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. Legally, any deficit 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 properties 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.

V. Marshaling of assets
A. To provide an equitable system for distributing assets during liquidation, the Uniform
Partnership Act states that claims against an insolvent partner shall be ranked as
follows:
1. Claims by separate creditors
2. Claims by partnership creditors
3. Claims by partners
B. This priority listing is referred to as the marshaling of assets doctrine.
C. The Uniform Partnership Act also provides that an individual partner's own creditors may
seek recovery of losses directly from the partnership
1. Payment of all partnership debts must be assured before any distribution to an
individual partners' creditors.
2. Payment of personal debts cannot exceed the capital balance of the specific
partner.
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.
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.

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. Discuss the roles played by the accountant in the termination and liquidation of a
partnership.
2. Produce journal entries to record the transactions incurred in the liquidation of a
partnership.
3. Prepare a schedule of liquidation.
4. Determine the appropriate distribution of any cash that remains at the end of a liquidation
when one or more of the partners has a deficit capital balance.
5. Explain the meaning of the term "safe capital balance."
6. Discuss marshaling of assets and explain how this doctrine is applied in distributing the
assets of an insolvent partnership.
7. Prepare a proposed schedule of liquidation to determine an equitable preliminary
distribution of available partnership assets.
8. Develop a predistribution plan and explain the advantages of such a plan over a proposed
schedule of 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 provefor legal reasonsthat 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.

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.

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. The marshaling of assets doctrine is a provision within the Uniform Partnership Act that
indicates the priority of claims when a partner becomes personally insolvent. By providing a
ranking of these claims, an orderly and fair distribution of available property can be made.
The marshaling of assets provision states:
Where a partner has become bankrupt or his estate is insolvent, the claims against his
separate property shall rank in the following order:
(I) Those owing to separate creditors,
(II) Those owing to partnership creditors,
(III) Those owing to partners by way of contributions.
9. A partner's personal creditors do have a limited claim against partnership assets. Recovery
is possible but only if payment of all partnership debts is assured and the insolvent partner
has a positive capital balance.
10. 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 partners loan balance is usually merged with that
partners 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.

11. 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.
12. 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.

Answers to Problems
1. C
2. A
3. D
4. B
5. B
Reported balances
Potential loss from
Cassidy deficit
(split 5/8:3/8)
Cash distributions

Angela, Capital

Woodrow, Capital

Cassidy, Capital

$19,000

$18,000

$(12,000)

(7,500)
$11,500

(4,500)
$13,500

12,000
-0-

6. B
Bell
Reported balances
$50,000
Loss on sale of assets ($110,000)
split on a 4:3:2:1 basis
(44,000)
Adjusted balances
$ 6,000
Potential loss from Dennard
deficit (split 4:3:1)
(4,000)
Minimum cash distributions
$2,000

Hardy
$56,000

Dennard
$14,000

Suddath
$80,000

(33,000)
$23,000

(22,000)
$(8,000)

(11,000)
$69,000

(3,000)
$20,000

8,000
$ -0-

(1,000)
$68,000

7. A
8. A
Reported balances .....................................
Loss on sale of assets ($22,000) split
on a 4:3:3 basis ........................................
Adjusted balances .....................................
Anticipated liquidation expenses ($12,000)
split on a 4:3:3 basis ...............................
Anticipated maximum loss on inventory
($31,000) split on a 4:3:3 basis ...............
Potential balances .....................................
Potential loss from Art deficit (split 3:3) .
Current cash distribution ..........................

Art
$18,000

Raymond
$25,000

Darby
$26,000

(8,800)
$ 9,200

(6,600)
$18,400

(6,600)
$19,400

(4,800)

(3,600)

(3,600)

(12,400)
$(8,000)
8,000
$ -0-

(9,300)
$ 5,500
(4,000)
$ 1,500

(9,300)
$ 6,500
(4,000)
$ 2,500

9. D 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
$100,000

B
$120,000

Reported balances
Anticipated loss ($370,000) split on
a 2:3:5 basis
(74,000)
Potential balances
$ 26,000
Potential loss from C's deficit (split 2:3)
(2,000)
Current cash distribution
$ 24,000

(111,000)
$ 9,000
(3,000)
$ 6,000

C
$180,000
(185,000)
$ (5,000)
5,000
$
-0-

10. C A predistribution plan should be created.

Maximum Losses That Can Be Absorbed
Kevin
Michael
Brendan
Jonathan

$59,000/40%
$39,000/30%
$34,000/10%
$34,000/20%

$147,500
130,000
340,000
170,000

(most vulnerable to losses)

The assumption is made that a $130,000 loss occurs.

Kevin
Reported balances ..........................$59,000
Assumed loss ($130,000) split on
a 4:3:1:2 basis .............................(52,000)
Adjusted balances ............................$ 7,000

Michael Brendan
$39,000
$34,000
(39,000)
$
-0-

Jonathan
$34,000

(13,000)
$21,000

(26,000)
$ 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
Reported balances .......................................$7,000
Assumed loss ($12,250) split on a
4:1:2 basis ................................................(7,000)
Adjusted balances
$ -0-

Brendan
$21,000

Jonathan
$8,000

(1,750)
$19,250

(3,500)
$4,500

Maximum Losses That Can Now Be Absorbed

Brendan
Jonathan

$19,250/1/3
$4,500/2/3

$57,750
6,750

(most vulnerable to losses)

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

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
$ -011. C To work this problem, a predistribution schedule is necessary. That
schedule, which is computed 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)

Beginning balances
Assumed loss of $90,000 (see
Schedule 1)(4:3:2:1)
Step one balances
Assumed loss of $42,000 (see
Schedule 2) (allocated on
a 4:0:2:1 basis)
Step two balances
Assumed loss of $15,000 (see
Schedule 3) (allocated on a
0:0:2:1 basis)
Step three balances

Carney
Pierce
$60,000 $27,000

Menton
$43,000

(36,000) (27,000)
$24,000
$ -0-

(18,000)
(9,000)
$25,000 $11,000

(24,000)
$ -0-

$ - 0$ -0-

(12,000)
$13,000

(6,000)
$ 5,000

- 0$ - 0-

(10,000)
$ 3,000

(5,000)
$ - 0-

- 0$ - 0-

Hoehn
$20,000

Partner
Carney
Pierce
Menton
Hoehn

Schedule 1
Maximum Loss
Capital Balance/
That Can
Loss Allocation
Be Absorbed
$60,000/40%
$150,000
$27,000/30%
$ 90,000 (most vulnerable)
$43,000/20%
$215,000
$20,000/10%
$200,000

Partner
Carney
Menton
Hoehn

Schedule 2
Maximum Loss
Capital Balance/
That Can
Loss Allocation
Be Absorbed
$24,000/(4/7)
$ 42,000 (most vulnerable)
$25,000/(2/7)
$ 87,500
$11,000/(1/7)
$ 77,000

Partner
Menton
Hoehn

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

12. C 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, the two deficits 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 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.
13. (8 Minutes) (Payment of safe capital balances)
$6,800 to Cleveland and $1,200 to Pierce
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
Reported balances ..............................
$170,000
Anticipated loss ($342,000) split
on a 5:3:2 basis ..............................
(171,000)
Potential balances ...............................
$ (1,000)
Potential loss from Nixon's deficit (split 3:2) 1,000
Current cash distribution ...................
$
-0-

Cleveland

Pierce

$110,000

$70,000

(102,600)
$ 7,400
(600)
$6,800

(68,400)
$ 1,600
(400)
$ 1,200

14. (20 Minutes) (Final settlement of a partnership being liquidated)

Part a.

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

Reported balances ......................................

Loss on sale of land ($10,000) split
on a 4:3:3 basis.......................................
Cash distribution .........................................
Part b.

Brown
$25,000

Fish
$15,000

Stone
$5,000

(4,000)
$21,000

(3,000)
$12,000

(3,000)
$2,000

Fish
$15,000

Stone
$5,000

Brown gets $16,429 and Fish gets $8,571

Brown
Reported balances ......................................
$25,000
Loss on sale of land ($20,000) split on
a 4:3:3 basis............................................
(8,000)
Adjusted balances .......................................
$17,000
Potential loss from Stone's deficit (split 4:3)
(571)
Cash distribution .........................................
$16,429
Part c.

(6,000)
$ 9,000
(429)
$ 8,571

(6,000)
$(1,000)
1,000
$
-0-

Brown gets $10,714 and Fish gets $4,286

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

Fish
$15,000
(9,000)
$ 6,000
(1,714)
$ 4,286

Stone
$5,000
(9,000)
$(4,000)
4,000
$
-0-

15. (10 Minutes) (Distribution made of contribution made by partner with deficit
balance)
The entire $20,000 goes to Atkinson.
Atkinson
Reported balances
Capital contribution
Adjusted balances
Potential loss from Dennsmore
and Rasputin ($60,000) split
on a 4:3 basis
Adjusted balances
Potential loss from Kaporale
($5,714)
Cash distribution

Kaporale Dennsmore

$60,000
-0$60,000

$20,000
-0$20,000

$(30,000)
-0$(30,000)

(34,286)
$25,714

(25,714)
$(5,714)

30,000
$
-0-

5,714
-0-

-0$ -0-

(5,714)
$20,000

Rasputin
$(50,000)
20,000
$(30,000)

30,000
-0-0$ -0-

16. (8 Minutes) (Determine safe capital balances)

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

Ball
$28,000

Eaton
$20,000

Lake
$22,000

(25,500)

(17,000)

(17,000)

(1,500)
$ 1,000

(1,000)
$ 2,000

(1,000)
$ 4,000

(857)
143

(571)
$ 1,429

(572)
$ 3,428

Saunders,
Capital

Ferris,
Loan &
Capital

200,000
(38,400)

230,000
(38,400)

17. (15 Minutes) (Prepare a proposed schedule of liquidation)

HARDWICK, SAUNDERS, AND FERRIS

Proposed Schedule of Liquidation
Other
Assets

Hardwick,
Accounts Loan and
Payable
Capital

Cash
Beginning
balances
90,000 820,000
210,000
270,000
Sold assets
200,000 (328,000)
(51,200)
Assumed: loss
on remaining
assets
(492,000)
(196,800)
Paid liabilities (210,000)
(210,000)
Safe balances
80,000
0
0
22,000

(147,600) (147,600)
14,000

44,000

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

$44,000 to Ferris.

18. (7 Minutes) (Amount of cash needed to assure payments to all partners)

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.
19. (5 Minutes) (Determine safe capital balances)
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.
20. (10 Minutes) (Determine amount to be contributed by partner with a deficit
balance)
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
Black
Green
Brown

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

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

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

21. (50 Minutes) (Compute effects of a liquidation under a variety of

circumstances)
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
-0Dobbs
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
Adams
Baker
Carvil
Dobbs

Share of Loss
New Capital Balance
2/10 x $250,000 = $50,000
$ 30,000
2/10 x $250,000 = $50,000
$(20,000)
3/10 x $250,000 = $75,000
$(15,000)
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
Dobbs

2/5 x $35,000 = $14,000

3/5 x $35,000 = $21,000

$ 16,000
$ (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
Adams
Baker
Carvil
Dobbs

Share of Loss
10% x $50,000 = $5,000
30% x $50,000 = $15,000
30% x $50,000 = $15,000
30% x $50,000 = $15,000

New Capital Balance

$ 75,000
$ 15,000
$ 45,000
$ 75,000

21. c. (continued)
Maximum potential loss of $130,000 on the land would be allocated as follows:
Partner

Share of Loss

Adams
Baker
Carvil
Dobbs

10% x $130,000 = $13,000

30% x $130,000 = $39,000
30% x $130,000 = $39,000
30% x $130,000 = $39,000

New Capital Balance

$ 62,000
$ (24,000)
$ 6,000
$ 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
Carvil
Dobbs

1/7 x $24,000 = $3,428

3/7 x $24,000 = $10,286
3/7 x $24,000 = $10,286

$ 58,572
$ (4,286)
$ 25,714

Maximum potential loss of $4,286 to be absorbed from Carvil would be

allocated as follows on a 1:3 basis:
Adams
Dobbs

1/4 x $4,286 = $1,072

3/4 x $4,286 = $3,214

$57,500
$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
Beginning balances
$ 80,000
Assumed loss of $100,000 (see
Schedule 1) (1:3:4:2)
(10,000)
Step One balances
$ 70,000
Assumed loss of $35,000 (see
Schedule 2) (allocated on a
1:0:4:2 basis)
(5,000)
Step Two balances
$ 65,000
Assumed loss of $90,000 (see
Schedule 3) (allocated on a
1:0:0:2 basis)
(30,000)
Step Three balances
$ 35,000

Baker
$ 30,000
$

(30,000)
-0-

Carvil
$ 60,000

Dobbs
$ 90,000

(40,000)
$ 20,000

(20,000)
$ 70,000

(20,000)
-0-

(10,000)
$ 60,000

- 0-0-

- 0- 0-

- 0- 0-

(60,000)
$
- 0-

21. 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
Partner
Adams
Baker
Carvil
Dobbs

Capital Balance/
Loss Allocation
$80,000/10%
$30,000/30%
$60,000/40%
$90,000/20%

Schedule 2
Partner
Adams
Carvil
Dobbs

Capital Balance/
Loss Allocation
$70,000/(1/7)
$20,000/(4/7)
$70,000/(2/7)

Schedule 3
Partner
Adams
Dobbs

Capital Balance/
Loss Allocation
$65,000/(1/3)
$60,000/(2/3)

Maximum Loss
That Can
Be Absorbed
$800,000
$100,000 (most vulnerable)
$150,000
$450,000
Maximum Loss
That Can
Be Absorbed
$490,000
$ 35,000 (most vulnerable)
$245,000
Maximum Loss
That Can
Be Absorbed
$195,000
$ 90,000 (most vulnerable)

22. (30 Minutes) (Prepare a predistributlon plan)

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
$
-0Assumed loss of $31,250 (see
Schedule 3) (allocated on a
0:3:2:0 basis)
-0(18,750)
(12,500)
-0Step Three balances
$
-0$
-0$ 35,000
$
-0PREDISTRIBUTION 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
Partner
Larson
Norris
Spencer
Harrison

Capital Balance/
Loss Allocation
$15,000/20%
$60,000/30%
$75,000/20%
$41,250/30%
Schedule 2

Partner
Norris
Spencer
Harrison

Partner
Norris
Spencer

Capital Balance/
Loss Allocation
$37,500/(3/8)
$60,000/(2/8)
$18,750/(3/8)
Schedule 3
Capital Balance/
Loss Allocation
$18,750/(3/5)
$47,500/(2/5)

Maximum Loss
That Can
Be Absorbed
$ 75,000 (most vulnerable)
$200,000
$375,000
$137,500
Maximum Loss
That Can
Be Absorbed
$100,000
$240,000
$ 50,000 (most vulnerable)
Maximum Loss
That Can
Be Absorbed
$ 31,250 (most vulnerable)
$118,750

23. (20 Minutes) (Prepare and use a predistribution plan)

Part a.
Maximum Losses That Can Be Absorbed
Able*
Moon
Yerkl

$50,000/.2
$60,000/.3
$50,000/.5

$250,000
200,000
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
Reported balances
$50,000
Assumed loss ($100,000) split on a 2:3:5 basis (20,000)
Adjusted balances
$30,000

Moon
$60,000
(30,000)
$30,000

Yerkl
$50,000
(50,000)
$
0

Maximum Losses That Can Now Be Absorbed

Able
Moon

$30,000/.4
$30,000/.6

$75,000
50,000 (most vulnerable to losses)

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

Reported balances
Assumed loss ($50,000) split on a 2:3 basis
Adjusted balances

Able
$30,000
(20,000)
$10,000

Moon
$30,000
(30,000)
$
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%).
24. (25 Minutes) (Produce a predistribution plan for a partnership liquidation)

Maximum Losses That Can Be Absorbed

Simpson
Hart
Bobb
Reidl

$18,000/20%
$40,000/40%
$48,000/20%
$135,000/20%

$ 90,000 (most vulnerable to losses)

100,000
240,000
675,000

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

Simpson
Reported balances
$18,000
Assumed loss ($90,000) split
on a 2:4:2:2 basis
(18,000)
Adjusted balances
$
0

Hart
$40,000

Bobb
$48,000

Reidl
$135,000

(36,000)
$ 4,000

(18,000)
$30,000

(18,000)
$117,000

Maximum Losses That Can Now Be Absorbed

Hart
Bobb
Reidl

$4,000/4/8
$30,000/2/8
$117,000/2/8

$ 8,000 (most vulnerable to losses)

120,000
468,000

The assumption is made that an $8,000 loss occurs.

Hart
Reported balances
$4,000
Assumed loss ($8,000) split on a 4:2:2 basis (4,000)
Adjusted balances
$
0

Bobb
$30,000
(2,000)
$28,000

Reidl
$117,000
(2,000)
$115,000

Maximum Losses That Can Now Be Absorbed

Bobb
Reidl

$28,000/2/4
$115,000/2/4

56,000 (most vulnerable to losses)

230,000

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

Reported balances
Assumed loss ($56,000) split on a 2:2 basis
Adjusted balances

Bobb
$28,000
(28,000)
$
0

Reidl
$115,000
(28,000)
$ 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.

25. (30 Minutes) (Determine the ramifications of a variety of liquidation situations)

Part A.
(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.
Part B.
(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
Sampson
Carton

$15,000
$ 3,667
$ 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)].

25. (continued)
(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.
26. (25 Minutes) (Prepare journal entries for a partnership liquidation)
JOURNAL ENTRIES
a. Cash .............................................................................
March, Capital (2/6 of loss) .......................................
April, Capital (3/6) .......................................................
May, Capital (1/6) ........................................................
Inventory ................................................................

56,000
6,000
9,000
3,000
74,000

b. March, Capital (2/6 of expenses) ..............................

April, Capital (3/6) .......................................................
May, Capital (1/6) ........................................................
Cash .......................................................................

2,500
3,750
1,250

c. Liabilities .....................................................................
Cash .......................................................................

40,000

d. Cash .............................................................................
Accounts Receivable ............................................

45,000

e.
Partner
March
April
May

Current Capital
Adjusted
$16,500
$62,250
$41,750

7,500
40,000
45,000

Share of
Potential
Maximum Loss*
Capital
2/6 x $77,000 = $25,667 $ (9,167)
3/6 x $77,000 = $38,500
$23,750
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:
Partner
April
May

Potential Capital
(above)
$23,750
$28,917

Share of
March's Deficit
3/4 x $9,167 = $6,875
1/4 x $9,167 = $2,292

Potential
Capital
$16,875
$26,625

26. (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%) ..................................................................
March, Capital (2/6 of loss) .......................................
April, Capital (3/6)........................................................
May, Capital (1/6).........................................................
Accounts Receivable ............................................

11,700
9,100
13,650
4,550

g. Cash ............................................................................
March, Capital (2/6 of loss) .......................................
April, Capital (3/6) .......................................................
May, Capital (1/6) ........................................................
Land, Building and Equipment ............................

17,000
7,000
10,500
3,500

h. Liabilities .....................................................................
Cash .......................................................................

21,000

39,000

38,000
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 .............................................................
April, Capital ...............................................................
May, Capital .................................................................
Cash .......................................................................

400
21,225
7,075
28,700

27. (30 Minutes) (Determine liquidation proceeds necessary to give partner a

specified amount)
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:
Beginning capital
Assumed loss of $120,000 (see
Schedule 1) (5:3:1:1)
Step One balances
Assumed loss of $70,000 (see
Schedule 2) (allocated on a
0:3:1:1 basis)
Step Two balances
Assumed loss of $8,000 (see
Schedule 3) (allocated on a
0:0:1:1 basis)
Step Three balances

W
X
$ 60,000 $ 78,000
$

(60,000) (36,000)
-0- $ 42,000

- 0- 0-

(42,000)
$
- 0-

- 0- 0-

- 0- 0-

Y
$ 40,000

Z
$ 30,000

(12,000)
$ 28,000

(12,000)
$ 18,000

(14,000)
$ 14,000

(14,000)
$ 4,000

(4,000)
$ 10,000

(4,000)
- 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.

27. (continued)
Schedule 1
Partner
W
X
Y
Z

Capital Balance/
Loss Allocation
$60,000/50%
$78,000/30%
$40,000/10%
$30,000/10%

Maximum Loss to
Be Absorbed
$120,000 (most vulnerable)
$260,000
$400,000
$300,000

Capital Balance/
Loss Allocation
$42,000/(3/5)
$28,000/(1/5)
$18,000/(1/5)

Maximum Loss to
Be Absorbed
$ 70,000 (most vulnerable)
$140,000
$ 90,000

Capital Balance/
Loss Allocation
$14,000/(1/2)
$ 4,000/(1/2)

Maximum Loss to
Be Absorbed
$ 28,000
$ 8,000 (most vulnerable)

Schedule 2
Partner
X
Y
Z
Schedule 3
Partner
Y
Z

28. (35 Minutes) (Determine monthly safe capital payments)

VAN, BAKEL, AND COX PARTNERSHIP
Safe Installment Payments to Partners
January 31, 2009
Profit and loss ratio

Total
100%

Preliquidation capital balances $282,000

Add (deduct) loans
(10,000)
272,000
January losses (Schedule 1)
(28,000)
Equity of partnership
January 31, 2009
244,000
Potential losses (Schedule 1)
(199,000)
45,000
Potential lossVan's deficit balance
(Bakel 3/5; Cox 2/5)
-0Safe payments to partners
$45,000

Van
50%

Bakel
30%

Cox
20%

$118,000
(30,000)
88,000
(14,000)

$ 90,000
20,000
110,000
(8,400)

$74,000
-074,000
(5,600)

74,000
(99,500)
(25,500)

101,600
(59,700)
41,900

68,400
(39,800)
28,600

25,500
$ -0-

(15,300)
$ 26,600

(10,200)
$18,400

Schedule 1
Computation of Actual and Potential Liquidation Losses
January 2009
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

28. (continued)
VAN, BAKEL, AND COX PARTNERSHIP
Safe Installment Payments to Partners
February 28, 2009
Total
Equity of partnership
January 31, 2009 (above) .. $244,000
Safe payments (above) ...........
(45,000)
February liquidation expenses
(3,000)
Equity of partnership
February 28, 2009 ..............
196,000
Potential liabilities and expenses (6,000)
Potential loss on machinery and
equipment .......................... (189,000)
1,000
Potential lossVan's deficit balance
(Bakel 3/5; Cox 2/5) ...........
- 0Safe payments to partners .....
$ 1,000

Van

Bakel

Cox

$74,000
-0(1,500)

$101,600
(26,600)
(900)

$68,400
(18,400)
(600)

72,500
(3,000)

74,100
(1,800)

49,400
(1,200)

(94,500)
(25,000)

(56,700)
15,600

(37,800)
10,400

25,000
$ -0-

(15,000)
$ 600

(10,000)
$ 400

VAN, BAKEL, AND COX PARTNERSHIP

Safe Installment Payments to Partners
March 31, 2009
Total
Equity of partnership
February 28, 2009 (above)... $196,000
Safe payments (above)..............
(1,000)
Loss on sale of machinery and
equipment ($189,000 $146,000) (43,000)
Liquidation expenses
(5,000)
Safe payments to partners
$147,000

Van

Bakel

Cox

$72,500
-0-

$74,100
(600)

$49,400
(400)

(21,500)
(2,500)
$48,500

(12,900)
(1,500)
$59,100

(8,600)
(1,000)
$39,400

29. (35 Minutes) (Determine cash distributions for four different partnership
liquidations)
Part A
Beginning balances
Contribution by Jackson
Capital balances
Elimination of Jackson's deficit
(40:20 basis)
Final distribution

Part B
Beginning balances
$82,000 loss on disposal (allocated on a
50:40:10 basis)
Liquidation expenses (50:40:10 basis)
Capital balances
Allocation of Luck's deficit (50:10 basis)
Final distribution

Part C
Beginning balances
$82,000 loss on disposal (allocated on a
2:4:4 basis)
Liquidation expenses (2:4:4 basis)
Capital balances
Allocation of Cummings' deficit balance
(2:4 basis)
Capital balances
Allocation of Luck's deficit balance
Final distribution

Simon,
Capital
$16,000
- 0$16,000
(6,000)
$10,000
Hough,
Loan and
Capital
$82,000
(41,000)
(10,500)
30,500
(1,000)
$29,500
Hough,
Loan and
Capital
$82,000

Haynes,
Loan and
Capital
$ 4,000
- 0$ 4,000
(3,000)
$ 1,000

Jackson,
Capital
($12,000)
3,000
($ 9,000)
$

9,000
- 0-

Luck,
Loan and Cummings,
Capital
Capital
$40,000
$20,000
(32,800)
(8,400)
(1,200)
1,200
$ - 0-

(8,200)
(2,100)
9,700
(200)
$ 9,500

Luck,
Loan and Cummings,
Capital
Capital
$40,000
$20,000

(16,400)
(1,200)
$64,400

(32,800)
(2,400)
$ 4,800

(32,800)
(2,400)
($15,200)

(5,067)
$59,333
(5,333)
$54,000

(10,133)
($ 5,333)
5,333
$ - 0-

15,200
-0- 0$ - 0-

29. (continued)
Part D

Beginning balances
Allocation of Redmond's
deficit balance (10:30:40
basis)
Capital balances
$32,000 contribution by
Ledbetter and $3,000 contribution by Watson
Final distribution*

Redmond,
Loan and Ledbetter,
Capital
Capital

Watson,
Capital

Sandridge,
Capital

($16,000) ($30,000)

$ 3,000

$15,000

(2,000)
($32,000)

(6,000)
($3,000)

(8,000)
$ 7,000

32,000
$ - 0-

3,000
$ - 0-

- 0$ 7,000

16,000
-0- 0$ - 0-

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

30. (40 Minutes) (Produce a schedule of liquidation)

FRICK, WILSON, AND CLARKE
Schedule of Partnership Liquidation
Final Balances

Beginning balances

Cash
$48,000

Noncash
Assets
$177,000

Liabilities
$35,000

Frick,
Capital
(60%)
$101,000

Wilson,
Capital
(20%)
$28,000

Clarke,
Capital
(20%)
$61,000

Distribution of $4,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan Schedule 1

Updated balances
Noncash assets sold
Updated balances
All liabilities are paid
Updated balances

(4,000)
$44,000
48,000
$92,000
(35,000)
$57,000

$177,000
(80,000)
$97,000
$97,000

$35,000
$35,000
(35,000)
$-0-

$101,000
(19,200)
$81,800

$28,000
(6,400)
$21,600

(4,000)
$57,000
(6,400)
$50,600

$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)
Next $22,667
Next $2,000
Updated balances
Noncash assets sold
Updated balances
Paid liquidation expenses
Updated balances
Final distribution based on ending
capital account balances
Ending balance

(23,333)
(22,667)
(2,000)
$9,000
44,000
$53,000
(7,000)
$46,000
(46,000)
$-0-

$97,000
(97,000)

$-0-

(17,000)
(1,200)
$63,600
(31,800)

(400)
$21,200
(10,600)

(23,333)
(5,667)
(400)
$21,200
(10,600)

$10,600
(1,400)
$9,200

$10,600
(1,400)
$9,200

(9,200)
$-0-

(9,200)
$-0-

$-0-

$-0-

$-0-

$-0-

$31,800
(4,200)
$27,600

$-0-

$-0-

(27,600)
$-0-

30. (continued)
Schedule 1
Development of Predistribution Schedule

Beginning balances ................................

Loss of $140,000 assumedSchedule 2
(allocated on a 60:20:20 basis) ...........
Step One balances ..................................
Loss of $22,667 assumedSchedule 3
(allocated on a 60:20 basis) ................
Step Two balances ..................................

Frick,
Capital
$101,000

Wilson,
Capital
$28,000

Clarke,
Capital
$61,000

(84,000)
$ 17,000

(28,000)
$
-0-

(28,000)
$33,000

(17,000)
- 0-

- 0- 0-

(5,667)
$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

Partner
Frick
Wilson
Clarke

Capital Balance/
Loss Allocation
$101,000/60%
$ 28,000/20%
$ 61,000/20%

Maximum Loss
That Can
Be Absorbed
$168,333
$140,000 (most vulnerable to loss)
$305,000

Schedule 3

Partner
Frick
Clarke

Capital Balance/
Loss Allocation
$17,000/(60/80)
$33,000/(20/80)

Maximum Loss
That Can
Be Absorbed
$ 22,667 (most vulnerable to loss)
$132,000

31. (50 Minutes) (Produce a predistribution plan and journal entries for a
partnership liquidation)
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 (allocated 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
$
-0Loss of $150,000 assumed (allocated on a 30:10:20 basis)
see Schedule 2 .....................
(75,000)
(25,000)
(50,000)
-0Step Two balances ..................
$
-0$48,000
$ 29,000
$
-0Loss of $43,500 assumed
(allocated on a 10:20 basis) see
Schedule 3 ...........................
-0(14,500)
(29,000)
-0Step Three balances ...............
$
-0$33,500
$
-0$
-0PREDISTRIBUTION 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

Partner

Capital Balance/
Loss Allocation

Wingler
Norris
Rodgers
Guthrie

$120,000/30%
$ 88,000/10%
$109,000/20%
$ 60,000/40%

Maximum Loss
That Can Be
Absorbed
$400,000
$880,000
$545,000
$150,000 (most vulnerable to loss)

31. a. (continued)
Schedule 2

Partner
Wingler
Norris
Rodgers

Capital Balance/
Loss Allocation
$75,000/(30/60)
$73,000/(10/60)
$79,000/(20/60)

Maximum Loss
That Can Be
Absorbed
$150,000 (most vulnerable to loss)
$438,000
$237,000

Schedule 3

Partner
Norris
Rodgers

Capital Balance/
Loss Allocation
$48,000/(10/30)
$29,000/(20/30)

Maximum Loss
That Can Be
Absorbed
$144,000
$ 43,500 (most vulnerable to loss)

31. (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 ......................................
Receivables are collected with losses allocated
to partners.

82,000

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 ...................................................
Cash .......................................................
All liabilities are paid.

74,000
74,000

31. 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.....................................................
Inventory is sold with loss allocated to partners.

101,000

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)................
Norris, Capital (10%)........................................
Rodgers, Capital (20%)....................................
Guthrie, Capital (40%)......................................
Cash............................................................
Liquidation expenses are paid.

3,300
1,100
2,200
4,400
11,000

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.

31. b. (continued)
CAPITAL ACCOUNT BALANCES

Beginning balances.................
Loss on accounts receivable.
Loss on land, building, and
equipment ..............................
Cash distribution.....................
Loss on inventory....................
Cash distribution.....................
Liquidation expenses..............
Subtotal ..............................
Guthrie insolvent......................
Current balances......................

Wingler,
Capital
$120,000
(4,920)

Norris,
Capital
$88,000
(1,640)

(30,900)
(31,800)
(9,000)
(35,500)
(3,300)
4,580
(2,080)
$2,500

(10,300)
(58,600)
(3,000)
(11,833)
(1,100)
1,527
(693)
$ 834

Rodgers,
Loan and Guthrie,
Capital
Capital
$109,000
$60,000
(3,280)
(6,560)
(20,600)
(50,200)
(6,000)
(23,667)
(2,200)
3,053
(1,387)
$1,666

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

(41,200)
-0(12,000)
-0(4,400)
(4,160)
4,160
$ -0-

5,000

Answers to Develop Your Skills Cases

Research Case
a. 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.
b. 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 doctors 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.
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
a. 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.
b. 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 entitys 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 partnerships 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.

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 Wilsons 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 Chos 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 Arringtons 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:
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%.

Spreadsheet to Determine the Remaining Capital Balances for

Wilson, Cho, and Arrington
A

Partner

Capital
Balance

Share
P/L

Subsequent
Loss Share

Remaining
Balance

Wilson

$200,000

40%

$20,000

$40,000

$140,000

Cho

180,000

20%

10,000

20,000

150,000

Arrington

110,000

40%

20,000

40,000

50,000

$490,000

100%

$50,000

$100,000

$340,000

D
Initial
Loss
Share

2
3
4
5
6
7 Losses during
liquidation
8 Final losses

50,000
100,000