Question

The following balance sheet is for a local partnership in which the partners have become very unhappy with each other.

Cash	$	49,000		Liabilities	$	39,000
Land		175,000		Adams, capital		108,500
Building		165,000		Baker, capital		45,000
				Carvil, capital		78,000
				Dobbs, capital		118,500
Total assets	$	389,000		Total liabilities and capital	$	389,000

To avoid more conflict, the partners have decided to cease operations and sell all assets. Using this information, answer the following questions. Each question should be viewed as an independent situation related to the partnership’s liquidation.

A) The $10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 2:3:3:2 basis, respectively, how will the $10,000 be divided?

B)The $10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated on a 2:2:3:3 basis, respectively, how will the $10,000 be divided?

C) The building is immediately sold for $91,000 to give total cash of $140,000. The liabilities are then paid, leaving a cash balance of $101,000. This cash is to be distributed to the partners. How much of this money will each partner receive if profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 1:3:3:3 basis, respectively? (Do not round intermediate calculations.)

D) Assume that profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 1:3:4:2 basis, respectively. How much money must the firm receive from selling the land and building to ensure that Carvil receives a portion? (Do not round intermediate calculations.)

Answer 1

a.

Allocation of Potential Loss of $270000 on non cash Assets and Distribution of $10000    

Partner	Sharing	Amount	New Capital Balances	The Distribution of $10000
Adams	$270000 * 2/10	$54000	$31000	$0
Baker	$270000*3/10	$81000	-$45000	$0
Carvil	$270000*3/10	$81000	-$17000	$0
Dobbs	$270000*2/10	$54000	$41000	$10000
	Total

b.

Allocation of Potential Loss of $270000 on non cash Assets and Distribution of $10000    

Partner	Sharing	Amount	New Capital Balances	The Distribution of $10000
Adams	$270000 * 2/10	$54000	$31000	$10000
Baker	$270000*2/10	$54000	-$18000	$0
Carvil	$270000*3/10	$81000	-$17000	$0
Dobbs	$270000*3/10	$81000	$14000	$0
	Total

    

c.

Allocation of Loss on Building of $58000      

Partner	Sharing	Amount	New Capital Balances
Adams	$58000 * 1/10	$5800	$79200
Baker	$58000 * 3/10	$17400	$18600
Carvil	$58000 * 3/10	$17400	$46600
Dobbs	$58000 * 3/10	$17400	$77600
	Total

Allocation of Possible Maximum Loss on land of $140000      

Partner	Sharing	Amount	New Capital Balances
Adams	$58000 * 1/10	$14000	$65200
Baker	$58000 * 3/10	$42000	-$23400
Carvil	$58000 * 3/10	$42000	$4600
Dobbs	$58000 * 3/10	$42000	$35600
	Total

Allocation of Loss absorbed from Baker of -$ 23400 in the ratio of 1:3:3    

Partner	Sharing	Amount	New Capital Balances
Adams	$23400 * 1/10	$3343	$61857
Carvil	$23400 * 3/10	$10029	-$5429
Dobbs	$23400 * 3/10	$10029	$25571
	Total

Allocation of Loss absorbed from Carvil of -$ 5429 in the ratio of 1:3    

Partner	Sharing	Amount	New Capital Balances
Adams	$5429 * 1/10	$1357	$60500
Dobbs	$5429 * 3/10	$4071	$21500
	Total

Therefore the excess Cash of $ 82000 will be distributed as Adams: $60500 and Dobbs: $21500

   

	Adams	Baker	Carvil	Dobbs
Opening Balances	$85000	$36000	$64000	$95000
Assumed Loss of $120000 (1:3:4:2)	$12000	$36000	$48000	$24000
Step One balances	$73000	$0	$16000	$71000
Assumed Loss of $28000 (1:4:2)	$4000		$16000	$8000
Step two Balances	$69000	$0	$0	$63000
Assumed Loss of $94500 (1:2)	$31500			$63000
	$37500			$0

Shedule-1

Partner	Capital Balance/Loss Allocation	Maximum Loss Can be Absorbed
Adams	$85000/1/10	$850000
Baker	$36000 / 3/10	$120000	Most vulnerable
Carvil	$64000 / 4/10	$160000
Dobbs	$95000 / 2/10	$475000
	Total

Shedule-2

Partner	Capital Balance/Loss Allocation	Maximum Loss Can be Absorbed
Adams	$73000/1/7	$511000
Carvil	$16000 / 4/7	$28000	Most Vulnerable
Dobbs	$71000 / 2/7	$248500
	Total

Shedule-3

Partner	Capital Balance/Loss Allocation	Maximum Loss Can be Absorbed
Adams	$69000/1/3	$207000
Dobbs	$63000 / 2/3	$94500	Most Vulnerable
	Total

The First $37500 available goes to Adams. Next $94500 will be split in the ratio of 1:2 between Adams and Dobbs. Next $28000 will be split between Adams ,Carvil and Dobbs in the ration of 1:4:2 Basis. All other remaining cash will be split between Adams,Baker,Carvil, and Dobbs in the original Profit and loss ratio.

Total Cash of $132000($37500+$94500) has to be available before carvil will receive any cash. As there is already $10000 cash in excess of liabilities , the land and Building must be sold for over $132000 to ensure Carvil of receiving some amount.