The following information concerns two different partnerships. These problems sh
ID: 2470002 • Letter: T
Question
The following information concerns two different partnerships. These problems should be viewed as independent situations. (Do not round intermediate calculations.)
This partnership is being liquidated. Ross and Milburn are each entitled to 40 percent of all profits and losses with the remaining 20 percent to Thomas.
What is the maximum amount that Milburn might have to contribute to this partnership because of the deficit capital balance?
To whom should the $22,000 cash that is presently available in excess of liabilities be distributed?
If the noncash assets are sold for a total of $48,000, what is the minimum amount of cash that Thomas could receive?
The partnership of Sampson, Klingon, Carton, and Romulan is being liquidated. It currently holds cash of $16,000 but no other assets. Liabilities amount to $26,000. The capital balances are as follows:
Profits and losses are allocated on the following basis: Sampson, 30 percent, Klingon, 20 percent, Carton, 30 percent, and Romulan, 20 percent.
If both Klingon and Romulan are personally insolvent, how much money must Carton contribute to this partnership?
If only Romulan is personally insolvent, how much money must Klingon contribute?
If only Klingon is personally insolvent, how much money should Sampson receive from the liquidation?
The following information concerns two different partnerships. These problems should be viewed as independent situations. (Do not round intermediate calculations.)
Explanation / Answer
Part A
(a) $59,400. Maximum losses of $111,000 on the noncash assets would increase Milburn's deficit balance by $44,400 (or 40%). Maximum losses would not create any other deficit balances.
(b) All $22,000 should go to Thomas. As Ross and Thomas view the current situation, maximum potential losses total $126,000: $111,000 on the noncash assets and $15,000 on Milburn's deficit balance. In determining safe capital balances, these assumed losses would be allocated on a 4:2 basis or $84,000 to Ross and $42,000 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 ($19,000 + $16,667). As shown in (b) above, the available $22,000 is distributed to Thomas, thus reducing that partner's capital balance to $50,000. A loss of $63,000 on the noncash assets would further reduce this partner's balance by $12,600 ($63,000 x 20%) to $37,400. That same loss would reduce Ross' capital to $50,800 and Milburn's deficit to ($40,200). The minimum cash amount would be caused by Milburn's failure to contribute this $31,600 so that it has to be absorbed by Ross (4/6 or $26,800) and Thomas (2/6 or $13,400). The remaining safe capital balance of $24,000 would be paid to Thomas.
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