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CHAPTER 3

PARTNERSHIP LIQUIDATION AND


INCORPORATION; JOINT VENTURES

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 3–1 Doris, Elsie & Frances Partnership (20 minutes, easy)
Journal entries for liquidation of an insolvent general partnership having a partner who is
unable to pay entire capital deficit to the partnership.
Pr. 3–2 Olmo, Perez & Quinto LLP (20 minutes, easy)
Journal entries for liquidation of a solvent limited liability partnership having an almost
insolvent partner who cannot pay entire loan from partnership or capital deficit.
Pr. 3–3 Hal, Ian, Jay & Kay LLP (20 minutes, easy)
Preparation of cash distribution program for a liquidating limited liability partnership.
Pr. 3–4 Carson & Worden LLP (20 minutes, easy)
Cash distribution program for liquidation of a limited liability partnership, and journal entries
for realization of assets and distributions of cash to creditors and partners.
Pr. 3–5 Luke, Mayo & Nomura LLP (20 minutes, easy)
Given the statement of realization and liquidation for a limited liability partnership, prepare
journal entries for the liquidation.
Pr. 3–6 Luna, Nava & Ruby LLP (30 minutes, easy)
Compute total loss from liquidation of a limited liability partnership, prepare a statement of
realization and liquidation, and prepare journal entries for the liquidation.
Pr. 3–7 Haye & Lee LLP (20 minutes, easy)
Partners accept bonds in exchange for certain limited liability partnership assets and withdraw
noncash assets during liquidation. Journal entries for transactions completed in carrying out
liquidation of the partnership.
Pr. 3–8 Adams, Barna & Coleman LLP (30 minutes, easy)
A limited liability partnership is insolvent, as is one of the three partners. Given a balance sheet
of the partnership and a summary of the financial status of partners, prepare a statement of
realization and liquidation and determine the amount of cash that would have to be generated
from the realization of partnership assets to enable the insolvent partner to pay personal
creditors in full. Prepare journal entries for the liquidation.
Pr. 3–9 Smith, Jones & Webb LLP (30 minutes, easy)
Installment liquidation of a limited liability partnership over a period of three months.
Statement of realization and liquidation with supporting analysis.
Pr. 3–10 Denson, Eastin & Feller LLP (45 minutes, medium)
Priorities among limited liability partners as to eligibility to receive cash payments in an
installment liquidation. Consists of a series of independent questions as to the circumstances
under which a partner would be entitled to receive a specified amount of cash.

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114 Modern Advanced Accounting, 10/e
Pr. 3–11 Lord & Lee LLP; Lord-Lee Corporation (50 minutes, medium)
Incorporation of a limited liability partnership. Journal entries for the partnership and the
corporation. Preparation of beginning balance sheet for the corporation.

ANSWERS TO REVIEW QUESTIONS


1. Because of the right of offset, Alo probably will not have any priority or advantage solely because
a portion of Alo’s investment in the partnership is recognized as a loan rather than as an increase in
Alo’s capital account balance. The right of offset means that a partner's loan account may be offset
against a debit balance (or potential debit balance) in that partner's capital account during the
liquidation of the LLP.
2. Assuming that the partner with a debit balance has no loan account or that the balance of the
partner’s loan account is insufficient to eliminate the debit balance of the partner’s capital account
when the right of offset is exercised, the partner is obligated to pay sufficient cash to the LLP to
eliminate the capital deficit. If the partner is unable to do so, the capital deficit must be absorbed
by the other partners as an additional loss to be shared in the same proportion as they previously
have shared net income and loss among themselves.
3. The cash of $32,500 may be distributed without delay to Cor and to Don. The cash payment
should be divided between Cor and Don to leave a sufficient credit balance in the capital account of
each to absorb any additional loss if Ell fails to pay the $5,000 capital deficit to the LLP. The
appropriate payments are $21,875 to Cor and $10,625 to Don. The possible additional loss of
$5,000 is divided between Cor and Don in a 5:3 ratio.
4. Fin's position cannot be supported; Fin is responsible for all unpaid liabilities of the general
partnership. Partnership creditors may demand payment in full from any partner and are not
concerned with the status of a partner's capital account or with the terms of the partnership
contract for sharing net income or losses.
The capital account of Han has a debit balance of $30,000 ($16,000 + $2,000 + $12,000 =
$30,000). If Fin pays the partnership creditors all or part of their claims, the journal entry of the
partnership will be to debit Trade Accounts Payable and credit Fin's capital account for the amount
of the payment.
5. The salary authorized for Ile as general manager is recorded by a debit to Partner's Salary Expense
and a credit to Ile, Capital. Thus, the "unpaid salary" is not a liability. The salary provision in the
partnership contract was a form of remuneration to Ile that increases Ile’s equity in net assets of the
partnership.
6. The income-sharing ratio should govern. The contract with respect to sharing of net income and
losses is an unqualified agreement. Because the contract is not expressly limited to operating
income or losses, application of any such limitation would not be in accord with the contract. The
LLP is not dissolved by the decision to discontinue operations, and the agreement concerning the
division of net income and losses is still in effect.
All losses represent a loss of capital invested in a limited liability partnership. The net income or
losses from operations that previously have been divided are periodic estimates. The ultimate
(lifetime) income or loss of the partnership is not determinable until the partnership is liquidated.
The loss or gain on realization of assets is a correction of all previous periodic income estimates,
and it also should be divided in the income-sharing ratio.

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115 Modern Advanced Accounting, 10/e
7. If cash is distributed to partners as it becomes available during a prolonged limited liability
partnership liquidation, each payment should be made as if no more cash would be forthcoming
from either realization of assets or collection of capital deficits from partners. Under these
assumptions, the liquidator will authorize a payment to a partner only to the extent that the credit
balance of the partner's capital account (or in the capital and loan accounts combined) is in excess
of the partner's share of the maximum possible loss that may be incurred. A partner's share of the
maximum possible loss reflects the possibility that all remaining noncash assets may prove
worthless and that the partner may be charged with additional losses if the other partners are
unable to pay to the partnership any deficit that may occur in their capital accounts.
8. No journal entries are entered in the LLP’s accounting records for possible losses from future
realization of partnership assets. The computation of the estimated loss and its division among the
partners is a working paper item; journal entries are prepared for actual transactions or events
only.
9. The total amount of cash received by each partner in an installment liquidation should be the same
as if the liquidator had retained all cash until all noncash assets were realized and liabilities paid
and then had made a single cash payment to the partners. One exception might be that if the
liquidator were able to earn interest on the cash retained during the course of the liquidation, the
interest would increase the amount of cash to be distributed to partners.
10. Cash received from realization of limited liability partnership noncash assets during an installment
liquidation may be distributed in the income-sharing ratio if the balances of the partners' equities in
the partnership are in the income-sharing ratio.
11. The $7,000 note receivable from San should be deducted from San's capital account balance to
compute San's capacity to absorb losses. The possible loss if all other noncash assets should prove
to be worthless would be $54,000 ($30,000 + $25,000 + $21,000 – $7,000 – $15,000 = $54,000),
to be charged against the partners' capital account balances in the amount of $18,000 to each. The
cash of $18,000 now available should be divided $13,000 to Rab, $1,000 to San, and $4,000 to
Tay. This will leave each partner with a capital account balance of $18,000, which is sufficient to
absorb each partner's share of the maximum possible additional loss.
12. Partner Urb may have received less cash than the other partners who had smaller capital account
balances for one or more of the following reasons:
(1) Urb's share of net income or loss was the largest, and substantial losses were incurred in the
realization of partnership noncash assets; or Urb's share was the smallest, and substantial
gains were realized from the partnership noncash assets.
(2) The assets of the partnership may have included a loan receivable from Urb that was offset
against Urb's capital account balance.
(3) Van and Woo may have had loan accounts that, when combined with their capital accounts,
gave them larger partnership equities than Urb's.
(4) Urb may have withdrawn noncash assets from the partnership during the liquidation.
13. The carrying amounts of the LLP’s assets should be increased to current fair value on the date of
incorporation because Yang-Zee Corporation is a new legal entity and accounting entity separate
from its owners. Even though all the capital stock of Yang-Zee has been issued in equal amounts to
the former partners, the corporation may later obtain authorization for additional capital stock to
be issued to outsiders. In this event, Yang and Zee will suffer if the partnership asset values are not
revised upward on the date of incorporation because of the understatement of their investments in
Yang-Zee Corporation as compared with the investments of other shareholders. Also, in obtaining
credit or bank financing, Yang-Zee Corporation may be handicapped by the understatement of
assets and understatement of stockholders' equity.

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Solutions Manual, Chapter 3 116
14. A joint venture differs from a partnership in that it is a temporary association of individuals or
business enterprises that combine resources for the purpose of carrying out a specific project, such
as exploration for petroleum in a foreign country. A joint venture has many of the characteristics of
a partnership, but it terminates on the completion of the specific project for which it was formed.
The life of a joint venture is more likely to be measured in months than in years.
15. Corporate joint ventures are corporations owned and operated by a small group of joint venturers
for the benefit of all the venturers. The ownership of a corporate joint venture seldom changes, and
its common stock generally is not traded publicly.
The APB, in Opinion No. 18, "The Equity Method of Accounting for Investments in Common
Stock," concluded that the equity method of accounting should be used by venturers (investors) to
account for investments in common stock of corporate joint ventures. Under the equity method, the
Investment in Corporate Joint Venture ledger account is debited in the accounting records of each
venturer for amounts invested and for the pro rata share of net income reported by the venture; the
account is credited for dividends received from the corporate joint venture and for the pro rata
share of net losses incurred by the venture.
16. Under the equity method of accounting for an investment in an unincorporated joint venture, each
investor records its share of the venture's net income or losses in the investment ledger account and
reduces the balance of the investment account by the amount of cash or other assets received from
the venture. In the investor's balance sheet the investment in the joint venture is displayed as one
amount, and in the investor's income statement the investor's share of net income or net loss of the
venture is displayed as a single amount.
In contrast, under the proportionate share method of accounting for an investment in an
unincorporated joint venture, each investor recognizes in its accounting records its share of each
asset, liability, revenue, gain, expense, and loss of the venture. Thus the assets, liabilities, revenue,
and expenses of the investor in its financial statements include the investor's share of the related
items of the joint venture.

SOLUTIONS TO EXERCISES
Ex. 3–1 1. d 8. b
2. c 9. b
3. b 10. b
4. a 11. c
5. c [($21,000 + $39,000) – $30,000 share of loss = $30,000] 12. b
6. a 13. b
7. a
Ex. 3–2 Journal entry for Pon, Quan & Ron LLP, Jan. 31, 2005:
Quan, Capital 3,500
Ron, Capital 11,500
Cash 15,000
To record payment of cash to partners, as follows:

Quan Ron
Capital account balances prior to cash
payment $8,000 $16,000
Potential loss from uncollectible capital
deficit of Pon ($9,000 shared equally) (4,500) (4,500)
Cash payment $3,500 $11,500
Ex. 3–3 Computation of amount of cash to be distributed to partners Archer and Bender:
Archer Bender
Capital account balances after payment of liabilities $40,000 $22,000

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117 Modern Advanced Accounting, 10/e
Less: Maximum possible loss on realization of noncash assets 25,20
($42,000), divided in 60:40 ratio 0 16,800
Distribution of $20,000 cash to partners $14,800 $ 5,200
Ex. 3–4 a. Computation of total loss incurred on liquidation of Carlo & Dodge LLP:
Capital account balances before liquidation ($23,000 + $13,500) $36,500
Add: Unpaid liabilities ($33,000 – $18,000) 15,000
Total loss on liquidation $51,500
b. Journal entry for Carlo & Dodge LLP:
Liabilities ($33,000 – $18,000) 15,000
Carlo, Capital [$23,000 – ($51,500 x 0.55)] 5,325
Dodge, Capital [$13,500 – ($51,500 x 0.45)] 9,675
To record Carlo’s payment to partnership creditors and to close
partners’ capital accounts.
Ex. 3–5 Journal entries for Rich, Stowe & Thorpe LLP, Sept. 24, 2005:
Cash 300,000
Rich, Capital ($60,000 x 0.40) 24,000
Stowe, Capital ($60,000 x 0.40) 24,000
Thorpe, Capital ($60,000 x 0.20) 12,000
Other Assets 360,000
To record realization of assets and division of $60,000 loss among
partners in 40%:40%:20% ratio.

Liabilities 240,000
Rich, Capital 8,000
Stowe, Capital 48,000
Thorpe, Capital 24,000
Cash 320,000
To record payment to creditors, and first installment to partners, as
follows:

Rich Stowe Thorpe


Capital per balance sheet $80,000 $120,000 $60,000
Realization loss (24,000) (24,000) (12,000)
Potential loss on $120,000
other assets (48,000) (48,000) (24,000)
Payments $ 8,000 $ 48,000 $24,000
Ex. 3–6 Journal entry for Ace, Bay & Cap LLP, June 3, 2005:
Liabilities 50,000
Ace, Capital 30,000
Cash 80,000
To record payment to creditors, and first installment to partner. Ace
receives $30,000 available cash because, assuming no cash to be
realized on other assets of $100,000, allocation of the resultant
potential loss $37,500 to Bay and $50,000 to Cap, and $15,000 of
Cap's resultant capital deficit of $20,000 to Bay, would cause a
capital deficit of $12,500 to Bay.

Ex. 3–7 Computation of amount of cash to be distributed to partners Ed, Flo, and Gus:
Ed Flo Gus
Capital account balances before payment of
liabilities $33,000 $40,000 $42,000
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Solutions Manual, Chapter 3 118
Less: Maximum possible loss on realization of
noncash assets ($78,000), divided in 5:3:2 ratio 39,000 23,400 15,600
Balances $ (6,000) $16,600 $26,400
Allocation of potential capital deficit of Ed in 3:2
ratio 6,000 (3,600) (2,400)
Distribution of $37,000 cash to partners after
payment of $5,000 of creditors’ claims
($42,000 – $5,000 = $37,000) $ 0 $13,000 $24,000
Ex. 3–8 Computation of amount of cash to be distributed to partners Hale and Ian:
Hale Ian
Capital balances before payment of liabilities and liquidation
costs $71,000 $ 54,000
Less: Maximum possible loss on realization of noncash assets
($110,000) and liquidation costs ($10,000), divided in 4:6 ratio $48,000 72,000
Balances $23,000 $(18,000)
Allocation of potential deficit of Ian (18,000) 18,000
Distribution of $5,000 cash to Hale after payment of $20,000
liabilities and withholding of $10,000 cash for liquidation
costs ($35,000 – $20,000 – $10,000 = $5,000) $ 5,000 $ 0
Ex. 3–9 a. JONES, KELL & LAMB LLP
Computation of Cash to Be Paid to Partners in First Installment
March 31, 2005

Jones Kell Lamb


(40%) (40%) (20%)
Balances of capital accounts before
liquidation $ 40,000 $65,000 $48,000
Realization of assets at loss of $40,000 (16,000) (16,000) (8,000)
Maximum potential loss on realization of
remaining assets of $90,000 (36,000) (36,000) (18,000)
Balances $(12,000) $13,000 $22,000
Eliminate potential capital deficit of Jones 12,000 (8,000) (4,000)
Cash payablefirst installment
($25,000+ $50,000 – $52,000= $23,000) $ 0 $ 5,000 $18,000
Note to Instructor: A cash distribution program may be prepared that would show that
Lamb would receive the first $15,500 and that Kell and Lamb would receive any amount
over $15,500, but not in excess of $37,500, in a 2:1 ratio. Because $23,000 is available,
1
Lamb receives $15,500 plus $2,500 ($7,500 x 3
= $2,500), or $18,000, and Kell receives
2
$5,000 ($7,500 x 3
= $5,000).

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119 Modern Advanced Accounting, 10/e
b. The $3,000 cash withheld represents an additional possible loss that would be absorbed by
Kell and Lamb in a 2:1 ratio. Thus, using the result in a, Kell would receive $3,000 and
Lamb would receive $17,000, or a total of $20,000 ($23,000 – $3,000 = $20,000).
c. Because each partner received some cash in the second distribution, additional payments
may be made to the partners in the income-sharing ratio of 2:2:1. Thus, the $14,000 would
be paid as follows: Jones and Kell, $5,600 each; Lamb, $2,800.
Ex. 3–10 a. MAY, NONA & OLIVE LLP
Cash Distribution Program
November 10, 2005

Creditors May Nona Olive


First $20,000 100%
Next (2 x 3,500) 7,000 100%
Next 2 1
(2 x 4,000) + (1 x 4,000) 12,000 3 3
4 2 1
All over $39,000 7 7 7

MAY, NONA & OLIVE LLP


Working Paper for Cash Distributions to Partners during Liquidation
November 10, 2005

May Nona Olive


Capital account balances before liquidation $20,000 $25,000 $9,000
Income-sharing ratio 4 2 1
Capital per unit of income (loss) sharing $ 5,000 $12,500 $9,000
Reduce Nona’s balance to equal Olive’s balance (3,500)
Reduce balances of Nona and Olive to equal
May’s balance (4,000) (4,000)
Capital per unit of income (loss) sharing $ 5,000 $ 5,000 $5,000
b. $26,000 If May received $4,000, Nona received $2,000 and Olive received $1,000
(fourth step in a), a total of $7,000. Before May received any cash, however,
Nona and Olive would have received $19,000, as shown in the second and
third distributions in the program developed in a.
c. $ 7,250 If May received $13,000, Olive received $3,250 (fourth step in a); however,
Olive previously would have received $4,000 (third step in a); therefore, Olive
received $3,250 + $4,000 = $7,250. Alternatively, when May received
$13,000, May's loss from realization of assets was $7,000 ($20,000 –
1
$13,000 = $7,000) and Olive's loss was $1,750 ($7,000 x 4
= $1,750);
therefore, $9,000 – $1,750 = $7,250.
d. $41,000 According to the cash distribution program developed in a, Nona received
$11,000, Olive received $2,000, and May received nothing. Thus, May lost
$20,000, Nona lost $14,000 ($25,000 – $11,000 = $14,000), and Olive lost
$7,000 ($9,000 – $2,000 = $7,000), or a total loss of $41,000, on the
realization of assets. Alternatively, because the partners received only $13,000
for their equities of $54,000, they must have sustained a loss of $41,000 on
the realization of assets ($54,000 – $13,000 = $41,000).

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Solutions Manual, Chapter 3 120
Ex. 3–11 PAUL & QUINN LLP
Cash Payments in Liquidation.
June through August, 2005

Paul Quinn Total


June $2,000 $ 2,000
July $ 7,200 5,300 12,500
August 13,500 9,000 22,500
Quinn receives $2,500 before Paul receives any cash; any amount paid to partners in excess of
$2,500 is divided in the income-sharing ratio, 60% to Paul and 40% to Quinn.

Ex. 3–12 ORVILLE, PAULA & QUINCY LLP


Cash Distribution Program
September 26, 2005

Creditors Orville Paula Quincy


First $ 80,000 100%
Next
(3 x 8,000) + (2 x 8,000) 40,000 60% 40%
All over $120,000 30% 50% 20%
ORVILLE, PAULA & QUINCY LLP
Working Paper for Cash Distributions to Partners during Liquidation
September 26, 2005
Orville Paula Quincy
Capital account balances before liquidation $120,000 $160,000 $80,000
Income-sharing ratio 3 5 2
Capital per unit of income (loss) sharing $ 40,000 $ 32,000 $40,000
Reduce Orville’s and Quincy’s balances to equal
Paula’s balance (8,000) (8,000)
Capital per unit of income (loss) sharing $32,000 $ 32,000 $32,000
Ex. 3–13 Journal entry for Ang, Bel & Capp LLP, Jan. 21, 2005:
Trade Accounts Payable 20,000
5
Loan Payable to Ang ($7,000 x 7
) 5,000
2
Cap, Capital $6,000 + ($7,000 x ) 7 8,000
Cash 33,000
To record payment to creditors, and first installment to partners.

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121 Modern Advanced Accounting, 10/e
Ex. 3–14 RUIZ, SALVO, THOMAS & URWIG LLP
Cash Distribution Program
May 5, 2005
Creditors Ruiz Salvo Thomas Urwig
First $15,000 100%
Next
(3 x 3,900) 11,700 100%
Next
(3 x 4,100) + 3 4
(4 x 4,100) 28,700 7 7
Next
(3 + 4 + 2 ) x 3 4 2
4,100 36,900 9 9 9
3 4 2 1
All over $92,300 10 10 10 10

RUIZ, SALVO, THOMAS & URWIG LLP


Working Paper for Cash Distributions to Partners during Liquidation
May 5, 2005

Ruiz Salvo Thomas Urwig


Capital account balances before
liquidation $36,000 $32,400 $8,000 $(100)
Income-sharing ratio 3 4 2 1
Capital per unit of income (loss)
sharing $12,000 $ 8,100 $4,000 $(100)
Reduce Ruiz’s balance to next
highest balance of Salvo (3,900)
Capital per unit of income (loss)
sharing $ 8,100 $ 8,100 $4,000 $(100)
Reduce balances of Ruiz and Salvo
to next highest balance of Thomas (4,100) (4,100)
Capital per unit of income (loss)
sharing $ 4,000 $ 4,000 $4,000 $(100)
Reduce balances of Ruiz, Salvo, and
Thomas to lowest balance of
Urwig (4,100) (4,100) (4,100)
Capital per unit of income (loss)
sharing $ (100) $ (100) $ (100) $(100)

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Solutions Manual, Chapter 3 122
Ex. 3–15 ALLEN, BROWN & COX LLP
Cash Distribution Program
September 30, 2005

Creditors Allen Brown Cox


First $ 53,000 100%
Next (2 x 333) 666 100%
Next (3 + 2) x 19,067 95,335 60% 40%
All over $149,001 50% 30% 20%

ALLEN, BROWN & COX LLP


Working Paper for Cash Distributions to Partners during Liquidation
September 30, 2005

Allen Brown Cox


Capital account balances before liquidation $88,000 $110,000 $74,000
Income-sharing ratio 5 3 2
Capital per unit of income (loss) sharing $17,600 $ 36,667 $37,000
Reduce Cox’s balance to next highest balance of
Brown (333)
Capital per unit of income (loss) sharing $17,600 $ 36,667 $36,667
Reduce Brown’s and Cox’s balances to lowest
balance of Allen (19,067) (19,067)
Capital per unit of income (loss) sharing $17,600 $ 17,600 $17,600

Ex. 3–16 Journal entries for Davis, Evans & Fagin LLP, Sept. 30, 2005:
Cash 100,000
Davis, Capital 16,000
Evans, Capital 8,000
Fagin, Capital 16,000
Other Assets 140,000
To record realization of assets and division of $40,000 loss among
partners in 4:2:4 ratio.

Liabilities 50,000
Cash 50,000
To record payment to creditors.

1 46,000
Evans, Capital [$34,000 + ($36,000 x )]
3
2 24,000
Fagin, Capital ($36,000 x )
3
Cash 70,000
To record payments to partners in accordance with cash distribution
program.

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123 Modern Advanced Accounting, 10/e
Ex. 3–17 VENWIG CORPORATION
Balance Sheet
October 1, 2005
Assets
Current Assets:
Cash $ 10,500
Trade accounts receivable $15,900
Less: Allowance for doubtful accounts 1,200 14,700
Inventories, at current fair value 48,000
Short-term prepayments 800
Total current assets $ 74,000
Equipment, at current fair value 72,000
Total assets $146,000
Liabilities & Stockholders’ Equity
Current liabilities:
Trade accounts payable $ 16,400
Accrued liabilities 750
Total current liabilities $ 17,150
Stockholders’ equity:
Common stock, $5 par, authorized 50,000 shares, issued and
outstanding 10,000 shares $50,000
Additional paid-in capital 78,850 128,850
Total liabilities & stockholders’ equity $146,000
Ex. 3–18 Journal entries for Yale Corporation:
a. 2005
Jan. 2 Investment in Y-Z Company (Joint Venture) 500,000
Cash 500,000
To record investment in joint venture.

Dec. 31 Investment in Y-Z Company (Joint Venture) 100,000


Investment Income 100,000
To record share of Y-Z Company net income
[($800,000 – $600,000) x 0.50 = $100,000].
b. 2005
Dec. 31 Current Assets ($600,000 x 0.50) 300,000
Plant Assets ($1,500,000 x 0.50) 750,000
Costs and Expenses ($600,000 x 0.50) 300,000
Investment Income 100,000
Current Liabilities ($300,000 x 0.50) 150,000
Long-Term Debt ($600,000 x 0.50) 300,000
Revenue ($800,000 x 0.50) 400,000
Investment in Y-Z Company (Joint Venture) 600,000
To record proportionate share of joint venture's
assets, liabilities, revenue, and expenses.

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Solutions Manual, Chapter 3 124
CASES
Case 3–1 Those who believe that the limited liability partnership (LLP) form does damage the mutual
agency characteristic of a general partnership might point out that an LLP provides a type of
screen between and among partners. Knowing that he or she is responsible only for his or her
acts and the acts of employees being supervised, a partner of an LLP might be somewhat
oblivious to the conduct and acts of other partners. The feeling of "all for one and one for all"
might be lost. Conversely, those who argue to the contrary might allege that, knowing he or she
is not liable for the acts of another partner, a partner of an LLP might be less inclined to "look
over the shoulders" of fellow partners and thus less apprehensive about the possibility of
misconduct by other partners. Thus, the partner may have a more collegial relationshipone
contributory to mutual agencywith other partners.
Case 3–2 In order to prepare a cash distribution program for the liquidating Nance, Olson, & Peale LLP,
Nancy Lane must estimate the amount of the partnership's unrecorded trade accounts payable
and other unrecorded liabilities. Methods for such estimating include reviewing unpaid invoices
and statements from vendors and other suppliers of goods and services; requesting current
statements from vendors and suppliers for whom such documents are not available at the
partnership; controlling incoming mail and screening it for invoices and statements from
vendors and suppliers; determining if all required payroll taxes and sales taxes, as well as other
taxes, have been paid; and inquiring of the partners, after they review lists of unpaid liabilities
developed through the foregoing procedures, if they know of any other unpaid liabilities. After
developing an estimate of total unrecorded liabilities by means of the foregoing procedures,
Lane may withhold cash in that amount during the installment liquidation of the partnership.
Case 3–3 a. The creditors of the partnership have total claims of $46,000 ($21,000 + $55,000 –
$30,000 = $46,000, the net debit balance of the three capital accounts). They may collect
their claims in full from Berg, who has net assets of $65,000 ($110,000 – $45,000 =
$65,000), or they may collect in part from Loomis, who has $10,000 ($55,000 – $45,000
= $10,000) of net assets, and collect the remainder from Berg.
b. The creditors of Berg and Loomis may collect in full, because both are solvent; the
creditors of Hancock may collect only $20,000, the amount of her assets. This represents
only 50% of their claims. They can collect nothing from the partnership, because the
partnership has no cash and Hancock has no equity in the partnership.
c. Because Hancock is insolvent, her $21,000 capital deficit represents an additional loss to
be divided equally between Berg and Loomis. After allocation of this loss, Berg will have
an equity of $19,500 ($30,000 – $10,500 = $19,500), and Loomis's debit balance will
increase to $65,500 ($55,000 + $10,500 = $65,500). If the creditors of the partnership
have collected their total claims from Berg, his equity will have risen to $65,500 ($19,500
+ $46,000 = $65,500), but he will be able to collect from Loomis only $10,000, the excess
of Loomis's personal resources over the claims of his personal creditors. Berg's ultimate
loss would have been the same, that is, $66,000 ($30,000 + $46,000 – $10,000 =
$66,000) if Loomis had used some of his resources to pay partnership creditors, because
this act would have reduced the need for such payments by Berg and would have reduced
the amount Berg collected from Loomis.

The McGraw-Hill Companies, Inc., 2006


125 Modern Advanced Accounting, 10/e
Case 3–4 a. The liquidation procedures followed by Lois Allen were not entirely appropriate. The
partners had agreed to share net income and losses equally, and this 50:50 ratio was
applicable not only during the operation of the partnership but also to gains and losses
from liquidation. By dividing the gains and losses from realization of noncash assets in a
40:60 ratio, Allen caused Barbara Brett to bear an inappropriate portion of the loss (or to
receive an inappropriate portion of the gain). Allen also erred in treating Brett's loan as
payable in full, regardless of the amount of loss to be deducted from the partners' capital
accounts. Because of the right of offset, no priority attaches to a partner's loan account in
liquidation.
b. Brett's capital account balance prior to liquidation was $60,000. If she received $24,000 in
settlement of her capital account in addition to full payment of her loan account, she
incurred a loss of $36,000 ($60,000 – $24,000 = $36,000) in the liquidation. Under the
procedure followed by Allen in the liquidation, the $36,000 loss to Brett was 60% of the
total loss of $60,000 ($36,000 ÷ 0.60 = $60,000).
If the liquidation had been handled properly, the total loss of $60,000 would have been
divided equally between the partners. Allen would have received $10,000 ($40,000 –
$30,000 = $10,000) cash in settlement of her equity, and Brett would have received
$40,000 including her loan account ($70,000 – $30,000 = $40,000). The improper
methods used by Allen resulted in an overpayment to her and an underpayment to Brett of
$6,000.
A question also might be raised as to whether Allen exceeded her authority by realizing the
assets without approval by Brett of the amounts to be accepted.
Case 3–5 Because many of the questions raised by the partners of the Wells, Conner & Zola Partnership
involve provisions of the Uniform Partnership Act, in effect in most states, and the U.S.
Bankruptcy Code, it is advisable for the partnership's accountant to request that the partners
retain an independent attorney, other than their personal attorneys, to provide counsel on legal
issues. Apart from that, the partnership's accountant may respond to accounting-type questions
as follows:
(1) Because the goodwill was recognized when Zola was admitted to the partnership, it most
likely is impaired and thus should be written off. However, the write-off should be
absorbed by the partners in their income-sharing ratio because the events causing the
goodwill to become worthless occurred after the formation of the present partnership. In
any event, in view of Zola's personal bankruptcy and capital deficit in the partnership, it
would make no sense to charge the entire goodwill write-off to Zola's capital.
(2) Pending legal advice to the contrary, the note and interest payable to partner Wells may not
be paid prior to determination of the amounts to be realized from the partnership's office
equipment and library, because if losses on realization caused Wells's capital account to
have a debit balance, he would have to repay the partnership part or all of the amount he
had received for the note and interest.
Because both Wells and Conner intend to continue the practice of public accounting, the
accountant for the dissolving and liquidating Wells, Conner & Zola Partnership might advise
Wells and Conner to consider reestablishing the previous Wells & Conner Partnership and
merely transfer their interests in the liquidating partnership to it. Alternatively, if Wells and
Conner decide to go their separate ways, they might consider receiving the noncash assets in
some appropriate split, and any cash remaining after trade accounts payable of $140,000 have
been paid, as their residual equity in the liquidating partnership. This course of action would
avoid the necessity of incurring possible substantial losses on the realization of the noncash
assets.
Case 3–6 If Anne Sanchez is not satisfied that a change to the equity method of accounting from the
proportionate share method is justified in terms of being preferable for accounting for the
Kane & Grant Partnership's investment in KG/WM Company, she should refuse the request of
Jane Kane and Lloyd Grant to make the change. It appears that Kane is interested in "window
dressing" the prospective corporation's opening balance sheet; that objective does not constitute
The McGraw-Hill Companies, Inc., 2006
Solutions Manual, Chapter 3 126
justification for the change. However, given that the Financial Accounting Standards Board has
not yet established accounting standards for investments in unincorporated joint ventures, and
that presently two methods of accounting for such investments are used in practice, Sanchez
should consider other possible reasons for justification of the accounting change. One reason
might be that other venturers in ventures such as KG/WM Company are using the equity
method of accounting for their investments; consistency among venturers might then provide
justification for a change in the Kane & Grant Partnership's accounting for its investment in
KG/WM Company.
Case 3–7 An argument in favor of a single accounting method for investments in both corporate and
unincorporated joint ventures is the desire for consistency in accounting practices for all
business enterprises, regardless of their legal form. Typically, the difference between a
corporate joint venture and an unincorporated joint venture is one of legal form; therefore, no
justification exists for different accounting methods for investments in joint ventures, whether
incorporated or unincorporated. Accompanying the argument for consistency is the argument
for comparability; users of financial statements issued by investors in joint ventures should
not have to deal with more than one method of accounting for such investments.
The choice of a single accounting method for investments in joint ventures is a difficult one.
Presumably, because investors in corporate joint ventures do not have unlimited liability for
debts of the venture (unless they have guaranteed payment of such debts), the proportionate
share method of accounting is inappropriate. However, the opposing argument in favor of the
proportionate share method of accounting for investments in unincorporated joint ventures
emphasizes that "off-balance-sheet financing" is avoided by use of the method, and that the
Financial Accounting Standards Board in recent years has attempted to eliminate that abuse
wherever possible. A rebuttal to that argument is that recognition of parts of an unincorporated
joint venture's nonmonetary assets in the balance sheet of a venturer is difficult to justify from
a theoretical or a practical point of view.
Perhaps, because of the different legal statuses of corporate and unincorporated joint ventures,
one method of accounting should be established for investments in corporate joint ventures and
another method for investments in unincorporated joint ventures. This would be a compromise
that would accord recognition to the different obligations for unpaid liabilities of the ventures
by investors therein; however, it would place undue emphasis on the legal form of the two
types of joint ventures.
To sanction more than one type of accounting for investments in both corporate and
unincorporated joint ventures is difficult to justify. Accounting standards setters have for
decades attempted to narrow differences in accounting treatments for like transactions and
events; allowing more than the presently required equity method of accounting for investments
in corporate joint ventures would be contradictory to that effort.

The McGraw-Hill Companies, Inc., 2006


127 Modern Advanced Accounting, 10/e
20 minutes, Easy
Doris, Elsie & Frances Partnership Pr. 3–1
Doris, Elsie & Frances Partnership
Journal Entries

20 05
Jan 17 Cash 9 0 0 0 0
Elsie, Capital ($280,000 – $200,000) 8 0 0 0 0
Frances, Capital ($250,000 – $240,000) 1 0 0 0 0
To record additional investments by Elsie and by Frances
in
Frances in partial settlement of their capital deficits.

17 Trade Accounts Payable 6 0 0 0 0


Doris, Capital 3 0 0 0 0
Cash 9 0 0 0 0
To record payment of liabilities, with remaining cash to
Doris in partial settlement of equity in partnership.

17 Doris, Capital ($120,000 – $30,000) 9 0 0 0 0


Elsie, Capital ($160,000 – $80,000) 8 0 0 0 0
Frances, Capital ($20,000 – $10,000) 1 0 0 0 0
To write off capital deficits of Elsie and Frances
against equity of Doris, and to complete liquidation of
partnership.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 128
20 Minutes, Easy
Olmo, Perez & Quinto LLP Pr. 3–2
Olmo, Perez & Quinto LLP
Journal Entries

20 05
Feb 1 Cash 1 4 0 0 0 0
Olmo, Capital ($40,000 x 0.40) 1 6 0 0 0
Perez, Capital ($40,000 x 0.40) 1 6 0 0 0
Quinto, Capital ($40,000 x 0.20) 8 0 0 0
Other Assets 1 8 0 0 0 0
To record realization of assets at a loss of $40,000
($180,000 – $140,000 = $40,000).

1 Trade Accounts Payable 9 0 0 0 0


Loan Payable to Olmo [$40,000 + ($20,000 x 2/3)] 5 3 3 3 3
Quinto, Capital ($20,000 x 1/3) 6 6 6 7
Cash ($10,000 + $140,000) 1 5 0 0 0 0
To record payment of liabilities and distribution of cash
to partners (see Exhibit 1 on page 130).

4 Cash 5 0 0 0 0
Olmo, Capital ($10,000 x 0.40) 4 0 0 0
Perez, Capital ($10,000 x 0.40) 4 0 0 0
Quinto, Capital ($10,000 x 0.20) 2 0 0 0
Other Assets 6 0 0 0 0
To record realization of remaining assets at a loss of
$10,000 ($60,000 – $50,000 = $10,000).

4 Loan Payable to Olmo ($60,000 – $53,333) 6 6 6 7


Olmo, Capital [($50,000 x 2/3) – $6,667] 2 6 6 6 6
Quinto, Capital ($50,000 x 1/3) 1 6 6 6 7
Cash 5 0 0 0 0
To record distribution of cash to partners (see Exhibit 1
on page 130).

5 Cash 3 0 0 0 0
Loan Receivable from Perez 3 0 0 0 0
To record partial payment of loan to Perez.

5 Olmo, Capital ($110,000 x 2/3) 7 3 3 3 3


Quinto, Capital (S110,000 x 1/3) 3 6 6 6 7
Loan Receivable from Perez ($50,000 –
$30,000) 2 0 0 0 0
Perez, Capital ($70,000 + $16,000 + $4,000) 9 0 0 0 0
To write off uncollectible amounts receivable from
Perez.

5 Olmo, Capital ($140,000 – $16,000 – $4,000 –


$26,666 – $73,333) 2 0 0 0 1
Quinto, Capital ($80,000 – $8,000 – $6,667 – $2,000 –
$16,667 – $36,667) 9 9 9 9
Cash 3 0 0 0 0
To record distribution of cash to partners and
completion of liquidation of partnership.

The McGraw-Hill Companies, Inc., 2006


129 Modern Advanced Accounting, 10/e
Olmo, Perez & Quinto LLP (concluded) Pr. 3–2
Exhibit 1 Olmo, Perez & Quinto LLP
Cash Distribution Program
January 31, 2005
Creditors Olmo Perez Quinto
First $ 90,000 1 0 0 %
Next 40,000 (1 x 40,000) 1 0 0 %
Next 420,000 (4+2) x (70,000) 2 / 3 1 / 3
All over $550,000 4 0 % 4 0 % 2 0 %

Olmo, Perez & Quinto LLP


Working Paper for Cash Distributions to Partners during Liquidation
January 31, 2005
Olmo Perez Quinto
Capital account balances before liquidation $ 2 0 0 0 0 0 $( 1 2 0 0 0 0 ) $ 8 0 0 0 0
Income–sharing ratio 4 4 2
Capital per unit of income (loss) sharing $ 5 0 0 0 0 $ ( 3 0 0 0 0 ) $ 4 0 0 0 0
Reduce Olmo’s balance to Quinto’s balance ( 1 0 0 0 0 )
Capital per unit of income (loss) sharing $ 4 0 0 0 0 $ ( 3 0 0 0 0 ) $ 4 0 0 0 0
Reduce balances of Olmo and Quinto to Perez’s
balance ( 7 0 0 0 0 ) ( 7 0 0 0 0 )
Capital per unit of income (loss) sharing $ ( 3 0 0 0 0 ) $ ( 3 0 0 0 0 ) $ ( 3 0 0 0 0 )

Note to Instructor: The loan payable to Olmo is not paid in full in the second journal entry on February 1, 2005, because of the
right of offset.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 130
20 minutes, Easy
Hal, Ian, Jay & Kay LLP Pr. 3–3
Hal, Ian, Jay & Kay LLP
Cash Distribution Program
September 25, 2005
Creditors Hal Ian Jay Kay
First $80,000 1 0 0 %
Next 30,000 (20 x 1,500) 1 0 0 %
Next 75,000 (75 x 1,000) 4 / 1 5 6 / 1 5 5 / 1 5
All over $185,000 2 0 % 2 5 % 3 0 % 2 5 %

Hal, Ian, Jay & Kay LLP


Working Paper for Cash Distributions to Partners during Liquidation
September 25, 2005
Hal Ian Jay Kay
Capital account balance before
liquidation $ 7 0 0 0 0 $ 2 5 0 0 0 $ 6 0 0 0 0 $ 5 0 0 0 0
Income-sharing ratio 2 0 2 5 3 0 2 5
Capital per unit of income (loss)
sharing $ 3 5 0 0 $ 1 0 0 0 $ 2 0 0 0 $ 2 0 0 0
Reduce Hal’s balance to balances
of Jay and Kay ( 1 5 0 0 )
Capital per unit of income (loss)
sharing $ 2 0 0 0 $ 1 0 0 0 $ 2 0 0 0 $ 2 0 0 0
Reduce balances of Hal, Jay, and
Kay to balance of Ian ( 1 0 0 0 ) ( 1 0 0 0 ) ( 1 0 0 0 )
Capital per unit of income (loss)
sharing $ 1 0 0 0 $ 1 0 0 0 $ 1 0 0 0 $ 1 0 0 0

The McGraw-Hill Companies, Inc., 2006


131 Modern Advanced Accounting, 10/e
20 Minutes, Easy
Carson & Worden LLP Pr. 3–4
a. Carson & Worden LLP
Cash Distribution Program
September 23, 2005
Creditors Carson Worden
First $15,000 1 0 0 %
Next 40,000 1 0 0 %
All over $55,000 4 0 % 6 0 %

Carson & Worden LLP


Working Paper for Cash Distribution to Partners during Liquidation
September 23, 2005

Capital account balances before liquidation (including


$10,000 loan payable to Worden) $ 6 0 0 0 0 $ 3 0 0 0 0
Income-sharing ratio 2 3
Capital per unit of income (loss) sharing $ 3 0 0 0 0 $ 1 0 0 0 0
Reduce Carson’s balance to Worden’s balance;
Carson receives $40,000 ($20,000 x 2) ( 2 0 0 0 0 )
Capital per unit of income (loss) sharing $ 1 0 0 0 0 $ 1 0 0 0 0

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 132
Carson & Worden LLP (concluded) Pr. 3–4
b. Carson & Worden LLP
Journal Entries

20 05
Sept 23 Cash 6 0 0 0 0
Carson, Capital ($10,000 x 0.40) 4 0 0 0
Worden, Capital ($10,000 x 0.60) 6 0 0 0
Other Assets 7 0 0 0 0
To record realization of other assets at a loss of
$10,000, divided between Carson and Worden in 2:3
ratio.

23 Trade Accounts Payable 1 5 0 0 0


Loan Payable to Worden 5 4 0 0
Carson, Capital 4 3 6 0 0
Cash 6 4 0 0 0
To record distribution of cash to creditors, and to
partners as below:
Carson Worden
First $40,000 to Carson $40,000
Balance of $9,000 to Carson
and Worden in 2:3 ratio 3,600 $5,400
Totals $43,600 $5,400

Oct 1 Cash 1 8 0 0 0
Carson, Capital ($12,000 x 0.40) 4 8 0 0
Worden, Capital ($12,000 x 0.60) 7 2 0 0
Other Assets 3 0 0 0 0
To record realization of remaining other assets at a
loss of $12,000, divided between Carson and Worden
in 2:3 ratio.

1 Loan Payable to Worden ($10,000 – $5,400) 4 6 0 0


Carson, Capital (balance of capital account) 7 6 0 0
Worden, Capital (balance of capital account) 6 8 0 0
Cash 1 9 0 0 0
To record distribution of cash to partners.

The McGraw-Hill Companies, Inc., 2006


133 Modern Advanced Accounting, 10/e
20 minutes, Easy
Luke, Mayo & Nomura LLP Pr. 3–5
Luke, Mayo & Nomura LLP
Journal Entries

20 05
May 9 Cash 8 0 0 0 0
Luke, Capital 4 0 0 0 0
Mayo, Capital 4 0 0 0 0
Nomura, Capital 4 0 0 0 0
Other Assets 2 0 0 0 0 0
To record realization of assets and division of
$120,000 loss equally among partners.

12 Liabilities 1 0 0 0 0 0
Cash 1 0 0 0 0 0
To record payment to creditors.

18 Liabilities 2 0 0 0 0
Luke, Capital 2 0 0 0 0
To record Luke’s payment to creditors.

25 Cash 2 0 0 0 0
Luke, Capital 1 0 0 0 0
Mayo, Capital 1 0 0 0 0
To record partners’ investments.

June 1 Nomura, Capital 2 0 0 0 0


Cash 2 0 0 0 0
To record payment to Nomura and completion of
liquidation.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 134
30 Minutes, Easy
Luna, Nava & Ruby LLP Pr. 3–6
a. Luna, Nava & Ruby LLP
Computation of Loss from Liquidation
December 31, 2005
Net capital balance of Ruby ($108,000 – $9,000) $ 9 9 0 0 0
Less: Amount received by Ruby on liquidation of partnership 8 3 2 5 0
Ruby’s share of loss on realization of assets (20%) $ 1 5 7 5 0
Total loss from liquidation ($15,750 ÷ 0.20) $ 7 8 7 5 0

b. Luna, Nava & Ruby LLP


Statement of Realization and Liquidation
December 31, 2005
Assets Partners’ Capital (net of drawings)
Cash Other Liabilities Luna (50%) Nava (30%) Ruby (20%)
Balances before liquidation (net) $ 5 2 5 0 0 $ 4 2 6 0 0 0 $ 1 5 0 0 0 0 $ 9 9 0 0 0 $ 1 3 0 5 0 0 $ 9 9 0 0 0
Realization of assets and distribution of loss
of $78,750 (see a) 3 4 7 2 5 0 ( 4 2 6 0 0 0 ) ( 3 9 3 7 5 ) ( 2 3 6 2 5 ) ( 1 5 7 5 0 )
Balances $ 3 9 9 7 5 0 $ 1 5 0 0 0 0 $ 5 9 6 2 5 $ 1 0 6 8 7 5 $ 8 3 2 5 0
Payment to creditors ( 1 5 0 0 0 0 ) ( 1 5 0 0 0 0 )
Balances $ 2 4 9 7 5 0 $ 5 9 6 2 5 $ 1 0 6 8 7 5 $ 8 3 2 5 0
Payment to partners ( 2 4 9 7 5 0 ) ( 5 9 6 2 5 ) ( 1 0 6 8 7 5 ) ( 8 3 2 5 0 )

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 135
Luna, Nava & Ruby LLP (concluded) Pr. 3–6
c. Luna, Nava & Ruby LLP
Journal Entries

20 05
Dec. 31 Cash 3 4 7 2 5 0
Luna, Capital ($78,750 x 0.50) 3 9 3 7 5
Nava, Capital ($78,750 x 0.30) 2 3 6 2 5
Ruby, Capital ($78,750 x 0.20) 1 5 7 5 0
Other Assets 4 2 6 0 0 0
To record realization of other assets at a loss of
$78,750.

31 Liabilities 1 5 0 0 0 0
Cash 1 5 0 0 0 0
To record payment to creditors.

31 Luna, Capital 2 4 0 0 0
Ruby, Capital 9 0 0 0
Luna, Drawing 2 4 0 0 0
Ruby, Drawing 9 0 0 0
To close partners’ drawing accounts to capital
accounts.

31 Luna, Capital 5 9 6 2 5
Loan payable to Nava 3 0 0 0 0
Nava, Capital 7 6 8 7 5
Ruby, Capital 8 3 2 5 0
Cash 2 4 9 7 5 0
To record payments to partners and to complete
liquidation.

The McGraw-Hill Companies, Inc., 2006


136 Modern Advanced Accounting, 10/e
20 Minutes, Easy
Haye & Lee LLP Pr. 3–7
Haye & Lee LLP
Journal Entries
20 05
Apr 1 Haye, Capital 4 4 0 0 0
Accumulated Other Comprehensive Income 2 4 0 0 0
Investments in Marketable Equity Securities 4 4 0 0 0
Haye, Capital ($24,000 x 0.75) 1 8 0 0 0
Lee, Capital ($24,000 x 0.25) 6 0 0 0
To record withdrawal of investments in common stock
by Haye at current fair value of $44,000. The invest-
ment gain of $24,000 is divided between Haye and
Lee in 3:1 ratio.

3 Investment in Wong Products 12% bonds 1 8 0 0 0 0


Other Assets 1 0 0 0 0 0
Haye, Capital ($80,000 x 0.75) 6 0 0 0 0
Lee, Capital ($80,000 x 0.25) 2 0 0 0 0
To record realization of other assets and trade name,
with investment gain of $80,000 divided in 3:1 ratio
between Haye and Lee.

7 Cash 3 5 6 0 0
Haye, Capital ($400 x 0.75) 3 0 0
Lee, Capital ($400 x 0.25) 1 0 0
Investment in Wong Products 12% bonds
($40,000 x 0.90) 3 6 0 0 0
To record realization of $40,000 face amount 12%
bonds, with investment loss of $400 divided in 3:1
ratio between Haye and Lee.

8 Liabilities 2 7 0 0 0
Cash 2 7 0 0 0
To record payment of liabilities.

10 Haye, Capital ($100,000 x 0.90) 9 0 0 0 0


Lee, Capital ($60,000 x 0.90) 5 4 0 0 0
Investment in Wong Products 12% bonds
($160,000 x 0.90) 1 4 4 0 0 0
To record distribution of Wong Products 12% bonds at
carrying amount, equal to 90% of face amount.

15 Haye, Capital 1 5 7 0 0 (1)


Lee, Capital 2 9 0 0 (2)
Cash 1 8 6 0 0 (3)
To record payment of cash to Haye and to Lee, based
on balances of their respective capital amounts, to
complete the liquidation of the partnership.

(1) $72,000 – $44,000 + $18,000 + $60,000 – $300 –


$90,000 = $15,700
(2) $31,000 + $6,000 + $20,000 – $100 – $54,000 =
$2,900
(3) $10,000 + $35,600 – $27,000 = $18,600

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 137
30 Minutes, Easy
Adams, Barna & Coleman LLP Pr. 3–8
a. Adams, Barna & Coleman LLP
Statement of Realization and Liquidation
June 4, 2005
Assets Partners’ Capital
Cash Other Liabilities Adams (40%) Barna (40%) Coleman (20%)
Balances before liquidation (including loan
payable to Barna, $4,000) $ 6 0 0 0 $ 9 4 0 0 0 $ 2 0 0 0 0 $ 2 7 0 0 0 $ 4 3 0 0 0 $ 1 0 0 0 0
Realization of assets at loss of $63,300 3 0 7 0 0 ( 9 4 0 0 0 ) ( 2 5 3 2 0 ) ( 2 5 3 2 0 ) ( 1 2 6 6 0 )
Balances $ 3 6 7 0 0 $ 2 0 0 0 0 $ 1 6 8 0 $ 1 7 6 8 0 $ ( 2 6 6 0 )
Unrecorded trade account payable 5 0 0 ( 2 0 0 ) ( 2 0 0 ) ( 1 0 0 )
Balances $ 3 6 7 0 0 $ 2 0 5 0 0 $ 1 4 8 0 $ 1 7 4 8 0 $ ( 2 7 6 0 )
Payment to creditors ( 2 0 5 0 0 ) ( 2 0 5 0 0 )
Balances $ 1 6 2 0 0 $ 1 4 8 0 $ 1 7 4 8 0 $ ( 2 7 6 0 )
Eliminate Coleman’s capital deficit ( 1 3 8 0 ) ( 1 3 8 0 ) 2 7 6 0
Balances $ 1 6 2 0 0 $ 1 0 0 1 6 1 0 0
Payment to partners ( 1 6 2 0 0 ) ( 1 0 0 ) ( 1 6 1 0 0 )

The McGraw-Hill Companies, Inc., 2006


138 Modern Advanced Accounting, 10/e
Adams, Barna & Coleman LLP (concluded) Pr. 3–8
b. Adams, Barna & Coleman LLP
Journal Entries

20 05
June 4 Cash 3 0 7 0 0
Adams, Capital ($63,300 x 0.40) 2 5 3 2 0
Barna, Capital ($63,300 x 0.40) 2 5 3 2 0
Coleman, Capital ($63,300 x 0.20) 1 2 6 6 0
Other Assets 9 4 0 0 0
To record realization of other assets at a loss of
$63,300.

4 Adams, Capital ($500 x 0.40) 2 0 0


Barna, Capital ($500 x 0.40) 2 0 0
Coleman, Capital ($500 x 0.20) 1 0 0
Liabilities 5 0 0
To record trade account payable.

4 Liabilities 2 0 5 0 0
Cash 2 0 5 0 0
To record payment to creditors.

4 Adams, Capital 1 3 8 0
Barna, Capital 1 3 8 0
Coleman, Capital 2 7 6 0
To eliminate Coleman’s capital deficit.

4 Adams, Capital 1 0 0
Loan Payable to Barna 4 0 0 0
Barna, Capital 1 2 1 0 0
Cash 1 6 2 0 0
To record payments to partners and to complete
liquidation.

c. Coleman’s loss must be limited to $5,000, or $25,000


for the partnership ($5,000 ÷ 0.20 = $25,000). Because
the liquidation of liabilities results in a loss of $500,
only $24,500 may be lost on the realization of other
assets. This requires that other assets realize $69,500
($94,000 – $24,500 = $69,500) to enable Coleman
to receive $5,000 from the partnership to pay personal
creditors in full.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 139
30 Minutes, Easy
Smith, Jones & Webb LLP Pr. 3–9
Smith, Jones & Webb LLP
Statement of Realization and Liquidation
May through July, 2005
Assets Partners’ Capital
Cash Other Liabilities Smith (1/3) Jones (1/3) Webb (1/3)
Balances before liquidation $ 2 0 0 0 0 $ 2 8 0 0 0 0 $ 8 0 0 0 0 $ 6 0 0 0 0 $ 7 0 0 0 0 $ 9 0 0 0 0
May—Realization of assets at loss of $30,000 7 5 0 0 0 ( 1 0 5 0 0 0 ) ( 1 0 0 0 0 ) ( 1 0 0 0 0 ) ( 1 0 0 0 0 )
Balances $ 9 5 0 0 0 $ 1 7 5 0 0 0 $ 8 0 0 0 0 $ 5 0 0 0 0 $ 6 0 0 0 0 $ 8 0 0 0 0
Payment to creditors ( 8 0 0 0 0 ) ( 8 0 0 0 0 )
Balances $ 1 5 0 0 0 $ 1 7 5 0 0 0 $ 5 0 0 0 0 $ 6 0 0 0 0 $ 8 0 0 0 0
Payment to Webb (Exhibit 1, p. 141) ( 1 5 0 0 0 ) ( 1 5 0 0 0 )
Balances $ - 0 - $ 1 7 5 0 0 0 $ 5 0 0 0 0 $ 6 0 0 0 0 $ 6 5 0 0 0
June—Realization of assets at loss of $36,000 2 5 0 0 0 ( 6 1 0 0 0 ) ( 1 2 0 0 0 ) ( 1 2 0 0 0 ) ( 1 2 0 0 0 )
Balances $ 2 5 0 0 0 $ 1 1 4 0 0 0 $ 3 8 0 0 0 $ 4 8 0 0 0 $ 5 3 0 0 0
Payments to partners (Exhibit 1, p. 141) ( 2 5 0 0 0 ) ( 1 0 0 0 0 ) ( 1 5 0 0 0 )
Balances $ - 0 - $ 1 1 4 0 0 0 $ 3 8 0 0 0 $ 3 8 0 0 0 $ 3 8 0 0 0
July—Realization of remaining assets at loss of
$30,000 8 4 0 0 0 ( 1 1 4 0 0 0 ) ( 1 0 0 0 0 ) ( 1 0 0 0 0 ) ( 1 0 0 0 0 )
Balances $ 8 4 0 0 0 $ 2 8 0 0 0 $ 2 8 0 0 0 $ 2 8 0 0 0
Payment to partners ( 8 4 0 0 0 ) ( 2 8 0 0 0 ) ( 2 8 0 0 0 ) ( 2 8 0 0 0

The McGraw-Hill Companies, Inc., 2006


140 Modern Advanced Accounting, 10/e
Smith, Jones & Webb LLP (concluded) Pr. 3–9
Exhibit 1 Smith, Jones & Webb LLP
Cash Distribution Program
April 30, 2005
Creditors Smith Jones Webb
First $80,000 1 0 0 %
Next 20,000 1 0 0 %
Next 20,000 5 0 % 5 0 %
All over $120,000 1 / 3 1 / 3 1 / 3

Smith, Jones & Webb


Working Paper for Cash Distributions to Partners during Liquidation
April 30, 2005
Smith Jones Webb
Capital account balances before liquidation $ 6 0 0 0 0 $ 7 0 0 0 0 $ 9 0 0 0 0
Income-sharing ratio 1 1 1
Divide capital account balances by income-
sharing ratio $ 6 0 0 0 0 $ 7 0 0 0 0 $ 9 0 0 0 0
Required reduction to bring capital balance of
Webb to equal the next highest balance of
Jones ( 2 0 0 0 0 )
Capital per unit of income (loss) sharing $ 6 0 0 0 0 $ 7 0 0 0 0 $ 7 0 0 0 0
Required reduction to bring the capital balances
of Jones and Webb to equal the capital balance
of Smith ( 1 0 0 0 0 ) ( 1 0 0 0 0 )
Capital per unit of income (loss) sharing $ 6 0 0 0 0 $ 6 0 0 0 0 $ 6 0 0 0 0

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Solutions Manual, Chapter 3 141
45 Minutes, Medium
Densen, Eastin & Feller LLP Pr. 3–10
Densen, Eastin & Feller LLP
Cash Distribution Program
December 31, 2005
Creditors Denson Eastin Feller
First $20,000 1 0 0 %
Next 2,400 (3 x 800) 1 0 0 %
Next 5,500 (2 + 3) x (1,100) 6 0 % 4 0 %
All over $27,900 5 0 % 3 0 % 2 0 %

Densen, Eastin & Feller LLP


Working Paper for Cash Distributions to Partners during Liquidation
December 31, 2005
Denson Eastin Feller
Capital account balances before liquidation
(including $10,000 loan payable to Denson) $ 3 2 0 0 0 $ 2 4 9 0 0 $ 1 5 0 0 0
Income-sharing ratio 5 3 2
Divide capital account balances by income-
sharing ratio $ 6 4 0 0 $ 8 3 0 0 $ 7 5 0 0
Required reduction to bring capital per unit of
income sharing for Eastin down to equal the
next highest balance for Feller ( 8 0 0 )
Capital per unit of income (loss) sharing $ 6 4 0 0 $ 7 5 0 0 $ 7 5 0 0
Required reduction to bring capital per unit of
income sharing for Eastin and Feller to equal the
balance for Denson ( 1 1 0 0 ) ( 1 1 0 0 )
Capital per unit of income (loss) sharing $ 6 4 0 0 $ 6 4 0 0 $ 6 4 0 0
4

a. Denson and Feller would receive nothing if


Eastin received only $2,000 on the first
distribution because Eastin is entitled to 100% of
the first $2,400 of any cash distributed after
creditors are paid.

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142 Modern Advanced Accounting, 10/e
Denson, Eastin & Feller LLP (concluded) Pr. 3–10
b. If Denson received $20,000 as a result of the liquidation, the total cash distributed must have been $67,900, consisting of $6,000 of cash on hand and
$61,900 realized from noncash assets. In reaching this conclusion, one may use the priorities indicated in a on page 142 and prepare the following program
of cash payments:
Partners’ Capital
Cash Liabilities Denson (5) Eastin (3) Feller (2)
First $20,000 to creditors $ 2 0 0 0 0 $ 2 0 0 0 0
Next $2,400 to Eastin 2 4 0 0 $ 2 4 0 0
Next $5,500 to Eastin and Feller in 3:2 ratio 5 5 0 0 3 3 0 0 $ 2 2 0 0
Any amount over $27,900 in 5:3:2 ratio 4 0 0 0 0 $ 2 0 0 0 0 1 2 0 0 0 8 0 0 0
Totals $ 6 7 9 0 0 $ 2 0 0 0 0 $ 2 0 0 0 0 $ 1 7 7 0 0 $ 1 0 2 0 0

A short-cut approach to the answer is based on the following: If Denson received $20,000, Denson incurred a loss of $12,000 on a total equity of $32,000.
Because Denson’s income-sharing ratio is 50%, the total loss must be $24,000 ($12,000 ÷ 0.50 = $24,000). A loss of $24,000 would mean that the noncash
assets, which have a carrying amount of $85,900 ($91,900 – $6,000 cash = $85,900), must have realized $61,900 ($85,900 – $24,000 = $61,900).

c. If Feller received $6,200 in the first distribution of cash, Denson must have received $10,000. The reason, as shown in a on page 142, is that Feller is entitled to
receive $2,200 ($5,500 x 0.40 = $2,200) before Denson gets anything. Feller then received the additional $4,000 as a 20% share of the next $20,000 and
Denson received 50% of $20,000, or $10,000.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 143
50 Minutes, Medium
Lord & Lee Partnership; Lord-Lee Corporation Pr. 3–11
a. Lord & Lee Partnership
Journal Entries

20 05
Dec 31 Short-Term Prepayments 1 5 0 0
Land ($45,000 – $28,000) 1 7 0 0 0
Inventories ($75,000 – $56,000) 1 9 0 0 0
Accrued Liabilities 7 5 0
Allowance for Doubtful Accounts 1 2 0 0 0
Lord, Capital ($24,750 x 0.40) 9 9 0 0
Lee, Capital ($24,750 x 0.60) 1 4 8 5 0
To adjust assets and liabilities and to divide net gain
of $24,750 in the income-sharing ratio of 40:60
between Lord and Lee.

31 Lord, Capital 9 0 0
Lee, Capital 1 0 5 0
Cash 1 9 5 0
To record withdrawal of cash by partners to avoid need
for issuance of fractional shares of common stock. (See
(See Jan 2, 2006, journal entry below.)

31 Receivable from Lord-Lee Corporation 1 9 6 8 0 0


Accumulated Depreciation of Buildings 1 7 0 0 0
Allowance for Doubtful Accounts 1 2 0 0 0
Accrued Liabilities 7 5 0
Trade Accounts Payable 1 0 0 0 0
Cash 3 5 0 5 0
Trade Accounts Receivable 3 0 0 0 0
Inventories 7 5 0 0 0
Short-Term Prepayments 1 5 0 0
Land 4 5 0 0 0
Buildings 5 0 0 0 0
To record transfer of assets and liabilities to Lord-Lee
Corporation.

31 Common Stock of Lord-Lee Corporation (12,300 x $16) 1 9 6 8 0 0


Receivable from Lord-Lee Corporation 1 9 6 8 0 0
To record receipt of 12,300 shares of $10 par common
stock issued at $16 a share in payment for net assets
transferred to Lord-Lee Corporation.
20 06
Jan 2 Lord, Capital (4,500 x $16) 7 2 0 0 0
Lee, Capital (7,800 x $16) 1 2 4 8 0 0
Common Stock of Lord-Lee Corporation 1 9 6 8 0 0
To record distribution of common stock of Lord-Lee
Corporation to partners: 4,500 shares to Lord and
7,800 shares to Lee.
Shares allocated as follows:
Lord [($63,000 + $9,900 – $900) ÷ $16] 4,500
Lee [($111,000 + $14,850 – $1,050) ÷ $16] 7,800
Total 12,300

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144 Modern Advanced Accounting, 10/e
Lord & Lee Partnership; Lord-Lee Corporation (continued) Pr. 3–11

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 145
b. Lord-Lee Corporation
Journal Entries

20 06
Jan 2 Memorandum entry: Received authorization to issue
150,000 shares of $10 par common stock.

2 Cash 3 2 0 0 0 0
Common Stock, $10 par (20,000 x $10) 2 0 0 0 0 0
Paid-In Capital in Excess of Par 1 2 0 0 0 0
To record issuance of 20,000 shares of common stock
Tat
at $16 a share to public investors.

2 Cash 3 5 0 5 0
Trade Accounts Receivable 3 0 0 0 0
Inventories 7 5 0 0 0
Short-Term Prepayments 1 5 0 0
Land 4 5 0 0 0
Buildings ($50,000 – $17,000) 3 3 0 0 0
Allowance for Doubtful Accounts 1 2 0 0 0
Accrued Liabilities 7 5 0
Trade Accounts Payable 1 0 0 0 0
Payable to Lord & Lee Partnership 1 9 6 8 0 0
To record acquisition of net assets of Lord & Lee
Partnership.

2 Payable to Lord & Lee Partnership 1 9 6 8 0 0


Common Stock, $10 par (12,300 x $10) 1 2 3 0 0 0
Paid-In Capital in Excess of Par 7 3 8 0 0
To record issuance of 12,300 shares of $10 par
common stock at $16 a share in payment for net
assets acquired from Lord & Lee Partnership.

Lord & Lee Partnership; Lord-Lee Corporation (concluded) Pr. 3–11


The McGraw-Hill Companies, Inc., 2006
146 Modern Advanced Accounting, 10/e
Lord-Lee Corporation
Balance Sheet
January 2, 2006
Assets
Current assets:
Cash $ 3 5 5 0 5 0
Trade accounts receivable $ 3 0 0 0 0
Less: Allowance for doubtful accounts 1 2 0 0 0 1 8 0 0 0
Inventories, at replacement cost 7 5 0 0 0
Short-term prepayments 1 5 0 0
Total current assets $ 4 4 9 5 5 0

Plant assets:
Land, at current fair value $ 4 5 0 0 0
Buildings (net) 3 3 0 0 0 7 8 0 0 0
Total assets $ 5 2 7 5 5 0

Liabilities & Stockholders’ Equity


Current liabilities:
Trade accounts payable $ 1 0 0 0 0
Accrued liabilities 7 5 0
Total current liabilities $ 1 0 7 5 0

Stockholders’ equity:
Common stock, $10 par, authorized 150,000 shares, issued
and outstanding 32,300 shares $ 3 2 3 0 0 0
Additional paid-in capital 1 9 3 8 0 0 5 1 6 8 0 0
Total liabilities & stockholders’ equity $ 5 2 7 5 5 0

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 3 147