Question

In: Accounting

The following condensed balance sheet is for the partnership of Miller, Tyson, and Watson, who share...

The following condensed balance sheet is for the partnership of Miller, Tyson, and Watson, who share profits and losses in the ratio of 6:2:2, respectively:

Cash $ 41,000 Liabilities $ 29,000
Other assets 101,000 Miller, capital 51,000
Tyson, capital 51,000
Watson, capital 11,000
Total assets $ 142,000 Total liabilities and capital $ 142,000

a. Assuming no liquidation expenses, calculate the safe payments that can be made to partners at this point in time.

b. For how much money must the other assets be sold so that each partner receives some amount of cash in a liquidation?

Solutions

Expert Solution

a) Calculation of Safe Payements
Cash $41,000
Other Assets $101,000
Liabilities $29,000
Miller, Capital $51,000 (60% of profits/losses)
Tyson, Capital $51,000 (20% of profits/losses)
Watson, Capital $11,000 (20% of profits/losses)
We have $41,000 in cash and $29,000 in Liabilities. Creditors have first claim on the firm's assets
so $29,000 has to be held back to satisfy the creditors
Therefore Safe payment available to partners is $12,000
Cash   Other Assets Liabilities Miller, Capital Tyson, Capital Watson, Capital
Balances $41,000.00 $101,000.00 $29,000.00 $51,000.00 $51,000.00 $11,000.00
Loss on Non- Cash Assets -$101,000.00 -$60,600.00 -$20,200.00 -$20,200.00
Balances -$9,600.00 $30,800.00 -$9,200.00
Allocate M's and W's Deficit   -$18,800.00
Final Balance $41,000.00 $29,000.00 $12,000.00
b) Amount at which other assets be sold so that each partner receives some money
Watson's Total Capital is $11,0000 and has a profit/loss sharing ratio of 20%. Therefore Watson can maximum bare a loss of $11,000
and Firm can bear a maximum loss of $55,000 (11,000/20%) so that no partner will become insolvent
Therefore if Other assets are sold at any price above $46,000 then each partner will receive some cash in liquidation
For Example if Other Assets is sold for $46,500, then each partner will receive some cash
Cash   Other Assets Liabilities Miller, Capital Tyson, Capital Watson, Capital
Balances $41,000.00 $101,000.00 $29,000.00 $51,000.00 $51,000.00 $11,000.00
Loss on Non- Cash Assets $46,500.00 -$54,500.00 -$32,700.00 -$10,900.00 -$10,900.00
Balances $18,300.00 $40,100.00 $100.00
Final Balance $87,500.00 $29,000.00 $18,300.00 $40,100.00 $100.00

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