The following balance sheet is for a local partnership in which the partners hav
ID: 2488511 • Letter: T
Question
The following balance sheet is for a local partnership in which the partners have become very unhappy with each other.
To avoid more conflict, the partners have decided to cease operations and sell all assets. Using this information, answer the following questions. Each question should be viewed as an independent situation related to the partnership’s liquidation.
The $10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 2:3:3:2 basis, respectively, how will the $10,000 be divided?
The $10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated on a 2:2:3:3 basis, respectively, how will the $10,000 be divided?
The building is immediately sold for $77,000 to give total cash of $124,000. The liabilities are then paid, leaving a cash balance of $87,000. This cash is to be distributed to the partners. How much of this money will each partner receive if profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 1:3:3:3 basis, respectively? (Do not round intermediate calculations.)
Assume that profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 1:3:4:2 basis, respectively. How much money must the firm receive from selling the land and building to ensure that Carvil receives a portion? (Do not round intermediate calculations.)
The following balance sheet is for a local partnership in which the partners have become very unhappy with each other.
Explanation / Answer
a. Dobbs receives the entire $10,000.
Maximum potential losses of $320,000 on noncash assets would be allocated as follows:
Partner
Share of Loss
Old capital balance
New Capital Balance
Adams
2/10 x $320,000
$ 64,000
$ 99,000
$ 35,000
Baker
3/10 x $320,000
$ 96,000
$ 48,000
-$ 48,000
Carvil
3/10 x $320,000
$ 96,000
$ 74,000
-$ 22,000
Dobbs
2/10 x $320,000
$ 64,000
$ 109,000
$ 45,000
Maximum total potential losses of $70,000 to be absorbed from Baker and Carvil above would then be allocated as follows on a 2:2 basis:
Adams 2/4 x $70,000 = $35,000; Final capital balance = $35,000 - $35,000 = 0
Dobbs 2/4 x $70,000 = $35,000; Final capital balance = $45,000 - $35,000 = $ 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 $320,000 on noncash assets would be allocated as follows:
Partner
Share of Loss
Old capital balance
New Capital Balance
Adams
2/10 x $320,000
$ 64,000
$ 99,000
$ 35,000
Baker
2/10 x $320,000
$ 64,000
$ 48,000
-$ 16,000
Carvil
3/10 x $320,000
$ 96,000
$ 74,000
-$ 22,000
Dobbs
3/10 x $320,000
$ 96,000
$ 109,000
$ 13,000
Maximum total potential losses of $38,000 to be absorbed from Baker and Carvil above would be allocated as follows on a 2:3 basis:
Adams 2/5 x $38,000 = $15,200; Final capital balance = $35,000 - $15,200 = $19,800
Dobbs 3/5 x $38,000 = $22,800; Final capital balance = $13,000 - $22,800 = $9,800
Absorbing the final $9,800 loss from Dobbs would leave Adams with a safe capital balance of $10,000.
c. Adams receives $68,749 and Dobbs gets $18,251.
The $78,000 loss on sale of the building would be allocated as follows:
Partner
Share of Loss
Old capital balance
New Capital Balance
Adams
1/10 x $78,000
$ 7,800
$ 99,000
$ 91,200
Baker
3/10 x $78,000
$ 23,400
$ 48,000
$ 24,600
Carvil
3/10 x $78,000
$ 23,400
$ 74,000
$ 50,600
Dobbs
3/10 x $78,000
$ 23,400
$ 109,000
$ 85,600
Maximum potential loss of $165,000 on the land would be allocated as follows:
Partner
Share of Loss
Capital balance
New Capital Balance
Adams
1/10 x $165,000
$ 16,500
$ 91,200
$ 74,700
Baker
3/10 x $165,000
$ 49,500
$ 24,600
-$ 24,900
Carvil
3/10 x $165,000
$ 49,500
$ 50,600
$ 1,100
Dobbs
3/10 x $165,000
$ 49,500
$ 85,600
$ 36,100
Maximum potential loss of $24,900 to be absorbed from Baker would be allocated as follows on a 1:3:3 basis:
Adams 1/7 x $24,900 = $3,558; New capital balance = $74,700 - $3,558 = $71,142
Carvil 3/7 x $24,900 = $10,671; New capital balance = $1,100 - $10,671 = -$9,571
Dobbs 3/7 x $24,900 = $10,671; New capital balance = $36,100 - $10,671 = $25,429
Maximum potential loss of $9,571 to be absorbed from Carvil would be allocated as follows on a 1:3 basis:
Adams 1/4 x $9,571 = $2,393; Final capital balance = $71,142 - $2,393 = $68,749
Dobbs 3/4 x $9,571 = $7,178; Final capital balance = $25,429 - $7,178 = $18,251
These amounts represent safe capital balances for distribution purposes.
Partner
Share of Loss
Old capital balance
New Capital Balance
Adams
2/10 x $320,000
$ 64,000
$ 99,000
$ 35,000
Baker
3/10 x $320,000
$ 96,000
$ 48,000
-$ 48,000
Carvil
3/10 x $320,000
$ 96,000
$ 74,000
-$ 22,000
Dobbs
2/10 x $320,000
$ 64,000
$ 109,000
$ 45,000
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