Question

The partnership of Butler, Osman, and Ward was formed several years as a local tax preparation firm. Two partners have reached retirement age and the partners have decided to terminate operations and liquidate the business. Liquidation expenses of $38,000 are expected. The partnership balance sheet at the start of liquidation is as follows:

Cash: $34,000 Liabilities: $174,000 Accounts receivable: 64,000 Butler, loan: 34,000 Office equipment (net): 54,000 Butler, capital (25%): 70,000 Building (net): 130,000 Osman, capital: (25%) 34,000 Land: 120,000 Ward, capital: (50%) 90,000 Total assets: $402,000 Total liabilities and capital: $402,000

Prepare a predistribution plan for this partnership.

Answer 1

Predistribution plan=

The first $246,000 goes to pay liabilities and expected liquidation expenses.

The next $25,000 goes entirely to Butler.

The next $33,000 is split between Butler and ward.

The next $136,000 is split among Bulter (1/4), Osman (1/4) and ward (2/4)

All remaining cash is split among the partners according to their original profit and loss ratio.

Explanation

MAximum losses that can be absorbed
Partner	Capital Balance/Loss Allocation	Maximum Loss that Can Be Absorbed
Butler	70000/25%	280000
Osman	34000/25%	136000	(most vulnerable to losses)
Ward	90000/50%	360000

The assumption is made that a $136,000 loss occurs
	Butler	Osman	Ward
Reported balances	70000	34000	90000
Assumed loss ($136,000) split on a 1:1:2 basis	34000	34000	68000
Adjusted balances	36000	0	22000

MAximum losses that can be absorbed
Partner	Capital Balance/Loss Allocation	Maximum LossThat CanBe Absorbed
Butler	36000/33.33%	108011
Ward	22000/66.67%	33000	(most vulnerable to losses)

The assumption is made that a $33,000 loss occurs
	Butler	Ward
Reported balances	36000	22000
Assumed loss ($44,000) split on a 1:2 basis	11000	22000
Adjusted balances	25000	0