Question

Problem 14-8 (LO 10) Calculating safe payments over the term of an installment liquidation. A partnership has decided to liquidate its operations. Prior to beginning the liquidation process, the partnership had cash balances of $12,000 and noncash assets of $210,000. At that time liabilities were $125,000 of which $25,000 represented a note payable to Partner B. The capital information for the current partners is as follows:

  

                                                                        Partner A         Partner B         Partner C

Profit and loss percentages                            50%                 30%                 20%

Capital balances                                              $75,000           $42,000           $(20,000)

The following events occurred over the four-month liquidation period, and it was decided that all available cash would be distributed at the end of each month.

Month 1—Payments of $35,000 were received on accounts receivable with a book value of $43,000, and the balance of those accounts were written off. A $12,000 allowance for uncollectible accounts was established against the remaining receivables. Inventory with a book value of $70,000 was returned to vendors in exchange for full satisfaction of $62,000 of accounts payable. It was decided that a minimum cash balance of $5,000 should be maintained at month-end.

Month 2—A division of the company was sold to an outside investor for $34,000. The book value of the division’s recognized net assets was $28,000, and they had a market value of $24,000. Any goodwill suggested by this transaction was to be recognized through the use of the bonus method. Equipment with a net book value of $15,000 and a market value of $20,000 was accepted by Partner B in full satisfaction of their note payable. A customer contract valued at $24,000 was completed at a cost of $14,000. The customer paid for the goods less the $8,000 deposit previously paid. The deposit had been erroneously recorded as a sale when received. Professional fees associated with the liquidation were paid in the amount of $6,000, and it was agreed to retain another $4,000 in anticipation of future liquidation expenses.

Month 3—Inventory with a book value of $15,000 was sold for $10,000. The partnership agreed to retain $4,000 against anticipated liquidation expenses. Partner C had personal assets of $85,000 and personal liabilities of $96,800. Partner C agreed to contribute personal assets to the partnership to whatever extent allowed by law. Partner B, who is Partner C’s brother, agreed to absorb any deficit balance that Partner C was unable to eliminate and to absorb any subsequently realized deficits that Partner C may be allocated. It was agreed to retain $4,000 in anticipation of future liquidation expenses.

Month 4—The remaining assets were sold for $7,000, and final liquidation expenses were paid in the amount of $4,500.

Prepare an installment liquidation schedule with all necessary supporting schedules.

Assuming new Partner D acquired 20% of Partner B’s interest from B for consideration of $15,000, what is Partner B’s capital balance after this transaction?

Assume that the above assets are understated by $25,000. If new Partner D were to acquire a 30% interest in the partnership by making a contribution of assets to the partnership, what would be the suggested value of the consideration?

If the above assets were overstated by $25,000, what amount of consideration should new Partner D convey to the partnership in exchange for a 25% interest in capital, keeping in mind that D would also be acquiring a 30% interest in profits?

If new Partner D conveyed assets with a fair market value of $66,000 to the partnership in exchange for a 30% interest in capital and a 25% interest in profits, what would be B’s capital balance after the transaction, assuming use of the bonus method?

Assume the same facts as item (4) above, except assume use of the goodwill method. What would be B’s capital balance after the transaction?

Assume that the above recognized assets are understated by $25,000 and new Partner D conveys assets with a fair market value of $70,000 to the partnership in exchange for a 30% interest in capital and a 25% interest in profits. What would be A’s capital balance after the transaction, assuming use of the bonus method?

Assuming the same facts as item (6) above, what amount of goodwill is suggested by the transaction?

Assume the same facts as item (7) above, except that Partner D acquired their interest for $25,000 cash. What amount of goodwill is suggested by the transaction?

Assume that Partner B sold their interest to the partnership for $51,000 and that previously recognized assets are understated by $30,000. What would be Partner A’s capital balance, assuming use of the goodwill method where goodwill traceable to the entire entity is recognized?

Answer 1

Calculation of balance sheet items after four months

Transaction	capital	other liabilies	notes Payable to b	Total Liabilities	Cash	assets	total assets
Opening balance	97000	100000	25000	222000	12000	210000	222000
Payment of accounts receivable	(8000)				35000	(43000)
Allowance made	(12000)					(12000)
Inventory paid to suppliers	(8000)	(62000)				(70000)
Sale of division	6000				34000	(28000)
Equipment sale	10000		(25000)			(15000)
Reversing sale and making deposit	(8000)	8000
Contract completion	10000	(8000)			16000	(14000)
Liquidatiion expense	(4500)				(4500)
Professional fees	(4000)				(4000)
Sale of inventory	(5000)				10000	(15000)
C personal assets & liabilities	(11800)	96800				85000
Remaining asset sale	(6000)				7000	(13000)
Closing balance	55700	134800	190500		105500	85000	190500

Capital balances

	A	B	C
Opening balance	75000	42000	(20000)
C's liabilities taken by B		(11800)
Liquudation expense - 29500	(14750)	(8850)	(5900)
Closing balance	60250	21350	(25900)

Deficit of c taken by B -

Balance of b = 21350 - 25900 = (4550)

20 percent share taken by d for 15000

B balance = (4550)+ 15000= 10450

Assets understated by 25000

Value of firm = 55700 + 25000 = 80700

Amount payablr by D for 30% share = 24210

Overstatement of assets

Value of firm = 55700 - 25700 = 30700

Amount payable by d = 30700*25% = 7675

No under and overstatement

Capital after d partnership = 55700/70% = 79571.43

D capital = 79571 - 55700 =23871

Market value of assets = 66000

Value of firm = 66000/30% = 22000

Bonus = 220000 - 55700- 23871 = 140429

B share of bonus = 140429/2 = 70215

B capital balnce = 70215 -4550 = 65665

I have solved 4.subparts

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