Question

The partnership of Susan, Tim, James, and Michelle was formed several years ago as a law firm. Several partners have undergone personal financial problems and have decided to terminate operations and liquidate the business. The following balance sheet is drawn up as a guideline for this process: Assets Liabilities and Capital Cash $ 33,000 Liabilities $ 70,000 Accounts receivable 100,000 James, loan 53,000 Inventory 119,000 Susan, capital (30%) 147,000 Land 94,000 Tim, capital (10%) 106,000 Building and equipment (net) 177,000 James, capital (20%) 83,000 Michelle, capital (40%) 64,000 Total assets $ 523,000 Total liabilities and capital $ 523,000 When the liquidation commenced, liquidation expenses of $15,000 were anticipated as being necessary to dispose of all property. Required: Prepare a pre-distribution plan for this partnership (15 points).

Answer 1

	Susan capital (30%)	Tim capital (10%)	James capital (20%)	Michelle capital (40%)
Begening balances	147000	106000	83000	64000
loss 160000 allocated to 30:10:20:40	48000	16000	32000	64000
step one balances	99000	90000	51000	----
loss 153000 allocated to (30:10:20)	76500	25500	51000
Step two balances	22500	64500	----
loss 30000 allocated to (30:10)	22500	7500
step three balance s	----	57000

A

Partner	capital balance / loss allocation	maximum loss that can be absorbed
Susan	147000 /30%	490000
Tim	106000/10%	1060000
james	83000/20%	415000
michelle	64000/40%	160000 (here most vulnerable to loss )

B

Partner	capital balance / loss allocation	maximum loss that can be absorbed
Susan	99000 /30*60	198000
Tim	90000/10*60	540000
james	51000/20*60	153000 (here most vulnerable to loss )
michelle	----	----

C

Partner	capital balance / loss allocation	maximum loss that can be absorbed
Susan	22500 /30*40	30000 (here most vulnerable to loss )
Tim	64500/10*40	258000
james	----	----
michelle	----	----

1) here loss of 153000 allocated to (30/60),(10/60),(20/60)

2) loss 30000 allocated to (30/40), (10/40)

3) 51000 entire goes to tim