Question

Twelve years ago, Adams, Boyd, and Chambers formed a partnership manufacturing small circuit boards. Unfortunately, foreign competition, a softening economy, and management errors have led the partners to realize that the company’s business cannot be sustained and that the partnership must be liquidated. A condensed balance sheet is as follows:

Cash	$ 12,000	Note payable to Adams	$ 10,000
Noncash assets	225,000	Other liabilities	170,000
		Capital, Adams	15,000
		Capital, Boyd	10,000
		Capital, Chambers	32,000
Total assets	$237,000	Total liabilities and capital	$237,000

The current value of personal assets and liabilities of the partners, excluding those related to the partnership, are as follows:

	Adams	Boyd	Chambers
Personal assets	$185,000	$62,000	$170,000
Personal liabilities	72,000	78,000	150,000

Boyd is extremely concerned that after liquidation of the partnership they would still continue to be personally insolvent. This would be devastating to Boyd, and they have come to you with their concerns.

Prepare a response to each of Boyd’s independent questions noting that profits and losses are allocated 40%, 20%, and 20% to Adams, Boyd, and Chambers, respectively.

1. If assets with a book value of $180,000 were sold for $200,000 and the partners agreed to maintain a minimum cash balance of $5,000, would any of the available cash be distributed to Boyd?

2. If all of the noncash assets were sold for net proceeds of $280,000 and all cash was distributed, would any of the available cash be distributed to Boyd?

3. Assume that all of the noncash assets were sold for net proceeds of $150,000 and all cash was distributed. If Adams contributed the necessary assets to the partnership to liquidate unsatisfied outside creditors, how much would Boyd be liable to Adams for?

4. How much would all of the noncash assets have to be sold for so that after distributing all available cash Boyd could liquidate their personal liabilities?

Please use this template:

Exercise 14-7
				Partner’s Loan
		Noncash		and Capital Balance
	Cash	Assets	Liabilities	Adams	Boyd	Chambers
Beginning balance
Sales of Assets
Balances
Pay liabilities
Distributions
Balances
	Schedule of Safe Payments
	Adams	Boyd	Chambers			Totals
Profit and Loss percentages
Combined capital and loan balances
Estimated liquidation expenses and/or adjustment of minimum cash balance
Balances
Maximum loss possible
Balances
Allocation of debit capital balances
Safe payment
2
				Partner’s Loan
		Noncash		and Capital Balance
	Cash	Assets	Liabilities	Adams	Boyd	Chambers
Beginning balances
Sales of assets
Balances
3				Partner’s Loan
		Noncash		and Capital Balance
	Cash	Assets	Liabilities	Adams	Boyd	Chambers
Beginning balances
Sales of assets
Balances
Payment of liabilities
Contribution of capital
Payment of liabilities
Allocation of Boyd balance
Balance
4
				Partner’s Loan
		Noncash		and Capital Balance
	Cash	Assets	Liabilities	Adams	Boyd	Chambers
Beginning balances
Sales of assets
Balances

Answer 1

Ans. 1

1. the a book value of $180,000 were sold for $200,000 and the partners agreed to maintain a minimum cash balance of $5,000, would any of the available cash be distributed to Boyd?

1. Sale of all Non Cash Assets

                                                                                                                  Cash a/c                                                                                                                                                    Dr.                                                                                                       $2,00,000

To Non Cash Assets                                                                                  $1,80,000

To Gain on Realization                                                                                  $20,000

1. Allocates the $20,000 gain on realization to the partners on their income ratios 2:1:1

Gain on Realization                                                                                                         $20,000

To Adams’s Capital          ($20,000*2/4)                                                                    $10,000

To Boyd’s Capital              ($20,000*1/4)                                                                    $5,000

To Chambers Capital       ($20,000*1/4)                                                                    $5,000

1. Payment of Liabilities

Notes payable to Adams                                                                                      $10,000

Other Liabilities                                                                                                         $1,70,000

To Cash                                                                                                                                                $1,80,000

Cash Balance

Opening-                                     $12,000

Sale Proceeds-                          $2,00,000

Less:

Payment of Liability-               $1,80,000

Net Cash Available                  $32,000

Min. Cash bal.                            $5,000

Available for Distribution      $27,000

1. Distribution of Remaining cash to the partners.

Cash$27,000

To Adams’s Capital          ($27,000*2/4)                                                                    $13,500

To Boyd’s Capital              ($27,000*1/4)                                                                    $6,750

To Chambers Capital       ($27,000*1/4)                                                                    $6,750

In Case No. 1. Case Mr. Boyd will get $6,750 cash after the dissolution of partnership.

Ans 2.

If all of the noncash assets were sold for net proceeds of $280,000 and all cash was distributed, would any of the available cash be distributed to Boyd?

1. Sale of all Non Cash Assets

Cash a/c                               Dr.                                                                                          $2,80,000

To Non Cash Assets                                                                                                        $2,25,000

To Gain on Realization                                                                                                   $55,000

1. Allocates the $20,000 gain on realization to the partners on their income ratios 2:1:1

Gain on Realization                                                                                                         $55,000

To Adams’s Capital          ($55,000*2/4)                                                                    $27,500

To Boyd’s Capital              ($55,000*1/4)                                                                    $13,750

To Chambers Capital       ($55,000*1/4)                                                                    $13,750

1. Payment of Liabilities

Notes payable to Adams                                                                                      $10,000

Other Liabilities                                                                                                         $1,70,000

To Cash                                                                                                                                                $1,80,000

Cash Balance

Opening-                                     $12,000

Sale Proceeds-                          $2,80,000

Less:

Payment of Liability-               $1,80,000

Net Cash Available                  $112,000

for Distribution

1. Distribution of Remaining cash to the partners.

                                                                                                                       Cash

                                                                                                                                 $1,12,000

To Adams’s Capital          $1,12,000*2/4)                                                                  $56,000

To Boyd’s Capital              $1,12,000*1/4)                                                                  $28,000

To Chambers Capital       $1,12,000*1/4)                                                                  $28,000

In Case No. 2. Case Mr. Boyd will get $28,000 cash after the dissolution of partnership.

Ans 3.

If all of the noncash assets were sold for net proceeds of $150,000.

1. Sale of all Non Cash Assets

Cash a/c                               Dr.                                                                                          $1,50,000

Loss on Realization Dr                                                                                                    $75000

To Non Cash Assets                                                                                                        $2,25,000

Allocates the $75,000 loss on realization to the partners on their income ratios 2:1:1

Gain on Realization                                                                                                         $75,000

To Adams’s Capital          ($75,000*2/4)                                                                    $37,500

To Boyd’s Capital              ($75,000*1/4)                                                                    $18,750

To Chambers Capital       ($75,000*1/4)                                                                    $18,750

1. Payment of Liabilities

Notes payable to Adams                                                                                      $10,000

Other Liabilities                                                                                                         $1,70,000

To Cash                                                                                                                                                $1,80,000