A, B and C form the equal ABC partnership by contributing $100,000 each, and pur

Question

A, B and C form the equal ABC partnership by contributing $100,000 each, and purchasing some equipment for $300,000. The equipment has a depreciable life of six years, and all depreciation (straight line) is allocated to A. Capital accounts are properly maintained. Any distributions in liquidation will be made according to the capital accounts of each partner. Partners are required to restore deficit capital accounts upon liquidation. Income aside from depreciation is $60,000 each year. If the partnership were liquidated at the end of year three, how much would each partner get?

What would your answer be if the liquidation occurred at the end of year four?

Explanation / Answer

Depreciation/yr = 300,000/6=50,000 which is all allocated to A. After 3 yrs, total depreciation allocated to A = 50000*3=150,000 Income for 3 years = 60000*3 = 180,000 which is allocated as 60,000 for each partner So capital account of A=initial 100,000+income of 60,000-depreciation of 150,000=10,000 Capital account of B=initial 100,000+income of 60,000=160,000 Capital account of C=initial 100,000+income of 60,000=160,000 Total amount on liquidation = 150000 for machine + total income of 180,000 = 330,000 This is distributed in ratio of 10,000:160,000:160,000 or 1:16:16, i.e. A will get 1/33*330,000 = 10000 B will get 16/33*330,000=160,000 C will get 16/33*330,000=160,000 If liquidation happens after yr 4, Depreciation for A = 50000*4=200,000 Income for 4 years = 60000*4=240,000 which is distributed as 80,000 for each partner Capital account of A=initial 100,000+income of 80,000-depreciation of 200,000= -20,000 Capital account of B=initial 100,000+income of 80,000=180,000 Capital account of C=initial 100,000+income of 80,000=180,000 Total amount on liquidation = 100000 for machine + total income of 240,000 = 340,000 So here, A will have to contribute 20,000 and B and C will each get 180,000.

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