How much of the existing cash balance could be distributed safely to partners at this time?

Answer:

The amount of cash that could be distributed to partners at this time = current cash balance $80,000 – liabilities $47,000 – estimate for liquidation expenses $10,000 = $23,000.

Learning Objective: 15-02

Topic: Statement of liquidation―Updated balances

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

REFER TO: 15-11

51. What would be the maximum amount Garr might have to contribute to the partnership to eliminate a deficit balance in his account?

Answer:

Canton

Yulls

Garr

Total

Capital account balances

$138,000

$119,500

$(19,500)

$238,000

Loss on sale of assets

(61,500)

(82,000)

(61,500)

(205,000)

Liquidation expenses

(3,000)

(4,000)

(3,000)

(10,000)

Balances

$73,500

$ 33,500

$(84,000)

$ 23,000

The maximum amount that Garr might have to contribute to eliminate a deficit would be $84,000, assuming that the noncash assets cannot be sold and become a total loss to the partnership.

Learning Objective: 15-03

Topic: Statement of liquidation―Deficit balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

REFER TO: 15-11

52. How much cash should each partner receive at this time, pursuant to a proposed schedule of liquidation?

Answer: To determine the amount to be distributed to partners, assuming maximum losses on liquidation:

Canton

Yulls

Garr

Total

Capital account balances

$138,000

$119,500

$(19,500)

$238,000

Loss on sale of assets

(61,500)

(82,000)

(61,500)

(205,000)

Liquidation expenses

(3,000)

(4,000)

(3,000)

(10,000)

Balances

$73,500

$ 33,500

$(84,000)

$ 23,000

Allocation of deficit

(36,000)

(48,000)

84,000

Balances

$ 37,500

$(14,500)

$ 0

$ 23,000

Allocation of deficit

(14,500)

14,500

_______

______

Safe balance

$ 23,000

$ 0

$ 23,000

The entire $23,000 should be distributed to Canton.

Learning Objective: 15-03

Learning Objective: 15-04

Topic: Safe payments―Allocate potential loss―Deficit

Topic: Schedule of liquidation―Safe capital balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

REFER TO: 15-11

53. If the noncash assets are sold for $105,000, what would be the maximum amount of cash that Canton could expect to receive?

Answer:

The maximum amount that Canton could be expected to receive is $105,000. This assumes that Garr can cover his deficit:

Canton

Yulls

Garr

Total

Capital account balances

$138,000

$119,500

$(19,500)

$238,000

Loss on sale of assets

(30,000)

(40,000)

(30,000)

(100,000)

Liquidation expenses

(3,000)

(4,000)

(3,000)

(10,000)

Balances

$105,000

$ 75,500

$(52,500)

$ 128,000

Learning Objective: 15-03

Topic: Statement of liquidation―Deficit balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

54. A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners.

Required:

Who would have received the $10,400?

Answer:

Since the partnership had total capital of $455,000, the $10,400 that was available would have indicated maximum potential losses of $444,600.

The $10,400 would have gone to Garfield ($8,840) and Arthur ($1,560).

Learning Objective: 15-05

Topic: Predistribution plan―Maximum loss to be absorbed

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

55. A partnership held three assets: Cash, $13,000; Land, $45,000; and a Building, $65,000. There were no recorded liabilities. The partners anticipated that expenses required to liquidate their partnership would amount to $6,000. Capital account balances were as follows:

King, Capital: $32,700

Murphy, Capital: 36,400

Madison, Capital: 26,000

Pond, Capital: 27,900

The partners shared profits and losses 30:30:20:20, respectively.

Required:

Prepare a proposed schedule of liquidation, showing how cash could be safely distributed to the partners at this time.

Answer:

Murphy received $700, Madison received $2,200, and Pond received $4,100.

King

Murphy

Madison

Pond

Recorded balances

$32,700

$36,400

$26,000

$27,900

Maximum losses on land and

building ($110,000)

allocated on a 3:3:2:2 basis

(33,000)

(22,000)

Estimated liquidation

expenses

($6,000) allocated 3:3:2:2

( 1,800)

( 1,200)

Potential balances

$( 2,100)

$ 1,600

$ 2,800

$ 4,700

Assume King to be insolvent

($2,100) allocated 3:2:2

2,100

( 900)

( 600)

Safe balances

$ 0

$ 700

$ 2,200

$ 4,100

Learning Objective: 15-04

Topic: Schedule of liquidation―Safe capital balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

REFERENCE: 15-12

On January 1, 2018, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows:

Debit

Credit

Cash

$ 23,400

Accounts Receivable

85,800

Inventory

67,600

Machinery and equipment, net

245,700

Won, loan

39,000

Accounts payable

$ 68,900

Cadel, loan

26,000

Won, capital

153,400

Cadel, capital

117,000

Dax, capital

96,200

Totals

$ 461,500

The partners planned an installment program to dispose of the business assets and to minimize liquidation losses. All available cash, less an amount retained to provide for future expenses, was to be distributed to the partners at the end of each month. A summary of liquidation transactions follows:

January
$66,300 was collected on the accounts receivable; the balance was deemed to

be uncollectible.

$49,400 was received for the entire inventory.

$2,600 in liquidation expenses were paid.

$65,000 was paid to outside creditors, after receiving a $3,900 credit memo

from a creditor on January 11.

Cash of $13,000 was retained at the end of the month to cover unrecorded

liabilities and anticipated expenses. The balance of cash was distributed to

the partners.
February
$3,900 in liquidation expenses were paid.

$7,800 in cash was retained at the end of the month to cover unrecorded

liabilities and anticipated expenses.
March
$189,800 was received on the sale of all machinery and equipment.

$6,500 in final liquidation expenses were paid.

No cash was retained as all cash was distributed to partners.

[QUESTION]

REFER TO: 15-12

56. Prepare a schedule to calculate the safe payments to be made to the partners at the end of January.

Answer:

Won, Cadel, and Dax Partnership

Safe Installment Payments to Partners

January 31, 2018

Won

Cadel

Dax

Total

Profit and loss ratio

50%

30%

20%

100%

Preliquidation Capital account balances

$153,400

$117,000

$96,200

$366,600

Add (deduct) loans

(39,000)

26,000

(13,000)

Subtotals

114,400

143,000

96,200

353,600

January actual losses (Schedule 1)

(18,200)

(10,920)

(7,280)

(36,400)

Partnership equity January 31, 2018

96,200

132,080

88,920

317,200

Potential losses (Schedule 1)

(129,350)

(77,610)

(51,740)

(258,700)

Subtotals

(33,150)

54,470

37,180

58,500

Potential loss – Won’s deficit balance

33,150

(19,890)

(13,260)

Safe payments to partners:

$ 0

$ 34,580

$23,920

$ 58,500

Proof of cash: Beginning $23,400 + collect A/R $66,300 + collect on inventory $49,400 – paid liq. expenses $2,600 – paid A/P $65,000 – cash retained $13,000 = $58,500.

Schedule 1

Calculation of Actual and Potential Liquidation Losses

January 2018

Actual

Potential

Losses

Collection of accounts receivable ($85,800 – $66,300)

$19,500

Sale of inventory ($67,600 – $49,400)

18,200

Liquidation expenses

2,600

Liability reduction from January credit memo

(3,900)

Machinery and equipment, net

$245,700

Potential unrecorded liabilities and anticipated expenses

______

13,000

Totals

$36,400

$258,700

Learning Objective: 15-04

Topic: Schedule of liquidation―Safe capital balances

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

REFER TO: 15-12

57. Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of February.

Answer:

Won, Cadel, and Dax Partnership

Safe Installment Payments to Partners

February 28, 2018

Won

Cadel

Dax

Total

Profit and loss ratio

50%

30%

20%

100%

Partnership equity January 31, 2018

$96,200

$132,080

$88,920

$317,200

Safe payments to partners, January 31

(34,580)

(23,920)

(58,500)

February liquidation expenses

( 1,950)

( 1,170)

( 780)

( 3,900)

Partnership equity February 28, 2018

94,250

96,330

64,220

254,800

Potential liabilities and expenses

( 3,900)

( 2,340)

( 1,560)

( 7,800)

Potential loss on machinery and equipment

(122,850)

( 73,710)

( 49,140)

( 245,700)

Subtotals

( 32,500)

20,280

13,520

1,300

Potential loss – Won’s deficit

32,500

( 19,500)

( 13,000)

Safe payments to partners

$ 0

$ 780

$ 520

$ 1,300

Proof of cash: Beginning $13,000 – liq. expenses paid $3,900 – cash retained $7,800 = $1,300

Learning Objective: 15-04

Topic: Schedule of liquidation―Safe capital balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

REFER TO: 15-12

58. Prepare a schedule to calculate the safe payments to be made to the partners at the end of March.

Answer:

Won, Cadel, and Dax Partnership

Safe Installment Payments to Partners

March 31, 2018

Won

Cadel

Dax

Total

Profit and loss ratio

50%

30%

20%

100%

Partnership equity February 28, 2018

$94,250

$96,330

$64,220

$254,800

Safe payments to partners, February 28

(780)

(520)

(1,300)

Loss on sale of machinery and

Equipment ($245,700 – $189,800)

(27,950)

(16,770)

(11,180)

(55,900)

Liquidation expenses

(3,250)

(1,950)

(1,300)

(6,500)

Safe payments to partners

$63,050

$76,830

$51,220

$191,100

Learning Objective: 15-04

Topic: Schedule of liquidation―Safe capital balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

REFERENCE: 15-13

Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems, and is insolvent. To satisfy Williams’ creditors, the partnership has decided to liquidate.

The following balance sheet has been produced:

Cash
$ 10,000

Liabilities
$ 80,000
Noncash assets
227,000

Hardin, capital
96,000

Sutton, capital
45,000

Williams, capital
16,000
Total assets
$ 237,000

Total liabilities and capital
$ 237,000

During the liquidation process, the following transactions take place:

– Noncash assets are sold for $116,000.

– Liquidation expenses of $12,000 are paid. No further expenses are expected.

– Safe capital distributions are made to the partners.

– Payment is made of all business liabilities.

– Any deficit capital account balances are deemed to be uncollectible.

[QUESTION]

REFER TO: 15-13

59. Develop a predistribution plan for this partnership, assuming $12,000 of liquidation expenses are expected to be paid.

Answer:

(1.) The first $92,000 pays for liabilities and liquidation expenses.

(2.) The next $28,500 goes to Hardin.

(3.) The next $32,500 goes to Hardin (60%) and Sutton (40%).

(4.) The remainder goes to all three partners in their 3:2:1 ratio.

Hardin

Sutton

Williams

Beginning balances
$ 96,000

$ 45,000

$ 16,000

Assumed $96,000 loss (Schedule A)

( 48,000)

(32,000)

(16,000)

Subtotal
$ 48,000

$ 13,000

$ 0

Assumed $32,500 loss (Schedule B)

( 19,500)

(13,000)

Total
$ 28,500
$ 0

$ 0

Schedule A:

Partner

Capital

Balance/Loss

Maximum Loss that

Allocation

Can Be Absorbed

Hardin
$96,000/ 1/2

$192,000

Sutton

$45,000/ 1/3

$135,000

Williams
$16,000/ 1/6

$ 96,000

Schedule B:

Partner

Capital

Balance/Loss

Maximum Loss that

Allocation

Can Be Absorbed

Hardin
$48,000/60%
$ 80,000
Sutton

$13,000/40%

$ 32,500

Learning Objective: 15-05

Topic: Predistribution plan―Maximum loss to be absorbed

Topic: Predistribution plan―Order of available cash

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

REFER TO: 15-13

60. Compute safe cash payments after the noncash assets have been sold and the liquidation expenses have been paid.

Answer:

Safe Cash Payments:

Hardin

Sutton

Williams

Beginning balances

$ 96,000

$ 45,000

$ 16,000

$12,000 liquidation expenses

( 6,000)

( 4,000)

( 2,000)

$111,000 loss on sale of assets

( 55,500)

(37,000)

(18,500)

Subtotals

$ 34,500

$ 4,000
( 4,500)
Absorption of deficit balance 3:2

( 2,700)

( 1,800)

4,500

Safe Cash Payments $34,000

$ 31,800

$ 2,200

$ 0

Learning Objective: 15-03

Topic: Statement of liquidation―Deficit balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

REFER TO: 15-13

61. Prepare journal entries to record the actual liquidation transactions.

Answer:

Cash

116,000

Hardin, capital

55,500

Sutton, capital

37,000

Williams capital

18,500

Noncash assets

227,000

Hardin, capital

6,000

Sutton, capital

4,000

Williams capital

2,000

Cash

12,000

Hardin, capital

31,800

Sutton, capital

2,200

Cash

34,000

Liabilities

80,000

Cash

80,000

Hardin, capital

$ 2,700

Sutton, capital

1,800

Williams, capital

$ 4,500

Learning Objective: 15-02

Topic: Prepare journal entries to record transactions

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

62. Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September 30, 2018. After realization of a portion of the noncash assets, the capital account balances were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000 were on hand. Creditors’ claims totaled $30,000. Jones, Marge, and Tate shared net income and losses in a 2:1:1 ratio, respectively.

Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at this time, assuming that no partner is solvent.

Answer:

Learning Objective: 15-04