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CHAPTER 14

UNDERSTANDING THE ISSUES

1. A major concern is that the value used as a basis for establishing the price an incoming partner should pay is the fair value of the existing partnership’s net assets. Existing capital balances most often do not reflect fair value. The fair value should include both tangible and intangible assets such as goodwill. All assets and liabilities should be considered in order to determine their fair value. Another concern is that acquiring a 30% interest by paying 30% of the existing partnership’s capital will not result in the in-coming partner having a 30% interest in the starting capital of the new partnership. For example, if the existing capital of a partner-ship is $100,000 and an incoming partner pays $30,000, then the new partnership will have a starting capital balance of $130,000. However, the incoming partner’s capital balance of $30,000 will only represent a 23% ($30,000 as a percentage of $130,000) interest in the capital of new partnership. It is important to remember that the capital balance of the original part-nership, even after adjusting to fair value, will represent 70% of the new partnership’s value; therefore, it should be used as a ba-sis to suggest the value of a 30% interest.

2. The first step would be to determine the fair value of the net assets of the original part-nership. This would include a valuation of existing net assets as well as the recogni-tion that there may be other net values that are not captured on the financial state-ments. For example, there may be a contingent liability or goodwill that has not been recognized. Once the fair value of the net assets (e.g., $400,000) has been determined, this amount would represent the percentage interest in the new partner-ship to be retained by the original partners (e.g., 80%). Dividing the fair value by the percentage interest retained results in a suggested value of the new partnership en-tity ($400,000 ÷ 80% = $500,000). The suggested value of the acquired interest is the difference between the value of the new

partnership and that of the original partner-ship ($500,000 versus $400,000).

3. Several guidelines govern the process of liquidating a partnership. First, all assets and liabilities of the partnership should be identified, and the assets should be con-verted into a distributable form. Second, as assets become available for distribution, the order of priority as established by RUPA should be followed. A practical ex-ception to this priority involves the doctrine of right of offset. Third, every attempt should be made to secure net personal assets from those partners that have deficit capital balances. Finally, of critical impor-tance is the guideline that distributions to parties should not be premature. That is to say, all distributions should be based on the conservative assumptions that re-maining assets are worthless and that all partners are personally insolvent. This overly conservative position will ensure that no partner receives a payment before he/she is entitled to it. The use of sched-ules of safe payments is a practical way to calculate appropriate and safe payments to partners.

4. If a fellow partner has a deficit capital balance, it is possible that other partners will have to absorb that deficit partner’s balance. Although the absorbing partners may have a personal claim against the def-icit partner for the amount absorbed, the collectibility of the claim may be a concern. If a partner has a deficit capital balance during the liquidation process, it is hoped that the deficit will be eliminated. If the subsequent liquidation of partnership net assets results in sufficient gains, it is possi-ble that a deficit capital balance may be eliminated or reduced. It is also possible that deficit capital balances in total means that there will be unsatisfied partnership creditors and that those creditors will attach to the personal assets of individual part-ners. Those creditors may move against any partner's assets; therefore, a partner

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with personal wealth could end up having to contribute additional assets to the part-nership. If other partners are not able to make similar contributions, their deficit capital balances may have to be absorbed by the partners with credit (surplus) capital balances. Whether the deficits absorbed can ultimately be collected from the deficit partners presents another concern.

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EXERCISES

EXERCISE 14-1

(1) Inventory................................................................................... 58,000 Accounts Receivable .......................................................... 18,000 Warranty Obligations .......................................................... 10,000 Pearson, Capital ................................................................. 18,000 Murphy, Capital................................................................... 12,000 To adjust book values to market values.

Cash ......................................................................................... 84,000 Goodwill .................................................................................... 56,000 Pearson, Capital ................................................................. 33,600 Murphy, Capital................................................................... 22,400 Warner, Capital................................................................... 84,000 To record admission of Warner and recognition of goodwill. If Warner contributes $84,000 for a 30% interest in capital, this suggests a total new partnership value of $280,000. (2) If the $56,000 of goodwill proved to be worthless, Warner would be charged 35% of

$56,000, or $19,600. However, the real harm to Warner would be that of having paid more to enter the partnership than he/she should have. If the goodwill did not exist, then the ad-justed assets of the previous partners would have been $140,000 ($45,000 + $65,000 + $30,000), which represents 70% of a total partnership value of $200,000. In that case, Warner would have only paid $60,000 for a 30% interest in capital. Therefore, Warner would have paid an extra $24,000 ($84,000 versus $60,000) for the goodwill that proved to be worthless.

EXERCISE 14-2

Date: To: My client From: Student, CPA Re: Issues involving goodwill and the liquidation of a partnership

With respect to the questions you had regarding the above referenced matter, please consider the following responses which correspond to your questions (1) through (7).

(1) It is correct that a corporation cannot record goodwill unless it has been purchased through the acquisition of another company. However, in the case of a partnership, when a new partner invests in the partnership or the partnership acquires the interest of an existing partner the transaction may be recorded under either the bonus method or the goodwill method. Under the goodwill method, goodwill is recognized on the partnership financial statements in order to reflect the economic goodwill suggested by the consideration con-veyed in the transaction.

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Exercise 14-2, Concluded

(2) The goodwill method involves recording goodwill and/or the appreciation on net assets and results in measuring net assets at amounts that are more in line with economic market val-ue. However, this typically results in an increase in assets as compared to the bonus method, which does not adjust to market values. Therefore, the bonus method would be most appropriate in that it understates the asset values and results in a higher return on assets and partnership capital. Furthermore, income would typically be lower under the goodwill method in that the depreciation and amortization associated with revised asset values would be charged against income.

(3) The capital of a partner is the last claim against assets to be satisfied given the liquidation

of a partnership. Technically, the claims are satisfied in the following order: amounts owed to creditors (including partners who are creditors) and amounts owed to partners as capital (after all closing entries). Generally speaking, amounts owed to partners as creditors are combined with capital accounts under the concept of right of offset.

(4) Unsatisfied partnership liabilities could attach to any one or more partners that had per-

sonal assets. Obviously, the unsatisfied creditors would seek out those partners that have the greatest and most liquid net personal assets. Which partner unsatisfied creditors will seek out is in no way controlled by which partner has the greatest positive capital balance in the partnership. Once the unsatisfied partnership liabilities move against an individual partner, it is important to note the partnership creditors share on a pro rata basis with the partner's personal creditors in the distribution of the partner's assets.

(5) Given the above response, it would be better to have a corporation own the office building

and thereby shelter it from being directly included in your personal assets. This does not mean that the stock you hold in the corporation is not ultimately a personal asset, but the value of that stock would first be reduced by any liabilities of the corporation as well as other factors that may influence its value such as real estate values.

(6) Per the response to item (3) above, a loan to the partnership would have a higher priority in

liquidation than a capital investment. However, loans typically have a rate of return that is below the rate of return that may be experienced on a capital investment. The answer to this question lies in the expected rate of return on capital versus the rate of interest on the debt. Debt generally is less risky and therefore offers a lower return on investment. One should be cautioned against thinking that invested capital always experiences a higher return than debt capital.

(7) In theory, the sales price should not differ between what is offered by the partnership and

that offered by an individual partner. In that case, the key factor would be which party has the greatest ability to pay the sales price. If any portion of the sales price is to be paid over time, the partnership as an entity may have a greater ability to pay over that of an individual partner. Receiving a lower sales price in the form of cash up front may be more advisable than a price paid over time which is subject to default risk.

After you have had an opportunity to review this memo, I would be happy to discuss these issues with you at your convenience. Please feel free to contact me.

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EXERCISE 14-3

(1) Both methods recognize asset write-downs. The recognition of such write-downs would normally be recognized even outside of the area of accounting for partnerships. Current examples of write-downs relate to measuring inventory at lower of cost or market and rec-ognizing the impairment of value on long-lived assets. However, only the goodwill method allows write-ups that would otherwise not be recognized by generally accepted accounting principles (GAAP).

(2) Under the bonus method, goodwill traceable to the original partnership is accounted for by

crediting the original partners’ capital balances. This credit, in substance, recognizes that their equity in the partnership is increased by virtue of the goodwill. However, these credits do not reflect the entire amount of the goodwill due to the fact that the bonus method does not allow for the write-up of assets.

(3) If a new incoming partner contributes net assets, both tangible and intangible, it is possible

that his/her capital balance may be more than the value contributed. This would occur un-der the bonus method when intangibles, including goodwill, are traceable to the new incom-ing partner.

(4) Use of the goodwill method will always result in a greater amount of total partnership capital

due to the recognition of write-ups. This would suggest that resulting interest on invested capital would also be higher under this method.

(5) A risk associated with the goodwill method is that the amortization and/or write-off of good-

will may occur using a profit and loss percentage that is different from an original partner’s interest in profits and losses. For example, assume that goodwill traceable to the original partners, A and B, was allocated among them 40% to A and 60% to B. If the goodwill is subsequently written off and A’s new interest in profits and losses is different from 40%, the resulting capital balance will be different than if the bonus method had originally been used. A similar result may occur when a new partner’s interest in profits is different from his/her initial interest in capital.

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EXERCISE 14-4

(1) The note payable has a market value greater than the book value that will reduce the net asset value of the partnership by $15,000. However, the assets whose market values differ from their book values will result in a $24,000 increase in the net asset value of the part-nership. The total net increase in the value is $9,000 ($24,000 less $15,000). Petersen’s interest in this net increase is $4,500 (50% × $9,000), resulting in a suggested value for his interest in the partnership of $104,500.

(2) If the value of Petersen’s interest before consideration of goodwill is $104,500 as set forth

above, then the difference between $130,000 and $104,500, or $25,500, represents Peter-sen’s 50% interest in the value of goodwill. Therefore, the suggested value of goodwill is $51,000.

(3) Both Jacobsen and Olsen would be acquiring equal interests in the net asset values asso-

ciated with Petersen’s interest; therefore, one would expect them to value these assets at equal amounts. The critical factor relates to the voting interests acquired by each of the remaining partners. If Jacobsen were to acquire half of Petersen’s interest along with half of his voting rights, then Jacobsen would have a controlling voting interest in the partnership. This may result in Jacobsen being motivated to pay more for her one-half than Olsen would be willing to pay. All things being equal, having a controlling interest represents a “control premium,” which is typically reflected in transaction prices.

(4) Based on the $104,500 value in item (1) above, a half interest in that would be $52,250.

Therefore, selling a half interest for $60,000 suggests that $7,750 represents Petersen’s 25% (one-half of a total 50% interest) interest in goodwill with an imputed total goodwill val-ue of $31,000. Prior to sale, Petersen’s capital balance would be increased by $4,500 per item (1) above plus the $7,750 goodwill traceable to the partial sale resulting in a total of $112,250. After the sale for $60,000, Petersen’s capital balance would be reduced to $52,250 ($112,250 less $60,000).

(5) In either case, Petersen should sell his interest for the same price. However, the ability for

him to collect the sales price may be a factor. The partnership itself may have a greater ability to pay the sales price. The partnership may have a greater ability to borrow the nec-essary funds for the purchase price due to its collateral position and operating cash flows. Obviously, Petersen would be most interested in maximizing the value of his interest and receiving a cash payment in the most timely and secure manner. The ability of a buyer to pay, whether it is the partnership or an individual, is a critical factor to be considered. If the partnership were to acquire Petersen’s interest, then Jacobsen could achieve a controlling interest in the remaining partnership without using her personal funds.

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EXERCISE 14-5

(1) Partnership A B C Fair market value of original partnership: Assets at book value ......................... $ 500,000 $ 600,000 $ 800,000 Liabilities at book value and fair market value................................... (369,500) (410,000) (558,000) (a) Book value of original partnership..... $ 130,500 $ 190,000 $ 242,000 Asset appreciation (depreciation)...... (50,000) 125,000 50,000 (b) Net assets ......................................... $ 80,500 $ 315,000 $ 292,000

Percent of new partnership represented by the:

(c) Investment of new partner................. 30% 25% 20% (d) Fair value of the original partnership. 70% 75% 80%

(e) Fair value of new partnership suggested by the fair value of the original partnership [(b) ÷ (d)] ... $ 115,000 $ 420,000 $ 365,000 (f) Fair value of original partnership....... 80,500 315,000 292,000 (g) Fair value of consideration that should be conveyed by the new partner [(e) – (f)]...................... $ 34,500 $ 105,000 $ 73,000 (2) Partnership A B C

Amount of consideration to be conveyed: Value of land ..................................... $ 50,000 $ 50,000 $ 50,000 Value of cash .................................... 4,000 60,000 15,000 (h) Total consideration............................ $ 54,000 $ 110,000 $ 65,000 (i) Fair value of new partnership suggested by the fair value of the new partner’s investment [(h) ÷ (c)] $ 180,000 $ 440,000 $ 325,000 (b) Fair value of the original partnership ..................................... $ 80,500 $ 315,000 $ 292,000 (h) Investment of new partner................. 54,000 110,000 65,000 (j) Adjusted value of new partnership excluding goodwill [(d) + (h)] .......... $ 134,500 $ 425,000 $ 357,000 If (i) exceeds (j), goodwill is Original Original traceable to .................................... Partners Partners In the amount of [(i) – (j)] ................... $ 45,500 $ 15,000 If (j) exceeds (i), goodwill is New traceable to .................................... Partner In the amount of [(e) – (j)].................. $ 8,000

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Proof: (a) Book value of original partnership..... $130,500 $190,000 $242,000 Asset appreciation (depreciation)...... (50,000) 125,000 50,000 Goodwill traceable to original partnership ..................................... 45,500 15,000 Goodwill traceable to new partner..... 8,000 (h) Investment of new partner................. 54,000 110,000 65,000 Total capital of new partnership ........ $180,000 $440,000 $365,000 (c) New partner’s interest in capital ........ × 30% × 25% × 20% New partner’s capital balance ........... $ 54,000 $110,000 $ 73,000

EXERCISE 14-6

1. Combined Capital Noncash and Loan Balances Cash Assets Liabilities A (50%) B (30%) C (20%)

Beginning balance ................ $ 20,000 $ 358,000 $ 92,000 $116,000 $ 90,000 $ 80,000 Liquidation of receivables

and inventory................... 140,000 (158,000) (9,000) (5,400) (3,600) Pay liabilities ......................... (92,000) (92,000) Assume maximum loss on

remaining noncash assets.............................. (200,000) (100,000) (60,000) (40,000)

Retain cash of $10,000 ......... (10,000) (5,000) (3,000) (2,000) Balances ............................... $ 58,000 $ — $ — $ 2,000 $ 21,600 $ 34,400

Distribution to B is ................. $ 21,600 2. Combined Capital Noncash and Loan Balances Cash Assets Liabilities A (50%) B (30%) C (20%)

Beginning balance ................ $ 20,000 $ 358,000 $ 92,000 $116,000 $ 90,000 $ 80,000 Sale of noncash assets......... 53,000 (213,000) (80,000) (48,000) (32,000) Pay liabilities ......................... (92,000) (92,000) Assume maximum loss on remaining noncash assets.............................. (145,000) (72,500) (43,500) (29,000) Retain cash of $10,000 ......... (10,000) (5,000) (3,000) (2,000) Balances ............................... $ (29,000) $ — $ — $ (41,500) $ (4,500) $ 17,000

Distribution to B is ................. Zero—There is not enough cash to even cover the liabilities.

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3. Combined Capital Noncash and Loan Balances Cash Assets Liabilities A (50%) B (30%) C (20%)

Beginning balance ................ $ 20,000 $ 358,000 $ 92,000 $116,000 $ 90,000 $ 80,000 Sale of noncash assets......... 250,000 (300,000) (25,000) (15,000) (10,000) Pay liabilities ......................... (92,000) (92,000) Pay loan payable to A ........... (70,000) (70,000) Assume maximum loss on remaining noncash assets.............................. (58,000) (29,000) (17,400) (11,600) Retain cash of $10,000 ......... (10,000) (5,000) (3,000) (2,000) Balances ............................... $ 98,000 $ — $ — $ (13,000) $ 54,600 $ 56,400 Absorb A's deficit balance..... 13,000 (7,800) (5,200) Balances ............................... $ 98,000 $ — $ — $ — $ 46,800 $ 51,200

Distribution to B is ................. $ 46,800

EXERCISE 14-7

Given the adjustment of selected assets to net realizable value, the result is net assets of $90,000. It is assumed that the net assets can be disposed of at book value. As a result of the adjustment, Crawford has developed a deficit of $15,000 (see Schedule A). If Crawford is per-sonally solvent to the extent of the deficit, then it would contribute the $15,000 to the partnership and net assets would be liquidated and distributed. This would result in Crawford and Meyer receiving $0 and $73,000, respectively. However, if Crawford were unable to contribute the full amount of the deficit, then Meyer and Jensen would have to absorb Crawford’s remaining deficit balance. In the worst case, the entire $15,000 deficit would be absorbed by Meyer and Jensen in the amount of $9,000 and $6,000, respectively. This would cause Meyer to have a capital balance of $64,000. I would advise Meyer to take Jensen’s offer for several reasons. First, Crawford’s ability to cover the deficit may be at issue. Second, the Jensen offer is not signifi-cantly less than the $73,000 they would receive if Crawford were able to fully cover the deficit. Finally, there are no guarantees that the net assets could actually net the amounts suggested. After all, the company is in a distressed condition, and there would likely be transaction costs associated with the liquidation.

Schedule A Partial Liquidation

Assets Crawford Meyer Jensen Profit and loss percentages ......... 50% 30% 20%

Beginning balances...................... $ 230,000 $ 55,000 $115,000 $ 60,000 Adjust net assets.......................... (140,000) (70,000) (42,000) (28,000) Balances ...................................... $ 90,000 $ (15,000) $ 73,000 $ 32,000

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EXERCISE 14-8

(1) Allocation of typical profits under the original partnership’s agreement:

Cumulative A B C Total Salaries................................. $30,000 $30,000 $40,000 $100,000 Bonus to A*........................... 12,000 112,000 Remaining profits.................. 10,000 4,000 6,000 132,000 Total...................................... $52,000 $34,000 $46,000

*Bonus = 10% (Net Income – Bonus) 110% Bonus = 10% (Net Income) 110% Bonus = $13,200 Bonus = $12,000 Allocation of new partnership profits necessary to satisfy Bower:

Cumulative A B C D Total Salaries....................................... $30,000 $30,000 $40,000 $30,000 $130,000 Remaining profits* ...................... 42,000 14,000 42,000 42,000 270,000 Bonus to Dawson**..................... 20,000 290,000 Total............................................ $72,000 $44,000 $82,000 $92,000

*In order for Bower to increase his allocation by $10,000, he would need to receive a $14,000 allocation based on the profit percentage. Therefore, the total amount of profit subject to this allocation would be $140,000 ($14,000 divided by 10%).

**If the cumulative total of income allocated before the bonus to Dawson is $270,000, then Dawson would be entitled to the $20,000 bonus under the revised partnership agree-ment.

(2) The fair value of the net assets of the original partnership is $56,000 ($530,000 –

$474,000). If Dawson acquires a 30% interest in the capital of the partnership, this would mean that the fair value traceable to the original partnership would represent 70% of the new partnership’s total capital. Therefore, the total capital of the new partnership would be $80,000 ($56,000 ÷ 70%), and Dawson would have to pay $24,000 ($80,000 – $56,000) for a 30% interest in the new partnership.

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(3) If the partnership were liquidated as described, Bower would receive additional cash of $88,200, determined as follows:

Noncash Offset Capital Balances Cash Assets Liabilities Arnold Bower Chambers Beginning balances ....... $ 0 $ 680,000 $ 430,000 $ 50,000 $140,000 $ 60,000 Recognition of liability.... 4,000 (2,000) (800) (1,200) Vehicle transfer.............. (20,000) (2,500) (16,000)* (1,500) Sales of assets .............. 515,000 (660,000) (72,500) (29,000) (43,500) Payment of liabilities...... (434,000) (434,000) Balances........................ $ 81,000 $ 0 $ 0 $ (27,000) $ 94,200 $ 13,800 Contribution of assets.... 12,000 12,000 Allocation of deficit......... 15,000 (6,000) (9,000) Balances........................ $ 93,000 $ 0 $ 0 $ 0 $ 88,200 $ 4,800

*$15,000 fair value + (20% × $5,000 book value vs. fair value) = $16,000

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EXERCISE 14-9

Installment Liquidation Schedule

Noncash Capital and Loan Balance Date Circumstance Cash Assets Liabilities Coleman Moore Ramsey June 1, 2017 Beginning balance ..................... $ 8,000 $ 96,000 $ 63,000 $ 47,000 $ (9,000) $ 3,000 June 15, 2017 Sale of assets ............................ (30,000) (20,000) (6,000) (2,000) (2,000) Balance...................................... $ 8,000 $ 66,000 $ 43,000 $ 41,000 $(11,000) $ 1,000 July 1, 2017 Contribution of personal assets . 9,000 9,000 Balance...................................... $ 17,000 $ 66,000 $ 43,000 $ 41,000 $ (2,000) $ 1,000 Distribution of assets ................. (20,000) (21,200) 600 600 Balance...................................... $ 17,000 $ 46,000 $ 43,000 $ 19,800 $ (1,400) $ 1,600 Sale of assets ............................ 54,000 (40,000) 8,400 2,800 2,800 Payment of liabilities .................. (43,000) (43,000) Balance...................................... $ 28,000 $ 6,000 $ 0 $ 28,200 $ 1,400 $ 4,400 Distribution to partners (see Schedule A)................. (28,000) (24,600) (200) (3,200) Balance...................................... $ 0 $ 6,000 $ 0 $ 3,600 $ 1,200 $ 1,200

Schedule A Schedule of Safe Payments

Coleman Moore Ramsey Total Profit and loss percentages ........................... 60% 20% 20% 100% July Distribution Combined capital and loan balance before distribution ............................. $28,200 $ 1,400 $ 4,400 $34,000 Maximum loss possible............................ (3,600) (1,200) (1,200) (6,000) Safe payments ......................................... $24,600 $ 200 $ 3,200 $28,000

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EXERCISE 14-10

(1) None of the cash would be distributed to Partner A because the outside creditors’ claims must be satisfied before any distributions to partners occur. Even after the sale, there is only $32,000 of cash available to service the liabilities of $35,000.

(2) Partner A would receive $5,000 determined as follows:

Partner’s Loan Noncash and Capital Balance Cash Assets Liabilities A B C Beginning balance....................... $ 12,000 $ 180,000 $ 35,000 $ 60,000 $ 70,000 $ 27,000 Sale of assets .............................. 70,000 (60,000) 5,000 3,000 2,000 Payment of liabilities.................... (35,000) (35,000) Balance........................................ $ 47,000 $ 120,000 $ 0 $ 65,000 $ 73,000 $ 29,000 Assume assets are worthless...... (120,000) (60,000) (36,000) (24,000) Balance........................................ $ 47,000 $ 0 $ 0 $ 5,000 $ 37,000 $ 5,000 (3) If Partner B received $27,000 from the first safe payment, then he/she would need to re-

ceive another $52,000 to reach the target of $79,000 in total. If his/her capital balance after the first sale of assets and the distribution of $27,000 is $37,000 ($64,000 – $27,000), then his/her share of a gain on the sale of the remaining assets would have to bring the capital balance to the desired amount of $52,000. The necessary share of the gain is $15,000 ($52,000 – $37,000), which represents 30% of a total gain of $50,000. Therefore, the re-maining assets would have to sell for $160,000 in order to produce a gain of $50,000.

Partner’s Loan Noncash and Capital Balance Cash Assets Liabilities A B C Beginning balance....................... $ 12,000 $ 180,000 $ 35,000 $ 60,000 $ 70,000 $ 27,000 Sale of assets .............................. 50,000 (70,000) (10,000) (6,000) (4,000) Payment of liabilities.................... (35,000) (35,000) Balance........................................ $ 27,000 $ 110,000 $ 0 $ 50,000 $ 64,000 $ 23,000 Assume assets are worthless...... (110,000) (55,000) (33,000) (22,000) Balance........................................ $ 27,000 $ 0 $ 0 $ (5,000) $ 31,000 $ 1,000 Absorb deficit balance ................. 5,000 (3,000) (2,000) Absorb deficit balance ................. (1,000) 1,000 Balance........................................ $ 27,000 $ 0 $ 0 $ 0 $ 27,000 $ 0

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PROBLEMS

PROBLEM 14-1

Capital Balances Carlton Weber Stansbury Laidlaw Wilson Total Balances as of December 31, 2014........ $ 120,000 $ 70,000 $ 80,000 $270,000 Withdrawal of Stansbury ............................ (80,000) $ 80,000 Allocation of 2015 income (see Schedule A).......................................... 100,000 87,500 112,500 Quarterly withdrawals in 2015.................... (120,000) (90,000) (90,000) Balances as of December 31, 2015........... $ 100,000 $ 67,500 $ 0 $102,500 270,000 Withdrawal of bonus amount ..................... (12,500) (37,500) Allocation of first six months of 2016 income (see Schedule A) ..................... 40,000 35,000 45,000 Quarterly withdrawals through June 30 ..... (60,000) (45,000) (45,000) Balances as of June 30, 2016.................... $ 80,000 $ 45,000 $ 0 $ 65,000 190,000 Acquisition of Laidlaw’s interest ................. (8,000) (6,000) (65,000) Allocation of second six months of 2016 income (see Schedule A) ............ 36,500 36,500 Quarterly withdrawals through December 31 (20,000) (20,000) Balances as of December 31, 2016........... $ 88,500 $ 55,500 $ 0 $ 0 144,000 Admit Wilson to partnership ($144,000/60% = $240,000) ................ $ 96,000 Allocation of 2017 income (see Schedule A).......................................... 140,000 140,000 140,000 Quarterly withdrawals in 2017.................... (120,000) (120,000) (120,000) Balances as of December 31, 2017........... $ 108,500 $ 75,500 $ 0 $ 0 $ 116,000 300,000 Allocation of first six months of 2018 income (see Schedule A) ..................... 85,000 85,000 85,000 Quarterly withdrawals through June 30 ..... (60,000) (60,000) (60,000) Balances as of June 30, 2018.................... $ 133,500 $ 100,500 $ 0 $ 0 $ 141,000 375,000 Withdrawal of Carlton: Recognition of goodwill ........................ 26,500 26,500 26,500 Payment of $160,000........................... (160,000) Balances as of July 1, 2018 ....................... $ 0 $ 127,000 $ 0 $ 0 $ 167,500 294,500

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Problem 14-1, Concluded

Schedule A—Allocation of Net Income

Carlton Weber Laidlaw Wilson Total 2015 Salary ..................................... $120,000 $ 90,000 $ 90,000 $300,000 Bonus (Note A)....................... 12,500 37,500 50,000 Subtotal .................................. $120,000 $102,500 $127,500 $350,000 Remaining profit (loss) ........... (20,000) (15,000) (15,000) (50,000) Total ....................................... $100,000 $ 87,500 $112,500 $300,000 1st 6 mos. 2016 Salary ..................................... $ 60,000 $ 45,000 $ 45,000 $150,000 Bonus (Note B)....................... 5,000 15,000 20,000 Subtotal .................................. $ 60,000 $ 50,000 $ 60,000 $170,000 Remaining profit (loss) ........... (20,000) (15,000) (15,000) (50,000) Total ....................................... $ 40,000 $ 35,000 $ 45,000 $120,000 2nd 6 mos. 2016 Per profit and loss percentages...................... $ 36,500 $ 36,500 $ 73,000 2017 Per profit and loss percentages...................... 140,000 140,000 $140,000 420,000 1st 6 mos. 2018 Per profit and loss percentages...................... 85,000 85,000 85,000 255,000 Note A: Bonus = 20% (Net Income – Bonus) Bonus = 20% ($300,000 – Bonus) 120% Bonus = $60,000 Bonus = $50,000 Note B: Bonus = 20% (Net Income – Bonus) Bonus = 20% ($120,000 – Bonus) 120% Bonus = $24,000 Bonus = $20,000

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PROBLEM 14-2

(1) The net assets of the partnership have a book value of $200,000 and a fair value of $108,000 ($437,000 less $329,000). The decline in value of $92,000 ($200,000 vs. $108,000) would be allocated to Rowe in the amount of $36,800 (40% of $92,000). There-fore, Rowe’s adjusted capital balance at fair value would be $43,200 ($80,000 less $36,800), or $21,600 for a half interest.

(2) The fair value of the original partnership is $108,000. This amount would represent 60% of

the new partnership’s total capital of $180,000 ($108,000 divided by 60%). Therefore, a new partner would have to convey assets with a value of $72,000 ($180,000 less $108,000).

(3) Rowe’s capital = $80,000 – $36,800 – $2,880 = $40,320 based on the following entries:

Capital, Kravitz ................................................................... 55,200 Capital, Rowe ..................................................................... 36,800 Net Assets .................................................................... 92,000 To recognize write-down of net assets. Cash ................................................................................... 60,000 Capital, Kravitz ................................................................... 4,320 Capital, Rowe ..................................................................... 2,880 Capital, New Partner..................................................... 67,200* To recognize investment of new partner.

*($108,000 + $60,000) × 40% (4) Rowe’s capital = $80,000 – $36,800 = $43,200.

If the goodwill method were employed, the difference between the new partner’s cash con-tribution of $60,000 and a suggested contribution of $72,000 [see item (2) above] would be recognized as goodwill traceable to the new partner.

(5) New partner’s capital = 30% × ($108,000 + $55,000) = $48,900.

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649

PROBLEM 14-3

(1) Grossman Casper Ziegler Total

Pre-sale capital balance ........................ $125,000 $200,000 $ 150,000 $ 475,000 Sale to Grossman.................................. 150,000 (150,000) — Post-sale capital balance....................... $275,000 $200,000 $ — $ 475,000 (2) Grossman Casper Ziegler Total

Pre-sale capital balance ........................ $125,000 $200,000 $ 150,000 $ 475,000 Recognize only decreases in the value of existing assets ..................... (12,250) (15,750) (7,000) (35,000) Sale to Grossman.................................. 143,000 (143,000) — Post-sale capital balance....................... $255,750 $184,250 $ — $ 440,000 (3) Grossman Casper Ziegler Total

Pre-sale capital balance ........................ $125,000 $200,000 $ 150,000 $ 475,000 Recognize only decreases in the value of existing assets ..................... (14,000) (14,000) (7,000) (35,000) Sale to partnership ................................ (8,500) (8,500) (143,000) (160,000) Post-sale capital balance....................... $102,500 $177,500 $ — $ 280,000 (4) Grossman Casper Ziegler Total

Pre-sale capital balance ........................ $125,000 $200,000 $ 150,000 $ 475,000 Recognize only decreases in the value of existing assets ..................... (14,000) (14,000) (7,000) (35,000) Recognition of Zeigler's goodwill ........... 17,000 17,000 Sale to partnership ................................ (160,000) (160,000) Post-sale capital balance....................... $111,000 $186,000 $ — $ 297,000 (5) Grossman Casper Ziegler Total

Pre-sale capital balance ........................ $125,000 $200,000 $ 150,000 $ 475,000 Recognize only decreases in the value of existing assets ..................... (14,000) (14,000) (7,000) (35,000) Recognition of all suggested goodwill ... 34,000 34,000 17,000 85,000 Sale to partnership ................................ (160,000) (160,000) Post-sale capital balance....................... $145,000 $220,000 $ — $ 365,000 (6) Grossman Casper Ziegler Total

Pre-sale capital balance ........................ $125,000 $200,000 $ 150,000 $ 475,000 Recognize all changes in the value of existing assets ..................... 8,000 8,000 4,000 20,000 Recognition of all suggested goodwill ... 12,000 12,000 6,000 30,000 Sale to partnership ................................ (160,000) (160,000) Post-sale capital balance....................... $145,000 $220,000 $ — $ 365,000 Note: This problem provides an opportunity to discuss which of the above alternatives, if any, is most appropriate. Consideration should be given to what is currently allowed by generally ac-cepted accounting principles.

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650

PROBLEM 14-4

(1) Capital Balances Davis Murray Clay Rayburn Total Balances as of December 31, 2013................ $ 50,000 $ 80,000 $ 70,000 Distribution of Clay’s 2013 bonus (see Schedule A).................... (36,000) Distribution of 2013 other income (see Schedule A; 80% × $144,000) ............................... (38,400) (38,400) (38,400) Allocation of 2014 income* (see Schedule A)............................ 108,000 108,000 84,000 Quarterly distributions .................. (100,000) (100,000) (70,000) Balances as of December 31, 2014................ $ 19,600 $ 49,600 $ 9,600 $ 78,800 Admission of Rayburn (see Schedule B)............................ (3,300) (3,300) (3,300) $ 68,900 Distribution of Clay’s 2014 bonus (see Schedule A).................... (6,000) Distribution of 2014 other income (see Schedule A; 80% × $24,000) ................................. (6,400) (6,400) (6,400) Allocation of 2015 income* (see Schedule A)............................ 50,000 50,000 36,100 5,900 Subtotal ........................................ $ 59,900 $ 89,900 $ 30,000 $ 74,800 Withdrawal of Davis**................... (59,900) 4,500 4,500 1,500 Balances as of December 31, 2015................ $ 0 $ 94,400 $ 34,500 $ 76,300 205,200 Distribution of Clay’s 2015 bonus (see Schedule A).................... (1,100) Distribution of 2015 other income (see Schedule A).................... 0 0 0 0 Allocation of 2016 income* (see Schedule A)............................ 0 40,948 40,948 28,104 Balances as of June 30, 2016...... $ 0 $ 135,348 $ 74,348 $104,404 314,100

*Not yet distributed **Davis balance of $59,900 – cash paid to Davis $49,400 = $10,500, which is allocated to

the remaining partners (Murray and Clay each get 3/7 and Rayburn gets 1/7)

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Problem 14-4, Continued

Schedule A Allocation of Profits and Losses

Cumulative 2013 Income Davis Murray Clay Rayburn Total Profit and loss percentages... 33.3% 33.3% 33.3%

Salaries ................................. $100,000 $100,000 $ 70,000 $270,000 Bonus (see Note A)............... 36,000 306,000 Remaining profits .................. 48,000 48,000 48,000 450,000 Total ...................................... $148,000 $148,000 $154,000 2014 Income Salaries ................................. $100,000 $100,000 $70,000 270,000 Bonus (see Note B)............... 6,000 276,000 Remaining profits .................. 8,000 8,000 8,000 300,000 Total ...................................... $108,000 $108,000 $84,000 2015 Income Salaries ................................. $50,000 $50,000 $35,000 $ 0 135,000 Interest .................................. 5,900 140,900 Bonus (see Note C)............... 1,100 142,000 Remaining profits .................. 0 0 0 142,000 Total ...................................... $50,000 $50,000 $36,100 $ 5,900 2016 Income Salaries ................................. $ 0 $ 0 $ 0 $ 0 0 Interest (10% × $76,300) ...... 7,630 7,630 Remaining profits .................. 0 40,948 40,948 20,474 110,000 Total ...................................... $ 0 $40,948 $40,948 $28,104 Note A: Bonus = 20% (Net Income – Salaries) Bonus = 20% ($450,000 – $270,000) Bonus = 20% ($180,000) Bonus = $36,000 Note B: Bonus = 20% (Net Income – Salaries) Bonus = 20% ($300,000 – $270,000) Bonus = 20% ($30,000) Bonus = $6,000 Note C: Bonus = 20% (Net Income – Salaries) Bonus = 20% ($142,000 – $135,000) Bonus = 20% ($7,000) Bonus = $1,400 but limited to available net income

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Schedule B Changes in Partnership Interests

Admission of Rayburn: Total capital of previous partners ........................................................... $ 78,800 Investment of Rayburn ........................................................................... 59,000 Total capital of new partnership ............................................................. $137,800 50% interest allocated to Rayburn ......................................................... 68,900 Balance allocated to previous partners .................................................. $ 68,900 Investment of Rayburn ........................................................................... 59,000 Balance of negative bonus to previous partners .................................... $ 9,900 (2) Distribution of Available Cash on September 15, 2016

Cash Liabilities Murray Clay Rayburn Available cash (see Schedule C) ...... $ 277,000 Payment of liabilities ......................... (84,000) $84,000 Payment to partners (see Note D) .... (183,000) $112,908 $1,908 $68,184 Total .................................................. $ 10,000 $84,000 $112,908 $1,908 $68,184

Schedule C Partial Liquidation Schedule

Noncash Loan from Capital Balances Cash Assets Liabilities Murray Murray Clay Rayburn Balances at June 30, 2016 ..... $ 15,000 $433,100 $84,000 $50,000 $135,348 $74,348 $104,404 August 1 sale of assets .......... 180,000 (220,000) (16,000) (16,000) (8,000) September 1 sale of assets .... 82,000 (70,000) 4,800 4,800 2,400 Balances ................................. $277,000 $143,100 $84,000 $50,000 $124,148 $63,148 $ 98,804 Note D: Schedule of Safe Payments Murray Clay Rayburn Total Profit and loss percentages........................... 40% 40% 20% 100%

Combined capital and loan balances ............ $174,148 $ 63,148 $ 98,804 $ 336,100 Estimated cash reserve................................. (4,000) (4,000) (2,000) (10,000) Maximum loss possible ................................. (57,240) (57,240) (28,620) (143,100) Safe payment ................................................ $112,908 $ 1,908 $ 68,184 $ 183,000

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PROBLEM 14-5

If the partnership is liquidated, Jacobs’ capital balance and resulting distribution will be as follows: Noncash Combined Loan and Capital Balances Cash Assets Liabilities Jacobs Williams Harrington

Profit and loss percentages .................... 30% 30% 40% Beginning balances................................. $ (15,000) $ 322,000 $ 160,000 $ 52,000 $ 65,000 $ 30,000 Discovery of liabilities.............................. 12,000 (3,600) (3,600) (4,800) Sale of assets ......................................... 232,000 (322,000) (27,000) (27,000) (36,000) Payment of liabilities ............................... (172,000) (172,000) Liquidation expenses .............................. (18,000) (5,400) (5,400) (7,200) Payment of Williams’ loan....................... (25,000) (25,000) Balances ................................................. $ 2,000 $ — $ — $ 16,000 $ 4,000 $ (18,000) Contribution by Harrington ...................... 13,000 13,000 Absorb Harrington's deficit ...................... (2,500) (2,500) 5,000 Payment of Williams’ loan....................... $ 15,000 $ — $ — $ 13,500 $ 1,500 $ — If the partnership is liquidated, Jacobs will receive $13,500 of cash and a claim against Harrington for $2,500. The claim against Har-rington will appear to be of questionable collectibility. If the offer by Williams is accepted, the amount received by Jacobs will be determined as follows: Noncash Combined Loan and Capital Balances Cash Assets Liabilities Jacobs Williams Harrington

Profit and loss percentages .................... 30% 30% 40% Beginning balances................................. $ (15,000) $ 322,000 $ 160,000 $ 52,000 $ 65,000 $ 30,000 Adjustment for uncertainties ................... (70,000) (21,000) (21,000) (28,000) Balances ................................................. $ (15,000) $ 252,000 $ 160,000 $ 31,000 $ 44,000 $ 2,000

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Payment due Jacobs: Capital balance .................................................. $ 31,000 Percent to be paid.............................................. 50% Total payment .................................................... $ 15,500 Less down payment ........................................... (3,100) Remaining balance ............................................ $ 12,400

Number of installments ...................................... 24 Installment payment ........................................... $ 516.67 Net present value of installments when: Payment is ................................................... $ 516.67 Number of months is .................................... 24 Monthly interest rate is ................................. 0.50% Net present value ......................................... $11,657.48 Total payment .................................................... $15,500.00 Less imputed interest: Stated payments .......................................... $ 12,400 NPV of payments ......................................... 11,657.48 742.52 Net consideration received........................... $14,757.48 Even after imputing interest on the installment receivable, it will appear that Jacobs is better off to accept the offer from Williams. Not only does Jacobs avoid the uncertainty associated with the claim against Harrington, but she is also able to avoid the uncertainties associated with questionable liquidation assumptions. Having said this, Jacobs should also evaluate the col-lectibility of the installment payments from Williams.

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PROBLEM 14-6

Capital Balances Murphy Reinartz Hepburn Pioso Total Balance as of December 31, 2015 ........... $ 54,000 $ 76,000 $ — $ — $ 130,000 2016 Allocation of profits (see Note A)....................... 127,600 102,400 230,000 Distributions ........................... (100,000) (100,000) (200,000) Year-end balance................... $ 81,600 $ 78,400 $ — $ — $ 160,000 2017 Beginning balance.................. $ 81,600 $ 78,400 $ 160,000 Admission of Hepburn (see Note C) ...................... 30,000 20,000 $ 70,000 120,000 Allocation of profits (see Note A)....................... 145,250 98,875 85,875 330,000 Distributions ........................... (80,000) (80,000) (80,000) (240,000) Year-end balance................... $ 176,850 $ 117,275 $ 75,875 $ — $ 370,000 2018 Beginning balance.................. $ 176,850 $ 117,275 $ 75,875 $ — $ 370,000 Sale of interest to Reinartz..... (176,850) 176,850 — Allocation of profits (see Note A)....................... — 100,000 100,000 200,000 Distributions ........................... (60,000) (80,000) (140,000) Year-end balance................... $ — $ 334,125 $ 95,875 $ — $ 430,000 2019 Beginning balance.................. $ — $ 334,125 $ 95,875 $ — $ 430,000 Adjustment of net assets........ (5,000) (5,000) (10,000) Recognition of Reinartz goodwill (see Note C) ........ 20,875 20,875 Sale of interest by Reinartz .... (350,000) — (350,000) Subtotal .................................. $ — $ — $ 90,875 $ — $ 90,875 Admission of Pioso (see Note C) ...................... — 21,625 75,000 96,625 Ending balance ...................... $ — $ — $112,500 $ 75,000 $ 187,500

Note A: Cumulative

2016 Allocation Profit Murphy Reinartz Total Profit and loss percentages ............................. 40% 60% Salary .............................................................. $ 80,000 $100,000 $180,000 Bonus (see Note B) ......................................... 46,000 226,000 Balance............................................................ 1,600 2,400 230,000 Totals............................................................... $127,600 $102,400

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Cumulative 2017 Allocation Murphy Reinartz Hepburn Total

Profit and loss percentages .. 30% 45% 25% Salary ................................... $ 80,000 $100,000 $70,000 $250,000 Bonus (see Note B) .............. 66,000 16,500 332,500 Balance................................. (750) (1,125) (625) 330,000 Totals.................................... $145,250 $ 98,875 $85,875 Cumulative

2018 Allocation Murphy Reinartz Hepburn Total Profit and loss percentages .. 50% 50% Balance................................. $100,000 $100,000 $200,000 Totals.................................... $ — $100,000 $100,000 Note B: 2016 Bonus Percent of Partner Income Income Bonus Murphy 20% $230,000 $46,000

2017 Bonus Percent of Partner Income Income Bonus Murphy 20% $330,000 $66,000 Hepburn 5% 330,000 16,500 $82,500 Note C: Admission of Hepburn: If Hepburn paid $70,000 for a 25% interest in capital, this

would suggest that the new partnership had a value of $280,000. This value exceeds the capital of the old partnership ($160,000) plus the investment of the new partner ($70,000). Therefore, goodwill of $50,000 [$280,000 – ($160,000 + $70,000)] is tra-ceable to the original partnership. The goodwill is allocated to the original partners per their profit percentages.

Sale of Reinartz Interest: If Reinartz's capital balance has a book value of $329,125

after the adjustment of net assets, a sale to the partnership for $350,000 suggests goodwill of $20,875 as being traceable to Reinartz.

Admission of Pioso: If Pioso paid $75,000 for a 40% interest in capital, this would

suggest that the new partnership had a value of $187,500. This value exceeds the capital of the old partnership ($90,875) plus the investment of the new partner ($75,000). Therefore, goodwill of $21,625 [$187,500 – ($90,875 + $75,000)] is trace-able to the original partnership. The goodwill is allocated to the original partners per their profit percentages (in this case, Hepburn gets 100%).

.

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PROBLEM 14-7

If the partnership were liquidated on March 31, 2016, Klaproth would receive $48,750, determined as follows:

Noncash Partner’s Capital Balances Event/Circumstance Cash Assets Liabilities Klaproth Stone Jackson Profit and loss percentages ....... 35% 30% 35% Beginning balances ................... $ 120,000 $1,500,000 $1,400,000 $110,000 $ 20,000 $ 90,000 Liquidation of assets.................. 1,380,000 (1,500,000) . (42,000) (36,000) (42,000) Settlement of liabilities............... (1,350,000) (1,400,000) 17,500 15,000 17,500 Unrecorded contingent liabilities ................................ (60,000) (21,000) (18,000) (21,000) Payment of liquidation expenses............................... (25,000) (8,750) (7,500) (8,750) Subtotal...................................... $ 65,000 $ — $ — $ 55,750 $ (26,500) $ 35,750 Contribution of personal assets . 12,500 12,500 Absorption of deficit ................... — (7,000) 14,000 (7,000) Subtotal...................................... $ 77,500 $ — $ — $ 48,750 $ — $ 28,750 Final payment to partners.......... (77,500) — — (48,750) — (28,750) Final balances............................ $ — $ — $ — $ — $ — $ —

If Klaproth continued in the partnership until March 31, 2018, he would receive draws of $20,000 and a final payment of $117,040 (110% of final capital balance of $106,400) less an investment of $50,000, determined as follows:

Noncash Partner’s Capital Balances Event/Circumstance Cash Assets Liabilities Klaproth Stone Jackson Profit and loss percentages ....... 35% 30% 35% Beginning balances ................... $120,000 $1,500,000 $1,400,000 $ 110,000 $ 20,000 $ 90,000 Allocation of 2016 net income (see Note A).......................... — 120,000 — 32,000 46,000 42,000 Partnership draws...................... (80,000) (20,000) (40,000) (20,000) Investment of capital.................. 80,000 50,000 30,000 Allocation of 2017 net income (see Note B).......................... — 200,000 56,900 62,200 80,900 Partnership draws...................... (60,000) — (40,000) (20,000) Subtotal...................................... $ 60,000 $1,820,000 $1,400,000 $ 228,900 $ 78,200 $ 172,900 Adjustment of receivables and Inventory to market value ..... — (350,000) (122,500) (105,000) (122,500) Final balances............................ $ 60,000 $1,470,000 $1,400,000 $ 106,400 $ (26,800) $ 50,400

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Note A Cumulative

Allocation of 2016 income: Klaproth Stone Jackson Total Profit and loss percentages ....... 35% 30% 35% Salary ......................................... $100,000 $130,000 $ 90,000 $320,000 Bonus as a percent of sales....... 30,000 — 50,000 400,000 Balance ...................................... (98,000) (84,000) (98,000) 120,000 Totals ......................................... $ 32,000 $ 46,000 $ 42,000

Note B Cumulative

Allocation of 2017 income: Klaproth Stone Jackson Total Profit and loss percentages ....... 35% 30% 35% Salary ......................................... $100,000 $130,000 $ 90,000 $320,000 Bonus as a percent of sales....... 36,000 — 70,000 426,000 Balance ...................................... (79,100) (67,800) (79,100) 200,000 Totals ......................................... $ 56,900 $ 62,200 $ 80,900

It appears that Klaproth would be well advised to continue in the partnership if forecasted results are realized. Even if the cash flows from the two alternatives were expressed as present values, continu-ing in the partnership appears to be the best alternative.

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659

PROBLEM 14-8

(1) Installment Liquidation Schedule

Noncash Partner’s Loan and Capital Balance Event/Circumstance Cash Assets Liabilities Dvorak Kelsen Morgan Profit and loss percentages.............. 30% 30% 40% Beginning balances.......................... $ 15,000 $ 722,000 $ 613,000 $ 20,000 $ 87,000 $ 17,000 Liquidate receivables and inventory .................................... 90,000 (130,000) (12,000) (12,000) (16,000) Refund of prepaids........................... 10,000 (12,000) (600) (600) (800) Balances........................................... $115,000 $ 580,000 $ 613,000 $ 7,400 $ 74,400 $ 200 Payoff of accounts payable .............. (80,000) (80,000) Balances........................................... $ 35,000 $ 580,000 $ 533,000 $ 7,400 $ 74,400 $ 200 Distribution of assets to partners ..... (25,000) (9,500) (1,500) (14,000) Sale of office equipment/vehicles.................... 28,000 (35,000) (2,100) (2,100) (2,800) Settle contingent liability................... (43,000) (83,000) 12,000 12,000 16,000 Balances........................................... $ 20,000 $ 520,000 $ 450,000 $ 7,800 $ 82,800 $ (600) Payment to partners (see Schedule A) ....................... (18,000) (18,000) Balances........................................... $ 2,000 $ 520,000 $ 450,000 $ 7,800 $ 64,800 $ (600) Sale of furniture and fixtures ............ 120,000 (150,000) (9,000) (9,000) (12,000) Collection agency proceeds............. 5,000 (20,000) (4,500) (4,500) (6,000) Sale of home and payoff of loan ...... (80,000) (350,000) (450,000) 6,000 6,000 8,000 Balances........................................... $ 47,000 $ 0 $ 0 $ 300 $ 57,300 $ (10,600) Contribution of deficit partners ......... 10,000 10,000 Allocation of deficit balances............ (300) (300) 600 Final payment to partners ................ (57,000) (57,000) Balances........................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

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Dvorak Kelsen Morgan Profit and loss percentages ...................... 30% 30% 40% Combined capital and loan balances........ $ 7,800 $ 82,800 $ (600) Cash retained/expenses anticipated ........ (600) (600) (800) Maximum loss possible ($520,000 – $450,000) ........................ (21,000) (21,000) (28,000) Balances ................................................... $ (13,800) $ 61,200 $ (29,400) Allocation of deficits .................................. 13,800 (43,200) 29,400 Safe payments.......................................... $ 0 $ 18,000 $ 0 (2) The distributions of the equipment and vehicles were not safe. First of all, distributions

should not be made unless all liabilities have been settled. Furthermore, if a schedule of safe payments had been made at that time, the partners would not have had adequate capi-tal balances to absorb potential losses.

(3) Solvent partners will have a legal claim against those partners who are not able to satisfy

their deficit balance. The ultimate collectability of these amounts is dependent upon the insolvent partner(s) subsequently becoming solvent.

Ch. 14—Problems

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PROBLEM 14-9

Other Partner’s Capital Balance Cash Assets Liabilities Adams Beyer Chenery

Profit and loss percentages .................... 30% 30% 40% Beginning balances................................. $ 25,000 $ 240,000 $ 200,000 $ 50,000 $ (10,000) $ 25,000 June 30 sale of assets ............................ 120,000 (160,000) (12,000) (12,000) (16,000) Balances ................................................. $ 145,000 $ 80,000 $ 200,000 $ 38,000 $ (22,000) $ 9,000 Contribution of assets ............................. 6,000 6,000 Payment of liabilities ............................... (131,000) (131,000) Balances ................................................. $ 20,000 $ 80,000 $ 69,000 $ 38,000 $ (16,000) $ 9,000 July 28 sale of assets.............................. 10,000 (80,000) (21,000) (21,000) (28,000) Balances ................................................. $ 30,000 $ — $ 69,000 $ 17,000 $ (37,000) $ (19,000) Contribution of assets ............................. 24,000 5,000 19,000 Payment of liabilities ............................... (54,000) (54,000) Balances ................................................. $ — $ — $ 15,000 $ 17,000 $ (32,000) $ — Adams contribution ................................. 12,000 12,000 Payment of liabilities ............................... (12,000) (12,000) Balances ................................................. $ — $ — $ 3,000 $ 29,000 $ (32,000) $ — Chenery contribution............................... 3,000 3,000 Payment of liabilities ............................... (3,000) (3,000) Balances ................................................. $ — $ — $ — $ 29,000 $ (32,000) $ 3,000 Allocation of Beyer deficit (3:4) ............... — (13,714) 32,000 (18,286) Balances ................................................. $ — $ — $ — $ 15,286 $ — $ (15,286) Allocation of Chenery deficit ................... — (15,286) 15,286 Balances ................................................. $ — $ — $ — $ — $ — $ —

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Allocation of Adams' personal assets: Personal liabilities..................................................................... $22,500 60% Unsatisfied partnership creditors .............................................. 15,000 40 Total claims against personal assets........................................ $37,500 100% Assets to be contributed to partnership (40% × $30,000) ........ $12,000 Allocation of Chenery's personal assets: Personal liabilities..................................................................... $27,000 90% Unsatisfied partnership creditors .............................................. 3,000 10 Total claims against personal assets........................................ $30,000 100% Assets to be contributed to partnership (10% × $30,000) ........ $3,000 (Note: The $30,000 of assets is $49,000 less the $19,000 previously contributed to the partnership.)

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PROBLEM 14-10

Installment Liquidation Schedule

Partner’s Loan Noncash and Capital Balance Event/Circumstance Cash Assets Liabilities Ziegler Nolan Petersen Profit and loss percentages........ 30% 30% 40% Beginning balance...................... $ 12,000 $228,000 $120,000 $ 20,000 $ 50,000 $ 50,000 Additional adjustment................. 17,400 (5,220) (5,220) (6,960) Conveyance of vehicles ............. (14,000) (20,300) 2,700 3,600 Sale of assets............................. 70,000 (90,000) (6,000) (6,000) (8,000) Balance ...................................... $ 82,000 $124,000 $137,400 $(11,520) $ 41,480 $ 38,640 Payment of liabilities .................. (82,000) (82,000) Balance ...................................... $ 0 $124,000 $ 55,400 $(11,520) $ 41,480 $ 38,640 Sale of assets............................. 92,000 (80,000) 3,600 3,600 4,800 Payment of subcontractor .......... (15,000) (4,500) (4,500) (6,000) Bill customer for subcontractor .. 20,000 6,000 6,000 8,000 Balance ...................................... $ 77,000 $ 64,000 $ 55,400 $ (6,420) $ 46,580 $ 45,440 Payment of liabilities (see Note A) (42,400) (42,400) Balance ...................................... $ 34,600 $ 64,000 $ 13,000 $ (6,420) $ 46,580 $ 45,440 Payment to partners (see Schedule A) ................. (16,600) 0 (14,257) (2,343) Balance ...................................... $ 18,000 $ 64,000 $ 13,000 $ (6,420) $ 32,323 $ 43,097 Conveyance of vehicles ............. (8,000) 1,200 1,200 (10,400) Settle liabilities ........................... (10,000) (13,000) 900 900 1,200 Collect receivables ..................... 20,000 (20,000) Balance ...................................... $ 28,000 $ 36,000 $ 0 $ (4,320) $ 34,423 $ 33,897 Payment to partners (see Schedule A) ................. (28,000) 0 (17,143) (10,857) Final sale of assets .................... 24,000 (36,000) (3,600) (3,600) (4,800) Payment of professional fees..... (6,000) (1,800) (1,800) (2,400) Balance ...................................... $ 18,000 $ 0 $ 0 $ (9,720) $ 11,880 $ 15,840 Contribution of capital ................ 9,720 9,720 Payment to partners................... (27,720) (11,880) (15,840) Balance ...................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Note A: The contingent liability of $13,000 remains unpaid.

Ch. 14—Problems

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Ziegler Nolan Petersen Profit and loss percentages .............................................. 30% 30% 40% July 15 Distribution Combined capital and loan balance.................................. $ (6,420) $ 46,580 $ 45,440 Cash retained/expenses anticipated................................. (1,500) (1,500) (2,000) Maximum loss possible..................................................... (19,200) (19,200) (25,600) Balance ............................................................................. $(27,120) $ 25,880 $ 17,840 Allocation of deficits .......................................................... 27,120 (11,623) (15,497) Safe payments .................................................................. $ 0 $ 14,257 $ 2,343 August 1 Distribution Combined capital and loan balance.................................. $ (4,320) $ 34,423 $ 33,897 Cash retained/expenses anticipated................................. 0 0 0 Maximum loss possible..................................................... (10,800) (10,800) (14,400) Balance ............................................................................. $(15,120) $ 23,623 $ 19,497 Allocation of deficits .......................................................... 15,120 (6,480) (8,640) Safe payments .................................................................. $ 0 $ 17,143 $ 10,857

fischer11e chap14 final

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