Solution manual advanced accounting 11th by beams chapter17

In simple partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances.. 3

PARTNERSHIP LIQUIDATION

Answers to Questions

1 Dissolution of a partnership terminates the partnership as a legal entity, but the partnership business may

continue under a new agreement When a partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity Thus, a partnership may be dissolved without liquidation, but it may not be liquidated without dissolution

2 A simple partnership liquidation is the liquidation of a solvent partnership in which all partners have equity

capital and all gains and losses are realized and recognized before any distributions are made to the partners In simple partnership liquidations, only one cash distribution is made and the amounts distributed

to individual partners are equal to their predistribution capital account balances

3 The priority ranking for the distribution of assets in liquidation pursuant to UPA is

Rank I Amounts owed to creditors other than partners and

amounts owed to partners other than for capital and profits

Rank II Amounts due to partners after all assets have been liquidated and liabilities paid

4 Normally if a partner has loaned money to the partnership, those liabilities are repaid before any capital

distributions However if a partner is owed money and they have a debit (negative) capital balance, the liability is deducted from the capital shortfall, rather than be distributed

5 The assumptions for determining distributions to partners prior to recognition of all gains and losses on

liquidation are (1) all partners are personally bankrupt such that no partner could contribute personal assets into the partnership and (2) all noncash assets are possible losses and should be considered actual losses for purposes of determining amounts to be distributed In addition, liquidation expenses and probable loss contingencies should be estimated and assumed to be actual losses for purposes of determining advance distributions

6 Capital balances represent one factor in determining a partner’s equity, but loans and advances payable to

and receivable from the partnership are factors that must also be considered in calculating safe payments Partner equities, rather than capital balances, are used in safe payment schedules in order to avoid making distributions to partners that may end up with debit capital balances; i.e., owing money to the partnership

7 Safe payment computations per se do not affect ledger account balances Actual cash distributions based on

safe payments computations do reduce partnership assets and equities and require recognition in ledger accounts

8 A statement of partnership liquidation is a summary of transactions and balances for a partnership during

its liquidation stage Such statements provide continuous records of liquidation events Interim liquidation statements are particularly helpful in showing the progress that has been made toward liquidation to date and in identifying remaining assets to be liquidated and liabilities to be paid Interim liquidation statements are helpful to partners and creditors in providing a basis for current decisions as well as future planning Liquidation statements are important legal documents for partnership liquidations that come under the jurisdiction of a court

9 Available cash may be distributed to partners according to their profit and loss sharing ratios only when

nonpartner liabilities have been satisfied and partner equities (capital and loan balances combined) are aligned with the relative profit and loss sharing ratios of the partners In the absence of loans or advances payable to or receivables from individual partners, cash can be distributed to partners in their profit and loss sharing ratios when capital balances are in the relative profit and loss sharing ratios of the partners and all nonpartner liabilities have been paid

10 Vulnerability ranks are an ordering of partners on the basis of the adequacy of their equities in the

partnership to absorb possible partnership losses The ordering is typically from the most vulnerable to the least vulnerable Vulnerability ranks are used in the preparation of assumed loss absorption schedules, which, in turn, are used in the construction of cash distribution plans

11 Partnership insolvency occurs when partnership liabilities exceed partnership assets In this case, all

available cash is distributed to partnership creditors Individual partners will be called upon to use their personal assets to satisfy the remaining claims of the partnership creditors

12 Partners with credit capital balances after all partnership assets have been distributed in liquidation have a

claim against partners with debit capital balances If the partners with debit balances are personally solvent, they should pay amounts equal to their debit balances into the partnership so that partners with credit balances can receive their partnership claims in full If partners with debit capital balances are insolvent, the partners with credit balances will absorb the losses of the insolvent partners with debit capital balances

in relation to their relative profit and loss sharing ratios

Solution E17-1

Schedule of Capital Balances

Capital balances January 1, 2011 $40,000 $20,000

January losses: Lumber

($40,000 book value- $25,000 sales price)

$15,000 (9,000) (6,000) Receivables

($25,000 - $21,000 collection)

4,000 (2,400) (1,600) Capital balances before distribution $28,600 $12,400

defaulta divided 3/7 and 4/7 (6,000) 14,000 (8,000)

Available cash is distributed 40,000 0 30,000

a

Notice that Ethel would have a debit balance in her capital account if the contingencies occurred and if the assets were a total loss In order to

determine how much cash is available for distribution, Fred and Lucy’s

balances must absorb Ethel’s debit balance

Solution E17-4

Beginning balances $60,000 $59,000 $29,000 $52,000

Loss on sale of assets

($180,000 - $120,000) (30,000) (18,000) (12,000) Additional liability 5,000 (2,500) (1,500) (1,000)

65,000 26,500 (10,500) 39,000

balance 5/7, 2/7 (7,500) 10,500 (3,000) Cash distribution $65,000 $19,000 0 $36,000 Kim owes $7,500 to Jan and $3,000 to Lee

Solution E17-5

Schedule to Correct Capital Accounts

Ali Bart Carrie

(40%)

Capital (20%)

Capital (40%) December 31, 2011 balance $60,000 $25,000 $65,000 Undervalued inventory ($15,000) 6,000 3,000 6,000 Corrected balances $66,000 $28,000 $71,000 The capital balances are adjusted for the error in computing net income in the partners’ residual equity ratios

Evers, Freda, and Grace Partnership

Safe Payment Schedule 40% Evers 40% Freda 20% Grace Total

Partner equities $100,000 $250,000 $170,000 $520,000

Loss on sale of assets (52,000) (52,000) (26,000) (130,000)

48,000 198,000 144,000 390,000 Possible lossesa (84,000) (84,000) (42,000) (210,000)a

(36,000) 114,000 102,000 180,000 Allocate Evers’ loss 36,000 (24,000) (12,000)

0 $ 90,000 $ 90,000 $180,000

a Remaining noncash assets of $200,000 plus contingency fund of $10,000 equals

$210,000 possible losses

Cash to distribute: Beginning cash balance of $100,000 plus $170,000 from sale

of assets less $10,000 contingency fund equals $260,000

(15,000) 0 35,000 20,000

from Alice 10,000 10,000

(5,000) 35,000 30,000 Write-off of Alice’s deficit 5,000 (5,000)

0 30,000 30,000 Cash distribution to Carle (30,000) (30,000)

0 0

a

Betty’s personal net assets after partnership creditor recovery are $80,000

personal assets - $60,000 personal liabilities = $20,000

Solution E17-8

Daniel, Eric, and Fred Partnership

Schedule for Phase-out of Partnership

40% Daniel 30% Eric 30% Fred Capital Capital Capital Total Capital balances $10,000 $60,000 $(90,000) $(20,000)

Fred’s payment to creditors 20,000 20,000

10,000 60,000 (70,000) 0 Fred’s payment to the

Partnership 40,000 40,000

10,000 60,000 (30,000) 40,000

deficit in the relative

profit sharing ratio of

Daniel and Eric 4/7:3/7 (17,143) (12,857) 30,000

(7,143) 47,143 0 40,000 Daniel’s payment to the

partnership for his

(2,143) 47,143 45,000 Write off of Daniel’s

deficit to Eric 2,143 (2,143) 0

0 45,000

0 0

a Fred’s personal assets of $100,000 less the $40,000 owed to his personal creditors,

and less the $20,000 paid to partnership creditors, equals $40,000 available for

his debit capital account balance

Ace, Ben, Cid, and Don

Statement of Partnership Liquidation for the period June 30 to July 31, 2011

Ace (50%) Ben(20%) Cid (20%) Don (10%) Cash Liabilities Capital Capital Capital Capital

Denver, Elsie, Fannie and George Partnership

Safe Payment Schedule January 31, 2011 Possible

Losses Denver

(20%)

Elsie (10%)

Fannie(50%)

George (20%)Partner’s equity at 1/1 $150,000 $80,000 $140,000 $78,000

Possible losses — noncash $395,000 (79,000) (39,500) (197,500) (79,000)

Possible losses — contingent 20,000 (4,000) (2,000) (10,000) (4,000)

$ 81,000 $45,500 $(32,500) $ 9,000Possible losses — Fannie (13,000) (6,500) 32,500 (13,000)

$ 68,000 $39,000 $ 0 $(4,000)Possible losses — George (2,667) (1,333) 4,000

Solution E17-12 (cont’d)

Payments of $103,000 can be safely made to Denver and Elsie in the amounts

Schedule of Assumed Loss Absorption

Quen Reed Stacy Total Predistribution equities $ 45,000 $ 25,000 $ 25,000 $ 95,000

Loss to absorb Reed (15,000) (25,000) (10,000) (50,000)

30,000 0 15,000 45,000 Loss to absorb Stacy

$15,000/40% (22,500) (15,000) (37,500)

Cash Distribution Plan

Creditors Capital Capital Loan Capital

The debit balance in Maris’s capital account should be charged against

the loan payable to Maris

4 d

Possible 50% Gwen 25% Bill 25% Sissy Losses Capital Capital Capital

Possible loss on inventories $100,000 (50,000) (25,000) (25,000)

Distribution of cash after

Distribution of cash after

6 c

30% Unsel 30% Vance 40% Wayne Capital Capital Capital Capital balances $90,000 $(60,000) $(100,000)

Wayne’s contribution 70,000

90,000 (60,000) (30,000)Vance’s personal net assets 39,000a

90,000 (21,000) (30,000)Vance’s remaining deficit divided 3/7

to Unsel and 4/7 to Wayne (9,000) 21,000 (12,000)

81,000 0 (42,000)Wayne’s remaining personal net assets

to offset his deficit capital balance 40,000b

81,000 (2,000)Wayne’s final deficit allocated to

Unsel and uncollectible (2,000) 2,000

Amount of Unsel’s partnership equity

that should be recoverable $79,000 0

Personal net assets= personal assets- personal liabilities

a

(100,000 - 61,000) = 39,000

b

(190,000 – 70,000 – 80,000) = 40,000

To distribute available cash to Barney computed as follows:

Safe Payments Schedule January 1, 2011

Chan, Dickerson, and Grunther Partnership

Cash Distribution Plan

Vulnerability ranks

Equity Loss Ratio Absorption Rank

Schedule of assumed loss absorption

Chan Dickerson Grunther Total

Loss to absorb Chan (80,000) (120,000) (200,000) (400,000)

0 90,000 5,000 95,000 Loss to absorb Grunther

($5,000  5/8) (3,000) (5,000) (8,000)

Cash distribution plan

Priority Loan from Chan Dickerson Grunther Creditors Dickerson Capital Capital Capital

Solution P17-3

Fred, Flint, and Wilma Partnership

Cash Distribution Plan

Schedule of Assumed Loss Absorption

30% Fred 20% Flint 50% Wilma Total

Predistribution equity $75,000 $20,000 $60,000 $155,000

Assumed loss to absorb Flint

$20,000  20% (30,000) (20,000) (50,000) (100,000)

45,000 0 10,000 55,000 Assumed loss to absorb Wilma

1 Gary, Henry, Ian, and Joseph Partnership

Cash Predistribution Plan Schedule of Vulnerability Ranks:

Gary Henry Ian Joseph Equity Equity Equity Equity Capital balance $300,000 $320,000 $100,000 $ 110,000

Schedule of Assumed Loss Absorption:

Gary Henry Ian Joseph Equities $300,000 $300,000 $100,000 $110,000 Loss to absorb Ian’s

equity (200,000) (150,000) (100,000) (50,000)

100,000 150,000 0 60,000 Loss to absorb Gary’s

equity (100,000) (75,000) (25,000)

0 75,000 35,000 Loss to absorb Henry’s

0 $ 10,000 Cash Distribution Plan:

(Profit and loss sharing ratios)

2 Available cash to distribute ($200,000 + $100,000) $300,000

Solution P17-5

Eli, Joe, and Ned, Consultants

Statement of Partnership Liquidation for the month ended August 31, 2011

Noncash Accounts 20% Eli 30% Joe 50% Ned Cash Assets Payable Capital Capital Capital

Jones, Smith, and Tandy Partnership

Statement of Partnership Liquidation for the liquidation period January 1, 2011 to March 31, 2011

March 2011

and fixtures ( 20,000) ( 4,000) ( 6,000) (10,000) Predistribution balance 112,000 0 40,000 24,400 36,600 11,000

1 Cash distribution plan for Lin, Mary, and Nell partnership

Schedule of assumed loss absorption

Lin Mary Nell Total Predistribution equities $55,000 $12,000 $20,000 $87,000 Assumed loss to absorb Mary’s

equity 50/30/20 (20,000) (12,000) ( 8,000)

(40,000) 35,000 0 12,000 47,000 Assumed loss to absorb Nell’s

Cash available for distribution $62,000

Lin, Mary, and Nell Partnership

Schedule of January 2012 Cash Distribution

Cash distribution 0 $55,000 $6,429 0 $ 571 $62,000

Jason, Kelly, and Becky Partnership

Statement of Partnership Liquidation for the period January 1, 2011 through February 28, 2011

Allocate possible losses $126,500 (63,250) (37,950) (25,300)

(10,750) 7,550 16,700 Allocate Jason’s deficit 10,750 (6,450) (4,300) Safe payments to partners

Schedule B

Partners’ equity February 28 $43,250 $38,850 $25,900

Safe payments to partners February 28 $43,250 $38,850 $25,900

Solution P17-9

Roger, Susan, and Tom Partnership

Statement of Partnership Liquidation for the period January 1, 2011 through February 28, 2011

Schedule A

30% 30% 40%

Possible Roger Susan Tom Losses Equity Equity Equity Partners’ equity January 1 $14,900 $35,000 $60,000 Allocate possible losses $90,000 (27,000) (27,000) (36,000)

(12,100) 8,000 24,000 Allocate Roger’s deficit 12,100 (5,186) (6,914) Safe payments to partners

Schedule B

Partners’ equity February 28 $(5,800) $11,486 $15,314 Allocate Roger’s deficit 5,800 (2,486) (3,314) Safe payments to partners February 28 0 $ 9,000 $12,000 Note: Since cash was distributed to Susan and Tom in January and since Roger