Question

Carney, Pierce, Menton, and Hoehn are partners who share profits and losses on a 4:3:2:1 basis, respectively. They are beginning to liquidate the business. At the start of this process, capital balances are

Carney, capital	$	71,000
Pierce, capital		30,300
Menton, capital		54,000
Hoehn, capital		23,300

Which of the following statements is true?

The first available $7,400 will go to Menton.

Carney will be the last partner to receive any available cash.

Carney will collect a portion of any available cash before Hoehn receives money.

The first available $5,300 will go to Hoehn.

Answer 1

Ans- To solve this problem, a predistribution plan is necessary. The plan is as follows:

First $7,400 goes to Menton

Next $16,650 goes to Menton (2/3) and Hoehn (1/3)

Next $53,550 goes to Carney (4/7), Menton (2/7) and Hoehn (1/7)

All remaining cash goes to Carney(4/10), Pierce(3/10), Menton (2/10) and Hoehn (1/10)

Carney Pierce Menton Hoehn    

Begining Balances $71,000 $30,300 $54,000 $23,300

Assumed loss of

$101,000 (see Schedule

1)(4:3:2:1) ( $40,400) ( $30,300) ( $20,200) ($10,100)

Step one balances $30,600 $0 $33,800 $13,200

Assumed loss of

$53,550 (see Schedule

-2)(allocated on

a 4:0:2:1 basis ($30,600) $0 ($15,300) ($7,650)

Step two balances $ 0 $ 0 $18,500 $5,550

Assumed loss of

$16,650 (see Schedule

-3)(allocated on a

0:0:2:1 basis) $ 0 $ 0 ($11,100) ($5,550)

Step three balances $ 0 $ 0 $7,400 $ 0

Schedule-1

Partner Capital Balance / Maximum Loss That Can Be Absorbed

Loss Allocation

Carney $71,000/40% $177,500

Pierce $30,300/30% $101,000 (most vulnerable)

Menton $54,000/20% $270,000

Hoehn $23,300/10% $233,000

Schedule-2

Partner Capital Balance/ Maximum Loss That Can Be Absorbed

Loss Allocation  

Carney $30,600/(4/7) $53,550 (most vulnerable)

Menton $33,800/(2/7) $118,300

Hoehn $13,200/(1/7) $92,400  

Schedule-3

Partner Capital Balance/ Maximum Loss That Can Be Absorbed Loss Allocation

Menton $18,500/(2/3) $27,750

Hoehn $5,550/(1/3) $16,650( most vulnerable)