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					Chapter 15 - Partnerships: Termination and Liquidation



                                                CHAPTER 15
                  PARTNERSHIPS: TERMINATION AND LIQUIDATION

Chapter Outline

I.   The termination of a partnership and liquidation of its property may take place for a number
     of reasons.
     A. The death, withdrawal, or retirement of a partner can lead to cessation of business
         activity.
     B. The bankruptcy of either an individual partner or the partnership as a whole can
         necessitate this same conclusion.

II. Because of the importance of liquidating and distributing assets fairly, all parties look to the
    accountant to play an important role in the process.
    A. The accountant provides timely financial information.
    B. The accountant works to ensure an equitable settlement of all claims.

III. The schedule of liquidation
     A. The liquidation process usually involves the disposal of noncash assets, payment of
        liabilities and liquidation expenses, and distribution of any remaining cash to the partners
        based on their final capital balances.
     B. A schedule of liquidation should be produced periodically by the accountant to disclose
        losses and gains that have been incurred, remaining assets and liabilities, and current
        capital balances.

IV. Deficit capital balances
    A. By the end of the liquidation process, one or more partners may have a negative (or
       deficit) capital balance often as a result of losses incurred in disposing of assets.
    B. The Uniform Partnership Act indicates that any deficit capital balance should be
       eliminated by having that partner contribute enough additional assets to offset the
       negative balance.
    C. If this contribution is not immediately received, the remaining partners may request a
       preliminary distribution of any partnership cash that is available.
       1. This payment is based on safe capital balances, the amounts that will remain in the
            individual capital accounts even if all deficits and other assets prove to be complete
            losses that must be absorbed by the remaining partners.
       2. If a portion (or all) of a deficit is subsequently recovered from a partner, a further
            distribution to the other partners is made based on newly computed safe capital
            balances.
       3. Any deficit that is not recovered from a partner must be charged to the remaining
            partners based on their relative profit and loss ratio.




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Chapter 15 - Partnerships: Termination and Liquidation


V. Treatment of partner’s loan to partnership
   A. The Uniform Partnership Act states that, in a liquidation, partnership assets should be
      used to first settle claims of partnership creditors, including claims of partners who are
      creditors.
      1. This implies that the partnership would first repay partners’ loans before distributing
          any cash to partners based on their capital balances.
   B. However, in practice, to avoid making a cash distribution to a partner who subsequently
      develops a deficit capital balance, partners’ loan accounts typically are combined with
      partners’ capital accounts and funds are distributed accordingly.

Vl. Preliminary distribution of assets to the partners
    A. The liquidation process can extend over a lengthy period of time as business activities
       wind down and property is sold.
    B. More cash may be generated than the amount needed to extinguish all potential liabilities
       and liquidation expenses.
    C. If possible, the distribution of excess cash amounts should be made as quickly as
       possible to enable the partners to make use of their funds.
       1. The accountant may choose to produce a proposed schedule of liquidation at such
           times to determine the equitable distribution of cash amounts that become available.
       2. The proposed schedule of liquidation is developed based upon simulating the
           accounting recognition that would be required by a possible series of transactions:
           assets are sold, expenses are paid, etc.
           a. These events are simulated with the anticipation of maximum losses in each
               case.
           b. Noncash assets are assumed to have no resale value; maximum possible
               liquidation expenses are included; all partners are considered personally
               insolvent; etc.
       3. Ending potential capital balances that remain on a proposed schedule of liquidation
           are safe capital balances, the amounts that could be immediately paid to each
           partner without jeopardizing future payments. Safe capital balances indicate that the
           partner will still have a sufficient interest in the partnership to absorb all potential
           losses even after a preliminary distribution.




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Chapter 15 - Partnerships: Termination and Liquidation




Vll. Predistribution plan
    A. The proposed schedule of liquidation (described above) indicates safe capital balances
        but a newly revised schedule must be prepared frequently.
    B. Accountants often prefer to produce a single predistribution plan at the start of a
        liquidation to provide guidance for all payments made to the partners throughout this
        process.
    C. Information for the predistribution plan is generated by assuming the occurrence of a
        series of losses, each just large enough to eliminate one partner's claim to any
        partnership property.
    D. Once a series of losses has been simulated that would eliminate the capital balances of
        all partners, the actual plan is developed by measuring the effects that occur if the losses
        do not materialize.
    E. By working backwards through this series of possible losses, a predistribution plan can
        be produced that will direct all payments made within the liquidation.




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Chapter 15 - Partnerships: Termination and Liquidation




Learning Objectives

Having completed Chapter 15 of this textbook, "Partnerships: Termination and Liquidation,"
students should be able to fulfill each of the following learning objectives:

1. Determine amounts to be paid to partners in a liquidation.

2. Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

3. Determine the distribution of available cash when one or more partners has a deficit capital
   balance or becomes personally insolvent.

4. Prepare a proposed schedule of liquidation from safe capital balances to determine an
   equitable preliminary distribution of available partnership assets.

5. Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.




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Chapter 15 - Partnerships: Termination and Liquidation


Answer to Discussion Question

What Happens if a Partner Becomes Insolvent?

This case demonstrates one of the nightmares of a partnership: the apparent insolvency of a
partner is threatening the future of a successful business. The problem is especially acute to
Wilkinson and Walker since this partnership was created solely for convenience; the partners
share the facilities but do not actually work together. Therefore, the presence of Rogers is not
essential to the other partners except that he pays a portion of the business's expenses.
However, the claim that has been filed could lead to the actual liquidation of the entire business.

Obviously, the partners should take no immediate action until they have spoken with Rogers.
The entire issue may prove to be a mistake. Conversely, numerous other claims against Rogers
may also be outstanding with the initial claim simply being the first to be filed. Because of the
various possibilities, Wilkinson and Walker should consult with a lawyer to learn of the
partnership laws that apply in their state. They should also begin considering possible
alternatives to salvage their business if Rogers is indeed insolvent.

One course of action is for Wilkinson and Walker to buy out the partnership interest of Rogers.
In that way, Rogers would receive his money and the remaining partnership could be left intact.
However, they would have to prove—for legal reasons—that a fair price was being paid. They
would also be forced to come up with a significant amount of cash in a short period of time.
Finally, Wilkinson and Walker would have a building that was apparently larger than their needs.
Unless they could utilize the space in some manner, they might have no way of recouping their
additional investment.

As a second possibility, a new dentist could be brought in to acquire Rogers’ interest in the
partnership. Again, the money is conveyed to Rogers but now the original partners are not
forced to make the payment. The building would continue to be fully utilized so that the partners'
expenses would not escalate. In this case, though, a new partner may have to be identified in a
short period of time. Furthermore, since the partners are sharing space, Wilkinson and Walker
will probably want to ensure that the new partner is someone with whom they can work
comfortably. Because of time considerations, they may not have the opportunity of getting the
new partner they would like.

Finally, the partnership can be liquidated. Wilkinson and Walker could then take their share of
the proceeds and buy a new building for the continuation of their practices. Unfortunately, in
liquidation, assets do not always bring fair market value. Thus, the partners may be forced to
absorb significant losses as a result of Rogers' insolvency. In addition, the moving of any
business can disrupt service and have a possible adverse impact on profitability.

Although Wilkinson and Walker have several possible actions that can be taken, none of these
is without problems. Therefore, partners should always include agreements within their Articles
of Partnership to specify actions that will be taken in such cases. The insolvency of a partner is
not a particularly unusual event. Hence, the partners (or their lawyers and accountants) should
have the forethought to arrange the resolution of the business if insolvency of a partner does
occur.




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Chapter 15 - Partnerships: Termination and Liquidation


Answers to Questions

1. A dissolution refers to the cessation of a partnership. In many cases, this process is simply a
   preliminary step in the transfer of business property to a newly formed partnership.
   Therefore, a dissolution does not necessarily affect the operations of the business. In a
   liquidation, however, actual business activities must cease. Partnership property is sold with
   the remaining cash distributed to creditors and to any partners with positive capital balances.
   Dissolution refers to changes in the composition of a partnership whereas liquidation is the
   selling of a partnership's assets.

2. Many reasons can exist that would lead to the termination and liquidation of a partnership.
   The business might simply have failed to generate sufficient profits or the partners may elect
   to enter other lines of work. Liquidation can also be required by the death, retirement, or
   withdrawal of one of the partners. In such cases, liquidation is often necessary to settle the
   partner's interest in the business. The bankruptcy of an individual partner can also force the
   termination of the business as can the bankruptcy of the partnership itself.

3. During the liquidation process, monitoring the balance of the partners' capital accounts
   becomes of paramount importance. That amount will eventually indicate either the cash to
   be received by the partners as final distributions or the additional contributions that they are
   required to pay. Consequently, all liquidation gains and losses are recorded directly as
   changes to these capital balances. Such recording enhances the informational value of the
   accounts. As an additional factor, the computation of a net income figure is of diminished
   importance since normal operations have ceased.

4. Final distributions made to the various partners are based solely on their ending capital
   account balances unless the partners have agreed otherwise. If any partner has a deficit
   balance, an additional contribution should be made to offset the negative amount. In some
   situations, a question may arise as to whether compensation for a deficit will ever be
   forthcoming from the responsible party. The remaining partners may choose to allocate the
   available cash immediately based on the assumption that the deficit balance eventually will
   prove to be a total loss.

5. A schedule of liquidation provides financial data about the liquidation process as it has
   progressed to date. Information to be presented includes the balances of all remaining
   assets, the liability total, and the capital account of each partner. In addition, the allocation of
   all gains and losses incurred in the liquidation process as well as the payment of expenses
   should be evident.

6. From a legal viewpoint, any partner who incurs a negative (or deficit) capital balance is
   obligated to make an additional contribution to offset that amount.




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Chapter 15 - Partnerships: Termination and Liquidation




7. A safe capital balance is the amount of a partner's capital account that exceeds all possible
   needs of a partnership as it goes through liquidation. A partner should, therefore, be able to
   receive this balance immediately without endangering the future amount to be received by
   any other party connected with the liquidation. Safe capital balances are computed by
   projecting a series of assumptions whereby the partnership undergoes maximum losses
   during the remainder of the liquidation process. All noncash assets are assumed to have no
   resale value, liquidation expenses are set at the largest possible estimation, and all partners
   are viewed as personally insolvent. Any capital balance that would remain after this series of
   anticipated events can be distributed to the partners immediately without incurring any risk.

8. For distribution purposes, the Uniform Partnership Act states that loans from partners rank
   ahead of the partners’ capital balances. Thus, the handling of loans in a liquidation would
   seem to be obvious: When money becomes available for the partners, all loans from
   partners should be repaid before any amount is given to a partner because of a safe capital
   balance.

    A problem arises, though, in the above solution if a partner (especially if the partner is
    currently insolvent) has made a loan to a partnership but has a potentially negative capital
    balance. The final capital balance may require a contribution to the partnership that the
    partner may be unable or unwilling to make. If the Uniform Partnership Act is followed
    precisely, a partner could collect money on a loan while still having an obligation to the
    partnership because of a negative capital balance.

    To avoid this problem, in practice a partner’s loan balance is usually merged with that
    partner’s capital balance to minimize the chance of a negative capital balance occurring.
    This particular partner may get less money from the liquidation because of this treatment but
    the other partners are better protected.

9. A proposed schedule of liquidation is used by the accountant to determine the allocation of
   any cash balances generated during the early stages of liquidation. Often, sufficient cash will
   be collected to pay all liabilities as well as potential liquidation expenses. Additional cash
   should then be distributed to the partners to allow them immediate use of their funds. A
   proposed schedule of liquidation can be produced to determine the allocation of this
   available cash. The statement is based on anticipating a series of assumed losses from the
   current day forward: all remaining noncash assets are scrapped, maximum liquidation
   expenses are incurred, and each partner is personally insolvent. The ending balances that
   would result from these simulated transactions represent safe capital balances. This amount
   of cash can be distributed presently and the partners will still retain enough capital to absorb
   all future losses.

10. A predistribution plan is produced based on an assumed series of losses. Each loss is
    calculated to eliminate in turn the capital balance of one of the partners. In this manner, the
    accountant can determine the vulnerability to losses exhibited by each capital account.
    When the last balance is eliminated, the accountant will have established a series of losses
    that exactly offsets each balance. The predistribution plan is then developed by measuring
    the effects that are created if the losses do not occur. In effect, the accountant works
    backwards through the assumed losses to create a pattern of available cash, the
    predistribution plan.


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Chapter 15 - Partnerships: Termination and Liquidation


Answers to Problems

1. C (LO1)

2. A (LO1)

3. D (LO3)

4. B Partner with Deficit Capital Balance (LO3)

                                  Angela, Capital          Woodrow, Capital     Cassidy, Capital

    Reported balances                     $19,000                 $18,000           $(12,000)
    Potential loss from
       Cassidy deficit
       (split 5/8:3/8)                     (7,500)                 (4,500)               12,000
    Cash distributions                    $11,500                 $13,500                    -0-

5. B Insolvent Partner (LO3)
                                          Bell                  Hardy         Dennard     Suddath
    Reported balances                 $50,000                   $56,000       $14,000     $80,000
    Loss on sale of assets ($110,000)
       split on a 4:3:2:1 basis       (44,000)                  (33,000)      (22,000)     (11,000)
    Adjusted balances                  $ 6,000                  $23,000       $(8,000)     $69,000
    Potential loss from Dennard
       deficit (split 4:3:1)            (4,000)                  (3,000)        8,000       (1,000)
    Minimum cash distributions          $2,000                  $20,000        $ -0-       $68,000

6. A Predistribution Plan (LO5)

7. A Proposed Schedule of Liquidation; Partner has Deficit (LO3, LO4)

                                                                    Art    Raymond          Darby
    Reported balances ....................................      $18,000     $25,000        $26,000
    Loss on sale of assets ($22,000) split
     on a 4:3:3 basis .......................................    (8,800)       (6,600)      (6,600)
    Adjusted balances ....................................      $ 9,200       $18,400      $19,400
    Anticipated liquidation expenses ($12,000)
     split on a 4:3:3 basis ..............................       (4,800)       (3,600)      (3,600)
    Anticipated maximum loss on inventory
     ($31,000) split on a 4:3:3 basis ..............            (12,400)       (9,300)      (9,300)
    Potential balances ....................................     $(8,000)      $ 5,500      $ 6,500
    Potential loss from Art deficit (split 3:3) .                 8,000        (4,000)      (4,000)
    Current cash distribution .........................          $ -0-        $ 1,500      $ 2,500



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Chapter 15 - Partnerships: Termination and Liquidation


8. D Proposed Schedule of Liquidation; Partner has Deficit (LO1, LO3, LO4)

        Since the partnership currently has total capital of $400,000, the $30,000
        that is available would indicate maximum potential losses of $370,000.
                                                                    A                B             C
        Reported balances                                       $100,000         $120,000       $180,000
        Anticipated loss ($370,000) split on
           a 2:3:5 basis                             (74,000)                     (111,000)     (185,000)
        Potential balances                          $ 26,000                        $ 9,000      $ (5,000)
        Potential loss from C's deficit (split 2:3)   (2,000)                        (3,000)        5,000
        Current cash distribution                   $ 24,000                        $ 6,000      $     -0-

9. C Predistribution Plan (LO5)

        A predistribution plan should be created.
        Maximum Losses That Can Be Absorbed
        Kevin            $59,000/40%                 $147,500
        Michael          $39,000/30%                  130,000                (most vulnerable to losses)
        Brendan          $34,000/10%                  340,000
        Jonathan         $34,000/20%                  170,000
        The assumption is made that a $130,000 loss occurs.
                                                      Kevin         Michael      Brendan       Jonathan
    Reported balances .......................... $59,000            $39,000       $34,000       $34,000
    Assumed loss ($130,000) split on
       a 4:3:1:2 basis ............................ (52,000)         (39,000)     (13,000)      (26,000)
    Adjusted balances ........................... $ 7,000           $     -0-     $21,000       $ 8,000
    Maximum Losses That Can Now Be Absorbed
    Kevin      $7,000/4/7       $12,250 (most vulnerable to losses)
    Brendan   $21,000/1/7       147,000
    Jonathan   $8,000/2/7        28,000
                                                                   Kevin        Brendan        Jonathan
    Reported balances ...................................... $7,000              $21,000         $8,000
    Assumed loss ($12,250) split on a
       4:1:2 basis ............................................... (7,000)        (1,750)        (3,500)
    Adjusted balances                                            $ -0-           $19,250         $4,500

    Maximum Losses That Can Now Be Absorbed
    Brendan            $19,250/1/3                 $57,750
    Jonathan            $4,500/2/3                   6,750      (most vulnerable to losses)

    The assumption is made that a $6,750 loss occurs.


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Chapter 15 - Partnerships: Termination and Liquidation


                                                                           Brendan         Jonathan
        Reported balances ............................................      $19,250          $4,500
        Assumed loss ($6,750) split on a 1:2 basis ....                      (2,250)          (4,500)
        Adjusted balances ............................................      $17,000          $ -0-

10. C Predistribution Plan (LO5)

        To solve this problem, a predistribution plan is necessary. That plan, which
        is created below, is as follows:
           First $3,000 goes to Menton
           Next $15,000 goes to Menton (2/3) and Hoehn (1/3)
           Next $42,000 goes to Carney (4/7), Menton (2/7), and Hoehn (1/7)
           All remaining cash goes to Carney (4/10), Pierce (3/10), Menton (2/10),
            and Hoehn (1/10)
                                                          Carney Pierce          Menton       Hoehn
    Beginning balances                                    $60,000 $27,000        $43,000     $20,000
    Assumed loss of $90,000 (see
       Schedule 1)(4:3:2:1)                               (36,000) (27,000)      (18,000) (9,000)
    Step one balances                                     $24,000     $ -0-      $25,000 $11,000
    Assumed loss of $42,000 (see
       Schedule 2) (allocated on
       a 4:0:2:1 basis)                                   (24,000)       $ -0-   (12,000)      (6,000)
    Step two balances                                        $ -0-       $ -0-   $13,000      $ 5,000
    Assumed loss of $15,000 (see
       Schedule 3) (allocated on a
       0:0:2:1 basis)                                           -0-        -0-   (10,000)      (5,000)
    Step three balances                                       $ -0-      $ -0-   $ 3,000         $ -0-

                                          Schedule 1
                                                Maximum Loss
                          Capital Balance/         That Can
    Partner               Loss Allocation        Be Absorbed
    Carney                   $60,000/40%             $150,000
    Pierce                   $27,000/30%             $ 90,000 (most vulnerable)
    Menton                   $43,000/20%             $215,000
    Hoehn                    $20,000/10%             $200,000
                                           Schedule 2
                                                 Maximum Loss
                          Capital Balance/          That Can
    Partner               Loss Allocation         Be Absorbed
    Carney                   $24,000/(4/7)            $ 42,000 (most vulnerable)
    Menton                   $25,000/(2/7)            $ 87,500
    Hoehn                    $11,000/(1/7)            $ 77,000


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Chapter 15 - Partnerships: Termination and Liquidation


                                          Schedule 3
                                                Maximum Loss
                         Capital Balance/          That Can
    Partner              Loss Allocation         Be Absorbed
    Menton                  $13,000/(2/3)            $ 19,500
    Hoehn                   $ 5,000/(1/3)            $ 15,000 (most vulnerable)

11. C Partners with Deficit Capital Balances; Proposed Schedule of Liquidation;
      Safe Capital Balances (LO3, LO4)

        The $16,000 available cash can be distributed but should be done under the
        assumption that all deficit balances will be total losses. After offsetting
        Jones' loan against his deficit capital balance, both Jones and Wayman
        have deficits of $2,000; total $4,000. Fuller and Rogers, the two partners
        with positive capital balances, share profits in a 30:20 relationship (the
        equivalent of a 60%:40% ratio). Fuller would absorb $2,400 of the potential
        $4,000 loss with Rogers being allocated $1,600. The remaining capital
        balances ($10,600 and $5,400) are safe capital balances and those amounts
        can be immediately distributed.

12. Determine Safe Capital Balances; Partner has Deficit (LO1, LO3, LO4)
    (8 minutes)

    Cleveland receives $6,800 and Pierce receives $1,200

    Since the partnership currently has total capital of $350,000, the $8,000 that is
    available would indicate maximum potential losses of $342,000.

                                                           Nixon   Cleveland      Pierce

    Reported balances .............................  $170,000       $110,000     $70,000
    Anticipated loss ($342,000) split
       on a 5:3:2 basis ............................ (171,000)      (102,600)    (68,400)
    Potential balances .............................  $ (1,000)       $ 7,400    $ 1,600
    Potential loss from Nixon's deficit (split 3:2) 1,000                (600)      (400)
    Current cash distribution ..................      $     -0-        $6,800    $ 1,200




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Chapter 15 - Partnerships: Termination and Liquidation


13. Final Settlement of a Partnership Being Liquidated; Various Amounts of Loss
   on Sale of Assets (LO1, LO3) (20 minutes)

Part a.     Brown gets $21,000, Fish gets $12,000, and Stone gets $2,000.

                                                                     Brown          Fish           Stone
    Reported balances .....................................         $25,000      $15,000          $5,000
    Loss on sale of land ($10,000) split
      on a 4:3:3 basis .....................................         (4,000)      (3,000)         (3,000)
    Cash distribution .......................................       $21,000      $12,000          $2,000

Part b.     Brown gets $16,429 and Fish gets $8,571

                                                                     Brown          Fish           Stone
    Reported balances .....................................         $25,000      $15,000          $5,000
    Loss on sale of land ($20,000) split on
       a 4:3:3 basis ...........................................     (8,000)       (6,000)      (6,000)
    Adjusted balances .....................................         $17,000       $ 9,000      $(1,000)
    Potential loss from Stone's deficit (split 4:3)                    (571)         (429)       1,000
    Cash distribution .......................................       $16,429       $ 8,571     $     -0-

Part c.     Brown gets $10,714 and Fish gets $4,286

                                                                    Brown           Fish           Stone
    Reported balances .....................................         $25,000      $15,000          $5,000
    Loss on sale of land ($30,000) split on
       a 4:3:3 basis ...........................................    (12,000)       (9,000)      (9,000)
    Adjusted balances .....................................         $13,000       $ 6,000      $(4,000)
    Potential loss from Stone's deficit (split 4:3)                  (2,286)       (1,714)       4,000
    Cash distribution .......................................       $10,714       $ 4,286     $     -0-

14. Distribute Cash Contributed by Partner with Deficit Balance (LO3)(10 minutes)

    The entire $20,000 goes to Atkinson.

                                                Atkinson           Kaporale Dennsmore        Rasputin

    Reported balances                            $60,000            $20,000     $(30,000)    $(50,000)
    Capital contribution                              -0-                -0-          -0-      20,000
    Adjusted balances                            $60,000            $20,000     $(30,000)    $(30,000)
    Potential loss from Dennsmore
       and Rasputin ($60,000) split
       on a 4:3 basis                            (34,286)           (25,714)      30,000          30,000
    Adjusted balances                            $25,714            $(5,714)     $    -0-     $       -0-
    Potential loss from Kaporale
       ($5,714)                                   (5,714)              5,714         -0-             -0-
    Cash distribution                            $20,000           $      -0-      $ -0-           $ -0-




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Chapter 15 - Partnerships: Termination and Liquidation


15. Determine Safe Capital Balances (LO4) (8 minutes)

    Ball gets $143, Eaton gets $1,429, and Lake gets $3,428.

                                                     Ace        Ball       Eaton       Lake
    Reported balances .......................    $25,000     $28,000     $20,000     $22,000
    Maximum losses on land and building
     ($85,000) split on a 3:3:2:2 basis          (25,500)    (25,500)     (17,000)   (17,000)
    Estimated liquidation expenses
     ($5,000) split 3:3:2:2 ...................    (1,500)    (1,500)      (1,000)    (1,000)
    Potential balances .......................   $(2,000)    $ 1,000      $ 2,000    $ 4,000
    Potential loss from Ace ($2,000) split
     on a 3:2:2 basis ..........................    2,000        (857)       (571)      (572)
    Cash distributions .......................    $     0    $    143     $ 1,429    $ 3,428


16. Prepare a Proposed Schedule of Liquidation (LO4) (15 minutes)

                            HARDWICK, SAUNDERS, AND FERRIS

                               Proposed Schedule of Liquidation

                                                          Hardwick,                  Ferris,
                                   Other         Accounts Loan and       Saunders,   Loan &
                    Cash           Assets         Payable  Capital        Capital    Capital
Beginning
   balances        90,000 820,000     210,000   270,000                  200,000     230,000
Sold assets       200,000 (328,000)             (51,200)                 (38,400)    (38,400)
Assumed: loss
   on remaining
   assets                  (492,000)           (196,800)                 (147,600) (147,600)
Paid liabilities (210,000)           (210,000)
Safe balances      80,000         0         0    22,000                   14,000      44,000

Of the available $80,000, $22,000 will go to Hardwick, $14,000 to Saunders, and
$44,000 to Ferris.




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Chapter 15 - Partnerships: Termination and Liquidation


17. Determine Amount of Cash Needed to Assure Payments to All Partners (LO5)
    (7 minutes)

    Watson is the partner most vulnerable to a loss. A loss of only $50,000 would
    completely eliminate Watson's capital balance:

    Miller $50,000/60% = $ 83,333 loss to eliminate capital
    Tyson  $50,000/20% = $250,000 loss to eliminate capital
    Watson $10,000/20% = $ 50,000 loss to eliminate capital

    Thus, if the loss on disposal is less than $50,000, all partners will retain
    positive capital balances and receive some cash in liquidation. Because of
    this, since "other assets" are $140,000, they must be sold for any amount over
    $90,000 for all partners to get cash.

18. Determine Safe Capital Balances (LO4) (5 minutes)

    Maximum potential losses are $128,000, $8,000 in liquidation expenses and a
    complete $120,000 loss on the noncash assets. Such a loss would reduce the
    capital balances to: Babb $8,800, Whitaker ($5,600), and Edwards ($1,200).
    Babb must retain sufficient capital ($6,800) to be able to absorb the possible
    losses of Whitaker and Edwards. The remaining $2,000 is a safe capital
    balance for Babb.

19. Determine Amount to be Contributed by Partner with a Deficit Capital Balance
    (LO3) (10 minutes)

    White and Blue are both insolvent and have negative capital balances (after
    offsetting the loan from White) totaling $15,000. Absorption by the other
    partners of these losses would be as follows (on a 30:10:20 basis):


    Partner      Share of Loss                       New Capital Balance
    Black       30/60 x      $15,000 = $7,500               $ (4,500)
    Green       10/60 x      $15,000 = $2,500               $ (5,500)
    Brown       20/60 x      $15,000 = $5,000               $10,000


    Black, who is also insolvent, now has a deficit capital of $4,500 that would
    have to be absorbed by Brown and Green (on a 10:20 basis):

    Partner Share of Loss             New Capital Balance
    Green   10/30 x   $4,500 = $1,500       $ (7,000)
    Brown 20/30 x     $4,500 = $3,000       $ 7,000


    Thus, Green must contribute $7,000 that will go to Brown.




                                                   15-14
Chapter 15 - Partnerships: Termination and Liquidation


20. Determine Payments under a Variety of Circumstances; Safe Capital Balances;
    Predistribution Plan (LO4, LO5) (50 minutes)
a. Dobbs receives the entire $10,000.
    Maximum potential losses of $250,000 on noncash assets would be allocated
    as follows:
    Partner         Share of Loss                         New Capital Balance
    Adams           2/10 x $250,000 = $50,000                 $ 30,000
    Baker           3/10 x $250,000 = $75,000                 $(45,000)
    Carvil          3/10 x $250,000 = $75,000                 $(15,000)
    Dobbs           2/10 x $250,000 = $50,000                 $ 40,000
    Maximum total potential losses of $60,000 to be absorbed from Baker and
    Carvil above would then be allocated as follows on a 2:2 basis:
    Adams           2/4 x $60,000 = $30,000                         -0-
    Dobbs           2/4 x $60,000 = $30,000                   $ 10,000
    Absorbing the final loss would leave Dobbs with a safe capital balance of
    $10,000.

b. Adams receives the entire $10,000.
    Maximum potential losses of $250,000 on noncash assets would be allocated
    as follows:
    Partner         Share of Loss                        New Capital Balance
    Adams           2/10 x $250,000 = $50,000                 $ 30,000
    Baker           2/10 x $250,000 = $50,000                 $(20,000)
    Carvil          3/10 x $250,000 = $75,000                 $(15,000)
    Dobbs           3/10 x $250,000 = $75,000                 $ 15,000
    Maximum total potential losses of $35,000 to be absorbed from Baker and
    Carvil above would be allocated as follows on a 2:3 basis:
    Adams           2/5 x $35,000 = $14,000                   $ 16,000
    Dobbs           3/5 x $35,000 = $21,000                   $ (6,000)
    Absorbing the final $6,000 loss from Dobbs would leave Adams with a safe
    capital balance of $10,000.

c. Adams receives $57,500 and Dobbs gets $22,500.
    The $50,000 loss on sale of the building would be allocated as follows:
    Partner         Share of Loss                        New Capital Balance
    Adams           10% x $50,000 = $5,000                    $ 75,000
    Baker           30% x $50,000 = $15,000                   $ 15,000
    Carvil          30% x $50,000 = $15,000                   $ 45,000
    Dobbs           30% x $50,000 = $15,000                   $ 75,000




                                                   15-15
Chapter 15 - Partnerships: Termination and Liquidation


20. c. (continued)

    Maximum potential loss of $130,000 on the land would be allocated as follows:

    Partner         Share of Loss                        New Capital Balance
    Adams           10% x $130,000 = $13,000                    $ 62,000
    Baker           30% x $130,000 = $39,000                    $ (24,000)
    Carvil          30% x $130,000 = $39,000                    $ 6,000
    Dobbs           30% x $130,000 = $39,000                    $ 36,000

    Maximum potential loss of $24,000 to be absorbed from Baker would be
    allocated as follows on a 1:3:3 basis:

    Adams           1/7 x $24,000 = $3,428                       $ 58,572
    Carvil          3/7 x $24,000 = $10,286                      $ (4,286)
    Dobbs           3/7 x $24,000 = $10,286                      $ 25,714

    Maximum potential loss of $4,286 to be absorbed from Carvil would be
    allocated as follows on a 1:3 basis:

    Adams           1/4 x $4,286 = $1,072                        $57,500
    Dobbs           3/4 x $4,286 = $3,214                        $22,500

    These amounts represent safe capital balances for distribution purposes.

d. The land and building must be sold for over $115,000 to ensure that Carvil will
   receive some cash.

                                   Adams                       Baker            Carvil        Dobbs
    Beginning balances           $ 80,000                   $ 30,000         $ 60,000       $ 90,000
    Assumed loss of $100,000 (see
       Schedule 1) (1:3:4:2)       (10,000)                    (30,000)       (40,000)       (20,000)
    Step One balances            $ 70,000                  $        -0-      $ 20,000       $ 70,000
    Assumed loss of $35,000 (see
       Schedule 2) (allocated on a
       1:0:4:2 basis)               (5,000)                        -0-           (20,000)    (10,000)
    Step Two balances            $ 65,000                  $       -0-       $        -0-   $ 60,000
    Assumed loss of $90,000 (see
       Schedule 3) (allocated on a
       1:0:0:2 basis)              (30,000)                        -0-               -0-     (60,000)
    Step Three balances          $ 35,000                  $       -0-       $       -0-    $     -0-




                                                   15-16
Chapter 15 - Partnerships: Termination and Liquidation


20. d. (continued)

    PREDISTRIBUTION PLAN

    The first $35,000 available goes to Adams. Next $90,000 is split between
    Adams and Dobbs on a 1:2 basis. Next $35,000 is split between Adams, Carvil,
    and Dobbs on a 1:4:2 basis. All remaining cash is split between Adams, Baker,
    Carvil, and Dobbs on the original profit and loss ratio.

    Total cash of $125,000 ($35,000 + $90,000) has to be available before Carvil will
    receive any cash. Since the partnership already has $10,000 cash in excess of
    its liabilities, the land and building must be sold for over $115,000 to ensure
    Carvil of receiving some amount.

    As another approach to the problem, Carvil's capital balance is eliminated
    through the $100,000 Step One loss and the $35,000 Step Two loss. Thus,
    avoiding a complete $135,000 loss ensures that Carvil will receive cash. Since
    the land and buildings have a book value of $250,000, such losses would be
    avoided by receiving over $115,000.

Schedule 1
                                                               Maximum Loss
                                            Capital Balance/   That Can
    Partner                                 Loss Allocation    Be Absorbed
    Adams                                    $80,000/10%       $800,000
    Baker                                    $30,000/30%       $100,000 (most vulnerable)
    Carvil                                   $60,000/40%       $150,000
    Dobbs                                    $90,000/20%       $450,000

Schedule 2
                                                               Maximum Loss
                                            Capital Balance/   That Can
    Partner                                 Loss Allocation    Be Absorbed
    Adams                                    $70,000/(1/7)     $490,000
    Carvil                                   $20,000/(4/7)     $ 35,000 (most vulnerable)
    Dobbs                                    $70,000/(2/7)     $245,000

Schedule 3
                                                               Maximum Loss
                                            Capital Balance/   That Can
    Partner                                 Loss Allocation    Be Absorbed
    Adams                                    $65,000/(1/3)     $195,000
    Dobbs                                    $60,000/(2/3)     $ 90,000 (most vulnerable)




                                                   15-17
Chapter 15 - Partnerships: Termination and Liquidation


21. Prepare a Predistributlon Plan (LO5) (30 minutes)
    An assumed series of losses is simulated which eliminates each partner's
    capital account in turn:
                                    Larson      Norris  Spencer   Harrison
    Beginning balances             $ 15,000  $ 60,000   $ 75,000   $ 41,250
    Assumed loss of $75,000 (see
       Schedule 1) (allocated on a
       2:3:2:3 basis)               (15,000)   (22,500)  (15,000)   (22,500)
    Step One balances                $ -0-   $ 37,500   $ 60,000   $ 18,750
    Assumed loss of $50,000 (see
       Schedule 2) (allocated on a
       0:3:2:3 basis)                    -0-   (18,750)  (12,500)   (18,750)
    Step Two balances              $     -0- $ 18,750   $ 47,500   $     -0-
    Assumed loss of $31,250 (see
       Schedule 3) (allocated on a
       0:3:2:0 basis)                    -0-   (18,750)  (12,500)        -0-
    Step Three balances            $     -0- $      -0- $ 35,000    $    -0-

    PREDISTRIBUTION PLAN
     First $55,000 goes to pay liabilities ($47,000) and liquidation expenses
      (estimated at $8,000).
     Next $35,000 available goes to Spencer.
     Next $31,250 is split between Norris and Spencer on a 3:2 basis.
     Next $50,000 is split among Norris, Spencer, and Harrison on a 3:2:3 basis.
     All remaining cash is split among Larson, Norris, Spencer, and Harrison on
      the original profit and loss ratio.
                                              Schedule 1
                                                               Maximum Loss
                                            Capital Balance/   That Can
    Partner                                 Loss Allocation    Be Absorbed
    Larson                                     $15,000/20%      $ 75,000 (most vulnerable)
    Norris                                     $60,000/30%     $200,000
    Spencer                                    $75,000/20%     $375,000
    Harrison                                   $41,250/30%     $137,500
                                                Schedule 2
                                                               Maximum Loss
                                            Capital Balance/   That Can
    Partner                                 Loss Allocation    Be Absorbed
    Norris                                     $37,500/(3/8)   $100,000
    Spencer                                    $60,000/(2/8)   $240,000
    Harrison                                   $18,750/(3/8)   $ 50,000 (most vulnerable)
                                                Schedule 3
                                                               Maximum Loss
                                            Capital Balance/   That Can
    Partner                                 Loss Allocation    Be Absorbed
    Norris                                     $18,750/(3/5)   $ 31,250 (most vulnerable)
    Spencer                                    $47,500/(2/5)   $118,750


                                                   15-18
Chapter 15 - Partnerships: Termination and Liquidation


22. Prepare and Use a Predistribution Plan (LO5) (20 minutes)

    Part a.

    Maximum Losses That Can Be Absorbed

            Able*             $50,000/.2                 $250,000
            Moon              $60,000/.3                  200,000
            Yerkl             $50,000/.5                  100,000 (most vulnerable to losses)

    *Able's balance includes capital and the loan to the partnership.

    The assumption is made that a $100,000 loss occurs.


                                                      Able                    Moon       Yerkl
    Reported balances                              $50,000                  $60,000    $50,000
    Assumed loss ($100,000) split on a 2:3:5 basis (20,000)                 (30,000)   (50,000)
    Adjusted balances                              $30,000                  $30,000    $     0

    Maximum Losses That Can Now Be Absorbed

    Able                        $30,000/.4                $75,000
    Moon                        $30,000/.6                 50,000 (most vulnerable to losses)

    The assumption is made that a $50,000 loss occurs.

                                                                               Able       Moon
        Reported balances                                                   $30,000     $30,000
        Assumed loss ($50,000) split on a 2:3 basis                         (20,000)    (30,000)
        Adjusted balances                                                   $10,000    $      0

    PREDISTRIBUTION PLAN

       The first $62,000 will go to pay liquidation expenses ($12,000) and liabilities
        ($50,000).
       The next $10,000 goes entirely to Able (to pay off loan).
       The next $50,000 is split between Able and Moon based on a 2:3 basis,
        respectively.
       All remaining cash will be divided among the partners according to their
        profit and loss ratio.


    Part b.

    After this sale, the partnership has $76,000 in cash. The first $62,000 should be
    held for the liabilities and the liquidation expenses. The next $10,000 goes to
    Able. The remaining $4,000 is divided between Able ($1,600 or 40%) and Moon
    ($2,400 or 60%).



                                                   15-19
Chapter 15 - Partnerships: Termination and Liquidation



23. Prepare a Predistribution Plan for a Partnership Liquidation (LO5)(25 minutes)

    Maximum Losses That Can Be Absorbed

    Simpson             $18,000/20%                      $ 90,000 (most vulnerable to losses)
    Hart                $40,000/40%                       100,000
    Bobb                $48,000/20%                       240,000
    Reidl              $135,000/20%                       675,000

    The assumption is made that a $90,000 loss occurs.

                                     Simpson                       Hart       Bobb        Reidl
        Reported balances             $18,000                   $40,000     $48,000    $135,000
        Assumed loss ($90,000) split
         on a 2:4:2:2 basis            (18,000)                 (36,000)    (18,000)    (18,000)
        Adjusted balances             $      0                 $ 4,000      $30,000    $117,000

    Maximum Losses That Can Now Be Absorbed

            Hart           $4,000/4/8                     $ 8,000 (most vulnerable to losses)
            Bobb          $30,000/2/8                    120,000
            Reidl        $117,000/2/8                    468,000

    The assumption is made that an $8,000 loss occurs.
                                                     Hart                     Bobb        Reidl
      Reported balances                           $4,000                    $30,000    $117,000
      Assumed loss ($8,000) split on a 4:2:2 basis (4,000)                   (2,000)     (2,000)
      Adjusted balances                           $     0                   $28,000    $115,000

    Maximum Losses That Can Now Be Absorbed

            Bobb                  $28,000/2/4               56,000 (most vulnerable to losses)
            Reidl                 $115,000/2/4             230,000

    The assumption is made that a $56,000 loss occurs.

                                                                              Bobb         Reidl
        Reported balances                                                   $28,000    $115,000
        Assumed loss ($56,000) split on a 2:2 basis                         (28,000)     (28,000)
        Adjusted balances                                                   $     0     $ 87,000

    PREDISTRIBUTION PLAN

       The first $59,000 goes to pay liabilities and expected liquidation expenses.
       The next $87,000 goes entirely to Reidl.
       The next $56,000 is split evenly between Bobb and Reidl.
       The next $8,000 is split among Hart (4/8), Bobb (2/8), and Reidl (2/8).
       All remaining cash is split among the partners according to their original
        profit and loss ratio.


                                                   15-20
Chapter 15 - Partnerships: Termination and Liquidation



24. Determine the Ramifications of a Variety of Liquidation Situations (LO3)
    (30 minutes)

    Part A. Partner with Deficit Capital Balance

    (a) $48,000. Maximum losses of $100,000 on the noncash assets would
        increase Milburn's deficit balance by $40,000 (or 40%). Maximum losses
        would not create any other deficit balances.

    (b) All $19,000 should go to Thomas. As Ross and Thomas view the current
        situation, maximum potential losses total $108,000: $100,000 on the
        noncash assets and $8,000 on Milburn's deficit balance. In determining safe
        capital balances, these assumed losses would be allocated on a 4:2 basis
        or $72,000 to Ross and $36,000 to Thomas. Since such a loss would entirely
        eliminate Ross' capital account, only Thomas has a safe capital balance at
        the current time.

    (c) The minimum cash payment to Thomas would be $35,667 ($19,000 +
        $16,667). As shown in (b) above, the available $19,000 is distributed to
        Thomas, thus reducing that partner's capital balance to $39,000. A loss of
        $59,000 on the noncash assets would further reduce this partner's balance
        by $11,800 ($59,000 x 20%) to $27,200. That same loss would reduce Ross'
        capital to $45,400 and Milburn's deficit to ($31,600). The minimum cash
        amount would be caused by Milburn's failure to contribute this $31,600 so
        that it has to be absorbed by Ross (4/6 or $21,067) and Thomas (2/6 or
        $10,533). The remaining safe capital balance of $16,667 would be paid to
        Thomas.




                                                   15-21
Chapter 15 - Partnerships: Termination and Liquidation


24. (continued)

    Part B. Partners with Deficit Capital Balances; Insolvent Partner

    (a) Carton will have to contribute $7,429. The $29,000 in deficits will have to be
        absorbed by Sampson and Carton on a 4:3 basis. Thus, Carton will be
        allocated $12,429 of this amount which creates a deficit of $7,429.

    (b) Klingon will have to contribute $19,667 [$17,000 + (20/90 x $12,000)] that will
        be distributed as follows:

        Creditors              $15,000
        Sampson                $ 3,667
        Carton                 $ 1,000

        Since Romulan is insolvent, the remaining partners will have to absorb the
        $12,000 deficit on a 4:2:3 basis. This allocation increases Klingon's deficit
        by 2/9 of $12,000 or $2,667. Klingon must contribute an amount equal to the
        new deficit balance of $19,667. The first $15,000 will go to the creditors that
        remain after the $9,000 in partnership cash is distributed. The remaining
        $4,667 is distributed to the two partners in accordance with their remaining
        positive capital balances after absorbing Romulan's loss, 4/9 to Sampson
        and 3/9 to Carton. Sampson has a postive capital balance of $3,667 [$9,000
        – ($12,000 x 4/9)] and Carton has a positive capital balance of $1,000 [$5,000
        – ($12,000 x 3/9)].

    (c) Sampson should receive $500. If Klingon is insolvent, the $17,000 deficit
        balance will have to be absorbed by the remaining three partners on a 4:3:1
        basis. This loss would decrease Sampson's capital balance by $8,500 (4/8)
        to $500.




                                                   15-22
Chapter 15 - Partnerships: Termination and Liquidation


25. Prepare Journal Entries for a Partnership Liquidation (LO2) (25 minutes)

                                              JOURNAL ENTRIES
    a. Cash . ..........................................................................   56,000
       March, Capital (2/6 of loss) ......................................                  6,000
       April, Capital (3/6) .....................................................           9,000
       May, Capital (1/6) ......................................................            3,000
          Inventory ..............................................................                    74,000

    b. March, Capital (2/6 of expenses) .............................                       2,500
       April, Capital (3/6) .....................................................           3,750
       May, Capital (1/6) ......................................................            1,250
          Cash .....................................................................                   7,500

    c. Liabilities ...................................................................     40,000
          Cash .....................................................................                  40,000

    d. Cash ...........................................................................    45,000
         Accounts Receivable ..........................................                               45,000

    e.                                Current Capital                             Share of        Potential
                   Partner              Adjusted                              Maximum Loss*        Capital
                   March                 $16,500                          2/6 x $77,000 = $25,667  $ (9,167)
                   April                 $62,250                          3/6 x $77,000 = $38,500  $23,750
                   May                   $41,750                          1/6 x $77,000 = $12,833  $28,917

    *Maximum losses could be suffered on the remaining $39,000 in accounts
    receivable and the $38,000 in land, building, and equipment.

    Based on the above potential losses, March would have a deficit capital
    balance of $9,167 which in turn has to be allocated to the two partners having
    positive capital balances:

                             Potential Capital                            Share of                  Potential
         Partner                 (above)                              March's Deficit                 Capital
         April                   $23,750                        3/4 x $9,167 = $6,875                $16,875
         May                     $28,917                        1/4 x $9,167 = $2,292                $26,625




                                                            15-23
Chapter 15 - Partnerships: Termination and Liquidation


25. (continued)

    As the above amounts represent safe capital balances, payments can be
    presently made to these two partners.
       April, Capital .............................................................  16,875
       May, Capital ...............................................................  26,625
          Cash .....................................................................        43,500

    f. Cash (30%) ................................................................       11,700
       March, Capital (2/6 of loss) ......................................                9,100
       April, Capital (3/6) ......................................................       13,650
       May, Capital (1/6) .......................................................         4,550
          Accounts Receivable ..........................................                          39,000

    g. Cash ..........................................................................   17,000
       March, Capital (2/6 of loss) ......................................                7,000
       April, Capital (3/6) .....................................................        10,500
       May, Capital (1/6) ......................................................          3,500
          Land, Building and Equipment ..........................                                 38,000

    h. Liabilities ...................................................................   21,000
          Cash .....................................................................              21,000

    i. Since $28,700 cash remains and each partner has a positive capital
       balance, the money left can be distributed based on these ending totals.

        March, Capital ...........................................................          400
        April, Capital .............................................................     21,225
        May, Capital ...............................................................      7,075
           Cash .....................................................................             28,700




                                                           15-24
Chapter 15 - Partnerships: Termination and Liquidation


26. Determine Liquidation Proceeds Necessary to Give Partner a Specified
    Amount; Predistribution Plan (LO5) (30 minutes)

    The other assets must be sold for at least $50,000.

    For this creditor to get $5,000 from Z's portion of partnership property, $27,000
    in cash above the current level must first be generated for creditors and
    liquidation expenses. Based on the predistribution schedule below, the next
    $10,000 is received solely by Y. A third $8,000 would be split evenly between Y
    and Z (giving Z $4,000 of the $5,000 needed). Z needs $1,000 from the next
    cash generated in order to satisfy this personal claim. Since the next level
    (Step Two balances) is split on a 3:1:1 basis, Z is entitled to 1/5 of the
    proceeds. Thus, $5,000 must be collected for Z to receive $1,000. For Z's
    creditor to get $5,000, the other assets have to be sold for $50,000 ($27,000 +
    $10,000 + $8,000 + $5,000).

    A predistribution plan must be developed to generate this information:

                                                          W         X                Y           Z
        Beginning capital                           $ 60,000 $ 78,000         $ 40,000    $ 30,000
        Assumed loss of $120,000 (see
           Schedule 1) (5:3:1:1)                        (60,000) (36,000)      (12,000)    (12,000)
        Step One balances                           $        -0- $ 42,000     $ 28,000    $ 18,000
        Assumed loss of $70,000 (see
           Schedule 2) (allocated on a
           0:3:1:1 basis)                                   -0-    (42,000)    (14,000)    (14,000)
        Step Two balances                           $       -0-   $     -0-   $ 14,000    $ 4,000
        Assumed loss of $8,000 (see
           Schedule 3) (allocated on a
           0:0:1:1 basis)                                   -0-        -0-      (4,000)     (4,000)
        Step Three balances                         $       -0-   $    -0-    $ 10,000    $     -0-

    PREDISTRIBUTION PLAN

       Current cash of $30,000 goes to creditors.
       Next $27,000 generated goes to remaining creditors ($12,000) and to pay
        liquidation expenses estimated at ($15,000).
       Next $10,000 goes to Y.
       Next $8,000 goes to Y and Z on a 1:1 basis.
       Next $70,000 goes to X, Y, and Z on a 3:1:1 basis.
       Any remaining cash is split among all four partners based on a 5:3:1:1
        basis.




                                                   15-25
Chapter 15 - Partnerships: Termination and Liquidation


26. (continued)

    Schedule 1
                                Capital Balance/           Maximum Loss to
      Partner                   Loss Allocation              Be Absorbed
         W                        $60,000/50%                 $120,000 (most vulnerable)
         X                        $78,000/30%                 $260,000
         Y                        $40,000/10%                 $400,000
         Z                        $30,000/10%                 $300,000

    Schedule 2
                                Capital Balance/           Maximum Loss to
      Partner                   Loss Allocation              Be Absorbed
         X                        $42,000/(3/5)                $ 70,000 (most vulnerable)
         Y                        $28,000/(1/5)               $140,000
         Z                        $18,000/(1/5)                $ 90,000

    Schedule 3
                                Capital Balance/           Maximum Loss to
      Partner                   Loss Allocation              Be Absorbed
         Y                        $14,000/(1/2)                $ 28,000
         Z                        $ 4,000/(1/2)                 $ 8,000 (most vulnerable)




                                                   15-26
Chapter 15 - Partnerships: Termination and Liquidation


27. Determine Monthly Payments to Partners based on Safe Capital Balances
    (LO4) (35 minutes)

                             VAN, BAKEL, AND COX PARTNERSHIP
                             Safe Installment Payments to Partners
                                           January 31

                                                     Total              Van             Bakel           Cox
Profit and loss ratio                                100%               50%              30%            20%

    Preliquidation capital balances $282,000                      $118,000          $ 90,000         $74,000
    Add (deduct) loans                (10,000)                     (30,000)           20,000              -0-
                                      272,000                       88,000           110,000          74,000
    January losses (Schedule 1)       (28,000)                     (14,000)           (8,400)         (5,600)
    Equity of partnership—
       January 31                     244,000                        74,000          101,600          68,400
    Potential losses (Schedule 1)    (199,000)                      (99,500)         (59,700)        (39,800)
                                       45,000                       (25,500)          41,900          28,600
    Potential loss—Van's deficit balance
       (Bakel 3/5; Cox 2/5)                -0-                       25,500          (15,300)        (10,200)
    Safe payments to partners         $45,000                        $ -0-          $ 26,600         $18,400

                                                Schedule 1
            Computation of Actual and Potential Liquidation Losses
                                                   January
                                                                                          Actual    Potential
                                                                                         Losses      Losses
    Collection of accounts receivable ($66,000 – $51,000)                                $15,000
    Sale of inventory ($52,000 – $38,000) ...........................                     14,000
    Liquidation expenses ....................................................              2,000
    Gain resulting from January credit memorandum
       reducing liability to creditors ..................................                 (3,000)
    Machinery and equipment, net .....................................                              $189,000
    Potential unrecorded liabilities and anticipated expenses                                         10,000
       Totals ......................................................................... $ 28,000    $199,000




                                                     15-27
Chapter 15 - Partnerships: Termination and Liquidation


27. (continued)

                            VAN, BAKEL, AND COX PARTNERSHIP
                            Safe Installment Payments to Partners
                                         February 28

                                               Total          Van        Bakel       Cox
    Equity of partnership –
       January 31 (above) .. ......... $244,000            $74,000    $101,600    $68,400
    Safe payments (above) ..........        (45,000)            -0-    (26,600)   (18,400)
    February liquidation expenses             (3,000)       (1,500)       (900)      (600)
    Equity of partnership –
       February 28 ........................ 196,000         72,500      74,100     49,400
    Potential liabilities and expenses (6,000)              (3,000)     (1,800)    (1,200)
    Potential loss on machinery and
       equipment ......................... (189,000)       (94,500)    (56,700)   (37,800)
                                               1,000       (25,000)     15,600     10,400
    Potential loss—Van's deficit balance
       (Bakel 3/5; Cox 2/5) ..........            -0-       25,000     (15,000)   (10,000)
    Safe payments to partners ....           $ 1,000        $ -0-      $ 600      $ 400

                            VAN, BAKEL, AND COX PARTNERSHIP
                            Safe Installment Payments to Partners
                                          March 31

                                           Total              Van        Bakel       Cox
    Equity of partnership—
       February 28 (above)...           $196,000           $72,500     $74,100    $49,400
    Safe payments (above)..............   (1,000)               -0-       (600)      (400)
    Loss on sale of machinery and
       equipment ($189,000 – $146,000) (43,000)            (21,500)    (12,900)    (8,600)
    Liquidation expenses                  (5,000)           (2,500)     (1,500)    (1,000)
    Safe payments to partners           $147,000           $48,500     $59,100    $39,400




                                                   15-28
Chapter 15 - Partnerships: Termination and Liquidation


28. Determine Cash Distributions for Four Different Partnership Liquidations;
    Insolvent Partners (LO3) (35 minutes)

    Part A                                                              Haynes,
                                                             Simon,    Loan and      Jackson,
                                                             Capital     Capital        Capital
    Beginning balances                                      $16,000      $ 4,000      ($12,000)
    Contribution by Jackson                                      -0-          -0-         3,000
    Capital balances                                        $16,000      $ 4,000       ($ 9,000)
    Elimination of Jackson's deficit
     (40:20 basis)                                           (6,000)      (3,000)         9,000
    Final distribution                                      $10,000      $ 1,000      $      -0-

                                                             Hough,       Luck,
    Part B                                                 Loan and    Loan and Cummings,
                                                             Capital     Capital    Capital
    Beginning balances                                      $82,000     $40,000    $20,000
    $82,000 loss on disposal (allocated on a
     50:40:10 basis)                                        (41,000)     (32,800)       (8,200)
    Liquidation expenses (50:40:10 basis)                   (10,500)       (8,400)      (2,100)
    Capital balances                                         30,500        (1,200)       9,700
    Allocation of Luck's deficit (50:10 basis)               (1,000)        1,200         (200)
    Final distribution                                      $29,500       $ -0-        $ 9,500

                                                             Hough,       Luck,
    Part C                                                 Loan and    Loan and Cummings,
                                                             Capital     Capital    Capital
    Beginning balances                                      $82,000     $40,000    $20,000
    $82,000 loss on disposal (allocated on a
       2:4:4 basis)                                         (16,400)     (32,800)     (32,800)
    Liquidation expenses (2:4:4 basis)                       (1,200)      (2,400)      (2,400)
    Capital balances                                        $64,400      $ 4,800     ($15,200)
    Allocation of Cummings' deficit balance
       (2:4 basis)                                           (5,067)     (10,133)      15,200
    Capital balances                                        $59,333     ($ 5,333)          -0-
    Allocation of Luck's deficit balance                     (5,333)       5,333           -0-
    Final distribution                                      $54,000        $ -0-       $ -0-




                                                   15-29
Chapter 15 - Partnerships: Termination and Liquidation


28. (continued)

    Part D
                                               Redmond,
                                               Loan and Ledbetter,      Watson,    Sandridge,
                                                Capital   Capital       Capital      Capital
    Beginning balances                        ($16,000) ($30,000)       $ 3,000     $15,000
    Allocation of Redmond's
       deficit balance (10:30:40
       basis)                                    16,000       (2,000)    (6,000)      (8,000)
    Capital balances                                 -0-    ($32,000)   ($3,000)     $ 7,000
    $32,000 contribution by
       Ledbetter and $3,000 con-
       tribution by Watson                            -0-    32,000      3,000            -0-
    Final distribution*                             $ -0-     $ -0-       $ -0-      $ 7,000

*Remaining $28,000 is used to pay liabilities.




                                                   15-30
Chapter 15 - Partnerships: Termination and Liquidation


29.     Produce a Schedule of Liquidation using a Predistribution Plan (LO1, LO5) (40 minutes)
                                                      FRICK, WILSON, AND CLARKE
                                                    Schedule of Partnership Liquidation
                                                              Final Balances
                                                                                                    Frick,           Wilson,          Clarke,
                                                                Noncash                             Capital          Capital          Capital
                                                   Cash          Assets          Liabilities        (60%)            (20%)            (20%)
Beginning balances                                  $48,000        $177,000          $35,000          $101,000         $28,000           $61,000
Distribution of $4,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan – Schedule 1
                                                      (4,000)                                                                            (4,000)
Updated balances                                     $44,000       $177,000           $35,000          $101,000          $28,000        $57,000
Noncash assets sold                                   48,000        (80,000)                            (19,200)          (6,400)        (6,400)
Updated balances                                     $92,000        $97,000           $35,000           $81,800          $21,600        $50,600
All liabilities are paid                             (35,000)                         (35,000)
Updated balances                                     $57,000         $97,000              $-0-          $81,800          $21,600        $50,600
Distribution of $48,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan – Schedule 1:
   First $23,333 (remainder of first
     distribution)                                   (23,333)                                                                           (23,333)
   Next $22,667                                      (22,667)                                           (17,000)                         (5,667)
   Next $2,000                                        (2,000)                                            (1,200)            (400)          (400)
Updated balances                                      $9,000         $97,000               $-0-         $63,600          $21,200        $21,200
Noncash assets sold                                   44,000         (97,000)                           (31,800)         (10,600)       (10,600)
Updated balances                                     $53,000             $-0-              $-0-         $31,800          $10,600        $10,600
Paid liquidation expenses                             (7,000)                                            (4,200)          (1,400)        (1,400)
Updated balances                                     $46,000             $-0-              $-0-         $27,600           $9,200         $9,200
Final distribution based on ending
  capital account balances                           (46,000)                                            (27,600)         (9,200)         (9,200)
Ending balance                                           $-0-            $-0-              $-0-              $-0-            $-0-            $-0-




                                                                      15-29
Chapter 15 - Partnerships: Termination and Liquidation


 29. (continued)

                                        Schedule 1
                              Development of Predistribution Plan

                                                               Frick,      Wilson,     Clarke,
                                                              Capital       Capital    Capital
      Beginning balances ...............................    $101,000       $28,000    $61,000
      Loss of $140,000 assumed—Schedule 2
       (allocated on a 60:20:20 basis) ...........           (84,000)      (28,000)   (28,000)
      Step One balances .................................   $ 17,000       $    -0-   $33,000
      Loss of $22,667 assumed—Schedule 3
       (allocated on a 60:20 basis) ................            (17,000)        -0-    (5,667)
      Step Two balances .................................   $        -0-   $    -0-   $27,333

      PREDISTRIBUTION PLAN

         Payment of liabilities and liquidation expenses must be assured. Next
          $27,333 goes to Clarke.
         Next $22,667 is split between Frick and Clarke on a 60:20 basis.
         Any further cash is split among Frick, Wilson, and Clarke on a 60:20:20
          basis.

                                              Schedule 2

                                                     Maximum Loss
                         Capital Balance/              That Can
      Partner            Loss Allocation              Be Absorbed
      Frick              $101,000/60%                  $168,333
      Wilson             $ 28,000/20%                  $140,000 (most vulnerable to loss)
      Clarke             $ 61,000/20%                  $305,000

                                              Schedule 3

                                                     Maximum Loss
                         Capital Balance/              That Can
      Partner            Loss Allocation              Be Absorbed
      Frick              $17,000/(60/80)                $ 22,667 (most vulnerable to loss)
      Clarke             $33,000/(20/80)               $132,000




                                                   15-30
Chapter 15 - Partnerships: Termination and Liquidation


30. Prepare a Predistribution Plan and Journal Entries for a Partnership
    Liquidation (LO2, LO5) (50 minutes)
                                                              Rodgers,
   Part A                                  Wingler,   Norris, Loan and   Guthrie,
                                            Capital   Capital   Capital   Capital
 Beginning balances ...............       $120,000   $88,000  $109,000   $60,000
 Loss of $150,000 assumed (al-
   located on a 30:10:20:40
   basis) see Schedule 1 ........           (45,000) (15,000)   (30,000)  (60,000)
 Step One balances .................      $ 75,000   $73,000   $ 79,000  $     -0-
 Loss of $150,000 assumed (al-
   located on a 30:10:20 basis)
   see Schedule 2 .....................     (75,000) (25,000)   (50,000)       -0-
 Step Two balances .................      $      -0- $48,000   $ 29,000  $     -0-
 Loss of $43,500 assumed
   (allocated on a 10:20 basis) see
   Schedule 3 ...........................        -0- (14,500)   (29,000)       -0-
 Step Three balances ...............      $      -0- $33,500   $     -0- $     -0-

  PREDISTRIBUTION PLAN

     Payment of all liabilities and liquidation expenses must be assured.
     Next $33,500 goes entirely to Norris.
     Next $43,500 is allocated to Norris (10/30) and Rodgers (20/30).
     Next $150,000 is allocated to Wingler (30/60), Norris (10/60), and Rodgers
      (20/60).
     Any further cash distributions are divided on the original profit and loss ratio:
      Wingler (30%), Norris (10%), Rodgers (20%), and Guthrie (40%).

                                               Schedule 1

                                                           Maximum Loss
                              Capital Balance/              That Can Be
             Partner          Loss Allocation                Absorbed

            Wingler             $120,000/30%                 $400,000
            Norris              $ 88,000/10%                 $880,000
            Rodgers             $109,000/20%                 $545,000
            Guthrie             $ 60,000/40%                 $150,000 (most vulnerable to loss)




                                                   15-31
Chapter 15 - Partnerships: Termination and Liquidation


 30. a. (continued)
                                              Schedule 2

                                                           Maximum Loss
                             Capital Balance/               That Can Be
             Partner         Loss Allocation                 Absorbed
             Wingler         $75,000/(30/60)                 $150,000 (most vulnerable to loss)
             Norris          $73,000/(10/60)                 $438,000
             Rodgers         $79,000/(20/60)                 $237,000

                                              Schedule 3

                                                           Maximum Loss
                             Capital Balance/               That Can Be
             Partner         Loss Allocation                 Absorbed
             Norris          $48,000/(10/30)                  $144,000
             Rodgers         $29,000/(20/30)                  $ 43,500 (most vulnerable to loss)




                                                   15-32
Chapter 15 - Partnerships: Termination and Liquidation


30. (continued)

     Part B

                Cash ........................................................................... 65,600
                  Wingler, Capital (30% of $16,400 loss) ..............                           4,920
                  Norris, Capital (10%) ...........................................               1,640
                  Rodgers, Capital (20%) .......................................                  3,280
                  Guthrie, Capital (40%) .........................................                6,560
                      Accounts Receivable .....................................                           82,000
                    Receivables are collected with losses allocated
                    to partners.

                     Cash ..................................................................... 150,000
                     Wingler, Capital (30% of $103,000 loss) ............                        30,900
                     Norris, Capital (10%) ...........................................           10,300
                     Rodgers, Capital (20%) .......................................              20,600
                     Guthrie, Capital (40%) .........................................            41,200
                        Land ...............................................................             85,000
                        Building and Equipment ..............................                           168,000
                      Land, building and equipment are sold with
                      losses allocated to partners.

                     Wingler, Capital .................................................. 31,800
                     Norris, Capital .................................................... 58,600
                     Rodgers, Loan .................................................... 35,000
                     Rodgers, Capital ................................................. 15,200
                       Cash ................................................................     140,600
                      Above entry distributes safe capital balances as
                      shown below (see predistribution plan in part A)
                      based on a current cash balance of $230,600.

           First $90,000 is held to pay liabilities ($74,000) and estimated liquidation
            expenses ($16,000).
           Next $33,500 goes entirely to Norris.
           Next $43,500 is split between Norris ($14,500) and Rodgers ($29,000).
           Remaining $63,600 is allocated to Wingler ($31,800), Norris ($10,600) and
            Rodgers ($21,200).
No journal entry is currently required by Guthrie's insolvency.
                     Liabilities .................................................           74,000
                        Cash .....................................................                        74,000
                     All liabilities are paid.




                                                       15-33
Chapter 15 - Partnerships: Termination and Liquidation


30. b. (continued)
                Cash ................................................................ 71,000
                Wingler, Capital (30% of $30,000 loss) ........                        9,000
                Norris, Capital (10%) ......................................           3,000
                Rodgers, Capital (20%) ..................................              6,000
                Guthrie, Capital (40%) ...................................            12,000
                   Inventory ...................................................               101,000
                    Inventory is sold with loss allocated to partners.

                Wingler, Capital...............................................     35,500
                Norris, Capital .................................................   11,833
                Rodgers, Capital .............................................      23,667
                    Cash ..........................................................        71,000
                 Above entry distributes available cash according to predistribution
                 plan. Although $87,000 in cash is being held, $16,000 must be
                 retained to pay liquidation expenses. The remaining $71,000 is
                 divided among Wingler, Norris, and Rodgers on a 30:10:20 basis.
                 According to the predistribution plan, a total of $150,000 must be
                 divided on this ratio but only $63,600 was allocated in this manner
                 in the first distribution above. Therefore, all $71,000 (making a total
                 of $134,600) is paid out on this 30:10:20 basis.
                Wingler, Capital (30% of expenses) ..............                     3,300
                Norris, Capital (10%) .......................................         1,100
                Rodgers, Capital (20%) ...................................            2,200
                Guthrie, Capital (40%).....................................           4,400
                    Cash ..........................................................             11,000
                  Liquidation expenses are paid.

                Wingler, Capital (30/60 of deficit) ..................        2,080
                Norris, Capital (10/60) .....................................   693
                Rodgers, Capital (20/60) .................................    1,387
                   Guthrie, Capital ........................................        4,160
                  To eliminate the deficit balance of insolvent partner as computed
                  on the next page.




                                                        15-34
Chapter 15 - Partnerships: Termination and Liquidation


30. b. (continued)
                                      CAPITAL ACCOUNT BALANCES
                                                                              Rodgers,
                                                     Wingler,        Norris, Loan and        Guthrie,
                                                       Capital       Capital   Capital        Capital
        Beginning balances.................          $120,000       $88,000 $109,000         $60,000
        Loss on accounts receivable .                   (4,920)       (1,640)   (3,280)        (6,560)
        Loss on land, building, and
          equipment .............................        (30,900)   (10,300)      (20,600)   (41,200)
        Cash distribution .....................          (31,800)   (58,600)      (50,200)         -0-
        Loss on inventory ....................            (9,000)    (3,000)       (6,000)   (12,000)
        Cash distribution .....................          (35,500)   (11,833)      (23,667)         -0-
        Liquidation expenses ..............               (3,300)    (1,100)       (2,200)     (4,400)
           Subtotal .............................          4,580      1,527         3,053      (4,160)
        Guthrie insolvent .....................           (2,080)      (693)       (1,387)      4,160
        Current balances .....................            $2,500     $ 834         $1,666     $ -0-

        Wingler, Capital .........................................................   2,500
        Norris, Capital ............................................................   834
        Rodgers, Capital ........................................................    1,666
          Cash       ...............................................................           5,000
         To distribute remaining cash based on final capital balances.




                                                    15-35
Chapter 15 - Partnerships: Termination and Liquidation


Answers to Develop Your Skills Cases

Research Case

1. Students often seem to believe that definitive answers can be discovered for
   all accounting and legal questions if a serious enough investigation is
   performed. However, here, there simply may be no easy answer to the
   question as to the amount of liability that the other six doctors in this case are
   facing.

2. Several questions can be raised that may impact the ultimate resolution:

       In what state will the court case be handled? Different states have
        somewhat different laws as to the potential liabilities incurred by partners
        and different courts seem to have varying ways of interpreting those laws.
       How difficult was the surgery that was performed? Should the doctor have
        been able to perform the work without accident? Or, perhaps, was it an
        extremely risky surgery where death might have been anticipated under any
        conditions?
       How much did the other doctors know about this doctor‘s ability to do this
        particular surgery? Did they have any reason to believe that such work
        should not be undertaken?
       What is meant in the case by the term ―very poor judgment?‖ How serious
        was the mistake made by the doctor?

The answers to such questions as these can have a huge impact on the extent of
the liability of the other doctors.

Here are several quotes from The Wall Street Journal article mentioned in the
case that might pertain to the issue at hand:

―Concerns are growing among Andersen's roughly 1,750 U.S. partners that even
those who had nothing to do with the firm's work for Enron Corp. could eventually
face personal liability stemming from the botched audit. Worried about what
protection the limited-liability partnership provides them, many are now
consulting lawyers for advice.‖

―The limited-liability partnership is a comparatively new corporate structure,
untested by the kind of stress now besetting Andersen. But that testing appears
to be just around the corner as Enron creditors, shareholders and employees
seek to recover the billions of dollars they have lost from someone.‖




                                                   15-36
Chapter 15 - Partnerships: Termination and Liquidation


―Because it is unclear how much protection the LLP structure will provide
Andersen partners, partnership and bankruptcy lawyers are expected to be
following the matter closely. ‗As far as I know, there has never been a litigation
test of the extent of the LLP shield, and there have been very few LLP cases about
liability at all,‘ said Larry Ribstein, a law professor at George Mason University.‖

―The limited-liability partnership was invented about a decade ago in the wake of
the savings-and-loan debacle to protect members of partnerships from being
wiped out by claims against their firms. Under the structure, capital invested by
partners into the firm is fair game for creditors. In theory, no partner is supposed
to lose more than what he or she has invested in the firm.‖

"‗There is a strong legal tradition that you don't pierce the corporate veil and go
after individual partners except under extraordinary circumstances,‘ said Lynn
LoPucki, a professor at the University of California Los Angeles law school. ‗But
the law is very vague and lets the courts do what they feel appropriate. It is very
case specific and fact intensive.‘‖

―In 1990, prior to the advent of limited-liability partnerships, the accounting firm of
Laventhol & Horwath filed for Chapter 11 bankruptcy-court protection, in part due
to lawsuits over questionable accounting. The firm's assets were insufficient to
cover the claims of creditors and litigants. Under a plan negotiated with the firm's
creditors, the 360 partners and former partners who had spent time at the firm
since 1984 were required to dig into their own pockets to share a $46 million
liability.‖

Analysis Case

1. In looking at the financial statements of a partnership, a number of obvious
   differences can be spotted in comparison to the statements of a corporation.
   For example, in looking at this set of statements, the following differences can
   be noted:
    The balance sheet shows ―partners‘ (deficiency) capital‖ rather than
       stockholders‘ equity.
    The income statement (statement of operations) reports ―net loss allocated
       to general partner‖ and ―net loss allocated to limited partners.‖ This
       statement also reports ―net loss per limited partnership interest‖ rather
       than earnings/loss per share.
    A ―statement of changes in partners‘ (deficiency) capital‖ is presented
       rather than a statement of changes in stockholders‘ equity.

    A potential investor in this partnership would become one of the ―limited
    partners,‖ whose aggregate capital is disclosed in the balance sheet.




                                                   15-37
Chapter 15 - Partnerships: Termination and Liquidation


2. There is a considerable amount of information provided in the notes to the
   financial statements about the unique characteristics of a limited partnership:
    Note 1 – Organization and Summary of Significant Accounting Policies
      discusses the creation and structure of this limited partnership.
    Note 2 – Investments in and Advances to Local Partnerships provides
      information about the entity‘s investment in other limited partnerships.
    Note 4 – Transactions with Affiliated Parties describes the obligation of the
      partnership to the General Partner.
    Note 5 – Income Taxes describes the manner in which individual partners
      are taxed on their share of partnership income.

In addition, in Item 5 (page 7), which precedes the financial statements,
disclosures are provided related to the market for partnership interests. Because
the partnership‘s ―shares‖ are not publicly traded, an individual investor may not
be able to sell his/her limited partner interest in the partnership.

As a limited partnership, potential investors (other than the general partner) would
probably view an investment in NTCI II as being fairly similar to that of holding
shares in a corporation. The major difference relates to the possible inability to
sell a limited partner interest in the company.

Communication Case

The bankruptcy of Laventhol & Horwath was one of the main reasons for the
creation of the limited liability partnership business structure. As a general
partnership, the litigation losses of this partnership that arose from poor
accounting and auditing practices fell on all partners and not just on those
involved. Partners were required to make contributions from their own personal
funds, often in amounts of up to several hundred thousand dollars to pay off the
debts of the partnership after its failure. A number of the partners eventually went
bankrupt as a result of the litigation that arose.

Today, the partners in a general partnership would still seem to have the same
risk that the partners of Laventhol & Horwath faced.     However, the alternatives
such as a limited liability partnership or a Subchapter S corporation would place
fewer individuals in this precarious position. Thus, more than anything else,
these articles on Laventhol & Horwath may be educational in showing why such
alternatives have been created and why they have become so popular.




                                                   15-38
Chapter 15 - Partnerships: Termination and Liquidation


Excel Case

There are a number of different ways that a spreadsheet could be created to solve
this particular problem. Here is one possible approach:

—Create Column Headings:

In Cell A1, enter label text ―Partner‖.
In Cell B1, enter label text ―Capital Balance‖.
In Cell C1, enter label text ―Share P/L‖.
In Cell D1, enter label text ―Initial Loss Share‖.
In Cell E1, enter label text ―Subsequent Loss Share‖.
In Cell F1, enter label text ―Remaining Balance‖.

—Enter Account Information for each partner:

In Cell A2, enter label text ―Wilson.‖ In Cell B2, enter Wilson‘s Capital Balance of
$200,000 and, in Cell C2, enter 40% as share of profit and loss.
In Cell A3, enter label text ―Cho.‖ In Cell B3, enter Cho‘s Capital Balance of
$180,000 and, in Cell C3, enter 20% as share of profit and loss.
In Cell A4, enter label text ―Arrington.‖ In Cell B4, enter Arrington‘s Capital
Balance of $110,000 and, in Cell C4, enter 40% as share of profit and loss.

—Enter the amounts on which to base the calculations for each partner:

In Cell A7, enter label text ―Losses during liquidation‖ and, in Cell B7, enter the
amount of $50,000.
In Cell A8, enter label text ―Final Losses‖ and, in Cell B8, enter the amount of
$100,000.

—Calculate Initial Loss Share:




                                                   15-39
Chapter 15 - Partnerships: Termination and Liquidation


Multiply the ―Losses during liquidation‖ amount by the percentage of ―Share P/L‖
for each partner. To calculate the Initial Share Loss for Wilson, create the
following formula in Cell D2: =+B7*C2. We need to also use this same general
formula for both Cho and Arrington. However, if we drag the fill handle in Cell D2
into Cell D3 and D4, the reference to Cell B7 will automatically change to B8 and
B9 respectively and the reference to Cell C2 will change to C3 and C4 respectively
in order to adjust for the new cell position. The change to C3 and C4 is correct
because those are the individual profit and loss percentages. No change, though,
should be made to the reference to B7 because that is the overall loss in question.
In order to ―hold‖ the reference to Cell B7 when it is copied, we need to create
what is known as an ―ABSOLUTE‖ reference. Absolute references, which are cell
references that always refer to cells in a specific location, can be created by
placing a $ symbol before the Column letter and/or the Row number. Thus, in Cell
D2, change the formula to read =$B$7*C2, and then copy this formula to cells D3
and D4. The resulting formula in Cell D3 will be =$B$7*C3 and in Cell D4 it will be
=$B$7*C4. The location of the reference to Cell B7 does not change due to the $
symbol in front of the B and in front of the 7.

—Calculate the Partners‘ Share of any Subsequent Losses:

Repeat the same process as above, creating a formula in Cell E2 as follows:
=+$B$8*C2
Copy this formula to Cells E3 and E4.

—Calculate the Remaining Capital Balance:

To calculate the Remaining Capital Balance, the beginning Capital Balance must
be reduced by the Initial Loss Share and Subsequent Loss Share.

In creating this last formula, it is important to note that the losses should be
added together and then subtracted in total from the beginning capital balance.
Therefore, enter the following function in Cell F2:          =+B2-(D2+E2).   The
computation inside the parenthesis is performed first and then subtracted from
the beginning capital balance (B2). Copy this formula to Cells F3 and F4 to
complete the worksheet. Note that the use of the $ is not used here because we
do want B2, D2, and E2 to adjust to the new position when copied.

Once this spreadsheet has been created, any of the variables may be changed
and the results will adjust automatically. There are eight variables that can be
changed: B2, B3, B4, B7, B8, C2, C3, and C4. C2, C3,and C4 must always add to
100%.




                                                   15-40
Chapter 15 - Partnerships: Termination and Liquidation


             Spreadsheet to Determine the Remaining Capital Balances for
                             Wilson, Cho, and Arrington

              A                  B             C             D           E           F
 1                                                         Initial
                             Capital        Share           Loss     Subsequent   Remaining
     Partner                 Balance         P/L           Share     Loss Share    Balance
 2
     Wilson                  $200,000          40%         $20,000      $40,000     $140,000
 3
     Cho                       180,000         20%          10,000       20,000      150,000
 4
     Arrington                 110,000         40%          20,000       40,000       50,000
 5
                             $490,000        100%          $50,000     $100,000     $340,000
 6
 7 Losses during
   liquidation                  50,000
 8 Final losses                100,000




                                                   15-41

				
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