1. A partnership has the following capital balances: A ( 20% of profits and loss
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1. A partnership has the following capital balances: A ( 20% of profits and losses) $ 100,000 B ( 30% of profits and losses) $ 120,000 C ( 50% of profits and losses) $ 180,000 If the partnership is to be liquidated and $ 30,000 becomes immediately available, who gets that money? Show your work: 2. The following balance sheet is for a local partnership in which the partners have become very unhappy with each other. To avoid more conflict, the partners have decided to cease operations and sell all assets. Using this information, answer the following questions. Each question should be viewed as an independent situation related to the partnerships liquidation. a. The $ 10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 2: 3: 3: 2 basis, respectively, how will the $ 10,000 be divided? b. The $ 10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated on a 2: 2: 3: 3 basis, respectively, how will the $ 10,000 be divided? Show your work.
A, Capital B, Capital C, Capital Reported Balances $ 100,000 $ 120,000 $ 180,000 Assumed $370,000 loss Potential balances Potential loss from C's deficit* Current cash distribution *The split is 20/30 or 40%/60% Requirement A: Since the partnership currently has total capital of $260,000, the $10,000 that is available would indicate maximum potential losses of $250,000. Adams, Baker, Carvil, Dobbs, Capital Capital Capital Capital Reported Balances Assumed $250,000 loss (2:3:3:2) Potential balances Potential loss from deficits (1:1) Current cash distribution Requirement
1. A partnership has the following capital balances: A ( 20% of profits and losses) $ 100,000 B ( 30% of profits and losses) $ 120,000 C ( 50% of profits and losses) $ 180,000 If the partnership is to be liquidated and $ 30,000 becomes immediately available, who gets that money? Show your work
B: Same cash to distribute, different allocations: Adams, Baker, Carvil, Dobbs, Capital Capital Capital Capital Reported Balances Assumed $250,000 loss (2:2:3:3) Potential balances, Step 1 Potential loss from deficits (4:6) Potential balances, Step 2 Potential loss from deficit (100%) Current cash distribution.
Answer #1 A B C Total Reported Balances 100000 120000 180000 400000 Anticipated loss ($370,000) ie 400000-30000 rati 2:3:5 -74000 -111000 -185000 -370000 Potential balances 26000 9000 -5000 30000 Potential loss from C's deficit (split 2:3) -2000 -3000 Current cash distribution 24000 6000Explanation / Answer
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 as follows on a 2:2 basis:
Adams 2/4 x $60,000 = $30,000 -0-
Dobbs 2/4 x $60,000 = $30,000 $ 10,000
Absorbing the final 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 Share of Loss New Capital Balance
Adams 2/10 x $250,000 = $50,000 $ 30,000
Baker 2/10 x $250,000 = $50,000 $(20,000)
Carvil 3/10 x $250,000 = $75,000 $(15,000)
Dobbs 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 as follows on a 2:3 basis:
Adams 2/5 x $35,000 = $14,000 $ 16,000
Dobbs 3/5 x $35,000 = $21,000 $ (6,000)
Absorbing the final $6,000 loss from Dobbs would leave Adams with a safe capital balance of $10,000.
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 Share of Loss New Capital Balance
Adams 10% x $50,000 = $5,000 $ 75,000
Baker 30% x $50,000 = $15,000 $ 15,000
Carvil 30% x $50,000 = $15,000 $ 45,000
Dobbs 30% x $50,000 = $15,000 $ 75,000
21. c. (continued)
Maximum potential loss of $130,000 on the land would be allocated as follows:
Partner Share of Loss New Capital Balance
Adams 10% x $130,000 = $13,000 $ 62,000
Baker 30% x $130,000 = $39,000 $ (24,000)
Carvil 30% x $130,000 = $39,000 $ 6,000
Dobbs 30% x $130,000 = $39,000 $ 36,000
Maximum potential loss of $24,000 to be absorbed from Baker would be allocated as follows on a 1:3:3 basis:
Adams 1/7 x $24,000 = $3,428 $ 58,572
Carvil 3/7 x $24,000 = $10,286 $ (4,286)
Dobbs 3/7 x $24,000 = $10,286 $ 25,714
Maximum potential loss of $4,286 to be absorbed from Carvil would be allocated as follows on a 1:3 basis:
Adams 1/4 x $4,286 = $1,072 $57,500
Dobbs 3/4 x $4,286 = $3,214 $22,500
These amounts represent safe capital balances for distribution purposes.
d. The land and building must be sold for over $115,000 to ensure that Carvil will receive some cash.
Adams Baker Carvil Dobbs
Beginning balances $ 80,000 $ 30,000 $ 60,000 $ 90,000
Assumed loss of $100,000 (see
Schedule 1) (1:3:4:2) (10,000) (30,000) (40,000) (20,000)
Step One balances $ 70,000 $ 0 $ 20,000 $ 70,000
Assumed loss of $35,000 (see
Schedule 2) (allocated on a
1:0:4:2 basis) (5,000) 0 (20,000) (10,000)
Step Two balances $ 65,000 $ 0 $ 0 $ 60,000
Assumed loss of $90,000 (see
Schedule 3) (allocated on a
1:0:0:2 basis) (30,000) 0 0 (60,000)
Step Three balances $ 35,000 $ 0 $ 0 $ 0
21. 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.
Schedule 1
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Adams $80,000/10% $800,000
Baker $30,000/30% $100,000 (most vulnerable)
Carvil $60,000/40% $150,000
Dobbs $90,000/20% $450,000
Schedule 2
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Adams $70,000/(1/7) $490,000
Carvil $20,000/(4/7) $ 35,000 (most vulnerable)
Dobbs $70,000/(2/7) $245,000
Schedule 3
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Adams $65,000/(1/3) $195,000
Dobbs $60,000/(2/3) $ 90,000 (most vulnerable)
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