The following balance sheet is for a local partnership in which the partners hav
ID: 2489650 • 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.
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
Adams
Baker
Carvil
Dobbs
Beginning balances
$ 99,000
$ 48,000
$ 74,000
$ 109,000
Assumed loss of $160,000 (see Schedule 1) (1:3:4:2)
-$ 16,000
-$ 48,000
-$ 64,000
-$ 32,000
Step One balances
$ 83,000
$ 0
$ 10,000
$ 77,000
Assumed loss of $17,500 (see Schedule 2) (allocated on a 1:0:4:2 basis)
-$ 2,500
$ 0
-$ 10,000
-$ 5,000
Step Two balances
$ 80,500
$ 0
$ 0
$ 72,000
Assumed loss of $108,000 (see Schedule 3) (allocated on a 1:0:0:2 basis)
-$ 36,000
$ 0
$ 0
-$ 72,000
Step Three balances
$ 44,500
$ 0
$ 0
$ 0
Schedule 1
Partner
Capital Balance/Loss Allocation
Profit share
Maximum Loss That Can Be Absorbed
(Capital balance / Profit share)
Adams
$ 99,000
1/10
$ 990,000
Baker
$ 48,000
3/10
$ 160,000
(most vulnerable)
Carvil
$ 74,000
4/10
$ 185,000
Dobbs
$ 109,000
2/10
$ 545,000
Schedule 2
Partner
Capital Balance/Loss Allocation
Maximum Loss That Can Be Absorbed
Adams
$ 83,000
1/7
$ 581,000
Carvil
$ 10,000
4/7
$ 17,500
(most vulnerable)
Dobbs
$ 77,000
2/7
$ 269,500
Schedule 3
Partner
Capital Balance/Loss Allocation
Maximum Loss That Can Be Absorbed
Adams
$ 80,500
1/3
$ 241,500
Dobbs
$ 72,000
2/3
$ 108,000
(most vulnerable)
The first $44,500 available goes to Adams. Next $108,000 is split between Adams and Dobbs on a 1:2 basis. Next $17,500 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 $152,500 ($44,500 + $108,000) 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 $142,500 to ensure Carvil of receiving some amount.
As another approach to the problem, Carvil's capital balance is eliminated through the $160,000 Step One loss and the $17,500 Step Two loss. Thus, avoiding a complete $177,500 loss ensures that Carvil will receive cash. Since the land and buildings have a book value of $320,000, such losses would be avoided by receiving over $142,500.
Adams
Baker
Carvil
Dobbs
Beginning balances
$ 99,000
$ 48,000
$ 74,000
$ 109,000
Assumed loss of $160,000 (see Schedule 1) (1:3:4:2)
-$ 16,000
-$ 48,000
-$ 64,000
-$ 32,000
Step One balances
$ 83,000
$ 0
$ 10,000
$ 77,000
Assumed loss of $17,500 (see Schedule 2) (allocated on a 1:0:4:2 basis)
-$ 2,500
$ 0
-$ 10,000
-$ 5,000
Step Two balances
$ 80,500
$ 0
$ 0
$ 72,000
Assumed loss of $108,000 (see Schedule 3) (allocated on a 1:0:0:2 basis)
-$ 36,000
$ 0
$ 0
-$ 72,000
Step Three balances
$ 44,500
$ 0
$ 0
$ 0
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