In: Accounting
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.
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) |