The partnership of Butler, Osman, and Ward was formed several years as a local t

Question

The partnership of Butler, Osman, and Ward was formed several years as a local tax preparation firm. Two partners have reached retirement age and the partners have decided to terminate operations and liquidate the business. Liquidation expenses of $38,000 are expected. The partnership balance sheet at the start of liquidation is as follows:

Cash: $34,000 Liabilities: $174,000 Accounts receivable: 64,000 Butler, loan: 34,000 Office equipment (net): 54,000 Butler, capital (25%): 70,000 Building (net): 130,000 Osman, capital: (25%) 34,000 Land: 120,000 Ward, capital: (50%) 90,000 Total assets: $402,000 Total liabilities and capital: $402,000

Prepare a predistribution plan for this partnership.

Explanation / Answer

Predistribution plan=

The first $246,000 goes to pay liabilities and expected liquidation expenses.

The next $25,000 goes entirely to Butler.

The next $33,000 is split between Butler and ward.

The next $136,000 is split among Bulter (1/4), Osman (1/4) and ward (2/4)

All remaining cash is split among the partners according to their original profit and loss ratio.

Explanation

MAximum losses that can be absorbed Partner Capital Balance/Loss Allocation Maximum Loss that Can Be Absorbed Butler 70000/25% 280000 Osman 34000/25% 136000 (most vulnerable to losses) Ward 90000/50% 360000

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