Solution manual advanced accounting 4e jeter ch16

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 16 ANSWERS TO QUESTIONS Realization gains or losses are allocated to partners in their profit and loss ratio because the changes in asset values are the result of risk assumed by the partnership Also, because it may be difficult to separate gains and losses that result from liquidation from the under- or over-statement in book values that result from accounting policies followed in prior years The final cash distribution is based on capital balances, not on profit and loss ratios, since the capital balance represents the partners' "residual claims" to the assets remaining after settlement of partnership obligations Because the UPA order of payment ranks partnership obligations to a partner ahead of asset distributions to a partner for capital investments, a debit balance in a partner's capital account will create problems when that partner has an outstanding loan balance Other partners will have a claim against this partner for the amount of his/her debit balance which is considered to be an asset of the partnership by the UPA If the partner with a debit balance settles his/her obligation with the partnership, there is no problem However, if he/she can't settle, the other partners must absorb the deficit as a loss, even though the partner with the debit balance had received cash for his/her outstanding loan balance To avoid this inequity, the courts have recognized the right of the partnership to offset the loan balance against the debit capital balance Maintaining separate accounts for outstanding loan and capital accounts recognizes the legal distinction between the two This would be important if the liquidation is carried on over an extended period, since the UPA provides that a partner is entitled to accrued interest on the loan balance When the equity interest of one partner is inadequate to absorb realization losses several alternative outcomes are possible If the partner is personally solvent, he may pay the partnership for the amount he is liable If he/she is personally insolvent then the other partners must absorb his/her debit balance in their respective profit and loss ratio If the other partners are unsure of what the partner with the debit balance will do, but still wish to distribute cash, they can assume the worst (absorbing their share of the debit balance) to determine what amount of cash can be safely distributed Cash should not be distributed to any partner until all liquidation losses are recognized in the accounts or are provided for in determining a safe cash payment The classification of assets into personal and partnership categories in recognition of the rights of both partnership creditors and creditors of the individual partners is referred to as "marshalling of assets." To the extent that personal creditors not recover from personal assets they can seek recovery from those partnerships assets still available after partnership obligations have been met This recovery, however, is limited to the extent that the partner involved has a credit interest in partnership assets 16 - To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Because in an installment liquidation the amount of cash to be received from the unsold assets and the resulting gain or loss is unknown, the partners should view each cash distribution as if it were the final distribution 10 The three assumptions upon which a safe cash distribution is determined are (1) any loan balances to partners are offset against their capital accounts, (2) the remaining noncash assets will not generate any more cash, and (3) any partner with a deficit capital balance will not settle his/her obligation to the partnership In other words, assume the worst The safe cash balance is computed as the difference between the current capital balances and the balance required to maintain the above assumptions 11 Unexpected costs are added to the book value of noncash assets When the potential loss on the noncash assets is allocated in the determination of a safe payment, these costs are also included 12 The objective of the procedure is to bring the balance of the partners' capital accounts into the agreed profit and loss ratio as soon as possible so that no one partner is placed in a better position than any other partner 13 The "loss absorption potential" is determined by dividing the partners' net capital balances by their respective profit ratio This determines the maximum amount of loss each partner can absorb 14 The Uniform Partnership Act provides that the liabilities of the partnership shall rank in order of payment as follows: (1) Those owing to creditors other than partners, (2) Those owing to partners other than for capital and profits, (3) Those owing to partners in respect of capital, (4) Those owing to partners in respect of profits Business Ethics Solution Business ethics solutions are merely suggestions of points to address The objective is to raise the students' awareness of the topics, and to invite discussion In most cases, there is clear room for disagreement or conflicting viewpoints 1) Partnership laws grant each partner the right to information about the firm’s business This allows each partner to monitor the firm’s activities Given the circumstances of the case, it would be your duty to inspect any questionable transaction Furthermore, you should ask the partner to explain the reason for increasing the cost by $10,000 This would give you the opportunity to raise the concern regarding the presence of the previously undetected rock If the additional charge is not based on fact, the cost should be removed 2) In the present scenario, it appears that the partner might be experiencing personal financial pressures However, the firm’s reputation and future implications of the action must be considered for the benefit of the partnership Your loyalty to your partner does not alter these responsibilities You may wish to find other, more constructive ways to offer assistance to your partner in meeting his personal obligations, and surviving what may be a difficult time in his life However, ignoring the situation is dishonest to the client and is likely to result in more serious long-term consequences Reference: http://www.lrc.ky.gov/KRS/362-01/403.PDF 16 - To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO EXERCISES Exercise 16-1 Part A Capital balances Loan balances Net interest Potential loss - $50,000 Potential loss - $5,000 Cash distribution Part B (30%) Cook $(30,000) _ (30,000) 15,000 (15,000) 3,000 $(12,000) (50%) Parks $(10,000) (10,000) (20,000) 25,000 5,000 (5,000) $ -0- Liabilities Cash 25,000 Cook, Capital Argo, Capital Cash 12,000 3,000 Cash Cook, Capital ($35,000 0.30) Parks, Capital ($35,000 50) Argo, Capital ($35,000 0.20) Other Assets 15,000 10,500 17,500 7,000 Parks, Loan Parks, Capital 10,000 25,000 15,000 50,000 10,000 Parks, Capital ($10,000 - $17,500 + $10,000) Cook, Capital Argo, Capital Cash 16 - 2,500 7,500 5,000 15,000 (20%) Argo $(15,000) (15,000) 10,000 (5,000) 2,000 $(3,000) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 16-2 Part A Account balances Sale of assets Payment to creditors Cash distribution Cash $70,000 270,000 340,000 (98,000) 242,000 (242,000) $ -0- Noncash Assets Liabilities $260,000 $(98,000) (260,000) _ (98,000) _ 98,000 _ _ $ -0$ -0- Part B Cash John $(90,000) (3,000) (93,000) _ (93,000) 93,000 $ -0- 270,000 Other Assets John, Capital Jake, Capital Joe, Capital 260,000 3,000 4,000 3,000 Liabilities Cash 98,000 John, Capital Jake, Capital Joe, Capital Cash 93,000 82,000 67,000 Exercise 16-3 Capital balances Estimated loss on sale of assets ($45,000) Allocate debit balance Estimated cash payment 98,000 242,000 (1/3) Doug $(55,000) 15,000 (40,000) 11,500 $(28,500) (1/3) Dave $(50,000) 15,000 (35,000) 11,500 $(23,500) 16 - (1/3) Dan $8,000 15,000 23,000 (23,000) $ -0- Capital Balances Jake $(78,000) (4,000) (82,000) _ (82,000) 82,000 $ -0- Joe $(64,000) (3,000) (67,000) _ (67,000) 67,000 $ -0- To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 16-4 Capital balances Drawing account Loans Operating loss Liquidation loss Allocate debit balance Cash distribution (1/5) Amos $(49,000) 10,000 4,200 2,400 (32,400) 733 $(31,667) (2/5) Boone $(18,000) 15,000 (8,000) 8,400 4,800 2,200 (2,200) $0 (2/5) Childs $(10,000) 20,000 (25,000) 8,400 4,800 (1,800) 1,467 $(333) The first $40,000 is paid to satisfy the claims of creditors Exercise 16-5 Account balances Sale of inventory, collect accounts receivable - allocate loss Payment to creditors Payment to partners (Schedule 1) Cash $10,000 38,000 48,000 (18,000) 30,000 (30,000) $ Noncash Assets $130,000 (43,000) 87,000 87,000 _ $87,000 Schedule Capital balances Allocation of potential loss Allocation of deficit Safe Payment Brink Davis Olsen $(43,000) $(25,000) $(49,000) 34,800 34,800 17,400 (8,200) 9,800 (31,600) 6,533 (9,800) 3,267 $(1,667) $ - $(28,333) 16 - Liabilities $(18,000) _ (18,000) 18,000 _ $ Capital Balances Brink Davis Olsen 40% 40% 20% $(45,000) $(27,000) $(50,000) 2,000 2,000 1,000 (43,000) (25,000) (49,000) _ _ _ (43,000) (25,000) (49,000) 1,667 28,333 $(41,333) $(25,000) $(20,667) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 16-6 Part A Balances Sale of other assets and allocation of loss Cash $15,000 30,000 45,000 Noncash Assets $110,000 (110,000) Liabilities $(42,000) (42,000) Allocate Zack's debit balance 45,000 14,286 59,286 (42,000) 17,286 (17,286) $0 Investment by Tom Payment to creditors Payment to Pete (42,000) (42,000) 42,000 0 Capital Balances Pete Tom Zack 40% 30% 30% $(55,000) $(14,000) $(14,000) 32,000 24,000 24,000 (23,000) 10,000 10,000 5,714 4,286 (10,000) (17,286) 14,286 (14,286) (17,286) 0 (17,286) 17,286 $0 $0 $0 Pete receives $17,286 Tom makes an additional investment of $14,286 Zack receives zero and cannot make an investment in the partnership because he is personally insolvent Part B Personal Assets $55,000 30,000 30,000 Pete Tom Zack Exercise 16-7 c c a d d Personal Liabilities $80,000 10,000 50,000 Exercise 16-8 c; X = ¼ b d c d ($690,000 + X); X = $230,000 16 - Excess (Deficiency) $(25,000) 20,000 (20,000) $0 Distribution from Partnership $17,286 - $0 Total Payable to Creditors $72,286 10,000 30,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 16-9 Part A The partnership creditors will receive payment before any distributions are made to the partners The creditors can seek recovery from Q and S's personal assets after their personal creditors have been paid from their personal assets Part B The personal creditors have first claim to the personal assets If they have not fully recovered the amount owed, they have a right to partnership assets after partnership creditors to the extent the partner has a credit interest in the partnership Part C Cash Balances Investment by Q Payment of Liabilities Allocation of T's deficit Investment by S Payment to partners $ Liabilities $(2,000) _ (2,000) 2,000 0 2,000 2,000 (2,000) 7,000 (7,000) $ $ $ Q $(500) (2,000) (2,500) (2,500) 2,000 (500) 500 Part D & E R T Personal Assets $8,000 6,000 Partnership Distribution $6,500 - 16 - Total $14,500 6,000 Capital Balance R S T $(7,500) $6,000 $4,000 (7,500) 6,000 4,000 (7,500) 6,000 4,000 1,000 1,000 (4,000) (6,500) 7,000 (7,000) 6,500 $ $ $ To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 16-10 Part A Net capital interest Profit-loss ratio Loss absorption potential Order of cash distribution Matt Allen Dave $54,000 0.45 $120,000 $30,000 0.30 100,000 $18,000 0.25 $72,000 Loss Absorption Potential Matt Allen Dave 0.45 0.30 0.25 $120,000 $100,000 $72,000 Profit-loss ratio Loss absorption potential Net capital interest Distribution to Matt to reduce loss potential to Allen's Balance after distribution Distribution to Matt and Allen to reduce loss potential to Dave's 20,000 100,000 28,000 $72,000 100,000 28,000 $72,000 Remainder of assets distributed Cash Distribution Plan Order of Cash Distribution First $18,000 Next $9,000 Next $21,000 Remainder Liabilities 100% Part B First $9,000 available to partner Next $21,000 Total Matt 45 Allen 30 Dave 25 100% 60% 45% 40% 30% 25% Matt $9,000 12,600 21,600 Allen Dave $8,400 $8,400 Matt, Loan Matt, Capital Allen, Capital Cash _ $ -0- 10,000 11,600 8,400 30,000 16 - 72,000 $72,000 Assets Distribution Matt Allen Dave 0.45 0.30 0.25 $54,000 9,000 45,000 12,600 $32,400 0.45 $30,000 $18,000 30,000 18,000 8,400 $21,600 $18,000 0.30 0.25 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO PROBLEMS Problem 16-1 Part A - DISCOUNT PARTNERSHIP Schedule of Partnership Liquidation January 14, 2008 Explanation Balances before realization Sales of noncash assets Balances Payment of liabilities Balances Allocation of Hardin's debit balance Balances Distribution of cash to partners Balances Cash $25,000 60,000 85,000 Other Assets Liabilities $120,000 $(40,000) (120,000) (40,000) 45,000 (40,000) Capital Balances Dawson Feeney Hardin $(31,000) $(65,000) $(9,000) 18,000 (13,000) 18,000 9,000 40,000 (13,000) (41,000) 9,000 45,000 3,857 (9,143) (45,000) $ $ $ 9,143 $ 16 - 24,000 (41,000) 5,143 (35,857) (9,000) 35,857 $ $ To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-1 (continued) DISCOUNT PARTNERSHIP Schedule of Partnership Liquidation January 14, 2008 Part A - Explanation Balances before realization Sales of noncash assets Balances Payment of liabilities Balances Cash investment by Hardin Balances Distribution of cash to partners Balances Cash Other Assets $25,000 $120,000 60,000 85,000 (120,000) (40,000) 45,000 9,000 54,000 (54,000) $0 16 - 10 $0 Capital Balances Liabilities Dawson Feeney Hardin $(40,000) $(31,000) $(65,000) $(9,000) (40,000) 18,000 (13,000) 24,000 (41,000) 18,000 9,000 40,000 (13,000) (41,000) 9,000 (13,000) (41,000) (9,000) $0 13,000 $0 41,000 $0 $0 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-1 (continued) Part A – Explanation Balances before realization Sales of noncash assets Balances Payment of liabilities Balances Cash investment by Hardin Balances Allocation of Hardin's deficit Balances Distribution of cash to partners Balances Part B DISCOUNT PARTNERSHIP Schedule of Partnership Liquidation January 14, 2008 Capital Balances Cash Other Assets Liabilities Dawson Feeney Hardin $25,000 $120,000 $(40,000) $(31,000) $(65,000) $(9,000) 50,000 75,000 (120,000) (40,000) 21,000 (10,000) 28,000 (37,000) 21,000 12,000 (40,000) 35,000 40,000 (10,000) (37,000) 12,000 8,000 43,000 (10,000) (37,000) 2,286 (34,714) (4,000) 34,714 $0 $0 43,000 0 (43,000) $0 $0 $0 8,286 $0 60,000 18,000 24,000 18,000 Liabilities Cash 40,000 120,000 40,000 9,000 Hardin, Capital Dawson, Capital Feeney, Capital Cash 1,714 (8,286) Cash Dawson, Capital Feeney, Capital Hardin, Capital Other Assets Cash (8,000) 4,000 9,000 13,000 41,000 54,000 16 - 11 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-2 Balances Sale of asset and allocation of gain Payment to creditors Payment to partners (Schedule 1) Sale of assets and allocation of gain Payment to partners (Schedule 2) Sale of assets and allocation of loss Payment to partners Sale of asset and allocation of loss Payment to partners Cash $5,000 16,000 21,000 (20,000) 1,000 (1,000) 12,000 12,000 (12,000) 10,000 10,000 (10,000) 2,000 2,000 (2,000) $0 Other Assets Liabilities $60,000 $(20,000) (12,000) 48,000 (20,000) 20,000 48,000 48,000 (10,000) 38,000 38,000 (20,000) 18,000 18,000 (18,000) 0 $0 $0 Capital & Loan Balances Nelson Parker Rice 0.40 0.30 $(20,000) $(12,000) $(13,000) (1,600) (1,200) (1,200) (21,600) (13,200) (14,200) (21,600) (13,200) (14,200) 1,000 (20,600) (13,200) (14,200) (800) (600) (600) (21,400) (13,800) (14,800) 6,200 2,400 3,400 (15,200) (11,400) (11,400) 4,000 3,000 3,000 (11,200) (8,400) (8,400) 4,000 3,000 3,000 (7,200) (5,400) (5,400) 6,400 4,800 4,800 (800) (600) (600) 800 600 600 $0 $0 $0 Schedules to Compute Safe Payments Schedule Capital Balance Allocation of potential loss ($48,000) Allocation of deficit balance Safe payment Nelson $(21,600) 19,200 (2,400) 1,400 $(1,000) Parker $(13,200) 14,400 1,200 (1,200) $0 Rice $(14,200) 14,400 200 (200) $0 Nelson $(21,400) 15,200 $(6,200) Parker $(13,800) 11,400 $(2,400) Rice $(14,800) 11,400 $(3,400) Schedule Capital Balance Allocation of potential loss ($38,000) Safe payment 16 - 12 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-3 Beginning Balances 3/15 asset sale 3/16 A/R sale 3/16 pay creditors 3/18 cash distribution (Schedule 1) 3/19 adjustment to fair value 3/19 withdrawal by Murphey 3/21 sale – allocate loss 3/25 assign lease 3/25 cash distribution (Schedule 2) 4/1 adjustment to fair value 4/1 withdrawal by Hamm 4/5 sale and allocate loss 4/6 investment by Hamm 4/6 final distribution Cash $10,000 80,000 90,000 26,000 116,000 (110,000) 6,000 (5,000) 1,000 1,000 1,000 30,000 31,000 12,000 43,000 (43,000) 4,000 4,000 2,000 6,000 (6,000) $0 Other Assets Liabilities $218,000 $(110,000) (90,000) 128,000 (110,000) (30,000) 98,000 (110,000) 110,000 98,000 98,000 3,000 101,000 (13,000) 88,000 (50,000) 38,000 38,000 38,000 (2,000) 36,000 (8,000) 28,000 (28,000) 0 0 $0 $0 16 - 13 Capital & Loan Balances Hann Murphey Ryan 0.50 0.30 0.20 $(50,000) $(42,000) $(26,000) 5,000 3,000 2,000 (45,000) (39,000) (24,000) 2,000 1,200 800 (43,000) (37,800) (23,200) (43,000) (37,800) (23,200) 4,200 800 (43,000) (33,600) (22,400) (1,500) (900) (600) (44,500) (34,500) (23,000) 13,000 (44,500) (21,500) (23,000) 10,000 6,000 4,000 (34,500) (15,500) (19,000) (6,000) (3,600) (2,400) (40,500) (19,100) (21,400) 21,500 7,700 13,800 (19,000) (11,400) (7,600) 1,000 600 400 (18,000) (10,800) (7,200) 8,000 (10,000) (10,800) (7,200) 12,000 7,200 4,800 2,000 (3,600) (2,400) (2,000) (3,600) (2,400) 3,600 2,400 $0 $0 $0 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-3 (continued) Schedules to Compute Safe Payments Schedule Capital balances Allocation of potential loss ($99,000) Allocation of deficit balance Safe cash payment Hann 0.50 $(43,000) 49,500 6,500 (6,500) $0 Murphey 0.30 $(37,800) 29,700 (8,100) 3,900 $(4,200) Ryan 0.20 $(23,200) 19,800 (3,400) 2,600 $(800) Schedule Capital balance Allocation of potential loss ($38,000) Safe cash distribution Problem 16-4 Part A Balances before realization Sale of assets Hann Murphey $(40,500) $(19,100) 19,000 11,400 $(21,500) $(7,700) Ryan $(21,400) 7,600 $(13,800) MARY, PAULA, AND RAY Schedule of Partnership Liquidation Cash $10,000 20,000 30,000 Other Assets Liabilities $100,000 $(40,000) (100,000) (40,000) (40,000) Mary 0.40 $(50,000) 32,000 (18,000) 8,000 (10,000) (40,000) 40,000 $0 (10,000) 10,000 $0 Allocate Ray's debit balance Investment by Paula Distribution of cash 30,000 20,000 50,000 (50,000) $0 $0 Paula 0.30 $(10,000) 24,000 14,000 6,000 20,000 (20,000) Mary will receive $10,000 Paula must invest $20,000 Ray is personally insolvent and cannot make an investment in the partnership to eliminate the deficit balance 16 - 14 $0 Ray 0.30 $(10,000) 24,000 14,000 (14,000) 0 $0 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-4 (continued) Part B Payments to Personal Creditors Personal $50,000 10,000 30,000 Mary Paula Ray Partnership Distribution $10,000 0 Total $60,000 10,000 30,000 Problem 16-5 Part A Capital and loan balances Profit and loss ratio Loss absorption potential Order of cash distribution Profit and loss rates Loss absorption potential Net capital interest Reduce loss absorption potential of Baker Reduce loss absorption potential of -Baker -Weak Baker $55,000 40 $137,500 Strong $45,000 40 $112,500 Weak $24,000 20 $120,000 Loss Absorption Potential Baker Strong Weak 40 40 20 $137,500 $112,500 $120,000 17,500 120,000 112,500 120,000 Weak 20 $45,000 $24,000 45,000 24,000 $45,000 0.40 1,500 $22,500 0.20 3,000 $112,500 7,500 $112,500 Remainder $17,000 7,000 4,500 Cash Distribution Strong 40 $55,000 7,000 48,000 7,500 $112,500 First Next Next Remainder Baker 40 Creditors 100% $45,000 0.40 Cash Distribution Baker Strong Weak 100% 67% 40% 33% 20% 16 - 15 40% To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-5 (continued) To Creditors To Baker To Baker and Weak Remainder -Profit and Loss Ratio Part B July Account balances Collection of accounts receivable Sale of inventory Paid liquidation expenses Cash distribution (Schedule 1) Account balances (end of July) August Paid liquidation expenses Gain on equipment Withdrawal on equipment Cash distribution (Schedule 2) Account balances (end of August) September Sale of equipment Paid liquidation expense Balances Cash distribution Total $17,000 7,000 4,500 77,500 $106,000 Creditors $17,000 Cash Distribution Baker Strong Weak $7,000 3,000 $1,500 31,000 $41,000 $17,000 $31,000 $31,000 15,500 $17,000 Accounts Plant and Accounts Baker Strong Weak Cash Receivable Inventory Equipment Payable 0.40 0.40 0.20 $6,000 $22,000 $14,000 $99,000 $(17,000) $(55,000) $(45,000) $(24,000) 16,500 (22,000) 2,200 2,200 1,100 10,000 (14,000) 1,600 1,600 800 (1,000) 400 400 200 (23,500) 17,000 6,500 8,000 0 99,000 (44,300) (40,800) (21,900) (1,500) 600 (2,400) 600 (2,400) 3,750 (42,350) 250 (42,350) (12,800) 0 $0 8,000 400 (33,950) 33,950 $0 8,000 400 (33,950) 33,950 $0 4,000 200 (8,600) 8,600 $0 6,000 (10,000) (4,000) 2,500 75,000 (1,000) 76,500 (76,500) $0 0 95,000 (95,000) 0 $0 16 - 16 0 $0 0 $0 300 (1,200) 10,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-5 (continued) Schedule Total Creditors $17,000 $17,000 6,500 _ $23,500 $17,000 First $17,000 Up to $7,000 0.4 Baker 0.4 Strong 0.2 Weak $6,500 $6,500 Schedule Capital balances Potential loss of $95,000 plus Cash retained 97,500 0.4 = 97,500 0.4 = 97,500 0.2 = $(46,100) 39,000 _ (7,100) (3,600) 3,350 _ $(3,750) Capital balances, 1/1/2008 Add: Investments Net income allocation* Totals Less: Withdrawals Capital balances, 12/31/2008 $60,000 $60,000 $60,000 Malone $ 140,000 21,000 161,000 30,000 $131,000 ($140,000/$400,000) ($160,000/$400,000) ($100,000/$400,000) Part B Malone, Capital Malone, Drawing Patton $ 160,000 24,000 184,000 $184,000 Spencer $ 100,000 15,000 115,000 $115,000 $21,000 24,000 15,000 $60,000 30,000 30,000 Income Summary Malone, Capital Patton, Capital Spencer, Capital 60,000 21,000 24,000 15,000 16 - 17 19,500 6,700 (6,700) 3,350 _ $(250) $0 MALONE, PATTON, AND SPENCER Statement of Changes in Partners' Capital For the Year Ended December 31, 2008 Part A * Malone Patton Spencer Total $(12,800) 39,000 Allocate Weak's potential deficit 1/2 1/2 Problem 16-6 $(42,600) Total $ 400,000 60,000 460,000 30,000 $430,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-6 (continued) Part C – On next page Part D Cash Malone, Capital Patton, Capital Spencer, Capital Accounts Receivable Inventory Furniture and Fixtures 243,000 36,400 41,600 26,000 Accounts Payable Cash 74,000 Patton, Capital Mortgage Payable Land Building 120,000 145,000 129,000 188,000 30,000 74,000 85,000 180,000 Malone, Capital Patton, Capital Spencer, Capital Cash 94,600 22,400 89,000 206,000 16 - 18 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-6 (continued) Part C MALONE, PATTON, AND SPENCER Schedule of Partnership Liquidation January 2, 2009 Explanation Capital Balances Malone Patton Spencer Other Assets Liabilities 35%_ 40%_ 25%_ $612,000 $(219,000) $(131,000) $(184,000) $(115,000) Balances before realization Cash $37,000 Sales of noncash assets Balances 243,000 280,000 (347,000) 265,000 (219,000) 36,400 (94,600) 41,600 (142,400) 26,000 (89,000) Payment of accounts payable Balances (74,000) 206,000 265,000 74,000 (145,000) (94,600) (142,400) (89,000) Distribution of land, bldg., and assumption of mortgage Balances 206,000 (265,000) 145,000 (94,600) 120,000 (22,400) (89,000) Distribution to partners Balances (206,000) $0 $0 $0 94,600 $0 22,400 $0 89,000 $0 Accounts Receivable Inventory Furniture/Fixtures Total Sales Price $ 92,000 141,000 10,000 $243,000 Book Value $129,000 188,000 30,000 $347,000 16 - 19 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-7 Part A Valuation Adjustment Accumulated Depreciation Office Equipment Allowance for Uncollectibles Jan, Loan 2,700 12,600 14,200 900 200 Jan, Loan Jan, Capital 6,600 Jan, Capital Sue, Capital Valuation Adjustment 1,350 1,350 6,600 2,700 Part B Jan, Capital ($29,400 + $6,600 - $1,350) Sue, Capital ($28,000 – $1,350) Capital Stock (400 $100) Additional Paid-in Capital Proof Cash Accounts receivable Allowance for uncollectibles Prepaid insurance Office equipment Total stockholders' equity 34,650 26,650 40,000 21,300 $15,000 32,400 (2,900) 800 16,000 $61,300 16 - 20 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-8 Part A Starnes, Capital Cash Partners 1-9, Capital ($50,000 90/95) Partner 10, Capital ($50,000 5/95) Cash 125,000 75,000 47,368 2,632 150,000 Norwood, Capital ($2,500,000 5%) Partners 1-9, Capital ($25,000 90/95) Partner 10, Capital ($25,000 5/95) 125,000 23,684 1,316 Because Alan is now a partner in the partnership, it is more difficult to determine the exact amount of his compensation because he will be taxed on his "share of partnership earnings" reported to him on his Schedule K-1 from BSM While this share of earnings will most likely bear a relationship to the draws taken by Alan, it will undoubtedly be more or less than $216,000 ($18,000 12) Alan must also consider the following additional expenses which correspond to his increased compensation and status as a partner: (a) Increased individual income tax to correspond to his increased earnings (b) Self-employment tax As an employee this was withheld from wages at a rate of 7.65% (2002 rate; with a ceilings of $84.900 for 6.2% of the tax) Now that Alan is a partner, he must pay these taxes himself at a rate of 15.3% with the same ceiling, and with an offsetting deduction for 50% of the self-employment tax This additional tax must be remitted with Alan's individual income tax return (c) Alan has invested $150,000 in the partnership If he borrowed the funds to join, he must make interest and principal payments on the debt The amount of required annual payments depends of course on the interest rate and term of the loan If he used his own funds (say from a mutual fund earning 10%) for the investment, he has traded the earning power of the funds for earnings from the partnership He has given up $15,000 in income from the former investment Alan should be concerned about the true value of a 5% interest in the partnership since Mr Starns was paid $75,000 for his 5% interest while within the same time frame, Alan is expected to pay $150,000 for an equivalent interest There may be mitigating circumstances (e.g Mr Starns contributes little to the firm, Alan lacks sufficient ability to bring in new clients), but Alan has a clear signal of a discrepancy which should prompt him to ask questions before investing in the partnership 16 - 21 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 16-8 (continued) Part B This matter is sometimes addressed in employment contracts Some professional firms require employees to agree not to actively recruit clients upon their departure from the firm Barring such a specific agreement or firm precedent (and profession-related guidelines), Alan and Mary must determine the basis on which they can rely to call a BSM client "their client" This may involve such issues as whether Alan or Mary were involved in bringing the client to BSM originally, or it may involve the extent to which the BSM clients were served by the firm as opposed to exclusively by Alan or Mary Further, if the client's interests are better served by BSM as a larger firm or by Alan and Mary in a smaller firm, that should enter the decision made by the departing employees It may be difficult to block actions by Alan and Mary if a written agreement is not in existence Clearly, the BSM partners can enlighten clients to any benefits of remaining a BSM client Part C Current Net income Partners 1-9, Capital ($25,000 90%) Partners 10-11, Capital ($25,000 10%) Cash 25,000 22,500 2,500 8,000,000 Accounts Receivable 8,000,000 Liabilities - Outside Starns, Loan Cash 7,490,000 10,000 7,500,000 Partners 1-9, Capital ($3,750 90/95) Partner 10, Capital ($3,750 5/95) Starns, Capital ($125,000 - $130,000 + $1,250 = $3,750) 3,553 197 3,750 Partners 1-9, Capital ($2,395,000 90/95) 2,268,947 Partner 10, Capital ($2,395,000 5/95) 126,053 Cash 2,395,000 ($2,025,000 - $130,000 + $8,000,000 - $7,500,000 = $2,395,000) Yes The debit balance in the Starns capital account is considered a partnership asset Judicial precedent exists to allow offset of the liability by the debit capital account balance The net payment to the partner with the debit capital account leaves both the partnership and partner's obligations fully paid without "endangering" the capital of other partners 16 - 22 ... respect of capital, (4) Those owing to partners in respect of profits Business Ethics Solution Business ethics solutions are merely suggestions of points to address The objective is to raise the...To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Because in an installment liquidation... consequences Reference: http://www.lrc.ky.gov/KRS/362-01/403.PDF 16 - To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO EXERCISES Exercise 16-1