Question

The partnership of Winn, Xie, Yang, and Zed has the following balance sheet:

Cash	$	34,000	Liabilities	$	45,000
Other assets		240,000	Winn, capital (50% of profits and losses)		64,000
			Xie, capital (30%)		87,000
			Yang, capital (10%)		44,000
			Zed, capital (10%)		34,000

Zed is personally insolvent, and one of his creditors is considering suing the partnership for the $3,000 that is currently owed. The creditor realizes that this litigation could result in partnership liquidation and does not wish to force such an extreme action unless Zed is reasonably sure of obtaining at least $3,000 from the liquidation.

Determine the amount for which the partnership must sell the other assets to ensure that Zed receives $3,000 from the liquidation. Liquidation expenses are expected to be $19,000.

Answer 1

Minimum amount = 21200+29000+3000 =$53200

Liabilities + liquidation expenses = 45000+19000 = 63000

It is $29000 more than the current cash balance of $34000

	Winn	Xie	Yang	Zed
Beginning capital	64000	87000	44000	34000
Assumed loss of $128,000 (see Schedule 1)(5:3:1:1)	(64000)	(38400)	(12800)	(12800)
Step one balances	0	48600	31200	21200
Assumed loss of $81,000 (see Schedule 2)(0:3:1:1)		(48600)	(16200)	(16200)
Step two balances		0	15000	5000
Assumed loss of $10000 (see Schedule 3)(0:0:1:1)			(5000)	(5000)
Step three balances			10000	0

Schedule 1

Partner	Capital Balance/Loss Allocation	Maximum Loss to Be Absorbed
Winn	64000/50%	128000 (most vulnerable)
Xie	87000/30%	290000
Yang	44000/10%	440000
Zed	34000/10%	340000

Schedule 2

Partner	Capital Balance/Loss Allocation	Maximum Loss to Be Absorbed
Xie	48600/(3/5)%	81000 (most vulnerable)
Yang	31200/(1/5)%	156000
Zed	21200/(1/5)%	106000

Schedule 3

Partner	Capital Balance/Loss Allocation	Maximum Loss to Be Absorbed
Yang	15000/(1/2)%	30000
Zed	5000/(1/2)%	10000 (most vulnerable)