Question

For the past ten years, Matthew, Michael, Maxwell, and Morgan Goode have been operating MM MM Goode, an imports business, as a partnership. Based on the provisions of the original Articles of Partnership, all profits and losses have been allocated on a 4:3:2:1 ratio, respectively. Recently, both Michael and Maxwell have undergone personal financial problems, and, as a result, these two individuals are now insolvent. Michael’s creditors have filed a $75,000 claim against the partnership’s assets, and $93,750 is being sought to repay Maxwell’s personal debts. To satisfy these legal obligations, the partnership must liquidate. The partners estimate that they will incur $45,000 in costs to dispose of all of the noncash assets.

On January 14, 2018, active operations cease and liquidation begins, the following balance sheet is produced for MM MM Goode:

MM MM Goode

Balance Sheet

14 January 2018

Cash                            $     75,000                  Accounts Payable                    $   281,250

Fixtures                            375,000                  Loan Payable-Vendor                  243,750

Inventory                         675,000                  Loan Payable-Michael                   37,500

                                                                        Matthew G., Capital                     285,000

                                                                        Michael G., Capital                        52,500

                                                                        Maxwell G., Capital                     191,250

                                                                        Morgan G., Capital                       33,750

Total Assets                $1,125,000                  Total Liabilities & Capital      $1,125,000

During the lengthy liquidation process, the following transactions take place:

January 20       Sale of fixtures with a book value of $281,250 for $207,187 cash and sale of inventory with a book value of $431,250 for $317,813 cash.

February 3       Payment of $52,500 in liquidation costs; no further expenses are expected.

February 12     Distribution of safe capital balances to the partners.

February 14     Payment of the loan to the vendor.

February 18     Payment of accounts payable.

February 28     Sale of remaining fixtures and inventory for cash of $37,500.

March 1           Determination that deficit capital balances for any insolvent partners are uncollectible.

March 6           Receipt of appropriate cash contributions from any solvent partners reporting a deficit capital balance.

March 16         Distribution of final cash.

REQUIRED:

Prepare a pre-distribution plan as of January 14, 2018.

Prepare journal entries to record the actual liquidation transactions.

Prepare a Schedule of Liquidation as of February 15, 2018.

Show all calculations; USE GOOD FORMAT.

Answer 1

Note	Michael and maxwell became insolvent
	Hence, their loss need to be borne by other partners in the sharing ratio
	Loss of Michael (186375-90000)			96375
	this is being shared by solvent partners (mathew and morgan) in ratio of 4:1
	shared by Mathew (4/5*96375)			77100
	shared by Morgan (1/5*96375)			19275