Twelve years ago, Adams, Boyd, and Chambers formed a partnership manufacturing s
ID: 2488316 • Letter: T
Question
Twelve years ago, Adams, Boyd, and Chambers formed a partnership manufacturing small circuit boards. Unfortunately, foreign competition, a softening economy, and management errors have led the partners to realize that the company's business cannot be sustained and that the partnership must be liquidated. A condensed balance sheet is as follows: The current value of personal assets and liabilities of the partners, excluding those related to the partnership, are as follows: Boyd is extremely concerned that after liquidation of the partnership they would still continue to be personally insolvent. This would be devastating to Boyd, and they have come to you with their concerns. Prepare a response to each of Boyd's independent questions noting that profits and losses are allocated 40%, 20%, and 20% to Adams, Boyd, and Chambers, respectively. If assets with a book value of $180,000 were sold for $200,000 and the partners agreed to maintain a minimum cash balance of $5,000, would any of the available cash be distributed to Boyd? If all of the noncash assets were sold for net proceeds of $280,000 and all cash was distributed, would any of the available cash be distributed to Boyd? Assume that all of the noncash assets were sold for net proceeds of $150,000 and all cash was distributed. If Adams contributed the necessary assets to the partnership to liquidate unsatisfied outside creditors, how much would Boyd be liable to Adams for? How much would all of the noncash assets have to be sold for so that after distributing all available cash Boyd could liquidate their personal liabilities?Explanation / Answer
:
(A)
Calculation of cash distribution to boyd:
The book value of asset = $180,000
Sold the asset = $200,000
$200,000 - $180,000
= $20,000
=$20,000 distribute to 3 partners in given ration
For Boyd = $20,000 * 20%
= $4,000
There is no available cash to distribute to boyd, because according to agreement they should maintain minimum balance, so due to that reason there is no available balance.
(B)
Calculation of non-cash distribution to boyd:
The value of non cash = $225,000
Sold the asset = $280,000
$280.000 - $225,000
= $20,000
$55,000
$55,000 * 20%
= $11,000 – Minimum balance
$11,000 - $5,000
= $6,000
Yes there is an available balance to destitute to the boyd.
(C)
The value of non-cash assets = $225,000
Sold the non-cash assets = $150,000
Net loss on Non- cash assets = $75,000
= $75,000 *20%
= $15,000
= $15,000 - $6,000
= $9,000
(D)
After distributing the all Non- cash assets, the boyd personal liabilities were increased from $78,000 to $87,000. So there is profit to boyd after distributing the non-cash assets.
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