Question

The following balance sheet is for a local partnership in which the partners have become very unhappy with each other.

Cash	$	41,000		Liabilities	$	31,000
Land		135,000		Adams, capital		84,000
Building		125,000		Baker, capital		30,000
				Carvil, capital		62,000
				Dobbs, capital		94,000
Total assets	$	301,000		Total liabilities and capital	$	301,000

To avoid more conflict, the partners have decided to cease operations and sell all assets. Using this information, answer the following questions. Each question should be viewed as an independent situation related to the partnership’s liquidation.

The $10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 2:3:3:2 basis, respectively, how will the $10,000 be divided?

The $10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated on a 2:2:3:3 basis, respectively, how will the $10,000 be divided?

The building is immediately sold for $71,000 to give total cash of $112,000. The liabilities are then paid, leaving a cash balance of $81,000. This cash is to be distributed to the partners. How much of this money will each partner receive if profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 1:3:3:3 basis, respectively? (Do not round intermediate calculations.)

Assume that profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 1:3:4:2 basis, respectively. How much money must the firm receive from selling the land and building to ensure that Carvil receives a portion? (Do not round intermediate calculations.)

Answer 1

	Maximum ptentialloss of non cash assets distributed as follows:
a)	Partner	Share of loss		New Share Capital=(Capital as per balance sheet-Share of loss)
	Adams	($260000*2/10)=	$     52,000.00	($84000-$52000)=	$   32,000.00
	Baker	($260000*3/10)=	$     78,000.00	($30000-$78000)=	$ -48,000.00
	Carvil	($260000*3/10)=	$     78,000.00	($62000-$78000)=	$ -16,000.00
	Dobbs	($260000*2/10)=	$     52,000.00	($94000-$52000)=	$   42,000.00
	Maximum potential loss of (48000+16000)=$64000 to be absorbed from Baker and Carvil would then be allocated as follows:			Safe Capital
	Adams	(2/4)*$64000=	32000	($32000-$32000)=0
	Dobbs	(2/4)*$64000=	32000	($42000-$32000)=$10000
	Absorbing the final loss would leave Dobbs with a safe capital balance of $10000.
	So Dobbs receives the entire $10000
	Non Cash Assets
	Land	$             1,35,000.00
	Building	$             1,25,000.00
	Total	$             2,60,000.00
b)
	Maximum ptentialloss of non cash assets distributed as follows:
	Partner	Share of loss		New Share Capital=(Capital as per balance sheet-Share of loss)
	Adams	($260000*2/10)=	52000	($84000-$52000)=	32000
	Baker	($260000*2/10)=	52000	($30000-$52000)=	-22000
	Carvil	($260000*3/10)=	78000	($62000-$78000)=	-16000
	Dobbs	($260000*3/10)=	78000	($94000-$78000)=	16000
	Maximum potential loss of (22000+16000)=$38000 to be absorbed from Baker and Carvil would then be allocated as follows:			Safe Capital
	Adams	(2/5)*$38000=	15200	($32000-$15200)=$16800
	Dobbs	(3/5)*$38000=	22800	($16000-$22800)=-$6800
	Absorbing the final loss $6800 from Dobbs would leave Adams with a safe capital balance of $10000.($16800-$6800)
	So Adams receives the entire $10000
	Non Cash Assets
	Land	$             1,35,000.00
	Building	$             1,25,000.00
	Total	$             2,60,000.00
c )	Loss on sale of Building is distributed as follows:($125000-$71000)=$54000
	Partner	Share of loss		New Share Capital=(Capital as per balance sheet-Share of loss)
	Adams	($54000*1/10)=	5400	($84000-$5400)=	78600
	Baker	($54000*3/10)=	16200	($30000-$16200)=	13800
	Carvil	($54000*3/10)=	16200	($62000-$16200)=	45800
	Dobbs	($54000*3/10)=	16200	($94000-$16200)=	77800
	Maximum potential loss of $135000 on the land would be distributed as follows:-
	Partner	Share of loss		New Share Capital=(Capital as per balance sheet-Share of loss)
	Adams	($135000*1/10)=	$     13,500.00	($78600-$13500)=	$   65,100.00
	Baker	($135000*3/10)=	$     40,500.00	($13800-$40500)=	$ -26,700.00
	Carvil	($135000*3/10)=	$     40,500.00	($45800-$40500)=	$     5,300.00
	Dobbs	($135000*3/10)=	$     40,500.00	($77800-$40500)=	$   37,300.00
	Maximum potential loss of $26700 to be absorbed from Baker would be allocated as follows:
	Partners	Share of loss		New Capital
	Adams	($26700*1/7)=	$             3,814	($65100-$3814)=	$   61,286.00
	Carvil	($26700*3/7)=	$           11,443	($5300-$11443)=	$   -6,143.00
	Dobbs	($26700*3/7)=	$           11,443	($37300-$11443)=	$   25,857.00
	Maximum potential loss of $6143 to be absorbed from Carvil would be allocated as follows:
	Partners	Share of loss		New Capital
	Adams	(6143*1/4)	$             1,536	($61286-$1536)=	$         59,750
	Dobbs	(6143*1/4)	$             1,536	($25857-$1536)=	$         24,321
	These amount of $58750 of Adams and $24321 of Dobbs is safe capital for distribution purpose.
d)	Schedule 1
	Partner	Capital Balance/Loss allocation	Maximum loss that can be absorbed
	Adams	($84000/10%)=	$ 8,40,000.00
	Baker	($30000/30%)=	$ 1,00,000.00	(most vulnerable)
	Carvil	($62000/40%)=	$ 1,55,000.00
	Dobbs	($94000/20%)=	$ 2,35,000.00
	Schedule 2
	Partner	Capital Balance/Loss allocation	Maximum loss that can be absorbed
	Adams	($74000/(1/7))=	$ 5,18,000.00
	Carvil	($22000/(4/7)=	$     38,500.00	(most Vulnerable)
	Dobbs	($74000/(2/7)=	$ 2,59,000.00
	Schedule 3
	Partner	Capital Balance/Loss allocation	Maximum loss that can be absorbed
	Adams	($68500/(1/3)	$ 2,05,500.00
	Dobbs	($63000/(2/3)=	$     94,500.00	(most Vulnerable)
		Adams	Baker	Carvil	Dobbs
	Capital Balance	$                84,000.00	$     30,000.00	$                                      62,000.00	$   94,000.00
	Assumbed loss of $100000 as per schedule 1 in the ratio of (1:3:4:2)	$               -10,000.00	$   -30,000.00	$                                     -40,000.00	$ -20,000.00
	Balance as per step 1	$                74,000.00	$                    -	$                                      22,000.00	$   74,000.00
	Assumbed loss of $38500 as per schedule 2 in the ratio of (1:4:2)	$                 -5,500.00		$                                     -22,000.00	$ -11,000.00
	Balance as per step 2	$                68,500.00	$                    -	$                                                      -	$   63,000.00
	Assumbed loss of $94500 as per schedule 3 in the ratio of (1:2)	$               -31,500.00			$ -63,000.00
	Balance as per step 3	$                37,000.00	$                    -	$                                                      -	$                  -
	The Carvil capital balance is eliminated through $100000 step 1 and $38500 as per step 2 loss. This avoiding complete $138500 loss ensure that Carvil will recive cash.
	Since the land and building has a book value $260000, such losses would be avoiding by receiving ($260000-$138500)=$121500
	The land and building must be sold for over $121500.