Question

The following information concerns two different partnerships. These problems should be viewed as independent situations. (Do not round intermediate calculations.)

Part A

The partnership of Ross, Milburn, and Thomas has the following account balances:

Cash	$ 59,000	Liabilities	$ 26,000
Noncash assets	129,000	Ross, capital	92,000
		Milburn, capital	(36,000	)	(deficit)
		Thomas, capital	106,000

This partnership is being liquidated. Ross and Milburn are each entitled to 40 percent of all profits and losses with the remaining 20 percent to Thomas.

a.	What is the maximum amount that Milburn might have to contribute to this partnership because of the deficit capital balance?

         

b.	To whom should the $33,000 cash that is presently available in excess of liabilities be distributed?
	Ross Thomas Milburn

c.	If the noncash assets are sold for a total of $66,000, what is the minimum amount of cash that Thomas could receive?

          

Part B

The partnership of Sampson, Klingon, Carton, and Romulan is being liquidated. It currently holds cash of $32,000 but no other assets. Liabilities amount to $52,000. The capital balances are as follows:

Sampson		$ 32,000
Klingon		(40,000	)
Carton		20,000
Romulan		(32,000	)

Profits and losses are allocated on the following basis: Sampson, 40 percent, Klingon, 20 percent, Carton, 20 percent, and Romulan, 20 percent.

a.	If both Klingon and Romulan are personally insolvent, how much money must Carton contribute to this partnership?

          

b-1.	If only Romulan is personally insolvent, how much money must Klingon contribute?

          

b-2.	If only Romulan is personally insolvent, how will Klingon's contribution (funds) be disbursed?

          

c.	If only Klingon is personally insolvent, how much money should Sampson receive from the liquidation?

          

Answer 1

1.

a. What is the maximum amount that Milburn might have to contribute to this partnership because of the deficit capital balance?

Answer:

Maximum Amount = 87,600

Calculation:

Noncash assets * Milburn's Profit/ Loss % =

129000 * 40% = 51,600

So, Milburn’s deficit Balance would increase by 51,600.

Current deficit balance	36,000
Add: Increase	51,600
Maximum Amount	87,600

Maximum amount that Milburn might have to contribute to this partnership because of the deficit capital balance is $87,600

b. To whom should the $33,000 cash that is presently available in excess of liabilities be distributed?

Answer:

Thomas

Calculation:

Maximum Loss =  Noncash assets + Milburn's deficit = 129,000 + 36,000 = 165000

Partner	Capital Balance	Loss Allocation	Maximum loss that can be Absorbed
Ross	92,000	40%	110,000
Milburn	-36,000
Thomas	106,000	20%	55,000
			165,000

Ratio = 4:2

Ross = 165,000 *4/6 = 110,000

Thomas = 165,000 *2/6 = 55,000

The loss would entirely eliminate Ross' capital account and only Thomas has a capital balance at the current time. So, Thomas can receive the balance of $33,000 of excess cash.

c. If the noncash assets are sold for a total of $66,000, what is the minimum amount of cash that Thomas could receive?

Answer:

Minimum amount of cash Thomas could receive is $73,000 ($33,000 + $40,000).

Calculation:

Total loss on sale = $129,000 - $66,000 = $63,000

Milburn:
Balance	(36,000)
Less: 40% of $63,000 loss	(25,200)
Adjusted Balance	(61,200)

Ross:
Balance	92,000
Less: 40% of $63,000 loss	25,200
Adjusted Balance	117,200
Loss absorbed by Ross:	(40,800)	(-61200 * 4/ 6)

Thomas:
Balance	106,000
Less: $33,000 (part b)	(33,000)
	73,000
Less: 20% of $63,000 loss	12,600
Adjusted Balance	60,400
Loss absorbed by Thomas	(20,400)	(-61200 * 2/ 6)
Paid to Thomas	40,000

The minimum cash payment to Thomas would be $73,000 ($33,000 (calculated in Part b)+ $40,000).

2.

a. If both Klingon and Romulan are personally insolvent, how much money must Carton contribute to this partnership?

Answer:

Carton will have to contribute $4,000

Calculation

	Deficit
Klingon	(40,000)
Romulan	(32,000)
Total	(72,000)

Allocation of Deficit based on 4:2 ratio

Sampson	40%	(48,000)
Carton	20%	(24,000)
		(72,000)

Carton's Capital= 20,000

Cartons Allocated deficit from Klingon and Romulan =  - 24,000

So 20,000 -24,000  = 4,000

Hence, Carton must contribute $4,000 to partnership

b-1. If only Romulan is personally insolvent, how much money must Klingon contribute?

Answer:

Klingon will have to contribute $48,000

Calculation

Romulan's Deficit

-32000

Romulan is insolvent, so, the remaining partners will have to absorb the $32,000 deficit on a 4:2:2 ratio.

Allocation of Deficit

	%	Allocated deficit
Klingon	20%	-8,000
Sampson	40%	-16,000
Carton	20%	-8,000
	80%	-32,000

So, Klington's Total Deficit will be:

Klington's Deficit	(40,000)
Romulan's Deficit allocated to Klington	(8,000)
Total	(48,000)

Klington need to contribute 48,000.

b-2. If only Romulan is personally insolvent, how will Klingon's contribution (funds) be disbursed?

Answer:

Creditors	20,000
Sampson	16,000
Carton	12,000

Calculation

Liabilities	52,000
Less : Cash paid	32,000
Remaning liabilities /Creditor	20,000

Creditors will be paid first from the contribution made by Romulan. That is:

Romulan's Contribution	48,000
Less : Creditors payment	20000
Remaning Contribution	28,000

The remaining $28,000 is distributed to the two partners in accordance with their remaining positive capital balances after absorbing Romulan's loss.

Sampson = 32,000 - (32000 * 40% / 80%) = 16,000

Carton = 20,000 - (32000 * 20% / 80%) = 12,000

So, Klington contribution of 48,000 is disbursed as below:

Creditors	20,000
Sampson	16,000
Carton	12,000
Total	48,000

c. If only Klingon is personally insolvent, how much money should Sampson receive from the liquidation?

Answer

Sampson should receive $12,000

Calculation

Klingtons Deficit

(40,000)

Klington is insolvent, so, the remaining partners will have to absorb the $40,000 deficit on a 4:2:2 ratio.

Allocation of Deficit

	%	Allocated deficit
Romulan	20%	(10,000)
Sampson	40%	(20,000)
Carton	20%	(10,000)
	80%	(40,000)

So, Sampson will get allocated with -20,000 deficit. This loss would decrease Sampson's capital balance by $20,000

Sampsons Capital = 32,000

So, 32,000 - 20,000 = 12,000

Sampson should receive $12,000 from the liquidation