Question

The following balance sheet is for a local partnership in which the partners have become very unhappy with each other. Cash $ 65,000 Liabilities $ 55,000 Land 255,000 Adams, capital 169,500 Building 245,000 Baker, capital 51,000 Carvil, capital 110,000 Dobbs, capital 179,500 Total assets $ 565,000 Total liabilities and capital $ 565,000 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. 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? 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? The building is immediately sold for $145,000 to give total cash of $210,000. The liabilities are then paid, leaving a cash balance of $155,000. 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.) 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

Part A

Partner	Share of loss	New capital balance
Adams (2/10*500000)	100000	69500
Baker (3/10*500000)	150000	(99000)
Carvil (3/10*500000)	150000	(40000)
Dobbs (2/10*500000)	100000	79500

Maximum total potential losses of $139,000 to be absorbed from Baker and Carvil above would then be allocated to Adams and Dobbs as follows on a 2:2 basis

Partner	Share of loss	New capital balance
Adams (2/4*139000)	69500	0
Dobbs (2/4*130000)	69500	10000

Thus,

Dobbs receives the entire $10,000 as the absorption of potential loss would have leave with a safe capital balance of $10,000.

Part B

Partner	Share of loss	New capital balance
Adams (2/10*500000)	100000	69500
Baker (2/10*500000)	100000	(49000)
Carvil (3/10*500000)	150000	(40000)
Dobbs (3/10*500000)	150000	29500

Maximum total potential losses of $89,000 to be absorbed from Baker and Carvil above would then be allocated to Adams and Dobbs as follows on a 2:3 basis

Partner	Share of loss	New capital balance
Adams (2/5*89000)	35600	33900
Dobbs (3/5*89000)	53400	(23900)

Absorbing the final $23900 loss from Dobbs would leave Adams with a safe capital balance of $10,000. Therefore, Adams receives the entire $10,000

Part C

$100000 loss on sale of the building

Partner	Share of loss	New capital balance
Adams (10%*100000)	10000	159500
Baker (30%*100000)	30000	21000
Carvil (30%*100000)	30000	80000
Dobbs (30%*100000)	30000	149500

Maximum potential loss of $255,000 on the land

Partner	Share of loss	New capital balance
Adams (10%*255000)	25500	134000
Baker (30%*255000)	76500	(55500)
Carvil (30%*255000)	76500	3500
Dobbs (30%*255000)	76500	73000

Maximum potential loss of $55000

Partner	Share of loss	New capital balance
Adams (1/7*55500)	7928	126072
Carvil (3/7*55500)	23786	(20286)
Dobbs (3/7*55500)	23786	49214

Maximum potential loss of $20286

Partner	Share of loss	New capital balance
Adams (1/4*20286)	5072	121000
Dobbs (3/4*20286)	15214	34000

Adams receives $121000 and Dobbs gets $34000

Part D

	Adams	Baker	Carvil	Dobbs
Beginning balances	169500	51000	110000	179500
Assumed loss of $170,000 (Schedule 1) (1:3:4:2 basis)	(17000)	(51000)	(68000)	(34000)
Step One balances	152500	0	42000	145500
Assumed loss of $73500 (Schedule 2) (1:0:4:2)	(10500)	0	(42000)	(21000)
Step Two balances	142000	0	0	124500
Assumed loss of $186750 (Schedule 3) (1:0:0:2)	(62250)			(124500)
Step Three balances	79750	0	0	0

Schedule 1

Partner	Capital balance / Loss allocation	Maximum loss that can be absorbed
Adams	169500/10%	1695000
Baker	51000/30%	170000
Carvil	110000/40%	275000
Dobbs	179500/20%	897500

Schedule 2

Partner	Capital balance / Loss allocation	Maximum loss that can be absorbed
Adams	152500/(1/7)	1067500
Carvil	42000/(4/7)	73500
Dobbs	145500/(2/7)	509250

Schedule 3

Partner	Capital balance / Loss allocation	Maximum loss that can be absorbed
Adams	142000 /(1/3)	426000
Dobbs	124500/(2/3)	186750

Land and building must be sold for over $276500 (79750+186750+10000) to ensure Carvil of receiving some amount.