Question

Twelve years ago, Adams, Boyd, and Chambers formed a partnership manufacturing small cricuit 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

Total assets........ 237,000 Capital, Adams................... 15,000

   Capital, Boyd...................... 10,000

   Capital, Chambers................ 32,000

   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 40% 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 mininum 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 necessare 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?

Answer 1