Fischer11e SMChap14 Final

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 sug-gested 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 schedules of safe payments is a practical way to calcu-late appropriate and safe payments to part-ners.

4. If a fellow partner has a deficit capital balance, it is possible that other partners will have to absorb that deficit partner’s bal-ance. Although the absorbing partners may have a personal claim against the deficit partner for the amount absorbed, the col-lectibility 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

633

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 cap-ital 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.

Ch. 14—Exercises

EXERCISES

EXERCISE 14-1

(1)Inventory.................................................................................... 58,000

Accounts Receivable........................................................... 18,000Warranty Obligations........................................................... 10,000Pearson, Capital.................................................................. 18,000Murphy, Capital................................................................... 12,000

To adjust book values to market values.

Cash.......................................................................................... 84,000Goodwill..................................................................................... 56,000

Pearson, Capital.................................................................. 33,600Murphy, Capital................................................................... 22,400Warner, 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 part-ner 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.

Ch. 14—Exercises

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 value. 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 as-sets and partnership capital. Furthermore, income would typically be lower under the good-will 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.

Ch. 14—Exercises

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 ex-amples of write-downs relate to measuring inventory at lower of cost or market and recog-nizing the impairment of value on long-lived assets. However, only the goodwill method al-lows 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.

Ch. 14—Exercises

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 partner-ship. 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 Pe-tersen’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 value 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.

Ch. 14—Exercises

EXERCISE 14-5

(1) Partnership A B C

Fair market value of original partnership:Assets at book value......................... $ 500,000 $ 600,000 $ 800,000Liabilities 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 ofthe 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 thenew 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 $ 50,000Value 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 thenew partner’s investment [(h) ÷ (c)] $ 180,000 $ 440,000 $ 325,000

(b) Fair value of the originalpartnership...................................... $ 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 Originaltraceable to..................................... Partners Partners

In the amount of [(i) – (j)]................... $ 45,500 $ 15,000If (j) exceeds (i), goodwill is New

traceable to..................................... PartnerIn the amount of [(e) – (j)].................. $ 8,000

Ch. 14—Exercises


Proof:(a) Book value of original partnership..... $130,500 $190,000 $242,000

Asset appreciation (depreciation)...... (50,000) 125,000 50,000Goodwill traceable to original

partnership...................................... 45,500 15,000Goodwill 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 CapitalNoncash 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



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

Ch. 14—Exercises

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

Ch. 14—Exercises




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 $ 56,400Absorb 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 re-ceiving $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 bal-ance of $64,000. I would advise Meyer to take Jensen’s offer for several reasons. First, Craw-ford’s ability to cover the deficit may be at issue. Second, the Jensen offer is not significantly 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 APartial Liquidation

Assets Crawford Meyer Jensen

Profit and loss percentages.......... 50% 30% 20%

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

Ch. 14—Exercises

Ch. 14—Exercises

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 $100,000Bonus to A*............................ 12,000 112,000Remaining profits................... 10,000 4,000 6,000 132,000Total....................................... $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 To -

tal

Salaries........................................ $30,000 $30,000 $40,000 $30,000$130,000Remaining profits*....................... 42,000 14,000 42,000 42,000270,000Bonus to Dawson**...................... 20,000 290,000Total............................................. $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.

Ch. 14—Exercises


(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 $60,000Recognition 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 $13,800Contribution of assets.... 12,000 12,000Allocation 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

Ch. 14—Exercises

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) $ 3,000June 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) $ 1,000July 1, 2017 Contribution of personal assets.. 9,000 9,000

Balance...................................... $ 17,000 $ 66,000 $ 43,000 $ 41,000 $ (2,000) $ 1,000Distribution of assets.................. (20,000 ) (21,200 ) 600 600 Balance...................................... $ 17,000 $ 46,000 $ 43,000 $ 19,800 $ (1,400) $ 1,600Sale of assets............................. 54,000 (40,000) 8,400 2,800 2,800Payment of liabilities.................. (43,000 ) (43,000 ) Balance...................................... $ 28,000 $ 6,000 $ 0 $ 28,200 $ 1,400 $ 4,400Distribution to partners

(see Schedule A)................. (28,000 ) (24,600 ) (200 ) (3,200 )Balance...................................... $ 0 $ 6,000 $ 0 $ 3,600 $ 1,200 $ 1,200

Schedule ASchedule 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$34,000Maximum loss possible............................. (3,600 ) (1,200 ) (1,200 )

(6,000 )Safe payments.......................................... $24,600 $ 200 $ 3,200 $28,000

Ch. 14—Exercises

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 LoanNoncash and Capital Balance

Cash Assets Liabilities A B C

Beginning balance....................... $ 12,000 $ 180,000 $ 35,000 $ 60,000 $ 70,000 $ 27,000Sale of assets.............................. 70,000 (60,000) 5,000 3,000 2,000Payment of liabilities.................... (35,000 ) (35,000 ) Balance........................................ $ 47,000 $ 120,000 $ 0 $ 65,000 $ 73,000 $ 29,000Assume 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.


Cash Assets Liabilities A B C

Beginning balance....................... $ 12,000 $ 180,000 $ 35,000 $ 60,000 $ 70,000 $ 27,000Sale 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 $ 23,000Assume assets are worthless...... (110,000 ) (55,000 ) (33,000 ) (22,000 )Balance........................................ $ 27,000 $ 0 $ 0 $ (5,000) $ 31,000 $ 1,000Absorb deficit balance................. 5,000 (3,000) (2,000)Absorb deficit balance................. (1,000 ) 1,000 Balance........................................ $ 27,000 $ 0 $ 0 $ 0 $ 27,000 $ 0

Ch. 14—Problems

PROBLEMS

PROBLEM 14-1

Capital Balances Carlton Weber Stansbury Laidlaw Wilson Total

Balances as of December 31, 2014........ $ 120,000 $ 70,000 $ 80,000 $270,000Withdrawal of Stansbury............................ (80,000) $ 80,000Allocation of 2015 income (see

Schedule A).......................................... 100,000 87,500 112,500Quarterly withdrawals in 2015.................... (120,000 ) (90,000 ) (90,000 )Balances as of December 31, 2015........... $ 100,000 $ 67,500 $ 0 $102,500 270,000Withdrawal of bonus amount...................... (12,500) (37,500)Allocation of first six months of 2016

income (see Schedule A)..................... 40,000 35,000 45,000Quarterly withdrawals through June 30...... (60,000 ) (45,000 ) (45,000 )Balances as of June 30, 2016.................... $ 80,000 $ 45,000 $ 0 $ 65,000 190,000Acquisition of Laidlaw’s interest................. (8,000) (6,000) (65,000)Allocation of second six months of

2016 income (see Schedule A)............ 36,500 36,500Quarterly withdrawals through December 31 (20,000 ) (20,000 ) Balances as of December 31, 2016........... $ 88,500 $ 55,500 $ 0 $ 0 144,000Admit Wilson to partnership

($144,000/60% = $240,000)................. $ 96,000Allocation of 2017 income (see

Schedule A).......................................... 140,000 140,000 140,000Quarterly withdrawals in 2017.................... (120,000 ) (120,000 ) (120,000 )Balances as of December 31, 2017........... $ 108,500 $ 75,500 $ 0 $ 0 $ 116,000 300,000Allocation of first six months of 2018

income (see Schedule A)..................... 85,000 85,000 85,000Quarterly withdrawals through June 30...... (60,000 ) (60,000 ) (60,000 )Balances as of June 30, 2018.................... $ 133,500 $ 100,500 $ 0 $ 0 $ 141,000 375,000Withdrawal of Carlton:

Recognition of goodwill........................ 26,500 26,500 26,500Payment of $160,000........................... (160,000 )

Balances as of July 1, 2018....................... $ 0 $ 127,000 $ 0 $ 0 $ 167,500 294,500

Ch. 14—Problems

Problem 14-1, Concluded

Schedule A—Allocation of Net Income

Carlton Weber Laidlaw Wilson To - tal 2015 Salary...................................... $120,000 $ 90,000 $ 90,000

$300,000Bonus (Note A)........................ 12,500 37,500

50,000 Subtotal................................... $120,000 $102,500 $127,500$350,000Remaining 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

$150,000Bonus (Note B)........................ 5,000 15,000

20,000 Subtotal................................... $ 60,000 $ 50,000 $ 60,000$170,000Remaining 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 85,000255,000

Note A: Bonus = 20% (Net Income – Bonus)Bonus = 20% ($300,000 – Bonus)

120% Bonus = $60,000Bonus = $50,000

Note B: Bonus = 20% (Net Income – Bonus)Bonus = 20% ($120,000 – Bonus)

120% Bonus = $24,000Bonus = $20,000

Ch. 14—Problems

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.................................................................... 55,200Capital, Rowe...................................................................... 36,800

Net Assets..................................................................... 92,000To recognize write-down of net assets.

Cash.................................................................................... 60,000Capital, Kravitz.................................................................... 4,320Capital, 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.

Ch. 14—Problems

PROBLEM 14-3

(1) Grossman Casper Ziegler Total

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


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


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


Pre-sale capital balance........................ $125,000 $200,000 $ 150,000 $ 475,000Recognize only decreases in the

value of existing assets..................... (14,000) (14,000) (7,000) (35,000)Recognition of Zeigler's goodwill........... 17,000 17,000Sale to partnership................................. (160,000 ) (160,000 )Post-sale capital balance....................... $111,000 $186,000 $ — $ 297,000


Pre-sale capital balance........................ $125,000 $200,000 $ 150,000 $ 475,000Recognize 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 85,000Sale to partnership................................. (160,000 ) (160,000 )Post-sale capital balance....................... $145,000 $220,000 $ — $ 365,000


Pre-sale capital balance........................ $125,000 $200,000 $ 150,000 $ 475,000Recognize all changes in the

value of existing assets..................... 8,000 8,000 4,000 20,000Recognition of all suggested goodwill.... 12,000 12,000 6,000 30,000Sale 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.

Ch. 14—Problems

PROBLEM 14-4

(1) Capital Balances Davis Murray Clay Rayburn To -

tal Balances as of

December 31, 2013................. $ 50,000 $ 80,000 $70,000Distribution 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* (seeSchedule 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 $78,800Admission of Rayburn (see

Schedule B)............................. (3,300) (3,300) (3,300) $ 68,900Distribution of Clay’s 2014 bonus


(see Schedule A; 80% ×$24,000).................................. (6,400) (6,400) (6,400)

Allocation of 2015 income* (seeSchedule A)............................. 50,000 50,000 36,100 5,900

Subtotal......................................... $ 59,900 $ 89,900 $30,000 $ 74,800Withdrawal of Davis**................... (59,900 ) 4,500 4,500 1,500 Balances as of

December 31, 2015................. $ 0 $ 94,400 $34,500 $ 76,300205,200Distribution of Clay’s 2015 bonus


(see Schedule A)..................... 0 0 0 0Allocation of 2016 income* (see

Schedule A)............................. 0 40,948 40,948 28,104 Balances as of June 30, 2016....... $ 0 $ 135,348 $ 74,348 $104,404314,100

*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)

Ch. 14—Problems

Problem 14-4, Continued

Schedule AAllocation of Profits and Losses

Cumulative 2013 Income Davis Murray Clay Rayburn To -

tal Profit and loss percentages... 33.3% 33.3% 33.3%

Salaries.................................. $100,000 $100,000 $ 70,000$270,000Bonus (see Note A)............... 36,000 306,000Remaining profits................... 48,000 48,000 48,000 450,000Total....................................... $148,000 $148,000 $154,000

2014 Income Salaries.................................. $100,000 $100,000 $70,000 270,000Bonus (see Note B)............... 6,000 276,000Remaining profits................... 8,000 8,000 8,000 300,000Total....................................... $108,000 $108,000 $84,000

2015 Income Salaries.................................. $50,000 $50,000 $35,000 $ 0 135,000Interest................................... 5,900 140,900Bonus (see Note C)............... 1,100 142,000Remaining profits................... 0 0 0 142,000Total....................................... $50,000 $50,000 $36,100 $ 5,900

2016 Income Salaries.................................. $ 0 $ 0 $ 0 $ 0 0Interest (10% × $76,300)....... 7,630 7,630Remaining profits................... 0 40,948 40,948 20,474 110,000Total....................................... $ 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

Ch. 14—Problems


Schedule BChanges in Partnership Interests

Admission of Rayburn:Total capital of previous partners........................................................... $ 78,800Investment of Rayburn........................................................................... 59,000 Total capital of new partnership.............................................................. $137,80050% interest allocated to Rayburn.......................................................... 68,900 Balance allocated to previous partners.................................................. $ 68,900Investment 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 Ray-burn

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

Schedule CPartial 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$104,404August 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 To -

tal Profit and loss percentages........................... 40% 40% 20% 100%

Combined capital and loan balances............ $174,148 $ 63,148 $ 98,804 $336,100Estimated cash reserve................................. (4,000) (4,000) (2,000)(10,000)Maximum loss possible................................. (57,240 ) (57,240 ) (28,620 )

(143,100 )

Ch. 14—Problems

Safe payment................................................ $112,908 $ 1,908 $ 68,184 $ 183,000

Ch. 14—Problems

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 $ 30,000Discovery 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 13,000Absorb 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 $ 30,000Adjustment for uncertainties.................... (70,000 ) (21,000 ) (21,000 ) (28,000 )Balances.................................................. $ (15,000 ) $ 252,000 $ 160,000 $ 31,000 $ 44,000 $ 2,000

Ch. 14—Problems


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

Number of installments....................................... 24Installment payment............................................ $ 516.67Net present value of installments when:

Payment is.................................................... $ 516.67Number of months is..................................... 24Monthly interest rate is.................................. 0.50%Net present value.......................................... $11,657.48

Total payment..................................................... $15,500.00Less imputed interest:

Stated payments........................................... $ 12,400NPV 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.

Ch. 14—Problems

PROBLEM 14-6

Capital Balances Murphy Reinartz Hepburn Pioso To -

tal Balance as of

December 31, 2015............ $ 54,000 $ 76,000 $ — $ — $130,000

2016 Allocation of profits (see Note A)........................ 127,600 102,400

230,000Distributions............................ (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

120,000Allocation of profits

(see Note A)........................ 145,250 98,875 85,875330,000

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)........................ — 100,000 100,000200,000

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 Reinartzgoodwill (see Note C)......... 20,875 20,875

Sale of interest by Reinartz..... (350,000 ) — (350,000 )

Ch. 14—Problems

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$180,000Bonus (see Note B).......................................... 46,000 226,000Balance............................................................ 1,600 2,400 230,000Totals............................................................... $127,600 $102,400

Ch. 14—Problems


Cumulative2017 Allocation Murphy Reinartz Hepburn Total

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

Cumulative2018 Allocation Murphy Reinartz Hepburn Total

Profit and loss percentages... 50% 50%Balance.................................. $100,000 $100,000$200,000Totals..................................... $ — $100,000 $100,000

Note B: 2016 Bonus

Percent ofPartner Income Income Bonus

Murphy 20% $230,000 $46,000

2017 Bonus

Percent ofPartner Income Income Bonus

Murphy 20% $330,000 $66,000Hepburn 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 trace-able 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 sug-gest 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 traceable to the original partnership. The goodwill is allocated to the original partners per their profit percentages (in this case, Hepburn gets 100%).

.

Ch. 14—Problems

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 $90,000Liquidation 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 15,00017,500Unrecorded 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) $35,750Contribution of personal assets.. 12,500 12,500Absorption of deficit.................... — (7,000 ) 14,000

(7,000 )Subtotal...................................... $ 77,500 $ — $ — $ 48,750 $ — $

28,750Final 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


Beginning balances.................... $120,000 $1,500,000 $1,400,000 $ 110,000 $ 20,000 $90,000Allocation of 2016 net income

(see Note A).......................... — 120,000 — 32,000 46,00042,000Partnership draws...................... (80,000) (20,000) (40,000)(20,000)Investment of capital.................. 80,000 50,000 30,000Allocation of 2017 net income

Ch. 14—Problems

(see Note B).......................... — 200,000 56,900 62,20080,900Partnership draws...................... (60,000 ) — (40,000 )

(20,000 )Subtotal...................................... $ 60,000 $1,820,000 $1,400,000 $ 228,900 $ 78,200 $172,900Adjustment 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

Ch. 14—Problems


Note ACumulative

Allocation of 2016 income: Klaproth Stone Jackson Total

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

Note BCumulative

Allocation of 2017 income: Klaproth Stone Jackson Total

Profit and loss percentages........ 35% 30% 35%Salary......................................... $100,000 $130,000 $ 90,000 $320,000Bonus as a percent of sales....... 36,000 — 70,000 426,000Balance...................................... (79,100 ) (67,800 ) (79,100 ) 200,000Totals......................................... $ 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.

Ch. 14—Problems

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 $

200Payoff of accounts payable............... (80,000 ) (80,000 ) Balances........................................... $ 35,000 $ 580,000 $ 533,000 $ 7,400 $ 74,400 $

200Distribution 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

10,000Allocation of deficit balances............ (300) (300)

600Final payment to partners................. (57,000 ) (57,000 ) Balances........................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Ch. 14—Problems



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

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) $ 25,000June 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) $ 9,000Contribution of assets.............................. 6,000 6,000Payment of liabilities................................ (131,000 ) (131,000 ) Balances.................................................. $ 20,000 $ 80,000 $ 69,000 $ 38,000 $ (16,000) $ 9,000July 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 19,000Payment of liabilities................................ (54,000 ) (54,000 ) Balances.................................................. $ — $ — $ 15,000 $ 17,000 $ (32,000) $ —Adams contribution.................................. 12,000 12,000Payment of liabilities................................ (12,000 ) (12,000 ) Balances.................................................. $ — $ — $ 3,000 $ 29,000 $ (32,000) $ —Chenery contribution............................... 3,000 3,000Payment of liabilities................................ (3,000 ) (3,000 ) Balances.................................................. $ — $ — $ — $ 29,000 $ (32,000) $ 3,000Allocation 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.................................................. $ — $ — $ — $ — $ — $ —

Ch. 14—Problems


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.)

Ch. 14—Problems

PROBLEM 14-10

Installment Liquidation Schedule


Event/Circumstance Cash Assets Liabilities Ziegler Nolan Pe-tersen


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) 2,7003,600

Sale of assets............................. 70,000 (90,000 ) (6,000 ) (6,000 ) (8,000 )Balance...................................... $ 82,000 $124,000 $137,400 $(11,520) $ 41,480 $

38,640Payment of liabilities.................. (82,000 ) (82,000 ) Balance...................................... $ 0 $124,000 $ 55,400 $(11,520) $ 41,480 $

38,640Sale of assets............................. 92,000 (80,000) 3,600 3,600

4,800Payment 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 $

45,440Payment of liabilities (see Note A) (42,400 ) (42,400 ) Balance...................................... $ 34,600 $ 64,000 $ 13,000 $ (6,420) $ 46,580 $

45,440Payment to partners

(see Schedule A)................. (16,600 ) 0 (14,257 ) (2,343 )Balance...................................... $ 18,000 $ 64,000 $ 13,000 $ (6,420) $ 32,323 $

43,097Conveyance of vehicles............. (8,000) 1,200 1,200

(10,400)Settle liabilities........................... (10,000) (13,000) 900 900

1,200Collect receivables..................... 20,000 (20,000 ) Balance...................................... $ 28,000 $ 36,000 $ 0 $ (4,320) $ 34,423 $

33,897Payment 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 )

Ch. 14—Problems

Balance...................................... $ 18,000 $ 0 $ 0 $ (9,720) $ 11,880 $15,840

Contribution of capital................ 9,720 9,720Payment 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



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 $

17,840Allocation 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 0Maximum loss possible...................................................... (10,800 ) (10,800 ) (14,400 )Balance.............................................................................. $(15,120) $ 23,623 $

19,497Allocation of deficits........................................................... 15,120 (6,480 ) (8,640 )Safe payments................................................................... $ 0 $ 17,143 $ 10,857

Fischer11e SMChap14 Final

Documents

fair value

capital of new partnership

suggested value

original partnership

new partnerships value

new partnership entity

intangible assets

existing partnerships