The following balance sheet is for a local partnership in which the partners hav

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.

A) 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?

B)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?

C) The building is immediately sold for $91,000 to give total cash of $140,000. The liabilities are then paid, leaving a cash balance of $101,000. 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.)

D) 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.)

Cash $ 49,000 Liabilities $ 39,000 Land 175,000 Adams, capital 108,500 Building 165,000 Baker, capital 45,000 Carvil, capital 78,000 Dobbs, capital 118,500 Total assets $ 389,000 Total liabilities and capital $ 389,000

Explanation / Answer

a.

Allocation of Potential Loss of $270000 on non cash Assets and Distribution of $10000    

Partner

Sharing

Amount

New Capital Balances

The Distribution of $10000

Adams

$270000 * 2/10

$54000

$31000

$0

Baker

$270000*3/10

$81000

-$45000

$0

Carvil

$270000*3/10

$81000

-$17000

$0

Dobbs

$270000*2/10

$54000

$41000

$10000

Total

b.

Allocation of Potential Loss of $270000 on non cash Assets and Distribution of $10000    

Partner

Sharing

Amount

New Capital Balances

The Distribution of $10000

Adams

$270000 * 2/10

$54000

$31000

$10000

Baker

$270000*2/10

$54000

-$18000

$0

Carvil

$270000*3/10

$81000

-$17000

$0

Dobbs

$270000*3/10

$81000

$14000

$0

Total

    

c.

Allocation of Loss on Building of $58000      

Partner

Sharing

Amount

New Capital Balances

Adams

$58000 * 1/10

$5800

$79200

Baker

$58000 * 3/10

$17400

$18600

Carvil

$58000 * 3/10

$17400

$46600

Dobbs

$58000 * 3/10

$17400

$77600

Total

Allocation of Possible Maximum Loss on land of $140000      

Partner

Sharing

Amount

New Capital Balances

Adams

$58000 * 1/10

$14000

$65200

Baker

$58000 * 3/10

$42000

-$23400

Carvil

$58000 * 3/10

$42000

$4600

Dobbs

$58000 * 3/10

$42000

$35600

Total

Allocation of Loss absorbed from Baker of -$ 23400 in the ratio of 1:3:3    

Partner

Sharing

Amount

New Capital Balances

Adams

$23400 * 1/10

$3343

$61857

Carvil

$23400 * 3/10

$10029

-$5429

Dobbs

$23400 * 3/10

$10029

$25571

Total

Allocation of Loss absorbed from Carvil of -$ 5429 in the ratio of 1:3    

Partner

Sharing

Amount

New Capital Balances

Adams

$5429 * 1/10

$1357

$60500

Dobbs

$5429 * 3/10

$4071

$21500

Total

Therefore the excess Cash of $ 82000 will be distributed as Adams: $60500 and Dobbs: $21500

   

Adams

Baker

Carvil

Dobbs

Opening Balances

$85000

$36000

$64000

$95000

Assumed Loss of $120000 (1:3:4:2)

$12000

$36000

$48000

$24000

Step One balances

$73000

$0

$16000

$71000

Assumed Loss of $28000 (1:4:2)

$4000

$16000

$8000

Step two Balances

$69000

$0

$0

$63000

Assumed Loss of $94500 (1:2)

$31500

$63000

$37500

$0

Shedule-1

Partner

Capital Balance/Loss Allocation

Maximum Loss Can be Absorbed

Adams

$85000/1/10

$850000

Baker

$36000 / 3/10

$120000

Most vulnerable

Carvil

$64000 / 4/10

$160000

Dobbs

$95000 / 2/10

$475000

Total

Shedule-2

Partner

Capital Balance/Loss Allocation

Maximum Loss Can be Absorbed

Adams

$73000/1/7

$511000

Carvil

$16000 / 4/7

$28000

Most Vulnerable

Dobbs

$71000 / 2/7

$248500

Total

Shedule-3

Partner

Capital Balance/Loss Allocation

Maximum Loss Can be Absorbed

Adams

$69000/1/3

$207000

Dobbs

$63000 / 2/3

$94500

Most Vulnerable

Total

The First $37500 available goes to Adams. Next $94500 will be split in the ratio of 1:2 between Adams and Dobbs. Next $28000 will be split between Adams ,Carvil and Dobbs in the ration of 1:4:2 Basis. All other remaining cash will be split between Adams,Baker,Carvil, and Dobbs in the original Profit and loss ratio.

Total Cash of $132000($37500+$94500) has to be available before carvil will receive any cash. As there is already $10000 cash in excess of liabilities , the land and Building must be sold for over $132000 to ensure Carvil of receiving some amount.

Partner

Sharing

Amount

New Capital Balances

The Distribution of $10000

Adams

$270000 * 2/10

$54000

$31000

$0

Baker

$270000*3/10

$81000

-$45000

$0

Carvil

$270000*3/10

$81000

-$17000

$0

Dobbs

$270000*2/10

$54000

$41000

$10000

Total

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