Question

The partnership of Winn, Xie, Yang, and Zed has the following balance sheet:

Cash	$	34,000	Liabilities	$	45,000
Other assets		240,000	Winn, capital (50% of profits and losses)		64,000
			Xie, capital (30%)		87,000
			Yang, capital (10%)		44,000
			Zed, capital (10%)		34,000

Zed is personally insolvent, and one of his creditors is considering suing the partnership for the $9,000 that is currently owed. The creditor realizes that this litigation could result in partnership liquidation and does not wish to force such an extreme action unless Zed is reasonably sure of obtaining at least $9,000 from the liquidation.

Determine the amount for which the partnership must sell the other assets to ensure that Zed receives $9,000 from the liquidation? Liquidation expenses are expected to be $19,000.

Answer 1

Under liquidation process, firstly the assets are sold and the realised amount is used to settle liquidation expenses and the liabilities of the firm existing on the date of liquidation. The remaining amount is distributed among the partners in profit sharing ratio unless a different ratio is specified in partnership deed.

As per above process, equation can be derived as follows:

Cash + Sale proceeds of Assets = Liquidation expenses + Liabilities + Share of each partner in remaining amount.

Here we decide that Zed should minimum get $9000 that means for his share of 10% he should get $9000.

This implies that Winn (50%), Xie (30%), Yang (10%) should get $45000, $27000, $9000 respectively.

So the aggregrate of partners share = 45000 + 27000 + 9000 + 9000 = $90,000

As per above formula:

Cash + Sale proceeds of Assets = Liquidation expenses + Liabilities + Share of each partner in remaining amount.

34000 + Sale proceeds of assets = 19000 + 45000 + 90000

Sale proceeds of assets = 154000 - 34000 = $120,000

Therefore the partnership must sell other assets for $120,000 to ensure that Zed receives $9,000 from the Liquidation.