The partnership of Hendrick, Mitchum, and Redding has the following account bala

Question

The partnership of Hendrick, Mitchum, and Redding has the following account balances:

Cash $ 54,000 Liabilities $ 44,000
Noncash assets 153,000 Hendrick, capital 122,000
Mitchum, capital 88,000
Redding, capital (47,000 )

This partnership is being liquidated. Hendrick and Mitchum are each entitled to 30 percent of all profits and losses with the remaining 40 percent going to Redding.

What is the maximum amount that Redding might have to contribute to this partnership because of the deficit capital balance?

How should the $10,000 cash that is presently available in excess of liabilities be distributed?

If the noncash assets are sold for a total of $68,000, what is the minimum amount of cash that Hendrick could receive?

Explanation / Answer

Part a : Maximum losses of $153,000 on non cash assets would increase Redding's deficit capital balance by $61,200 (i.e. 40% of $153,000). Thus the maximum amount that Redding might have to contribute to this partnership because of the deficit capital balance will be $108,200 ($47,000+$61,200).

Part b : All $10,000 cash should go to Hendrick. As Handrick and Mitchum view the current situation, total maximum potential losses $200,000($153,000 for non cash asset and $47,000 Redding's defecit capital balance). In determinig safe capital balances, these assumed losses would be allocated on a 3:3 basis (i.e. $100,000 to Hendrick and $100,000 to Mitchum). Since such a loss would entirely eliminate Mitchum's capital balance of $88,000, only Hendrick has a safe capital balance of $22,000 at the current time. Thus all excess cash would go to Hendrick.

Part c : The minimum cash payment to Hendrick woul be $56,000 ($10,000+$46,000)   

As shown in part b above, the available $10,000 is distributed to Hendrick thus reducing the partner's capital balance to $112,000 ($122,000-$10,000). A loss of $85,000 ($68,000-$153,000) on the non cash assets would further reduce this partner's capital balance by $25,500 ($85,000*30%) to $86,500.

That same loss would reduce Mitchum Capital balance of $88,000 by $25,500 ($85,000*30%) to $62,500 and Redding's deficit capital balance would be ($81,000) [i.e.$47,000+($85,000*40%)]. The minimum cash amount would be caused by Redding's failure to contribute this deficit of $81,000 so that it has to be absorbed by Hendrick (3/6 of $81,000 or $40,500) and Mitchum (3/6 of $81,000 or $40,500).

The remaining safe capital balance of $46,000 ($86,500-$40,500) would be paid to Hendrick

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