45,000 book value $47,000 25,000 72,000 (10,000) $62,000

Cash balance December 31, 2008 Realized during 2009 Less: Amount reserved for contingencies

Cash available for distribution Link, Mack, and Nell Partnership Schedule of January 2009 Cash Distribution
Cash Available Cash to be distributed Payments to creditors Remainder To Link (for loan balance) Remainder To Link (5/7) and Nell (2/7) Cash distribution $62,000 (55,000) 7,000 (5,000) 2,000 (2,000) 0 $55,000 1,429 $6,429 0 $ $ 571 571 $5,000 $55,000 Priority Creditors Link Mack Nell

Total

$55,000

5,000

2,000 $62,000

71
Solution P16-8

Dissolution and Liquidation of a Partnership

Jason, Kelly, and Becky Partnership Statement of Partnership Liquidation for the period January 1, 2003 through February 28, 2003
Noncash Assets $163,500 14,000* 25,000 2,000* 39,500 21,000* 13,500* 5,000 2,000* 108,000 111,000 3,000 108,000* 0 121,500* 0 3,000 3,000* $43,250 0 38,850* 0 25,900* 0 0 121,500 21,000 21,000* 121,500 0 3,000 9,500 28,000* Priority Liabilities $21,000 Becky Loan $9,500 50% Jason Capital $69,000 14,000* 1,500* 1,000* 52,500 900* 600* 45,500 600* 400* 32,500 30% Kelly Capital $47,000 20% Becky Capital $33,500

Cash Balances January 1 Offset loan to Jason Collection of receivables Liquidation expenses Predistribution balances Cash distribution: Creditors Partners-Schedule A Balances January 31 Liability discovered Liquidation expenses Sale of remaining assets Predistribution balances Cash distribution: Creditors Partners-Schedule B Balances February 28 $ 16,500

9,500* 0

52,500 1,500* 1,000* 6,750* 43,250

1,100* 44,400 900* 600* 4,050* 38,850

2,900* 29,600 600* 400* 2,700* 25,900

Schedule A Possible Losses Partners' equity January 31 Allocate possible losses Allocate Jason's deficit Safe payments to partners January 31 Schedule B Partners' equity February 28 Safe payments to partners February 28 $126,500

50% Jason Equity $52,500 (63,250) (10,750) 10,750 0

30% Kelly Equity $45,500 (37,950) 7,550 (6,450) $ 1,100

20% Becky Equity $42,000 (25,300) 16,700 (4,300) $12,400

$43,250 $43,250

$38,850 $38,850

$25,900 $25,900

Chapter 16

72

Solution P16-9 Roger, Susan, and Tom Partnership Statement of Partnership Liquidation for the period January 1, 2003 through February 28, 2003
Noncash Assets $140,000 10,000* 40,000 60,000 40,100* 19,900* 0 21,000 40,000* 90,000 40,100 40,100* 90,000 90,000* 5,000* 21,000 21,000* 0 $ 5,800* 0 0 0 5,000 9,900 20,700* 5,000 5,800* 11,486 9,000* $ 2,486 15,314 12,000* $ 3,314 5,000 9,900 35,000 60,000 Priority Liabilities $40,100 Roger Loan $5,000 30% Roger Capital $ 9,900 30% Susan Capital $45,000 10,000* 40% Tom Capital $60,000

Cash Balances January 1 Offset loan to Susan Sale of assets Predistribution balances Cash distribution: Creditors Partners-Schedule A Balances January 31 Sale of remaining assets Offset loan to Roger capital Predistribution balances Cash distribution: Partners-Schedule B Balances February 28 $ 20,000

2,814* 32,186 20,700*

17,086* 42,914 27,600*

Note: Roger owes Susan $2,486 and Tom $3,314. These balances remain on the partnership books until it is determined if Roger is personally solvent and able to pay $5,800 to the other partners.

Schedule A Possible Losses Partners' equity January 1 Allocate possible losses Allocate Roger's deficit Safe payments to partners January 31 Schedule B Partners' equity February 28 Allocate Roger's deficit Safe payments to partners February 28 $90,000

30% Roger Equity $14,900 (27,000) (12,100) 12,100 0

30% Susan Equity $35,000 (27,000) 8,000 (5,186) $ 2,814

40% Tom Equity $60,000 (36,000) 24,000 (6,914) $17,086

$(5,800) 5,800 0

$11,486 (2,486) $ 9,000

$15,314 (3,314) $12,000

Note: Since cash was distributed to Susan and Tom in January and since Roger has negative equity, the distribution in February is necessarily in the 3/7 and 4/7 relative profit and loss sharing ratio of Susan and Tom.

73
Solution P16-10 Cash $ 21,000 Noncash Assets $348,000 (15,000) 40,000 50,000 60,000 (50,600) (80,000) (2,000) 38,400 33,400 5,000 38,000 10,000 174,000 174,000 (95,000) (19,000) (20,000) (40,000) (800) 52,200 (52,200) ----(44,000) (60,000) (55,000)

Dissolution and Liquidation of a Partnership

Balances October 1 Write-off Ral's loan against capital Collected accounts receivable Sale of inventory Sale of equipment Payment of bank loan and accrued interest Payment of accounts payable Liquidation expenses Predistribution balances October 31 distribution Balance November 1 Sale of equipment Accounts receivable Inventory to Vic Write-off remaining inventory Liquidation expenses Predistribution balances Cash distributed Balances

Liabilities $130,000

30% Ral Capital $43,600 (15,000) (1,200) (3,000) 1,500

50% Tom Capital $150,000

20% Vic Capital $45,400

(2,000) (800) (5,000) (2,000) 2,500 1,000 (300) (1,000) 144,200 (120) (400) 43,080

(50,000) (80,000)

(180) (600)

---

25,120 25,120 (17,100) (2,700) (3,000) (12,000) (240) (9,920) (9,920) 50% Tom

(33,400) 110,800 43,080 (28,500) (11,400) (4,500) (1,800) (5,000) (12,000) (20,000) (400) 52,400 (45,314) 7,086 (8,000) (160) 9,720 (6,886) 2,834

Schedule of Safe Payments 30% Ral October 31 Partners' equity October 31, 2003 Possible losses Possible loss on contingency fund $25,120 (52,200) (1,500) (28,580) 28,580 0

20% Vic $43,080 (34,800) (1,000) 7,280 (8,166) (886) 886 0 $ 9,720 (2,834) $ 6,886

$174,000 5,000

$144,200 (87,000) (2,500) 54,700 (20,414) 34,286 (886) 33,400 $ 52,400 (7,086) $ 45,314

Possible loss from Ral allocated 5/7 and 2/7 (rounded) Possible loss from Vic Cash distribution November 30 Partners' equity November 30 Possible loss from Ral's debit balance 5/7 and 2/7 Cash distribution

$(9,920) 9,920 0

Chapter 16

74

Solution P16-11 1 Tucker, Gilliam, and Simpson Partnership Safe Payments Schedule for Cash Distribution on January 1, 2004 Possible Losses Partner equity on January 1 Possible loss on noncash assets Possible loss on cash withheld Possible loss on Gilliam's deficit Possible loss on Simpson deficit Safe payment to Tucker () deduct or loss Distribution of available cash: To creditors To Tucker for partnership capital Retained for contingencies Total cash on hand $ 65,000 45,000 10,000 $120,000 $370,000 Equity of Tucker 20% $130,000 (74,000) 56,000 10,000 (2,000) 54,000 (4,000) 50,000 (5,000) $ 45,000 Equity of Gilliam 30% $100,000 (111,000) (11,000) (3,000) (14,000) 14,000 0 Equity of Simpson 50% $195,000 (185,000) 10,000 (5,000) 5,000 (10,000) (5,000) 0 0

75
Solution P16-11 2 (continued)

Dissolution and Liquidation of a Partnership

Cash distribution plan Profit and Loss Ratio 20% 30 50 Loss Absorption Potential $650,000 333,333 390,000

Vulnerability ranks Equity in Partnership Tucker Gilliam Simpson $130,000 100,000 195,000 Vulnerability Ranking 3 1 2

Schedule of assumed loss absorption Tucker Equity Predistribution equities Assumed loss to eliminate Gilliam Assumed loss to eliminate Simpson $130,000 (66,667) 63,333 (11,333) $ 52,000 Cash distribution plan Creditors First $65,000 Next $52,000 Next $39,667 Remainder 100% 100% 2/7 20% 30% 5/7 50% Tucker Gilliam Simpson Gilliam Equity $100,000 (100,000) 0 Simpson Equity $195,000 (166,667) 28,334 (28,334) 0 Total $425,000 (333,333) 91,667 (39,667) $ 52,000

Chapter 16

76

Solution P16-12 1 Closing entry Revenue Jee capital Moore capital Olsen capital Expenses $200,000 25,000 75,000 100,000 $400,000

To close revenue and expense items and distribute loss to partners as follows: Net Loss 20% Jee 40% Moore 40% Olsen Salaries Loss to divide Divided 20:40:40 Loss allocated 2 Cash distribution plan Loss Absorption $1,125,000 937,500 675,000 Vulnerability Rank 3 2 1 $(200,000) (50,000) (250,000) 250,000 0 $ 25,000 (50,000) $(25,000) $ 25,000 (100,000) $ (75,000) $(100,000) $(100,000)

Vulnerability ranks Equity Jee: $300,000 balance - $50,000 loan - $25,000 loss Moore: loss $450,000 balance - $75,000 $375,000/40% $270,000/40% $225,000/20%

Olsen: $350,000 balance + $20,000 loan - $100,000 loss Assumed loss absorption Jee Predistribution equities Loss to absorb Olsen Loss to absorb Moore $105,000 40/60 (157,500) $ $ 225,000 (135,000) 90,000 (52,500) 37,500

Moore $ 375,000 (270,000) 105,000 (105,000) 0

Olsen $ 270,000 (270,000) 0

Total $ 870,000 (675,000) 195,000

37,500

77
Solution P16-12 (continued)

Dissolution and Liquidation of a Partnership

Cash distribution plan Priority Creditors First $80,000 Second $37,500 Third $157,500 Remainder 3 Cash distribution schedule Priority Creditors First Second Third $ 80,000 37,500 18,000 $135,500 $80,000 $80,000 $37,500 6,000 $43,500 $12,000 $12,000 0 Jee Moore Olsen 100% 100% 2/6 20% 4/6 40% 40% Jee Moore Olsen

Chapter 16

78

Solution P16-13 Beams, Plank, and Timbers Partnership Statement of Partnership Liquidation for the period January 1, 2004 to March 31, 2004
Noncash Assets $580,000 20,000* 100,000 100,000 320,000 100,000* 80,000* 380,000 250,000 10,000 180,000 10,000 6,000 176,000 4,000 84,000 50% Beams Capital $170,000 Plank Loan $10,000 30% Plank Capital $170,000 20% Timbers Capital $100,000 20,000*

Cash Balances January 1 Charge Timbers' loan to Timbers' capital Collection of receivables Sale of inventory Predistribution balances January distribution (schedule 1) Creditors Plank Balances February 1 Plant assets to Beams and loss distribution Sale of inventory Liquidation expenses paid Liability discovered Predistribution balances February distribution (schedule 2) Creditors Plank Timbers Balances March 1 Sale of plant assets and write-off Liquidation expenses paid Predistribution balances March distribution Liquidation completed March 31 110,000 5,000* 115,000 115,000* 0 68,000 60,000 2,000* $120,000

Liabilities $250,000

250,000* 60,000* 10,000 380,000 60,000* 120,000*

250,000* 0 180,000 50,000* 5,000* 30,000* 1,000* 8,000 200,000 8,000 4,000* 90,000

10,000* 0

50,000* 126,000 3,000* 18,000* 600* 2,400* 102,000 84,000 2,000* 12,000* 400* 1,600* 68,000

8,000* 30,000* 20,000* 10,000 200,000 200,000*

8,000*

30,000* 90,000 45,000* 2,500* 72,000 27,000* 1,500* 43,500 43,500* 0

20,000* 48,000 18,000* 1,000* 29,000 29,000* 0

42,500 42,500* 0

79
Solution 16-13 Schedule 1 (continued)

Dissolution and Liquidation of a Partnership

Beams, Plank, and Timbers Partnership Schedule of Safe Payments to Partners January Distribution Possible Losses Noncash assets Contingency reserve Possible losses Distribution 50:30:20 Distribution of Beams' deficit 60:40 Safe payment to Plank 15,000 0 9,000* $ 60,000 6,000* 0 $380,000 10,000 390,000 390,000* 0 195,000* 15,000* 117,000* 69,000 78,000* 6,000 Beams Capital $180,000 Plank Capital and Loan $186,000 Timbers Capital $ 84,000

Schedule 2 Beams, Plank, and Timbers Partnership Schedule of Safe Payments to Partners February Distribution Possible Losses Noncash assets Contingency reserve Possible losses Distribution 50:30:20 Distribution of Beams' deficit 60:40 Safe payment to Plank and Timbers *Deduct or deficit 15,000 0 9,000* $ 30,000 6,000* $ 20,000 $200,000 10,000 210,000 210,000* 0 105,000* 15,000* 63,000* 39,000 42,000* 26,000 Beams Capital $ 90,000 Plank Capital $102,000 Timbers Capital $ 68,000