Chapter 10, Problem 20P

The following balance sheet is for a local partnership in which the partners have become very

unhappy with each other.

Cash	$40,000
Land....................	130,000
Building.................	120,000
Total assets...........	$290,000

Liabilities....................	$ 30,000
Adams, capital...............	80,000
Baker, capital................	30,000
Carvil, capital................	60,000
Dobbs, capital...............	90,000
Total liabilities and capital...	$290,000

To avoid more conflict, the partners have decided to cease operations and sell all assets. Using this information, answer the following questions. Each question should be viewed as an independent situation related to the partnership’s liquidation.

a. The $10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 2:3:3:2 basis, respectively, how will the $10,000 be divided?

b. The $10,000 cash that exceeds the partnership liabilities is to be disbursed immediately. If profits and losses are allocated on a 2:2:3:3 basis, respectively, how will the $10,000 be divided?

c. The building is immediately sold for $70,000 to give total cash of $110,000. The liabilities are then paid, leaving a cash balance of $80,000. This cash is to be distributed to the partners. How much of this money will each partner receive if profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 1:3:3:3 basis, respectively?

d. Assume that profits and losses are allocated to Adams, Baker, Carvil, and Dobbs on a 1:3:4:2 basis, respectively. How much money must the firm receive from selling the land and building to ensure that Carvil receives a portion?

To determine

Determine how the amount of $10,000 is to be divided when profits and losses are allocated in the ratio of 2:3:3:2.

Explanation of Solution

Calculate the amount of non cash assets:

$\begin{array}{c}\text{Non}\text{cash}\text{assets}=\text{Land}+\text{Building}\\ =\$130,000+\$120,000\\ =\$250,000\end{array}$

Calculate the amount of new capital balance

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Loss on non cash assets	$   (50,000)	$   (75,000)	$  (75,000)	$   (50,000)
Adjusted capital balance	$     30,000	$   (45,000)	$  (15,000)	$     40,000

Table: (1)

There is a deficit balance of $45,000 from person B and $15,000 from person C which is to be distributed among the partners in their profit sharing ratio.

Calculate the distribution of loss:

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{A}\text{and}\text{person}\text{D}=\$60,000\times \frac{2}{4}\\ =\$30,000\end{array}$

Calculate the ending capital balance of the partners:

Particulars	Person A	Person D
Beginning balance	$     30,000	$     40,000
Loss distribution	$   (30,000)	$   (30,000)
Adjusted capital balance	$               -	$     10,000

Table: (2)

Person D will receive $10,000 cash.

To determine

Determine how the amount of $10,000 is to be divided when profits and losses are allocated in the ratio of 2:2:3:3.

Explanation of Solution

Calculate the amount of new capital balance

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Loss on non cash assets	$   (50,000)	$   (50,000)	$  (75,000)	$   (75,000)
Adjusted capital balance	$     30,000	$   (20,000)	$  (15,000)	$     15,000

Table: (3)

There is a deficit balance of $20,000 from person B and $15,000 from person C which is to be distributed among the partners in their profit sharing ratio.

Calculate the distribution of loss

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{A}=\$35,000\times \frac{2}{5}\\ =\$14,000\\ \text{Loss}\text{share}\text{to}\text{person}\text{D}=\$35,000\times \frac{3}{5}\\ =\$21,000\end{array}$

Calculate the ending capital balance of the partners

Particulars	Person A	Person D
Beginning balance	$     30,000	$     15,000
Loss distribution	$   (14,000)	$   (21,000)
Adjusted capital balance	$     16,000	$     (6,000)

Table: (4)

Loss of $6,000 will be transferred to person A and the net balance of person A would be

$\begin{array}{c}\text{Capital}\text{balance}\text{of}\text{person}\text{A}=\$16,000-\left(\$6,000\right)\\ =\$10,000\end{array}$

Person A will receive the $10,000 cash.

To determine

Determine the amount of money that each partner will receive if profits and losses are allocated in the ratio of 1:3:3:3.

Explanation of Solution

The value of the building is $120,000 and it is sold for $70,000.

Calculate the amount of loss in the sale of building:

$\begin{array}{c}\text{Loss}\text{in}\text{the}\text{sale}\text{of}\text{building}=\$120,000-\$70,000\\ =\$50,000\end{array}$

Calculate the loss distribution to other partners

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{A}=\$50,000\times \frac{1}{10}\\ =\$5,000\\ \text{Loss}\text{share}\text{to}\text{person}\text{B}=\$50,000\times \frac{3}{10}\\ =\$15,000\end{array}$

Now, loss share to other partners

$\begin{array}{c}\text{Loss}\text{share}\text{to}\text{person}\text{C}=\$50,000\times \frac{3}{10}\\ =\$15,000\\ \text{Loss}\text{share}\text{to}\text{person}\text{D}=\$50,000\times \frac{3}{10}\\ =\$15,000\end{array}$

Calculate the ending balances of capital

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Loss on non cash assets	$     (5,000)	$   (15,000)	$  (15,000)	$   (15,000)
Adjusted capital balance	$     75,000	$     15,000	$    45,000	$     75,000

Table: (5)

Calculate the loss of land $130,000:

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{A}=\$130,000\times \frac{1}{10}\\ =\$13,000\\ \text{Loss}\text{to}\text{person}\text{B}=\$130,000\times \frac{3}{10}\\ =\$39,000\end{array}$

Now, loss to other partners:

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{C}=\$130,000\times \frac{3}{10}\\ =\$39,000\\ \text{Loss}\text{to}\text{person}\text{D}=\$130,000\times \frac{3}{10}\\ =\$39,000\end{array}$

Calculate the ending capital balances:

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     75,000	$     15,000	$    45,000	$     75,000
Loss on non cash assets	$   (13,000)	$   (39,000)	$  (39,000)	$   (39,000)
Adjusted capital balance	$     62,000	$   (24,000)	$      6,000	$     36,000

Table: (6)

Calculate the loss distribution of person B to other partners:

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{A}=\$24,000\times \frac{1}{7}\\ =\$3,429\\ \text{Loss}\text{to}\text{person}\text{C}\text{and}\text{D}=\$24,000\times \frac{3}{7}\\ =\$10,286\end{array}$

Calculate the new capital balances after allocation:

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     62,000	$   (24,000)	$      6,000	$     36,000
Loss distribution	$     (3,428)	$     24,000	$  (10,286)	$   (10,286)
New capital balance	$     58,572	$              -	$    (4,286)	$     25,714

Table: (7)

Person C is having a loss of $4,286 which is distributed by person A and person D in their profit sharing ratio

Calculate the loss distribution of partners:

$\begin{array}{c}\text{Loss}\text{share}\text{of}\text{person}\text{A}=\$4,286\times \frac{1}{4}\\ =\$1,072\\ \text{Loss}\text{share}\text{of}\text{person}\text{D}=\$4,286\times \frac{3}{4}\\ =\$3,214\end{array}$

Calculate the ending balance of partners:

Particulars	Person A	Person D
Beginning balance	$     58,572	$     25,714
Loss distribution	$     (1,072)	$     (3,214)
New capital balance	$     57,500	$     22,500

Table: (8)

Person A and person D will receive $57,500 and $22,500 of cash respectively.

To determine

Determine the amount of money that the firm receive from selling the land and building to ensure that person C receives a portion if profits and losses are allocated on 1:3:4:2 basis.

Explanation of Solution

Calculate the amount of money that the firm receive from selling the land and building

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Assumed loss of $100,000	$   (10,000)	$   (30,000)	$  (40,000)	$   (20,000)
New balance	$     70,000	$              -	$    20,000	$     70,000
Assumed loss of $35,000	$     (5,000)		$  (20,000)	$   (10,000)
New balance	$     65,000	$              -	$             -	$     60,000
Assumed loss of $90,000	$   (30,000)			$   (60,000)
New balance	$     35,000	$              -	$              -	$              -

Table: (9)

$35, 000 goes to person A and $90,000 is distributed in the profit sharing ratio of partners of 1:2. Then, $35,000 is distributed among the partners in their profit sharing ratio of 1:4:2 and$100,000 is distributed among the partners in their profit sharing ratio of 1:3:4:2.

The firm has total cash of $125,000 before person C receives any cash. The partnership firm has a cash of $10,000 after paying the liabilities of the firm. The land and building is to be sold for $115,000 for providing a portion to person C.

Working note

Calculate the assumed loss of $100,000:

Particulars	Person A	Person B	Person C	Person D
Beginning balance	$     80,000	$     30,000	$    60,000	$     90,000
Maximum allocated loss	$   800,000	$   100,000	$  150,000	$   450,000

Table: (10)

The maximum allocated loss of person B is less of $100,000. Hence, 100,000 is to be taken as assumed loss.

Calculate the assumed loss of $35,000:

Particulars	Person A	Person C	Person D
Beginning balance	$     70,000	$     20,000	$    70,000
Maximum allocated loss	$   490,000	$     35,000	$  245,000

Table: (11)

The maximum allocated loss of person C is less of $35,000. Hence, $35,000 is to be taken as assumed loss.

Calculate the assumed loss of $90,000:

Particulars	Person A	Person D
Beginning balance	$     65,000	$     60,000
Maximum allocated loss	$   195,000	$     90,000

Table: (12)

The maximum allocated loss of person D is less of $90,000. Hence, $90,000 is to be taken as assumed loss.