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CHAPTER 15

PARTNERSHIPS: TERMINATION AND LIQUIDATION

Answers to Questions

1. A dissolution refers to the cessation of a partnership. In many cases, this process is simply a
preliminary step in the transfer of business property to a newly formed partnership.
Therefore, a dissolution does not necessarily affect the operations of the business. In a
liquidation, however, actual business activities must cease. Partnership property is sold with
the remaining cash distributed to creditors and to any partners with positive capital balances.
Dissolution refers to changes in the composition of a partnership whereas liquidation is the
selling of a partnership's assets.

2. Many reasons can exist that would lead to the termination and liquidation of a partnership.
The business might simply have failed to generate sufficient profits or the partners may elect
to enter other lines of work. Liquidation can also be required by the death, retirement, or
withdrawal of one of the partners. In such cases, liquidation is often necessary to settle the
partner's interest in the business. The bankruptcy of an individual partner can also force the
termination of the business as can the bankruptcy of the partnership itself.

3. During the liquidation process, monitoring the balance of the partners' capital accounts
becomes of paramount importance. That amount will eventually indicate either the cash to
be received by the partners as final distributions or the additional contributions that they are
required to pay. Consequently, all liquidation gains and losses are recorded directly as
changes to these capital balances. Such recording enhances the informational value of the
accounts. As an additional factor, the computation of a net income figure is of diminished
importance since normal operations have ceased.

4. Final distributions made to the various partners are based solely on their ending capital
account balances unless the partners have agreed otherwise. If any partner has a deficit
balance, an additional contribution should be made to offset the negative amount. In some
situations, a question may arise as to whether compensation for a deficit will ever be
forthcoming from the responsible party. The remaining partners may choose to allocate the
available cash immediately based on the assumption that the deficit balance eventually will
prove to be a total loss.

5. A schedule of liquidation provides financial data about the liquidation process as it has
progressed to date. Information to be presented includes the balances of all remaining
assets, the liability total, and the capital account of each partner. In addition, the allocation of
all gains and losses incurred in the liquidation process as well as the payment of expenses
should be evident.

6. From a legal viewpoint, any partner who incurs a negative (or deficit) capital balance is
obligated to make an additional contribution to offset that amount.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-1
7. A safe capital balance is the amount of a partner's capital account that exceeds all possible
needs of a partnership as it goes through liquidation. A partner should, therefore, be able to
receive this balance immediately without endangering the future amount to be received by
any other party connected with the liquidation. Safe capital balances are computed by
projecting a series of assumptions whereby the partnership undergoes maximum losses
during the remainder of the liquidation process. All noncash assets are assumed to have no
resale value, liquidation expenses are set at the largest possible estimation, and all partners
are viewed as personally insolvent. Any capital balance that would remain after this series of
anticipated events can be distributed to the partners immediately without incurring any risk.

8. The marshaling of assets doctrine is a provision within the Uniform Partnership Act that
indicates the priority of claims when a partner becomes personally insolvent. By providing a
ranking of these claims, an orderly and fair distribution of available property can be made.
The marshaling of assets provision states:

Where a partner has become bankrupt or his estate is insolvent, the claims against his
separate property shall rank in the following order:
(I) Those owing to separate creditors,
(II) Those owing to partnership creditors,
(III) Those owing to partners by way of contributions.

9. A partner's personal creditors do have a limited claim against partnership assets. Recovery
is possible but only if payment of all partnership debts is assured and the insolvent partner
has a positive capital balance.

10. For distribution purposes, the Uniform Partnership Act states that loans from partners rank
ahead of the partners’ capital balances. Thus, the handling of loans in a liquidation would
seem to be obvious: When money becomes available for the partners, all loans from
partners should be repaid before any amount is given to a partner because of a safe capital
balance.

A problem arises, though, in the above solution if a partner (especially if the partner is
currently insolvent) has made a loan to a partnership but has a potentially negative capital
balance. The final capital balance may require a contribution to the partnership that the
partner may be unable or unwilling to make. If the Uniform Partnership Act is followed
precisely, a partner could collect money on a loan while still having an obligation to the
partnership because of a negative capital balance.

To avoid this problem, in practice a partner’s loan balance is usually merged with that
partner’s capital balance to minimize the chance of a negative capital balance occurring.
This particular partner may get less money from the liquidation because of this treatment but
the other partners are better protected.

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15-2 Solutions Manual
11. A proposed schedule of liquidation is used by the accountant to determine the allocation of
any cash balances generated during the early stages of liquidation. Often, sufficient cash will
be collected to pay all liabilities as well as potential liquidation expenses. Additional cash
should then be distributed to the partners to allow them immediate use of their funds. A
proposed schedule of liquidation can be produced to determine the allocation of this
available cash. The statement is based on anticipating a series of assumed losses from the
current day forward: all remaining noncash assets are scrapped, maximum liquidation
expenses are incurred, and each partner is personally insolvent. The ending balances that
would result from these simulated transactions represent safe capital balances. This amount
of cash can be distributed presently and the partners will still retain enough capital to absorb
all future losses.

12. A predistribution plan is produced based on an assumed series of losses. Each loss is
calculated to eliminate in turn the capital balance of one of the partners. In this manner, the
accountant can determine the vulnerability to losses exhibited by each capital account.
When the last balance is eliminated, the accountant will have established a series of losses
that exactly offsets each balance. The predistribution plan is then developed by measuring
the effects that are created if the losses do not occur. In effect, the accountant works
backwards through the assumed losses to create a pattern of available cash, the
predistribution plan.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-3
Answers to Problems

1. C

2. A

3. D

4. B

5. B Angela, Capital Woodrow, Capital Cassidy, Capital

Reported balances $19,000 $18,000 $(12,000)


Potential loss from
Cassidy deficit
(split 5/8:3/8) (7,500) (4,500) 12,000
Cash distributions $11,500 $13,500 -0-

6. B Bell Hardy Dennard Suddath


Reported balances $50,000 $56,000 $14,000 $80,000
Loss on sale of assets ($110,000)
split on a 4:3:2:1 basis (44,000) (33,000) (22,000) (11,000)
Adjusted balances $ 6,000 $23,000 $(8,000) $69,000
Potential loss from Dennard
deficit (split 4:3:1) (4,000) (3,000) 8,000 (1,000)
Minimum cash distributions $2,000 $20,000 $ -0- $68,000

7. A

8. A Art Raymond Darby


Reported balances .................................... $18,000 $25,000 $26,000
Loss on sale of assets ($22,000) split
on a 4:3:3 basis ....................................... (8,800) (6,600) (6,600)
Adjusted balances .................................... $ 9,200 $18,400 $19,400
Anticipated liquidation expenses ($12,000)
split on a 4:3:3 basis .............................. (4,800) (3,600) (3,600)
Anticipated maximum loss on inventory
($31,000) split on a 4:3:3 basis .............. (12,400) (9,300) (9,300)
Potential balances .................................... $(8,000) $ 5,500 $ 6,500
Potential loss from Art deficit (split 3:3) . 8,000 (4,000) (4,000)
Current cash distribution ......................... $ -0- $ 1,500 $ 2,500

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15-4 Solutions Manual
9. D Since the partnership currently has total capital of $400,000, the $30,000
that is available would indicate maximum potential losses of $370,000.
A B C
Reported balances $100,000 $120,000 $180,000
Anticipated loss ($370,000) split on
a 2:3:5 basis (74,000) (111,000) (185,000)
Potential balances $ 26,000 $ 9,000 $ (5,000)
Potential loss from C's deficit (split 2:3) (2,000) (3,000) 5,000
Current cash distribution $ 24,000 $ 6,000 $ -0-
10. C A predistribution plan should be created.
Maximum Losses That Can Be Absorbed
Kevin $59,000/40% $147,500
Michael $39,000/30% 130,000 (most vulnerable to losses)
Brendan $34,000/10% 340,000
Jonathan $34,000/20% 170,000
The assumption is made that a $130,000 loss occurs.
Kevin Michael Brendan Jonathan
Reported balances .......................... $59,000 $39,000 $34,000 $34,000
Assumed loss ($130,000) split on
a 4:3:1:2 basis ............................ (52,000) (39,000) (13,000) (26,000)
Adjusted balances ........................... $ 7,000 $ -0- $21,000 $ 8,000
Maximum Losses That Can Now Be Absorbed
Kevin $7,000/4/7 $12,250 (most vulnerable to losses)
Brendan $21,000/1/7 147,000
Jonathan $8,000/2/7 28,000
Kevin Brendan Jonathan
Reported balances ...................................... $7,000 $21,000 $8,000
Assumed loss ($12,250) split on a
4:1:2 basis ............................................... (7,000) (1,750) (3,500)
Adjusted balances $ -0- $19,250 $4,500

Maximum Losses That Can Now Be Absorbed


Brendan $19,250/1/3 $57,750
Jonathan $4,500/2/3 6,750 (most vulnerable to losses)

The assumption is made that a $6,750 loss occurs.

Brendan Jonathan
Reported balances ............................................ $19,250 $4,500
Assumed loss ($6,750) split on a 1:2 basis .... (2,250) (4,500)
Adjusted balances ............................................ $17,000 $ -0-

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-5
11. C To work this problem, a predistribution schedule is necessary. That
schedule, which is computed below, is as follows:
 First $3,000 goes to Menton
 Next $15,000 goes to Menton (2/3) and Hoehn (1/3)
 Next $42,000 goes to Carney (4/7), Menton (2/7), and Hoehn (1/7)
 All remaining cash goes to Carney (4/10), Pierce (3/10), Menton (2/10),
and Hoehn (1/10)
Carney Pierce Menton Hoehn
Beginning balances $60,000 $27,000 $43,000 $20,000
Assumed loss of $90,000 (see
Schedule 1)(4:3:2:1) (36,000) (27,000) (18,000) (9,000)
Step one balances $24,000 $ -0- $25,000 $11,000
Assumed loss of $42,000 (see
Schedule 2) (allocated on
a 4:0:2:1 basis) (24,000) $ -0- (12,000) (6,000)
Step two balances $ -0- $ -0- $13,000 $ 5,000
Assumed loss of $15,000 (see
Schedule 3) (allocated on a
0:0:2:1 basis) -0- -0- (10,000) (5,000)
Step three balances $ -0- $ -0- $ 3,000 $ -0-
Schedule 1
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Carney $60,000/40% $150,000
Pierce $27,000/30% $ 90,000 (most vulnerable)
Menton $43,000/20% $215,000
Hoehn $20,000/10% $200,000
Schedule 2
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Carney $24,000/(4/7) $ 42,000 (most vulnerable)
Menton $25,000/(2/7) $ 87,500
Hoehn $11,000/(1/7) $ 77,000
Schedule 3
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Menton $13,000/(2/3) $ 19,500
Hoehn $ 5,000/(1/3) $ 15,000 (most vulnerable)

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15-6 Solutions Manual
12. C The $16,000 available cash can be distributed but should be done under the
assumption that all deficit balances will be total losses. After offsetting
Jones' loan, the two deficits total $4,000. Fuller and Rogers, the two
partners with positive capital balances, share profits in a 30:20 relationship
(the equivalent of a 60%:40% ratio). Fuller would absorb $2,400 of the
potential loss with Rogers being allocated $1,600. The remaining capital
balances ($10,600 and $5,400) are safe capital balances and those amounts
can be immediately distributed.

13. (8 Minutes) (Payment of safe capital balances)

$6,800 to Cleveland and $1,200 to Pierce

Since the partnership currently has total capital of $350,000, the $8,000 that is
available would indicate maximum potential losses of $342,000.

Nixon Cleveland Pierce

Reported balances ............................. $170,000 $110,000 $70,000


Anticipated loss ($342,000) split
on a 5:3:2 basis ............................ (171,000) (102,600) (68,400)
Potential balances ............................. $ (1,000) $ 7,400 $ 1,600
Potential loss from Nixon's deficit (split 3:2) 1,000 (600) (400)
Current cash distribution .................. $ -0- $6,800 $ 1,200

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-7
14. (20 Minutes) (Final settlement of a partnership being liquidated)

Part a. Brown gets $21,000, Fish gets $12,000, and Stone gets $2,000.

Brown Fish Stone


Reported balances ..................................... $25,000 $15,000 $5,000
Loss on sale of land ($10,000) split
on a 4:3:3 basis ..................................... (4,000) (3,000) (3,000)
Cash distribution ....................................... $21,000 $12,000 $2,000

Part b. Brown gets $16,429 and Fish gets $8,571

Brown Fish Stone


Reported balances ..................................... $25,000 $15,000 $5,000
Loss on sale of land ($20,000) split on
a 4:3:3 basis ........................................... (8,000) (6,000) (6,000)
Adjusted balances ..................................... $17,000 $ 9,000 $(1,000)
Potential loss from Stone's deficit (split 4:3) (571) (429) 1,000
Cash distribution ....................................... $16,429 $ 8,571 $ -0-

Part c. Brown gets $10,714 and Fish gets $4,286

Brown Fish Stone


Reported balances ..................................... $25,000 $15,000 $5,000
Loss on sale of land ($30,000) split on
a 4:3:3 basis ........................................... (12,000) (9,000) (9,000)
Adjusted balances ..................................... $13,000 $ 6,000 $(4,000)
Potential loss from Stone's deficit (split 4:3) (2,286) (1,714) 4,000
Cash distribution ....................................... $10,714 $ 4,286 $ -0-

15. (10 Minutes) (Distribution made of contribution made by partner with deficit
balance)

The entire $20,000 goes to Atkinson.

Atkinson Kaporale Dennsmore Rasputin

Reported balances $60,000 $20,000 $(30,000) $(50,000)


Capital contribution -0- -0- -0- 20,000
Adjusted balances $60,000 $20,000 $(30,000) $(30,000)
Potential loss from Dennsmore
and Rasputin ($60,000) split
on a 4:3 basis (34,286) (25,714) 30,000 30,000
Adjusted balances $25,714 $(5,714) $ -0- $ -0-
Potential loss from Kaporale
($5,714) (5,714) 5,714 -0- -0-
Cash distribution $20,000 $ -0- $ -0- $ -0-

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15-8 Solutions Manual
16. (8 Minutes) (Determine safe capital balances)

Ball gets $143, Eaton gets $1,429, and Lake gets $3,428.

Ace Ball Eaton Lake


Reported balances ....................... $25,000 $28,000 $20,000 $22,000
Maximum losses on land and building
($85,000) split on a 3:3:2:2 basis (25,500) (25,500) (17,000) (17,000)
Estimated liquidation expenses
($5,000) split 3:3:2:2 ................... (1,500) (1,500) (1,000) (1,000)
Potential balances ....................... $(2,000) $ 1,000 $ 2,000 $ 4,000
Potential loss from Ace ($2,000) split
on a 3:2:2 basis .......................... 2,000 (857) (571) (572)
Cash distributions ....................... $ 0 $ 143 $ 1,429 $ 3,428

17. (15 Minutes) (Prepare a proposed schedule of liquidation)

HARDWICK, SAUNDERS, AND FERRIS

Proposed Schedule of Liquidation

Hardwick, Ferris,
Other Accounts Loan and Saunders, Loan &
Cash Assets Payable Capital Capital Capital
Beginning
balances 90,000 820,000 210,000 270,000 200,000 230,000
Sold assets 200,000 (328,000) (51,200) (38,400) (38,400)
Assumed: loss
on remaining
assets (492,000) (196,800) (147,600) (147,600)
Paid liabilities (210,000) (210,000)
Safe balances 80,000 0 0 22,000 14,000 44,000

Of the available $80,000, $22,000 will go to Hardwick, $14,000 to Saunders, and


$44,000 to Ferris.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-9
18. (7 Minutes) (Amount of cash needed to assure payments to all partners)

Watson is the partner most vulnerable to a loss. A loss of only $50,000 would
completely eliminate Watson's capital balance:

Miller $50,000/60% = $ 83,333 loss to eliminate capital


Tyson $50,000/20% = $250,000 loss to eliminate capital
Watson $10,000/20% = $ 50,000 loss to eliminate capital

Thus, if the loss on disposal is less than $50,000, all partners will retain
positive capital balances and receive some cash in liquidation. Because of
this, since "other assets" are $140,000, they must be sold for any amount over
$90,000 for all partners to get cash.

19. (5 Minutes) (Determine safe capital balances)

Maximum potential losses are $128,000, $8,000 in liquidation expenses and a


complete $120,000 loss on the noncash assets. Such a loss would reduce the
capital balances to: Babb $8,800, Whitaker ($5,600), and Edwards ($1,200).
Babb must retain sufficient capital ($6,800) to be able to absorb the possible
losses of Whitaker and Edwards. The remaining $2,000 is a safe capital
balance for Babb.

20. (10 Minutes) (Determine amount to be contributed by partner with a deficit


balance)

White and Blue are both insolvent and have negative capital balances (after
offsetting the loan from White) totaling $15,000. Absorption by the other
partners of these losses would be as follows (on a 30:10:20 basis):

Partner Share of Loss New Capital Balance


Black 30/60 x $15,000 = $7,500 $ (4,500)
Green 10/60 x $15,000 = $2,500 $ (5,500)
Brown 20/60 x $15,000 = $5,000 $10,000

Black, who is also insolvent, now has a deficit capital of $4,500 that would
have to be absorbed by Brown and Green (on a 10:20 basis):

Partner Share of Loss New Capital Balance


Green 10/30 x $4,500 = $1,500 $ (7,000)
Brown 20/30 x $4,500 = $3,000 $ 7,000

Thus, Green must contribute $7,000 that will go to Brown.

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15-10 Solutions Manual
21. (50 Minutes) (Compute effects of a liquidation under a variety of
circumstances)
a. Dobbs receives the entire $10,000.
Maximum potential losses of $250,000 on noncash assets would be allocated
as follows:
Partner Share of Loss New Capital Balance
Adams 2/10 x $250,000 = $50,000 $ 30,000
Baker 3/10 x $250,000 = $75,000 $(45,000)
Carvil 3/10 x $250,000 = $75,000 $(15,000)
Dobbs 2/10 x $250,000 = $50,000 $ 40,000
Maximum total potential losses of $60,000 to be absorbed from Baker and
Carvil above would then be allocated as follows on a 2:2 basis:
Adams 2/4 x $60,000 = $30,000 -0-
Dobbs 2/4 x $60,000 = $30,000 $ 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 $250,000 on noncash assets would be allocated
as follows:
Partner Share of Loss New Capital Balance
Adams 2/10 x $250,000 = $50,000 $ 30,000
Baker 2/10 x $250,000 = $50,000 $(20,000)
Carvil 3/10 x $250,000 = $75,000 $(15,000)
Dobbs 3/10 x $250,000 = $75,000 $ 15,000
Maximum total potential losses of $35,000 to be absorbed from Baker and
Carvil above would be allocated as follows on a 2:3 basis:
Adams 2/5 x $35,000 = $14,000 $ 16,000
Dobbs 3/5 x $35,000 = $21,000 $ (6,000)
Absorbing the final $6,000 loss from Dobbs would leave Adams with a safe
capital balance of $10,000.

c. Adams receives $57,500 and Dobbs gets $22,500.


The $50,000 loss on sale of the building would be allocated as follows:
Partner Share of Loss New Capital Balance
Adams 10% x $50,000 = $5,000 $ 75,000
Baker 30% x $50,000 = $15,000 $ 15,000
Carvil 30% x $50,000 = $15,000 $ 45,000
Dobbs 30% x $50,000 = $15,000 $ 75,000

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-11
21. c. (continued)

Maximum potential loss of $130,000 on the land would be allocated as follows:

Partner Share of Loss New Capital Balance


Adams 10% x $130,000 = $13,000 $ 62,000
Baker 30% x $130,000 = $39,000 $ (24,000)
Carvil 30% x $130,000 = $39,000 $ 6,000
Dobbs 30% x $130,000 = $39,000 $ 36,000

Maximum potential loss of $24,000 to be absorbed from Baker would be


allocated as follows on a 1:3:3 basis:

Adams 1/7 x $24,000 = $3,428 $ 58,572


Carvil 3/7 x $24,000 = $10,286 $ (4,286)
Dobbs 3/7 x $24,000 = $10,286 $ 25,714

Maximum potential loss of $4,286 to be absorbed from Carvil would be


allocated as follows on a 1:3 basis:

Adams 1/4 x $4,286 = $1,072 $57,500


Dobbs 3/4 x $4,286 = $3,214 $22,500

These amounts represent safe capital balances for distribution purposes.

d. The land and building must be sold for over $115,000 to ensure that Carvil will
receive some cash.

Adams Baker Carvil Dobbs


Beginning balances $ 80,000 $ 30,000 $ 60,000 $ 90,000
Assumed loss of $100,000 (see
Schedule 1) (1:3:4:2) (10,000) (30,000) (40,000) (20,000)
Step One balances $ 70,000 $ -0- $ 20,000 $ 70,000
Assumed loss of $35,000 (see
Schedule 2) (allocated on a
1:0:4:2 basis) (5,000) -0- (20,000) (10,000)
Step Two balances $ 65,000 $ -0- $ -0- $ 60,000
Assumed loss of $90,000 (see
Schedule 3) (allocated on a
1:0:0:2 basis) (30,000) -0- -0- (60,000)
Step Three balances $ 35,000 $ -0- $ -0- $ -0-

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15-12 Solutions Manual
21. d. (continued)

PREDISTRIBUTION PLAN

The first $35,000 available goes to Adams. Next $90,000 is split between
Adams and Dobbs on a 1:2 basis. Next $35,000 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 $125,000 ($35,000 + $90,000) 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 $115,000 to ensure
Carvil of receiving some amount.

As another approach to the problem, Carvil's capital balance is eliminated


through the $100,000 Step One loss and the $35,000 Step Two loss. Thus,
avoiding a complete $135,000 loss ensures that Carvil will receive cash. Since
the land and buildings have a book value of $250,000, such losses would be
avoided by receiving over $115,000.

Schedule 1
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Adams $80,000/10% $800,000
Baker $30,000/30% $100,000 (most vulnerable)
Carvil $60,000/40% $150,000
Dobbs $90,000/20% $450,000

Schedule 2
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Adams $70,000/(1/7) $490,000
Carvil $20,000/(4/7) $ 35,000 (most vulnerable)
Dobbs $70,000/(2/7) $245,000

Schedule 3
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Adams $65,000/(1/3) $195,000
Dobbs $60,000/(2/3) $ 90,000 (most vulnerable)

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-13
22. (30 Minutes) (Prepare a predistributlon plan)
An assumed series of losses is simulated which eliminates each partner's
capital account in turn:
Larson Norris Spencer Harrison
Beginning balances $ 15,000 $ 60,000 $ 75,000 $ 41,250
Assumed loss of $75,000 (see
Schedule 1) (allocated on a
2:3:2:3 basis) (15,000) (22,500) (15,000) (22,500)
Step One balances $ -0- $ 37,500 $ 60,000 $ 18,750
Assumed loss of $50,000 (see
Schedule 2) (allocated on a
0:3:2:3 basis) -0- (18,750) (12,500) (18,750)
Step Two balances $ -0- $ 18,750 $ 47,500 $ -0-
Assumed loss of $31,250 (see
Schedule 3) (allocated on a
0:3:2:0 basis) -0- (18,750) (12,500) -0-
Step Three balances $ -0- $ -0- $ 35,000 $ -0-

PREDISTRIBUTION PLAN
 First $55,000 goes to pay liabilities ($47,000) and liquidation expenses
(estimated at $8,000).
 Next $35,000 available goes to Spencer.
 Next $31,250 is split between Norris and Spencer on a 3:2 basis.
 Next $50,000 is split among Norris, Spencer, and Harrison on a 3:2:3 basis.
 All remaining cash is split among Larson, Norris, Spencer, and Harrison on
the original profit and loss ratio.
Schedule 1
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Larson $15,000/20% $ 75,000 (most vulnerable)
Norris $60,000/30% $200,000
Spencer $75,000/20% $375,000
Harrison $41,250/30% $137,500
Schedule 2
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Norris $37,500/(3/8) $100,000
Spencer $60,000/(2/8) $240,000
Harrison $18,750/(3/8) $ 50,000 (most vulnerable)
Schedule 3
Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Norris $18,750/(3/5) $ 31,250 (most vulnerable)
Spencer $47,500/(2/5) $118,750

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


15-14 Solutions Manual
23. (20 Minutes) (Prepare and use a predistribution plan)

Part a.

Maximum Losses That Can Be Absorbed

Able* $50,000/.2 $250,000


Moon $60,000/.3 200,000
Yerkl $50,000/.5 100,000 (most vulnerable to losses)

*Able's balance includes capital and the loan to the partnership.

The assumption is made that a $100,000 loss occurs.

Able Moon Yerkl


Reported balances $50,000 $60,000 $50,000
Assumed loss ($100,000) split on a 2:3:5 basis (20,000) (30,000) (50,000)
Adjusted balances $30,000 $30,000 $ 0

Maximum Losses That Can Now Be Absorbed

Able $30,000/.4 $75,000


Moon $30,000/.6 50,000 (most vulnerable to losses)

The assumption is made that a $50,000 loss occurs.

Able Moon
Reported balances $30,000 $30,000
Assumed loss ($50,000) split on a 2:3 basis (20,000) (30,000)
Adjusted balances $10,000 $ 0

PREDISTRIBUTION PLAN

 The first $62,000 will go to pay liquidation expenses ($12,000) and liabilities
($50,000).
 The next $10,000 goes entirely to Able (to pay off loan).
 The next $50,000 is split between Able and Moon based on a 2:3 basis,
respectively.
 All remaining cash will be divided among the partners according to their
profit and loss ratio.

Part b.

After this sale, the partnership has $76,000 in cash. The first $62,000 should be
held for the liabilities and the liquidation expenses. The next $10,000 goes to
Able. The remaining $4,000 is divided between Able ($1,600 or 40%) and Moon
($2,400 or 60%).

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-15
24. (25 Minutes) (Produce a predistribution plan for a partnership liquidation)

Maximum Losses That Can Be Absorbed

Simpson $18,000/20% $ 90,000 (most vulnerable to losses)


Hart $40,000/40% 100,000
Bobb $48,000/20% 240,000
Reidl $135,000/20% 675,000

The assumption is made that a $90,000 loss occurs.

Simpson Hart Bobb Reidl


Reported balances $18,000 $40,000 $48,000 $135,000
Assumed loss ($90,000) split
on a 2:4:2:2 basis (18,000) (36,000) (18,000) (18,000)
Adjusted balances $ 0 $ 4,000 $30,000 $117,000

Maximum Losses That Can Now Be Absorbed

Hart $4,000/4/8 $ 8,000 (most vulnerable to losses)


Bobb $30,000/2/8 120,000
Reidl $117,000/2/8 468,000

The assumption is made that an $8,000 loss occurs.


Hart Bobb Reidl
Reported balances $4,000 $30,000 $117,000
Assumed loss ($8,000) split on a 4:2:2 basis (4,000) (2,000) (2,000)
Adjusted balances $ 0 $28,000 $115,000

Maximum Losses That Can Now Be Absorbed

Bobb $28,000/2/4 56,000 (most vulnerable to losses)


Reidl $115,000/2/4 230,000

The assumption is made that a $56,000 loss occurs.

Bobb Reidl
Reported balances $28,000 $115,000
Assumed loss ($56,000) split on a 2:2 basis (28,000) (28,000)
Adjusted balances $ 0 $ 87,000

PREDISTRIBUTION PLAN

 The first $59,000 goes to pay liabilities and expected liquidation expenses.
 The next $87,000 goes entirely to Reidl.
 The next $56,000 is split evenly between Bobb and Reidl.
 The next $8,000 is split among Hart (4/8), Bobb (2/8), and Reidl (2/8).
 All remaining cash is split among the partners according to their original
profit and loss ratio.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


15-16 Solutions Manual
25. (30 Minutes) (Determine the ramifications of a variety of liquidation situations)

Part A.
(a) $48,000. Maximum losses of $100,000 on the noncash assets would
increase Milburn's deficit balance by $40,000 (or 40%). Maximum losses
would not create any other deficit balances.

(b) All $19,000 should go to Thomas. As Ross and Thomas view the current
situation, maximum potential losses total $108,000: $100,000 on the
noncash assets and $8,000 on Milburn's deficit balance. In determining safe
capital balances, these assumed losses would be allocated on a 4:2 basis
or $72,000 to Ross and $36,000 to Thomas. Since such a loss would entirely
eliminate Ross' capital account, only Thomas has a safe capital balance at
the current time.

(c) The minimum cash payment to Thomas would be $35,667 ($19,000 +


$16,667). As shown in (b) above, the available $19,000 is distributed to
Thomas, thus reducing that partner's capital balance to $39,000. A loss of
$59,000 on the noncash assets would further reduce this partner's balance
by $11,800 ($59,000 x 20%) to $27,200. That same loss would reduce Ross'
capital to $45,400 and Milburn's deficit to ($31,600). The minimum cash
amount would be caused by Milburn's failure to contribute this $31,600 so
that it has to be absorbed by Ross (4/6 or $21,067) and Thomas (2/6 or
$10,533). The remaining safe capital balance of $16,667 would be paid to
Thomas.

Part B.
(a) Carton will have to contribute $7,429. The $29,000 in deficits will have to be
absorbed by Sampson and Carton on a 4:3 basis. Thus, Carton will be
allocated $12,429 of this amount which creates a deficit of $7,429.

(b) Klingon will have to contribute $19,667 [$17,000 + (20/90 x $12,000)] that will
be distributed as follows:

Creditors $15,000
Sampson $ 3,667
Carton $ 1,000

Since Romulan is insolvent, the remaining partners will have to absorb the
$12,000 deficit on a 4:2:3 basis. This allocation increases Klingon's deficit
by 2/9 of $12,000 or $2,667. Klingon must contribute an amount equal to the
new deficit balance of $19,667. The first $15,000 will go to the creditors that
remain after the $9,000 in partnership cash is distributed. The remaining
$4,667 is distributed to the two partners in accordance with their remaining
positive capital balances after absorbing Romulan's loss, 4/9 to Sampson
and 3/9 to Carton. Sampson has a postive capital balance of $3,667 [$9,000
– ($12,000 x 4/9)] and Carton has a positive capital balance of $1,000 [$5,000
– ($12,000 x 3/9)].

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-17
25. (continued)

(c) Sampson should receive $500. If Klingon is insolvent, the $17,000 deficit
balance will have to be absorbed by the remaining three partners on a 4:3:1
basis. This loss would decrease Sampson's capital balance by $8,500 (4/8)
to $500.

26. (25 Minutes) (Prepare journal entries for a partnership liquidation)

JOURNAL ENTRIES
a. Cash . .......................................................................... 56,000
March, Capital (2/6 of loss) ...................................... 6,000
April, Capital (3/6) ..................................................... 9,000
May, Capital (1/6) ...................................................... 3,000
Inventory .............................................................. 74,000

b. March, Capital (2/6 of expenses) ............................. 2,500


April, Capital (3/6) ..................................................... 3,750
May, Capital (1/6) ...................................................... 1,250
Cash ..................................................................... 7,500

c. Liabilities ................................................................... 40,000


Cash ..................................................................... 40,000

d. Cash ........................................................................... 45,000


Accounts Receivable .......................................... 45,000

e. Current Capital Share of Potential


Partner Adjusted Maximum Loss* Capital
March $16,500 2/6 x $77,000 = $25,667 $ (9,167)
April $62,250 3/6 x $77,000 = $38,500 $23,750
May $41,750 1/6 x $77,000 = $12,833 $28,917

*Maximum losses could be suffered on the remaining $39,000 in accounts


receivable and the $38,000 in land, building, and equipment.

Based on the above potential losses, March would have a deficit capital
balance of $9,167 which in turn has to be allocated to the two partners having
positive capital balances:

Potential Capital Share of Potential


Partner (above) March's Deficit Capital
April $23,750 3/4 x $9,167 = $6,875 $16,875
May $28,917 1/4 x $9,167 = $2,292 $26,625

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


15-18 Solutions Manual
26. (continued)

As the above amounts represent safe capital balances, payments can be


presently made to these two partners.
April, Capital ............................................................. 16,875
May, Capital ............................................................... 26,625
Cash ..................................................................... 43,500

f. Cash (30%) ................................................................ 11,700


March, Capital (2/6 of loss) ...................................... 9,100
April, Capital (3/6) ...................................................... 13,650
May, Capital (1/6) ....................................................... 4,550
Accounts Receivable .......................................... 39,000

g. Cash .......................................................................... 17,000


March, Capital (2/6 of loss) ...................................... 7,000
April, Capital (3/6) ..................................................... 10,500
May, Capital (1/6) ...................................................... 3,500
Land, Building and Equipment .......................... 38,000

h. Liabilities ................................................................... 21,000


Cash ..................................................................... 21,000

i. Since $28,700 cash remains and each partner has a positive capital
balance, the money left can be distributed based on these ending totals.

March, Capital ........................................................... 400


April, Capital ............................................................. 21,225
May, Capital ............................................................... 7,075
Cash ..................................................................... 28,700

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-19
27. (30 Minutes) (Determine liquidation proceeds necessary to give partner a
specified amount)

The other assets must be sold for at least $50,000.

For this creditor to get $5,000 from Z's portion of partnership property, $27,000
in cash above the current level must first be generated for creditors and
liquidation expenses. Based on the predistribution schedule below, the next
$10,000 is received solely by Y. A third $8,000 would be split evenly between Y
and Z (giving Z $4,000 of the $5,000 needed). Z needs $1,000 from the next
cash generated in order to satisfy this personal claim. Since the next level
(Step Two balances) is split on a 3:1:1 basis, Z is entitled to 1/5 of the
proceeds. Thus, $5,000 must be collected for Z to receive $1,000. For Z's
creditor to get $5,000, the other assets have to be sold for $50,000 ($27,000 +
$10,000 + $8,000 + $5,000).

A predistribution plan must be developed to generate this information:

W X Y Z
Beginning capital $ 60,000 $ 78,000 $ 40,000 $ 30,000
Assumed loss of $120,000 (see
Schedule 1) (5:3:1:1) (60,000) (36,000) (12,000) (12,000)
Step One balances $ -0- $ 42,000 $ 28,000 $ 18,000
Assumed loss of $70,000 (see
Schedule 2) (allocated on a
0:3:1:1 basis) -0- (42,000) (14,000) (14,000)
Step Two balances $ -0- $ -0- $ 14,000 $ 4,000
Assumed loss of $8,000 (see
Schedule 3) (allocated on a
0:0:1:1 basis) -0- -0- (4,000) (4,000)
Step Three balances $ -0- $ -0- $ 10,000 $ -0-

PREDISTRIBUTION PLAN

 Current cash of $30,000 goes to creditors.


 Next $27,000 generated goes to remaining creditors ($12,000) and to pay
liquidation expenses estimated at ($15,000).
 Next $10,000 goes to Y.
 Next $8,000 goes to Y and Z on a 1:1 basis.
 Next $70,000 goes to X, Y, and Z on a 3:1:1 basis.
 Any remaining cash is split among all four partners based on a 5:3:1:1
basis.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


15-20 Solutions Manual
27. (continued)

Schedule 1
Capital Balance/ Maximum Loss to
Partner Loss Allocation Be Absorbed
W $60,000/50% $120,000 (most vulnerable)
X $78,000/30% $260,000
Y $40,000/10% $400,000
Z $30,000/10% $300,000

Schedule 2
Capital Balance/ Maximum Loss to
Partner Loss Allocation Be Absorbed
X $42,000/(3/5) $ 70,000 (most vulnerable)
Y $28,000/(1/5) $140,000
Z $18,000/(1/5) $ 90,000

Schedule 3
Capital Balance/ Maximum Loss to
Partner Loss Allocation Be Absorbed
Y $14,000/(1/2) $ 28,000
Z $ 4,000/(1/2) $ 8,000 (most vulnerable)

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-21
28. (35 Minutes) (Determine monthly safe capital payments)

VAN, BAKEL, AND COX PARTNERSHIP


Safe Installment Payments to Partners
January 31, 2007

Total Van Bakel Cox


Profit and loss ratio 100% 50% 30% 20%

Preliquidation capital balances $282,000 $118,000 $ 90,000 $74,000


Add (deduct) loans (10,000) (30,000) 20,000 -0-
272,000 88,000 110,000 74,000
January losses (Schedule 1) (28,000) (14,000) (8,400) (5,600)
Equity of partnership—
January 31, 2007 244,000 74,000 101,600 68,400
Potential losses (Schedule 1) (199,000) (99,500) (59,700) (39,800)
45,000 (25,500) 41,900 28,600
Potential loss—Van's deficit balance
(Bakel 3/5; Cox 2/5) -0- 25,500 (15,300) (10,200)
Safe payments to partners $45,000 $ -0- $ 26,600 $18,400

Schedule 1
Computation of Actual and Potential Liquidation Losses
January 2007
Actual Potential
Losses Losses
Collection of accounts receivable ($66,000 – $51,000) $15,000
Sale of inventory ($52,000 – $38,000) ........................... 14,000
Liquidation expenses .................................................... 2,000
Gain resulting from January credit memorandum
reducing liability to creditors .................................. (3,000)
Machinery and equipment, net ..................................... $189,000
Potential unrecorded liabilities and anticipated expenses 10,000
Totals ......................................................................... $ 28,000 $199,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


15-22 Solutions Manual
28. (continued)

VAN, BAKEL, AND COX PARTNERSHIP


Safe Installment Payments to Partners
February 28, 2004

Total Van Bakel Cox


Equity of partnership –
January 31, 2007 (above) .. $244,000 $74,000 $101,600 $68,400
Safe payments (above) .......... (45,000) -0- (26,600) (18,400)
February liquidation expenses (3,000) (1,500) (900) (600)
Equity of partnership –
February 28, 2007 ............. 196,000 72,500 74,100 49,400
Potential liabilities and expenses (6,000) (3,000) (1,800) (1,200)
Potential loss on machinery and
equipment ......................... (189,000) (94,500) (56,700) (37,800)
1,000 (25,000) 15,600 10,400
Potential loss—Van's deficit balance
(Bakel 3/5; Cox 2/5) .......... -0- 25,000 (15,000) (10,000)
Safe payments to partners .... $ 1,000 $ -0- $ 600 $ 400

VAN, BAKEL, AND COX PARTNERSHIP


Safe Installment Payments to Partners
March 31, 2007

Total Van Bakel Cox


Equity of partnership—
February 28, 2004 (above)... $196,000 $72,500 $74,100 $49,400
Safe payments (above).............. (1,000) -0- (600) (400)
Loss on sale of machinery and
equipment ($189,000 – $146,000) (43,000) (21,500) (12,900) (8,600)
Liquidation expenses (5,000) (2,500) (1,500) (1,000)
Safe payments to partners $147,000 $48,500 $59,100 $39,400

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-23
29. (35 Minutes) (Determine cash distributions for four different partnership
liquidations)

Haynes,
Part A Simon, Loan and Jackson,
Capital Capital Capital
Beginning balances $16,000 $ 4,000 ($12,000)
Contribution by Jackson -0- -0- 3,000
Capital balances $16,000 $ 4,000 ($ 9,000)
Elimination of Jackson's deficit
(40:20 basis) (6,000) (3,000) 9,000
Final distribution $10,000 $ 1,000 $ -0-

Hough, Luck,
Part B Loan and Loan and Cummings,
Capital Capital Capital
Beginning balances $82,000 $40,000 $20,000
$82,000 loss on disposal (allocated on a
50:40:10 basis) (41,000) (32,800) (8,200)
Liquidation expenses (50:40:10 basis) (10,500) (8,400) (2,100)
Capital balances 30,500 (1,200) 9,700
Allocation of Luck's deficit (50:10 basis) (1,000) 1,200 (200)
Final distribution $29,500 $ -0- $ 9,500

Hough, Luck,
Part C Loan and Loan and Cummings,
Capital Capital Capital
Beginning balances $82,000 $40,000 $20,000
$82,000 loss on disposal (allocated on a
2:4:4 basis) (16,400) (32,800) (32,800)
Liquidation expenses (2:4:4 basis) (1,200) (2,400) (2,400)
Capital balances $64,400 $ 4,800 ($15,200)
Allocation of Cummings' deficit balance
(2:4 basis) (5,067) (10,133) 15,200
Capital balances $59,333 ($ 5,333) -0-
Allocation of Luck's deficit balance (5,333) 5,333 -0-
Final distribution $54,000 $ -0- $ -0-

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15-24 Solutions Manual
29. (continued)

Part D
Redmond,
Loan and Ledbetter, Watson, Sandridge,
Capital Capital Capital Capital

Beginning balances ($16,000) ($30,000) $ 3,000 $15,000


Allocation of Redmond's
deficit balance (10:30:40
basis) 16,000 (2,000) (6,000) (8,000)
Capital balances -0- ($32,000) ($3,000) $ 7,000
$32,000 contribution by
Ledbetter and $3,000 con-
tribution by Watson -0- 32,000 3,000 -0-
Final distribution* $ -0- $ -0- $ -0- $ 7,000

*Remaining $28,000 is used to pay liabilities.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-25
30. (40 Minutes) (Produce a schedule of liquidation)
FRICK, WILSON, AND CLARKE
Schedule of Partnership Liquidation
Final Balances
Frick, Wilson, Clarke,
Noncash Capital Capital Capital
Cash Assets Liabilities (60%) (20%) (20%)
Beginning balances $48,000 $177,000 $35,000 $101,000 $28,000 $61,000
Distribution of $4,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan – Schedule 1
(4,000) (4,000)
Updated balances $44,000 $177,000 $35,000 $101,000 $28,000 $57,000
Noncash assets sold 48,000 (80,000) (19,200) (6,400) (6,400)
Updated balances $92,000 $97,000 $35,000 $81,800 $21,600 $50,600
All liabilities are paid (35,000) (35,000)
Updated balances $57,000 $97,000 $-0- $81,800 $21,600 $50,600
Distribution of $48,000 (cash in excess of liabilities and estimated liquidation expenses) in accordance with predistribution plan – Schedule 1:
First $23,333 (remainder of first
distribution) (23,333) (23,333)
Next $22,667 (22,667) (17,000) (5,667)
Next $2,000 (2,000) (1,200) (400) (400)
Updated balances $9,000 $97,000 $-0- $63,600 $21,200 $21,200
Noncash assets sold 44,000 (97,000) (31,800) (10,600) (10,600)
Updated balances $53,000 $-0- $-0- $31,800 $10,600 $10,600
Paid liquidation expenses (7,000) (4,200) (1,400) (1,400)
Updated balances $46,000 $-0- $-0- $27,600 $9,200 $9,200
Final distribution based on ending
capital account balances (46,000) (27,600) (9,200) (9,200)
Ending balance $-0- $-0- $-0- $-0- $-0- $-0-

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-29
30. (continued)

Schedule 1
Development of Predistribution Schedule

Frick, Wilson, Clarke,


Capital Capital Capital
Beginning balances ............................... $101,000 $28,000 $61,000
Loss of $140,000 assumed—Schedule 2
(allocated on a 60:20:20 basis) ........... (84,000) (28,000) (28,000)
Step One balances ................................. $ 17,000 $ -0- $33,000
Loss of $22,667 assumed—Schedule 3
(allocated on a 60:20 basis) ................ (17,000) -0- (5,667)
Step Two balances ................................. $ -0- $ -0- $27,333

PREDISTRIBUTION PLAN

 Payment of liabilities and liquidation expenses must be assured. Next


$27,333 goes to Clarke.
 Next $22,667 is split between Frick and Clarke on a 60:20 basis.
 Any further cash is split among Frick, Wilson, and Clarke on a 60:20:20
basis.

Schedule 2

Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Frick $101,000/60% $168,333
Wilson $ 28,000/20% $140,000 (most vulnerable to loss)
Clarke $ 61,000/20% $305,000

Schedule 3

Maximum Loss
Capital Balance/ That Can
Partner Loss Allocation Be Absorbed
Frick $17,000/(60/80) $ 22,667 (most vulnerable to loss)
Clarke $33,000/(20/80) $132,000

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15-30 Solutions Manual
31. (50 Minutes) (Produce a predistribution plan and journal entries for a
partnership liquidation)
Rodgers,
Part A Wingler, Norris, Loan and Guthrie,
Capital Capital Capital Capital
Beginning balances ............... $120,000 $88,000 $109,000 $60,000
Loss of $150,000 assumed (al-
located on a 30:10:20:40
basis) see Schedule 1 ........ (45,000) (15,000) (30,000) (60,000)
Step One balances ................. $ 75,000 $73,000 $ 79,000 $ -0-
Loss of $150,000 assumed (al-
located on a 30:10:20 basis)
see Schedule 2 ..................... (75,000) (25,000) (50,000) -0-
Step Two balances ................. $ -0- $48,000 $ 29,000 $ -0-
Loss of $43,500 assumed
(allocated on a 10:20 basis) see
Schedule 3 ........................... -0- (14,500) (29,000) -0-
Step Three balances ............... $ -0- $33,500 $ -0- $ -0-

PREDISTRIBUTION PLAN

 Payment of all liabilities and liquidation expenses must be assured.


 Next $33,500 goes entirely to Norris.
 Next $43,500 is allocated to Norris (10/30) and Rodgers (20/30).
 Next $150,000 is allocated to Wingler (30/60), Norris (10/60), and Rodgers
(20/60).
 Any further cash distributions are divided on the original profit and loss ratio:
Wingler (30%), Norris (10%), Rodgers (20%), and Guthrie (40%).

Schedule 1

Maximum Loss
Capital Balance/ That Can Be
Partner Loss Allocation Absorbed

Wingler $120,000/30% $400,000


Norris $ 88,000/10% $880,000
Rodgers $109,000/20% $545,000
Guthrie $ 60,000/40% $150,000 (most vulnerable to loss)

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-31
31. a. (continued)
Schedule 2

Maximum Loss
Capital Balance/ That Can Be
Partner Loss Allocation Absorbed
Wingler $75,000/(30/60) $150,000 (most vulnerable to loss)
Norris $73,000/(10/60) $438,000
Rodgers $79,000/(20/60) $237,000

Schedule 3

Maximum Loss
Capital Balance/ That Can Be
Partner Loss Allocation Absorbed
Norris $48,000/(10/30) $144,000
Rodgers $29,000/(20/30) $ 43,500 (most vulnerable to loss)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007


15-32 Solutions Manual
31. (continued)

Part B

Cash ........................................................................... 65,600


Wingler, Capital (30% of $16,400 loss) .............. 4,920
Norris, Capital (10%) ........................................... 1,640
Rodgers, Capital (20%) ....................................... 3,280
Guthrie, Capital (40%) ......................................... 6,560
Accounts Receivable ..................................... 82,000
Receivables are collected with losses allocated
to partners.

Cash ..................................................................... 150,000


Wingler, Capital (30% of $103,000 loss) ............ 30,900
Norris, Capital (10%) ........................................... 10,300
Rodgers, Capital (20%) ....................................... 20,600
Guthrie, Capital (40%) ......................................... 41,200
Land ............................................................... 85,000
Building and Equipment .............................. 168,000
Land, building and equipment are sold with
losses allocated to partners.

Wingler, Capital .................................................. 31,800


Norris, Capital .................................................... 58,600
Rodgers, Loan .................................................... 35,000
Rodgers, Capital ................................................. 15,200
Cash ................................................................ 140,600
Above entry distributes safe capital balances as
shown below (see predistribution plan in part A)
based on a current cash balance of $230,600.

 First $90,000 is held to pay liabilities ($74,000) and estimated liquidation


expenses ($16,000).
 Next $33,500 goes entirely to Norris.
 Next $43,500 is split between Norris ($14,500) and Rodgers ($29,000).
 Remaining $63,600 is allocated to Wingler ($31,800), Norris ($10,600) and
Rodgers ($21,200).
No journal entry is currently required by Guthrie's insolvency.
Liabilities ................................................. 74,000
Cash ..................................................... 74,000
All liabilities are paid.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-33
31. b. (continued)
Cash ................................................................ 71,000
Wingler, Capital (30% of $30,000 loss) ........ 9,000
Norris, Capital (10%) ...................................... 3,000
Rodgers, Capital (20%) .................................. 6,000
Guthrie, Capital (40%) ................................... 12,000
Inventory ................................................... 101,000
Inventory is sold with loss allocated to partners.

Wingler, Capital............................................... 35,500


Norris, Capital ................................................. 11,833
Rodgers, Capital ............................................. 23,667
Cash .......................................................... 71,000
Above entry distributes available cash according to predistribution
plan. Although $87,000 in cash is being held, $16,000 must be
retained to pay liquidation expenses. The remaining $71,000 is
divided among Wingler, Norris, and Rodgers on a 30:10:20 basis.
According to the predistribution plan, a total of $150,000 must be
divided on this ratio but only $63,600 was allocated in this manner
in the first distribution above. Therefore, all $71,000 (making a total
of $134,600) is paid out on this 30:10:20 basis.
Wingler, Capital (30% of expenses) .............. 3,300
Norris, Capital (10%) ....................................... 1,100
Rodgers, Capital (20%) ................................... 2,200
Guthrie, Capital (40%)..................................... 4,400
Cash .......................................................... 11,000
Liquidation expenses are paid.

Wingler, Capital (30/60 of deficit) .................. 2,080


Norris, Capital (10/60) ..................................... 693
Rodgers, Capital (20/60) ................................. 1,387
Guthrie, Capital ........................................ 4,160
To eliminate the deficit balance of insolvent partner as computed
on the next page.

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15-34 Solutions Manual
31. b. (continued)
CAPITAL ACCOUNT BALANCES
Rodgers,
Wingler, Norris, Loan and Guthrie,
Capital Capital Capital Capital
Beginning balances................. $120,000 $88,000 $109,000 $60,000
Loss on accounts receivable . (4,920) (1,640) (3,280) (6,560)
Loss on land, building, and
equipment ............................. (30,900) (10,300) (20,600) (41,200)
Cash distribution ..................... (31,800) (58,600) (50,200) -0-
Loss on inventory .................... (9,000) (3,000) (6,000) (12,000)
Cash distribution ..................... (35,500) (11,833) (23,667) -0-
Liquidation expenses .............. (3,300) (1,100) (2,200) (4,400)
Subtotal ............................. 4,580 1,527 3,053 (4,160)
Guthrie insolvent ..................... (2,080) (693) (1,387) 4,160
Current balances ..................... $2,500 $ 834 $1,666 $ -0-

Wingler, Capital ......................................................... 2,500


Norris, Capital ............................................................ 834
Rodgers, Capital ........................................................ 1,666
Cash ............................................................... 5,000
To distribute remaining cash based on final capital balances.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-35
Excel Case

There are a number of different ways that a spreadsheet could be created to solve
this particular problem. Here is one possible approach:

—Create Column Headings:

In Cell A1, enter label text “Partner”.


In Cell B1, enter label text “Capital Balance”.
In Cell C1, enter label text “Share P/L”.
In Cell D1, enter label text “Initial Loss Share”.
In Cell E1, enter label text “Subsequent Loss Share”.
In Cell F1, enter label text “Remaining Balance”.

—Enter Account Information for each partner:

In Cell A2, enter label text “Wilson.” In Cell B2, enter Wilson’s Capital Balance of
$200,000 and, in Cell C2, enter 40% as share of profit and loss.
In Cell A3, enter label text “Cho.” In Cell B3, enter Cho’s Capital Balance of
$180,000 and, in Cell C3, enter 20% as share of profit and loss.
In Cell A4, enter label text “Arrington.” In Cell B4, enter Arrington’s Capital
Balance of $110,000 and, in Cell C4, enter 40% as share of profit and loss.

—Enter the amounts on which to base the calculations for each partner:

In Cell A7, enter label text “Losses during liquidation” and, in Cell B7, enter the
amount of $50,000.
In Cell A8, enter label text “Final Losses” and, in Cell B8, enter the amount of
$100,000.

—Calculate Initial Loss Share:

Multiply the “Losses during liquidation” amount by the percentage of “Share P/L”
for each partner. To calculate the Initial Share Loss for Wilson, create the
following formula in Cell D2: =+B7*C2. We need to also use this same general
formula for both Cho and Arrington. However, if we drag the fill handle in Cell D2
into Cell D3 and D4, the reference to Cell B7 will automatically change to B8 and
B9 respectively and the reference to Cell C2 will change to C3 and C4 respectively
in order to adjust for the new cell position. The change to C3 and C4 is correct
because those are the individual profit and loss percentages. No change, though,
should be made to the reference to B7 because that is the overall loss in question.
In order to “hold” the reference to Cell B7 when it is copied, we need to create
what is known as an “ABSOLUTE” reference. Absolute references, which are cell
references that always refer to cells in a specific location, can be created by
placing a $ symbol before the Column letter and/or the Row number. Thus, in Cell

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15-36 Solutions Manual
D2, change the formula to read =$B$7*C2, and then copy this formula to cells D3
and D4. The resulting formula in Cell D3 will be =$B$7*C3 and in Cell D4 it will be
=$B$7*C4. The location of the reference to Cell B7 does not change due to the $
symbol in front of the B and in front of the 7.

—Calculate the Partners’ Share of any Subsequent Losses:

Repeat the same process as above, creating a formula in Cell E2 as follows:


=+$B$8*C2
Copy this formula to Cells E3 and E4.

—Calculate the Remaining Capital Balance:

To calculate the Remaining Capital Balance, the beginning Capital Balance must
be reduced by the Initial Loss Share and Subsequent Loss Share.

In creating this last formula, it is important to note that the losses should be
added together and then subtracted in total from the beginning capital balance.
Therefore, enter the following function in Cell F2: =+B2-(D2+E2). The
computation inside the parenthesis is performed first and then subtracted from
the beginning capital balance (B2). Copy this formula to Cells F3 and F4 to
complete the worksheet. Note that the use of the $ is not used here because we
do want B2, D2, and E2 to adjust to the new position when copied.

Once this spreadsheet has been created, any of the variables may be changed
and the results will adjust automatically. There are eight variables that can be
changed: B2, B3, B4, B7, B8, C2, C3, and C4. C2, C3,and C4 must always add to
100%.

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Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e 15-37
Spreadsheet to Determine the Remaining Capital Balances for
Wilson, Cho, and Arrington

A B C D E F
1 Initial
Capital Share Loss Subsequent Remaining
Partner Balance P/L Share Loss Share Balance
2
Wilson $200,000 40% $20,000 $40,000 $140,000
3
Cho 180,000 20% 10,000 20,000 150,000
4
Arrington 110,000 40% 20,000 40,000 50,000
5
$490,000 100% $50,000 $100,000 $340,000
6
7 Losses during
liquidation 50,000
8 Final losses 100,000

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15-38 Solutions Manual