Dissolution of a partnership

Chapter 16

PARTNERSHIP LIQUIDATION

Answers to Questions

1 Dissolution of a partnership terminates the partnership as a legal entity, but the partnership business may continue under a new agreement. When a partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity. Thus, a partnership may be dissolved without liquidation, but it may not be liquidated without dissolution.

2 A simple partnership liquidation is the liquidation of a solvent partnership in which all partners have equity capital and all gains and losses are realized and recognized before any distributions are made to the partners. In simple partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances.

3              The priority ranking for the distribution of assets in liquidation pursuant to the Uniform Partnership Act is
Rank I                   Amounts owed to creditors other than partners
Rank II                 Amounts owed to partners other than for capital and profits
Rank III                Amounts due to partners in respect to capital
Rank IV                Amounts owing to partners in respect to profits
Since all profits and losses and drawings balances are closed to capital before distributions are made, Ranks III and IV may be considered together.

4 The distribution of assets for capital interests (Rank III) prior to the payment of loan balances to the partners (Rank II) is not in accordance with the Uniform Partnership Act. But the partners may agree to distribute cash or other assets for capital interests before all losses on liquidation are known. With agreement among all partners, distributions to the partners would be based on each partner’s equity (combined capital and loan balances) in relation to his share of possible future losses. A partner with sufficient equity to absorb his share of possible future losses would be included in distributions, but a partner with loans to the partnership would not be included in distributions until his equity was sufficient to absorb his share of possible future losses.

5 The assumptions for determining distributions to partners prior to recognition of all gains and losses on liquidation are (1) all partners are personally bankrupt such that no partner could contribute personal assets into the partnership and (2) all noncash assets are possible losses and should be considered actual losses for purposes of determining amounts to be distributed. In addition, liquidation expenses and probable loss contingencies should be estimated and assumed to be actual losses for purposes of determining advance distributions.

6 Capital balances represent one factor in determining a partner’s equity, but loans and advances payable to and receivable from the partnership are factors that must also be considered in calculating safe payments. Partner equities, rather than capital balances, are used in safe payment schedules in order to avoid making distributions to partners that may end up with debit capital balances; i.e., owing money to the partnership.

7 Safe payment computations per se do not affect ledger account balances. Actual cash distributions based on safe payments computations do reduce partnership assets and equities and require recognition in ledger accounts.

8 A statement of partnership liquidation is a summary of transactions and balances for a partnership during its liquidation stage. Such statements provide continuous records of liquidation events. Interim liquidation statements are particularly helpful in showing the progress that has been made toward liquidation to date and in identifying remaining assets to be liquidated and liabilities to be paid. Interim liquidation statements are helpful to partners and creditors in providing a basis for current decisions as well as future planning. Liquidation statements are important legal documents for partnership liquidations that come under the jurisdiction of a court.

9 Available cash may be distributed to partners according to their profit and loss sharing ratios only when nonpartner liabilities have been satisfied and partner equities (capital and loan balances combined) are aligned with the relative profit and loss sharing ratios of the partners. In the absence of loans or advances payable to or receivables from individual partners, cash can be distributed to partners in their profit and loss sharing ratios when capital balances are in the relative profit and loss sharing ratios of the partners and all nonpartner liabilities have been paid.

10 Vulnerability ranks are an ordering of partners on the basis of the adequacy of their equities in the partnership to absorb possible partnership losses. The ordering is typically from the most vulnerable to the least vulnerable. Vulnerability ranks are used in the preparation of assumed loss absorption schedules, which, in turn, are used in the construction of cash distribution plans.

11 Partnership insolvency occurs when partnership liabilities exceed partnership assets. In this case, all available cash is distributed to partnership creditors. Individual partners will be called upon to use their personal assets to satisfy the remaining claims of the partnership creditors.

12 Partners with credit capital balances after all partnership assets have been distributed in liquidation have a claim against partners with debit capital balances. If the partners with debit balances are personally solvent, they should pay amounts equal to their debit balances into the partnership so that partners with credit balances can receive their partnership claims in full. If partners with debit capital balances are insolvent, the partners with credit balances will absorb the losses of the insolvent partners with debit capital balances in relation to their relative profit and loss sharing ratios.

SOLUTIONS TO EXERCISES

Solution E16-1

Schedule of Capital Balances

		60% Folly	40% Frill
Capital balances January 1, 2006		$40,000	$20,000
January losses: Lumber	$15,000	(9,000)	(6,000)
Receivables	4,000	(2,400)	(1,600)
Capital balances before distribution		$28,600	$12,400

	Cash distribution:
	Accounts payable	$15,000
	Folly	28,600
	Frill	12,400
	Total cash	$56,000

Solution E16-2

Sale of inventory

	Cash	$10,000
	Inventory		$10,000

To record sale of inventory items.

Distribution of cash

	Accounts payable	$ 5,000
	Cash		$ 5,000

To record payment to creditors.

Mike capital	$12,600
Nancy capital	6,200
Okey capital	25,200
Cash		$44,000

To record distribution of available cash to partners computed as follows:

	Capital		Possible Loss from
	Balance	-	Unsold Inventory	=	Balance
Mike capital	$15,000		$2,400		$12,600
Nancy capital	8,000		1,800		6,200
Okey capital	27,000		1,800		25,200
Totals	$50,000		$6,000		$44,000

Solution E16-3

	30% Terry	30% Vivian	40% Walter
January 1 balances	$85,000	$25,000	$90,000
Contingency fund of $10,000	(3,000)	(3,000)	(4,000)
Possible losses on
asset disposal ($120,000)	(36,000)	(36,000)	(48,000)
	46,000	(14,000)	38,000
Loss on Vivian’s possible
default divided 3/7 and 4/7	(6,000)	14,000	(8,000)
Available cash is distributed	40,000	0	30,000

Solution E16-4

	Creditors	50% Jan	30% Kim	20% Lee
Beginning balances	$60,000	$59,000	$29,000	$52,000
Offset Kim’s loan			(20,000)
Loss on sale of assets
($180,000 - $120,000)		(30,000)	(18,000)	(12,000)
Additional liability	5,000	(2,500)	(1,500)	(1,000)
	65,000	26,500	(10,500)	39,000
Distribute Kim’s debit
balance 5/7, 2/7		(7,500)	10,500	(3,000)
Cash distribution	$65,000	$19,000	0	$36,000

Kim owes $7,500 to Jan and $3,000 to Lee.

Solution E16-5

Schedule to Correct Capital Accounts

		Anita	Bernice	Colleen
		Capital	Capital	Capital
December 31, 2006 balance		$40,000	$35,000	$25,000
Overvalued inventory	$10,000	(5,000)	(3,000)	(2,000)
Corrected balances		$35,000	$32,000	$23,000

The capital balances are adjusted for the error in computing net income in the partners’ residual equity ratios.

Solution E16-6

Schedule to Correct Capital Accounts

		Ali	Bart	Carrie
		Capital	Capital	Capital
December 31, 2006 balance		$60,000	$25,000	$65,000
Undervalued inventory	($15,000)	6,000	3,000	6,000
Corrected balances		$66,000	$28,000	$71,000

The capital balances are adjusted for the error in computing net income in the partners’ residual equity ratios.

Solution E16-7

Evers, Freda, and Grace Partnership

Safe Payment Schedule

	.4 Evers	.4 Freda	.2 Grace	Total
Partner equities	$100,000	$250,000	$170,000	$520,000
Loss on sale of assets	(52,000)	(52,000)	(26,000)	(130,000)
	48,000	198,000	144,000	390,000
Possible lossesa	(84,000)	(84,000)	(42,000)	(210,000)
	(36,000)	114,000	102,000	180,000
Allocate Evers’ loss	36,000	(24,000)	(12,000)
	0	$ 90,000	$ 90,000	$180,000

a Remaining noncash assets of $200,000 plus contingency fund of $10,000 equals $210,000 possible losses.

Cash to distribute: Beginning cash balance of $100,000 plus $170,000 from sale of assets less $10,000 contingency fund equals $260,000.

Distribution of cash:	Accounts payable	$ 80,000
	Freda	90,000
	Grace	90,000
		$260,000

Solution E16-8

Jerry, Joan, and Jill Partnership

Statement of Partnership Liquidation

at November 30, 2006

				40%	Loan	50%	10%
		Noncash	Priority	Jerry	from	Joan	Jill
	Cash	Assets	Claims	Capital	Joan	Capital	Capital

Balances Nov. 30	$8,000	$27,000	$4,000	$10,800	$ 4,000	$13,200	$3,000

Offset receivable
from Jerry		(3,000)		(3,000)

Write-off patent		(8,000)		(3,200)		(4,000)	(800)

Balances after
adjustments	8,000	16,000	4,000	4,600	4,000	9,200	2,200

Cash distribution:
Creditors	(4,000)		(4,000)
Partners	(4,000)				(3,700)		(300)

Balances	0	$16,000	0	$ 4,600	$ 300	$ 9,200	$1,900

(This solution assumes that Joan agrees to a distribution of amounts that can be distributed safely. If she does not agree, no distribution can be made to either Joan or Jill.)

Jerry, Joan, and Jill Partnership

Safe Payments Schedule at November 30, 2006

		40%	50%	10%
	Possible	Jerry	Joan	Jill
	Losses	Equity	Equity	Equity

Partners’ equities		$ 4,600	$13,200	$ 2,200
Possible inventory losses	$16,000	(6,400)	(8,000)	(1,600)
		(1,800)	5,200	600
Allocate Jerry’s deficit		1,800	(1,500)	(300)
Safe payments to partners		0	$ 3,700	$ 300

Solution E16-9

Insolvent partnership and insolvent partner:

		Larry	Moe	Curly
	Cash	Capital	Capital	Capital

Liabilities over assets	$(20,000)
Capital balances January 1		$ 70,000	$(60,000)	$(30,000)
Loss on Moe’s insolvency		(30,000)	60,000	(30,000)
		40,000	0	(60,000)
Recovery from Curly	$ 40,000			40,000
		40,000		(20,000)
Loss on Curly’s insolvency		(20,000)		20,000
		$ 20,000		0

Larry can expect to receive $20,000 from the partnership liquidation.

Solution E16-10

Schedule for Phase-out of the Partnership

	30% Alice	40% Betty	30% Carle	Total
Capital balances	$ 20,000	$(120,000)	$ 70,000	$(30,000)
Creditors’ recovery
from Betty		30,000		30,000
	20,000	(90,000)	70,000	0
Partnership recovery
from Betty		20,000		20,000
	20,000	(70,000)	70,000	20,000
Write-off of Betty’s deficit	(35,000)	70,000	(35,000)
	(15,000)	0	35,000	20,000
Partnership recovery
from Alice	10,000			10,000
	(5,000)		35,000	30,000
Write-off of Alice’s deficit	5,000		(5,000)
	0		30,000	30,000
Cash distribution to Carle			(30,000)	(30,000)
			0	0

Solution E16-11

Daniel, Eric, and Fred Partnership

Schedule for Phaseout of Partnership

	40% Daniel	30% Eric	30% Fred
	Capital	Capital	Capital	Total
Capital balances	$10,000	$60,000	$(90,000)	$(20,000)
Fred’s payment to creditors			20,000	20,000
	10,000	60,000	(70,000)	0
Fred’s payment to the
partnershipa			40,000	40,000
	10,000	60,000	(30,000)	40,000
Write-off of Fred’s
deficit in the relative
profit sharing ratio of
Daniel and Eric 4/7:3/7	(17,143)	(12,857)	30,000
	(7,143)	47,143	0	40,000
Daniel’s payment to the
partnership for his
deficit	5,000			5,000
	(2,143)	47,143		45,000
Write off of Daniel’s
deficit to Eric	2,143	(2,143)		0
	0	45,000
Payment to Eric		(45,000)		(45,000)
		0		0

a Fred’s personal assets of $100,000 less the $40,000 owed to his personal creditors, and less the $20,000 paid to partnership creditors, equals $40,000 available for his debit capital account balance.

Solution E16-12

Ace, Ben, Cid, and Don

Statement of Partnership Liquidation

for the period June 30 to July 31, 2006

			Ace	Ben	Cid	Don
	Cash	Liabilities	Capital	Capital	Capital	Capital
Balances
June 30, 2006	$200,000	$400,000	$ 40,000	$10,000	$(170,000)	$(80,000)
July 1, 2006
Investment of Ace	200,000		200,000
	400,000	400,000	240,000	10,000	(170,000)	(80,000)
July 1, 2006
Payment of
liabilities	(400,000)	(400,000)
Balances
July 1, 2006	0	0	240,000	10,000	(170,000)	(80,000)
July 15, 2006
Investment of Cid	100,000				100,000
Investment of Don	80,000					80,000
	180,000		240,000	10,000	(70,000)	0

Loss on Cid’s			(50,000)	(20,000)	70,000
insolvency	180,000		190,000	(10,000)	0

Loss on Ben’s			(10,000)	10,000
insolvency	180,000		180,000	0
July 31, 2006
Final distribution	(180,000)		(180,000)
	0		0

() Debit capital balance or deduct.

Solution E16-13

Denver, Elsie, Fannie and George Partnership

Safe Payment Schedule

January 31, 2006

	Possible
	Losses	Denver	Elsie	Fannie	George
Partner’s equity at 1/1		$150,000	$80,000	$140,000	$78,000
January profit/loss transactions:
Inventory sale		(6,000)	(3,000)	(15,000)	(6,000)
Land sale		20,000	10,000	50,000	20,000
Partner’s equity at 1/31		$164,000	$87,000	$175,000	$92,000
Possible losses — noncash	$395,000	(79,000)	(39,500)	(197,500)	(79,000)
Possible losses — contingent	20,000	(4,000)	(2,000)	(10,000)	(4,000)
		$ 81,000	$45,500	$(32,500)	$ 9,000
Possible losses — Fannie		(13,000)	(6,500)	32,500	(13,000)
		$ 68,000	$39,000	$ 0	$(4,000)
Possible losses — George		(2,667)	(1,333)		4,000
		$ 65,333	$37,667		$ 0

Payments of $103,000 can be safely made to Denver and Elsie in the amounts shown above.

Check: Cash available	$ 523,000
Accounts payable	$(400,000)
Contingencies	(20,000)
Available to partners	$ 103,000

Solution E16-14

1 b

2 d

3 a

Supporting computations: See cash distribution plan that follows.

Vulnerability Rankings

	Partners’		Loss Absorption	Vulnerability
	Equities		Potential	Ranks
Quen	$45,000	30%	$150,000	3
Reed	$25,000	50%	50,000	1
Stac	$25,000	20%	125,000	2

Schedule of Assumed Loss Absorption

	Quen	Reed	Stac	Total
Predistribution equities	$ 45,000	$ 25,000	$ 25,000	$ 95,000
Loss to absorb Reed	(15,000)	(25,000)	(10,000)	(50,000)
	30,000	0	15,000	45,000
Loss to absorb Stac
$15,000/40%	(22,500)		(15,000)	(37,500)
Balance	$ 7,500		0	$ 7,500

Cash Distribution Plan

	Priority	Quen	Reed	Stac	Stac
	Creditors	Capital	Capital	Loan	Capital
First $50,000	100%
Next $7,500		100%
Next $37,500		60%		26.667%	13.333%
Remainder		30%	50%		20%

Solution E16-15

1 d

Answer b is correct for situations in which all partners have equity in partnership assets; in other words, credit capital balances.

2 d

3 c

The debit balance in Maris’s capital account should be charged against the loan payable to Maris.

4 d

	Possible	50% Gwen	25% Bill	25% Sissy
	Losses	Capital	Capital	Capital
Net capital balances		$40,000	$45,000	$35,000
Possible loss on inventories	$100,000	(50,000)	(25,000)	(25,000)
		(10,000)	20,000	10,000
Gwen’s debit balance 50:50		10,000	(5,000)	(5,000)
Distribution of cash after
payment of accounts payable		0	$15,000	$ 5,000

5 c

	Possible	20% Dick	40% Frank	40% Helen
	Losses	Capital	Capital	Capital
Net capital balances		$ 50,000	$220,000	$155,000
Noncash assets:
Accounts receivable	$ 60,000
Inventories	85,000
Plant assets — net	200,000
Contingency fund	5,000
	$350,000	(70,000)	(140,000)	(140,000)
		(20,000)	80,000	15,000
Allocate Dick’s possible deficit		20,000	(10,000)	(10,000)
Distribution of cash after
payment of $60,000 liabilities		0	$ 70,000	$ 5,000

6 c

	30% Unsel	30% Vance	40% Wayne
	Capital	Capital	Capital
Capital balances	$90,000	$(60,000)	$(100,000)
Wayne’s contribution			70,000
	90,000	(60,000)	(30,000)
Vance’s personal net assets		39,000
	90,000	(21,000)	(30,000)
Vance’s remaining deficit divided 3/7
to Unsel and 4/7 to Wayne	(9,000)	21,000	(12,000)
	81,000	0	(42,000)
Wayne’s remaining personal net assets
to offset his deficit capital balance			40,000
	81,000		(2,000)
Wayne’s final deficit allocated to
Unsel and uncollectible	(2,000)		2,000
Amount of Unsel’s partnership equity
that should be recoverable	$79,000		0

Solution E16-16 [AICPA adapted]

1 d

The Uniform Partnership Act ranks partnership liabilities first (Rank I) in order of recovery from partnership assets.

2 d

Partnership creditors can seek recovery in full or in part from any partner under the Uniform Partnership Act.

3 d

Compare the two situations:

Recovery from Q	Q	R	S	T
Capital balances	$15,000	$10,000	$(20,000)	$(30,000)
Q pays creditors	25,000
T’s loss is allocated	(10,000)	(10,000)	(10,000)	30,000
Capital balances	$30,000	0	$(30,000)	0
S owes Q $30,000.

Recovery from S	Q	R	S	T
Capital balances	$15,000	$10,000	$(20,000)	$(30,000)
S pays creditors			25,000
T’s loss is allocated	(10,000)	(10,000)	(10,000)	30,000
Capital balances	$ 5,000	0	$ (5,000)	0
S owes Q $5,000.

In either case, Q’s loss is $10,000 and he receives $5,000 net cash.

4 c

	40% X	25% Y	35% Z	Total
Capital balances	$30,000	$15,000	$ 5,000	$ 50,000
Loss on dissolution of
partnership business	(12,000)	(7,500)	(10,500)	(30,000)
	18,000	7,500	(5,500)	20,000

Z will contribute $5,500 to cover his deficit balance.

5 a

	Smith	Jones
	Equity	Equity
Balances	$175,000	$155,000
Loss on sale of other assets ($65,000)	(39,000)	(26,000)
	$136,000	$129,000

SOLUTIONS TO PROBLEMS

Solution P16-1

1 Journal entry to distribute available cash on January 1

	Barney capital	$25,000
	Cash		$25,000

To distribute available cash to Barney computed as follows:

Safe Payments Schedule January 1, 2006

	Possible
	Losses	Barney	Betty	Rubble
Partners’ capital
balances		$72,000	$28,000	$15,000
Allocation of possible
losses	$90,000	(30,000)	(30,000)	(30,000)
		42,000	(2,000)	(15,000)
Allocate deficits to
Barney		(17,000)	2,000	15,000
Safe payments to
Barney		$25,000	0	0

2 Journal entry to record sale of assets on February 9

Cash	$81,000
Barney capital	3,000
Betty capital	3,000
Rubble capital	3,000
Inventory		$72,000
Supplies		18,000

To record sale of inventory items and supplies and recognize gain or loss.

3 Journal entry to distribute cash on February 10

Barney capital	$44,000
Betty capital	25,000
Rubble capital	12,000
Cash		$81,000

To distribute cash to partners in final liquidation. [Amounts are equal to final capital account balances.]

Solution P16-2

Chan, Dickerson, and Grunther Partnership

Cash Distribution Plan

Vulnerability ranks

		Profit and	Loss	Vulnerability
	Equity	Loss Ratio	Absorption	Rank
Chan	$ 80,000	20%	$400,000	1
Dickerson	210,000	30	700,000	3
Grunther	205,000	50	410,000	2

Schedule of assumed loss absorption

	Chan	Dickerson	Grunther	Total
Equities	$80,000	$210,000	$205,000	$495,000
Loss to absorb Chan	(80,000)	(120,000)	(200,000)	(400,000)
	0	90,000	5,000	95,000
Loss to absorb Grunther
($5,000 5/8)		(3,000)	(5,000)	(8,000)
		$ 87,000	0	$ 87,000

Cash distribution plan

	Priority	Loan from	Chan	Dickerson	Grunther
	Creditors	Dickerson	Capital	Capital	Capital
First $90,000	100%
Second $50,000		100%
Third $37,000				100%
Fourth $8,000				3/8	5/8
Remainder			20%	30%	50%

Solution P16-3

Fred, Flint, and Wilma Partnership

Cash Distribution Plan

Vulnerability Ranking

	Partnership	Profit and	Loss Absorption	Vulnerability
	Equity	Loss Ratio	Potential	Ranking
Fred	$75,000	30%	$250,000	3
Flint	20,000	20%	100,000	1
Wilma	60,000	50%	120,000	2

Schedule of Assumed Loss Absorption

	30% Fred	20% Flint	50% Wilma	Total
Predistribution equity	$75,000	$20,000	$60,000	$155,000
Assumed loss to absorb Flint
$20,000 20%	(30,000)	(20,000)	(50,000)	(100,000)
	45,000	0	10,000	55,000
Assumed loss to absorb Wilma
$10,000 5/8	(6,000)		(10,000)	(16,000)
	$39,000		0	$ 39,000

Cash Distribution Plan

	Priority
	Creditors	30% Fred	20% Flint	50% Wilma
First $20,000	100%
Next $39,000		100%
Next $16,000		3/8		5/8
Remainder		30%	20%	50%

Solution P16-4

1	Gary, Henry, Illa, and Joseph Partnership
	Cash Predistribution Plan

Schedule of Vulnerability Ranks:

	Gary	Henry	Illa	Joseph
	Equity	Equity	Equity	Equity

Capital balance	$200,000	$320,000	$100,000	$ 110,000
Loan to Henry		(20,000)
Loan from Gary	100,000
Partner equity	$300,000	$300,000	$100,000	$ 110,000
Divided by profit
ratio	40%	30%	20%	10%

Loss absorption
potential	$750,000	$1,000,000	$500,000	$1,100,000

Vulnerability ranks	2	3	1	4

Schedule of Assumed Loss Absorption:

	Gary	Henry	Illa	Joseph
Equities	$300,000	$300,000	$100,000	$110,000
Loss to absorb Illa’s
equity	(200,000)	(150,000)	(100,000)	(50,000)
	100,000	150,000	0	60,000
Loss to absorb Gary’s
equity	(100,000)	(75,000)		(25,000)
	0	75,000		35,000
Loss to absorb Henry’s
equity		(75,000)		(25,000)
		0		$ 10,000

Cash Distribution Plan:

	Priority Liabilities	Contingency Fund	Gary	Henry	Illa	Joseph
First $100,000	100%
Next $50,000		100%
Next $10,000						100%
Next $100,000				3/4		1/4
Next $200,000			1/2	3/8		1/8
Remainder			40%	30%	20%	10%
			(Profit and loss sharing ratios)

Available cash to distribute ($200,000 + $100,000)

$300,000

	Priority	Contingency
	Liabilities	Fund	Gary	Henry	Illa	Joseph
First $100,000	$100,000
Next 50,000		$50,000
Next 10,000						$10,000
Next 100,000				75,000		25,000
Next 40,000			20,000	$15,000		5,000
Distribution to
partners			$20,000	$90,000		$40,000

Solution P16-5

Eli, Joe, and Ned, Consultants

Statement of Partnership Liquidation

for the month ended August 31, 2006

		Noncash	Accounts	Eli	20% Eli	30% Joe	50% Ned
	Cash	Assets	Payable	Loan	Capital	Capital	Capital
July 31 balances	$13,000	$47,000	$6,000	$4,000	$20,000	$15,000	$15,000
Receivables:
Collections	8,000	(8,000)
Assumption		(3,000)					(3,000)
Write-off		(1,000)			(200)	(300)	(500)
Liabilities paid	(6,000)		(6,000)
Expenses paid	(3,000)				(600)	(900)	(1,500)
Furniture:
Sold	15,000	(25,000)			(2,000)	(3,000)	(5,000)
to Joe		(4,000)				(1,000)
					(600)	(900)	(1,500)
Donated		(6,000)			(1,200)	(1,800)	(3,000)
Predistribution
balances	27,000	0	0	4,000	15,400	7,100	500
To Eli for loan	(4,000)			(4,000)
To partners	(23,000)				(15,400)	(7,100)	(500)
	0			0	0	0	0

Solution P16-6

Jones, Smith, and Tandy Partnership

Statement of Partnership Liquidation

for the liquidation period January 1, 2006 to March 31, 2006

				20%	30%	50%
		Noncash	Accounts	Jones	Smith	Tandy
	Cash	Assets	Payable	Capital	Capital	Capital
Balances	$ 15,000	$215,000	$80,000	$40,000	$60,000	$50,000
January 2006
Inventories sold	20,000	65,000*		9,000*	13,500*	22,500*
Receivables collections	14,000	14,000*
Predistribution balance	49,000	136,000	80,000	31,000	46,500	27,500
Cash distribution to
creditors	40,000*		40,000*

Balances January 31	9,000	136,000	40,000	31,000	46,500	27,500
February 2006
Land sold	60,000	40,000*		4,000	6,000	10,000
Land and buildings sold	40,000	70,000*		6,000*	9,000*	15,000*
Receivables collections	3,000	6,000*		600*	900*	1,500*
Balances February 28	112,000	20,000	40,000	28,400	42,600	21,000
March 2006
Write-off of furniture
and fixtures		20,000*		4,000*	6,000*	10,000*
Predistribution balance	112,000	0	40,000	24,400	36,600	11,000
Cash distribution:
Creditors	40,000*		40,000*
Partners	72,000*			24,400*	36,600*	11,000*
Balances March 31	0		0	0	0	0

Solution P16-7

1 Cash distribution plan for Link, Mack, and Nell partnership

Vulnerability ranks

					Profit	Loss
	Capital		Loan	Equity in	and Loss	Absorption	Vulnerability
	Balances		Balances	Partnership	Ratio	Potential	Ranking

Link	$40,000	+	$15,000	$55,000	50%	$110,000	3
Mack	20,000	-	8,000	12,000	30	40,000	1
Nell	20,000			20,000	20	100,000	2
	$80,000		$ 7,000	$87,000

Schedule of assumed loss absorption

	Link	Mack	Nell	Total
Predistribution equities	$55,000	$12,000	$20,000	$87,000
Assumed loss to absorb Mack’s
equity 50/30/20	20,000	12,000	8,000	40,000
	35,000	0	12,000	47,000
Assumed loss to absorb Nell’s
equity 50/20	30,000		12,000	42,000
	$ 5,000		0	$ 5,000

Cash distribution plan

	Priority
	Creditors	Link	Mack	Nell
First $55,000	100%
Next $5,000		100%
Next $42,000		5/7		2/7
Remainder		50%	30%	20%

2 Cash of $25,000 is realized from inventories and receivables with a $45,000 book value

	Cash balance December 31, 2006	$47,000
	Realized during 2007	25,000
		72,000
	Less: Amount reserved for contingencies	(10,000)
	Cash available for distribution	$62,000

Link, Mack, and Nell Partnership

Schedule of January 2007 Cash Distribution

	Cash	Priority
	Available	Creditors	Link	Mack	Nell	Total

Cash to be distributed	$62,000

Payments to creditors	(55,000)	$55,000				$55,000

Remainder	7,000

To Link (for loan
balance)	(5,000)		$5,000			5,000

Remainder	2,000

To Link (5/7) and
Nell (2/7)	(2,000)		1,429		$ 571	2,000

Cash distribution	0	$55,000	$6,429	0	$ 571	$62,000

Solution P16-8

Jason, Kelly, and Becky Partnership

Statement of Partnership Liquidation

for the period January 1, 2006 through February 28, 2006

					50%	30%	20%
		Noncash	Priority	Becky	Jason	Kelly	Becky
	Cash	Assets	Liabilities	Loan	Capital	Capital	Capital
Balances January 1	$ 16,500	$163,500	$21,000	$9,500	$69,000	$47,000	$33,500
Offset loan to Jason		14,000*			14,000*
Collection of
receivables	25,000	28,000*			1,500*	900*	600*
Liquidation expenses	2,000*				1,000*	600*	400*
Predistribution
balances	39,500	121,500	21,000	9,500	52,500	45,500	32,500
Cash distribution:
Creditors	21,000*		21,000*
Partners —
Schedule A	13,500*			9,500*		1,100*	2,900*
Balances January 31	5,000	121,500	0	0	52,500	44,400	29,600
Liability discovered			3,000		1,500*	900*	600*
Liquidation expenses	2,000*				1,000*	600*	400*
Sale of remaining
assets	108,000	121,500*			6,750*	4,050*	2,700*
Predistribution
balances	111,000	0	3,000	0	43,250	38,850	25,900
Cash distribution:
Creditors	3,000		3,000*
Partners — Schedule B	108,000*				$43,250	38,850*	25,900*
Balances February 28	0				0	0	0

Schedule A

		50%	30%	20%
	Possible	Jason	Kelly	Becky
	Losses	Equity	Equity	Equity
Partners’ equity January 31		$52,500	$45,500	$42,000
Allocate possible losses	$126,500	(63,250)	(37,950)	(25,300)
		(10,750)	7,550	16,700
Allocate Jason’s deficit		10,750	(6,450)	(4,300)
Safe payments to partners
January 31		0	$ 1,100	$12,400

Schedule B

Partners’ equity February 28	$43,250	$38,850	$25,900
Safe payments to partners February 28	$43,250	$38,850	$25,900

Source: http://www.sba.oakland.edu/faculty/bazaz/acc401/beams9esm_ch16.doc

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