Chapter 16 Test Bank
DISSOLUTION AND LIQUIDATION OF A PARTNERSHIP
Multiple Choice Questions
LO1
1.
Which statement is correct in describing the rank order of
payments as specified by the Uniform Partnership Act?
a. Payments to partners with loans to the partnership are
ranked equally with payments to other creditors.
b. Payments to partners with loans to the partnership are
ranked ahead of payments to partners without loans to the
partnership.
c. Payments to other creditors are ranked ahead of payments to
partners with loans to the partnership.
d. After payments are made to other creditors and partners
with loans to the partnership, payment can be made to
partners with capital interests.
LO1
2.
Which of the following procedures is acceptable when accounting
for a deficit balance in a partner’s capital account during
partnership liquidation?
a. A partner with a negative capital balance must contribute
personal assets to the partnership that are sufficient to
bring the capital account to zero.
b. If a partner with a negative capital balance is personally
insolvent, the negative capital balance may be absorbed by
those partners having a positive capital balance according
to the residual profit and loss sharing ratios that apply
to all the partners.
c. If a partner with a negative capital balance is personally
insolvent, the negative capital balance may be absorbed by
those partners having a positive capital balance according
to the residual profit and loss sharing ratios that apply
to those partners having positive balances.
d. All the above procedures are acceptable.
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LO1
3.
A partnership dissolution differs from a liquidation in that
a. payments are made to creditors before partners receive
value.
b. periodic payments to partners are made when cash becomes
available.
c. a partner withdraws from the business and the enterprise
continues to function.
d. full payment is made to all outside creditors before
remaining cash is distributed to partners in a final lump
sum payment.
LO1
4.
A partnership in liquidation has converted all assets into cash
and paid all liabilities. According to the Uniform Partnership
Act, the order of payment
a. will have amounts due to partners with respect to their
capital accounts take precedence over amounts owed by
partners other than for capital and profits.
b. will be according to the partners’ residual profit and loss
sharing ratios.
c. will have amounts owed by partners other than for capital
and profits take precedence over amounts due to partners
with respect to their capital accounts.
d. Will be by any manner that is both reasonable and rational
for the partnership.
LO1
5.
In partnership liquidation, how are partner salary allocations
treated?
a. Salary allocations take precedence over creditor payments.
b. Salary allocations take precedence over amounts due to
partners with respect to their capital interests, but not
profits.
c. Salary allocations take precedence over amounts due to
partners with respect to their capital profits, but not
capital interests.
d. Salary allocations are disregarded.
LO1
6.
A simple partnership liquidation requires
a. periodic payments to creditors and partners determined by a
safe payments schedule.
b. partnership assets to be converted into cash with full
payment made to all outside creditors before remaining cash
is distributed to partners in a lump sum payment.
c. only creditors to be paid in an orderly manner.
d. periodic payments to partners as cash becomes available.
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LO2
7.
In a simple partnership liquidation, the last remaining cash
distribution should be made according to the ratio of
a. the individual partner’s profit and loss agreement.
b. the individual partner's capital accounts, increased by
partner loans to the partnership.
c. the individual partner’s capital accounts, increased by
partnership loans to the partners and decreased by partner
loans to the partnership.
d. the individual partner’s capital accounts, decreased by
partnership loans to the partners and increased by partner
loans to the partnership.
LO2
8.
If conditions produce a debit balance in a partner’s capital
account when liquidation losses are allocated
a. the partner receives further allocations of liquidation
losses, but not gains.
b. the partner receives no further allocation of liquidation
losses and gains.
c. the partner is no longer obligated to partnership
creditors.
d. the partner has an obligation of personal net assets to the
other partners.
Use the following information for questions 9, 10 and 11.
On June 30, 2006, the Warle, Xin, and Yates partnership had the
following fiscal year-end balance sheet:
Cash
Accounts receivable
Inventory
Plant assets-net
Loan to Warle
Total assets
$
$
4,000
6,000
14,000
12,000
6,000
42,000
Accounts payable
Loan from Xin
Warle, capital(20%)
Xin, capital(30%)
Yates, capital(50%)
Total liab./equity
$
$
7,000
5,000
14,000
10,000
6,000
42,000
The percentages shown are the residual profit and loss sharing
ratios. The partners dissolved the partnership on July 1, 2006,. and
began the liquidation process. During July the following events
occurred:
* Receivables of $3,000 were collected.
* The inventory was sold for $4,000.
* All available cash was distributed on
July 31, except for $2,000 that was
set aside for contingent expenses.
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LO2
9.
The book value of the partnership equity (i.e., total equity of
the partners) on June 30, 2006 is
a.
b.
c.
d.
LO2
10.
The cash available for distribution to the partners on July 31,
2006 is
a.
b.
c.
d.
LO2
11.
$ 2,000.
$ 4,000.
$ 7,000.
$11,000.
How much cash would Xin receive from the cash that is available
for distribution on July 31?
a.
b.
c.
d.
LO2
12.
$60,000.
$29,000.
$30,000.
$42,000.
$
0.
$ 600.
$1,000.
$2,000.
Hara, Ives, and Jack are in the process of liquidating their
partnership. Since it may take several months to convert the
other assets into cash, the partners agree to distribute all
available cash immediately, except for $10,000 that is set
aside for contingent expenses. The balance sheet and residual
profit and loss sharing percentages are as follows:
Cash
Other assets
$
400,000
200,000
Accounts payable
Hara, capital (40%)
Ives, capital (30%)
Jack, capital (30%)
$
200,000
135,000
216,000
49,000
Total assets
$
600,000
Total liab./equity
$
600,000
How much cash should Ives receive in the first distribution?
a.
b.
c.
d.
$146,000.
$147,000.
$153,000.
$156,000
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LO2
13.
Jade, Kahl, and Lane are in the process of liquidating their
partnership. Lane has agreed to accept the inventory, which has
a fair value of $60,000, as part of her settlement. A balance
sheet and the residual profit and loss sharing percentages are
as follows:
Cash
Inventory
Plant assets
$
198,000
80,000
230,000
Accounts payable
Jade, capital (40%)
Kahl, capital (40%)
Lane, capital (20%)
$
149,000
79,000
140,000
140,000
Total assets
$
508,000
Total liab./equity
$
508,000
If the partners then distribute the available cash, Lane will
receive
a.
b.
c.
d.
LO2
14.
$23,000.
$29,000
$30,000.
$34,000.
Under the rule of offset, what is the proper disposition of a
partnership loan that was made from a partner who has a debit
balance?
a. The loan is first paid to the debtor partner before cash
payments are made to partners.
b. The loan is written off as a partnership loss if the
partner does not have the cash to cover the debit balance.
c. The loan is charged off to the capital accounts of all the
partners in their profit and loss sharing ratios.
d. The loan is charged off to the capital account of the
debtor partner.
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LO3
15.
In partnership liquidations, what are safe payments?
a. The amounts of distributions that can be made to the
partners, after all creditors have been paid in full.
b. The amounts of distributions that can be made to the
partners with assurance that such amounts will not have to
be returned to the partnership.
c. The amounts of distributions that can be made to the
partners, after all non-cash assets have been adjusted to
fair market value.
d. All the above are examples of the safe payments concept.
LO4
16.
If all partners are included in the first installment of an
installment liquidation, then in future installments
a. cash will be distributed according to the residual profit
and loss sharing ratio.
b. cash should not be distributed until all non-cash assets
are converted into cash.
c. a safe payments schedule must be prepared before each cash
distribution to avoid excessive payments to partners.
d. a cash distribution plan must be prepared so that partners
will know when they will be included in cash distributions.
LO5
17.
The year-end balance sheet and residual profit and loss sharing
percentages for the Lang, Maas, and Neal partnership on
December 31, 2005, are as follows:
Cash
Loan to Lang
Other assets
$
30,000
40,000
480,000
Total assets
$
550,000
Accounts payable
Loan from Maas
Lang, capital (25%)
Maas, capital (25%)
Neal, capital (50%)
Total liab./equity
$
$
200,000
50,000
70,000
80,000
150,000
550,000
The partners agree to liquidate the business and distribute
cash when it becomes available. A cash distribution plan for
the Lang, Maas, and Neal partnership will show that cash
available, after outside creditors are paid, will initially go
to
a.
b.
c.
d.
Lang
Maas
Maas
Neal
in
in
in
in
the
the
the
the
amount
amount
amount
amount
of
of
of
of
$20,000.
$45,000.
$55,000.
$90,000.
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LO5
18.
In a schedule of assumed loss absorptions
a.
b.
c.
d.
LO5
19.
the partner with lowest loss absorption is eliminated last.
it is necessary to have a cash distribution plan first.
the least vulnerable partner is eliminated first.
the most vulnerable partner is eliminated first.
Which partner is considered the most vulnerable as a result of
a computation of vulnerability rankings?
a. The partner with the lowest vulnerability ranking, who
has the lowest loss absorption potential.
b. The partner with the lowest vulnerability ranking, who
has the highest loss absorption potential.
c. The partner with the highest vulnerability ratio, who
has the lowest loss absorption potential.
d. The partner with the highest vulnerability ranking,
also has the highest loss absorption potential.
LO6
20.
The rank order is for claims against a bankrupt partner of
I. Those owing to partners by way of contribution
II.Those owing to separate creditors
III.Those owing to partnership creditors
a.
b.
c.
d.
II first; I second and III
III first; II second and I
I first; III second and II
II first; III second and I
third.
third.
third.
third.
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also
also
also
who
LO2
Exercise 1
The balance sheet of the Alba, Blick, and Calvo partnership on
January 1, 2006 (the date of partnership dissolution) was as follows:
Cash
Other assets
Loan to Calvo
$
2,000
13,000
1,000
Total assets
$
16,000
Liabilities
Loan from Alba
Alba, capital (20%)
Blick, capital(40%)
Calvo, capital(40%)
Total liab./equity
$
4,010
500
990
4,500
6,000
16,000
$
In January, other assets with a book value of $8,000 were sold for
$5,000 in cash.
Required:
Determine how
distributed.
the
available
cash
on
January
31,
2006
will
be
LO2
Exercise 2
The partnership of Dale, Edgar, and Fred was dissolved, and by July
1, 2006, all assets had been converted into cash and all partnership
liabilities were paid. The partnership balance sheet on July 1, 2006
(with partner residual profit and loss sharing percentages) was as
follows:
Cash
$
10,000
Fred, capital(30%)
Dale, capital(40%)
Edgar, capital(30%)
$
40,000
(20,000)
(10,000)
Total assets
$
10,000
Total equity
$
10,000
The value of partners' personal assets and liabilities on July 1,
2006 were as follows:
Personal assets
Personal liabilities
$
Dale
45,000 $
30,000
Edgar
30,000 $
20,000
Fred
25,000
10,000
Required:
Prepare the final statement of partnership liquidation.
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16-8
LO2
Exercise 3
The balance sheet of the Omar, Paolo, and Quek partnership on
November 1, 2006 (before commencement of partnership liquidation) was
as follows:
Cash
Inventory
Loan to Omar
Loan to Quek
Plant assets-net
$
58,000
60,000
8,000
14,000
70,000
Accounts payable
Notes payable
Omar, capital(40%)
Paolo, capital(25%)
Quek, capital (35%)
$
34,000
62,000
24,000
26,000
64,000
Total assets
$
210,000
Total liab./equity
$
210,000
Liquidation events in November were as follows:
- The inventory was sold for $10,000 above book value;
- Plant assets with a book value of $60,000 were sold for $34,000.
Required:
Determine how the
distributed.
available cash
on
November 31,
2006
should be
LO2
Exercise 4
A cash distribution plan for the Folger, Glover, and Hale partnership
was as follows:
First $250,000
Next $100,000
Next $150,000
Remainder
Priority
Creditors
100%
Folger
Glover
70%
30%
11/15
20%
35%
Hale
4/15
45%
Required:
If $850,000 of cash was distributed by the partnership, how much was
received respectively by the priority creditors, Folger, Glover, and
Hale?
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16-9
LO2
Exercise 5
The balance sheet of the Jody, Kane, and Lark partnership on May 1,
2006 (before commencement of partnership liquidation) was as follows:
Cash
Inventory
Loan to Jody
Loan to Lark
Plant assets-net
$
54,000
60,000
10,000
16,000
110,000
Accounts payable
Notes payable
Jody, capital (30%)
Kane, capital (45%)
Lark, capital (25%)
$
28,000
60,000
32,000
90,000
40,000
Total assets
$
250,000
Total liab./equity
$
250,000
Liquidation events in May were as follows:
- The inventory was sold for $6,000 below book value;
- Plant assets with a book value of $50,000 were sold for $60,000.
Required:
Determine how the available cash on April 30, 2006 should be distributed.
LO2
Exercise 6
The balance sheet of the Nebe, Oak, and Pang partnership on October
1, 2006 (the date of partnership dissolution) was as follows:
Cash
Other assets
Loan to Oak
$
3,000
33,000
4,000
Total assets
$
40,000
Liabilities
Loan from Nebe
Nebe, capital (20%)
Oak, capital (30%)
Pang, capital (50%)
Total liab./equity
$
9,000
1,000
3,000
6,000
21,000
40,000
$
In October, other assets with a book value of $15,000 were sold for
$17,000 in cash.
Required:
Determine how
distributed.
the
available
cash
on
October
31,
2006
will
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be
LO2
Exercise 7
The partnership of Hanly, Ide, and Jen was dissolved. By August 1,
2006, all assets had been converted into cash and all partnership
liabilities were paid. The partnership balance sheet on August 1,
2006 (with partner residual profit and loss sharing percentages) was
as follows:
Cash
$
50,000
Hanly, capital(30%)
Ide, capital(20%)
Jen, capital(50%)
$
4,000
(60,000)
106,000
Total assets
$
50,000
Total equity
$
50,000
The value of partners' personal assets and liabilities on August 1,
2006 were as follows:
Personal assets
Personal liabilities
$
Hanly
74,000 $
72,000
Ide
120,000 $
80,000
Required:
Prepare the final statement of partnership liquidation.
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16-11
Jen
56,000
60,000
LO5
Exercise 8
Luis, Mac, Nel, and Oma are partners who share profits and losses
40%, 25%, 25%, and 10%, respectively. The partnership will be
liquidated gradually over several months beginning January 1, 2006.
The partnership trial balance at December 31, 2005 is as follows:
Cash
Accounts receivable
Inventory
Loan to Nel
Furniture
Equipment
Goodwill
Accounts payable
Note payable
Loan from Luis
Luis, capital (40%)
Mac, capital (25%)
Nel, capital (25%)
Oma, capital (10%)
Totals
$
Debits
3,000
19,000
25,000
5,000
15,000
10,000
12,000
Credits
$
$
89,000 $
14,000
30,000
5,000
15,000
9,000
12,000
4,000
89,000
Required:
Prepare a cash distribution plan for January 1, 2006, showing how
cash installments will be distributed among the partners as it
becomes available.
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16-12
LO5
Exercise 9
Quan, Ray, Sen, and Tad are partners who share profits and losses 30%, 20%,
35%, and 15%, respectively. The partnership will be liquidated gradually
over several months beginning January 1, 2006. The partnership trial
balance at December 31, 2005 is as follows:
Cash
Accounts receivable
Inventory
Loan to Ray
Furniture
Equipment
Goodwill
Accounts payable
Note payable
Loan from Sen
Quan, capital (30%)
Ray, capital (20%)
Sen, capital (35%)
Tad, capital (15%)
Totals
$
Debits
3,000
10,000
25,000
4,000
15,000
18,000
10,000
Credits
$
$
12,000
30,000
6,000
12,000
9,000
12,000
4,000
85,000
85,000 $
Required:
Prepare a cash distribution plan for January 1, 2006, showing how
cash installments will be distributed among the partners as it
becomes available.
LO5
Exercise 10
A cash distribution plan
partnership was as follows:
First $100,000
Next $180,000
Next $270,000
Remainder
Priority
Creditors
100%
for
the
Upton,
Valenta,
and
Walker
Upton
Valenta
Walker
44%
2/9
11%
10%
1/9
44%
46%
2/3
45%
Required:
If $700,000 of cash was distributed by the partnership, how much was
received respectively by the priority creditors, Upton, Valenta, and
Walker?
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16-13
SOLUTIONS
Multiple Choice Questions
1.
c
2.
c
3.
a
4.
c
5.
d
6.
b
7.
a
8.
d
9.
b
($14,000 Warle capital + $10,000 Xin capital +
$6,000 Yates capital + $5,000 Loan from Xin $6,000 Loan to Warle)
10.
a
($4,000 beginning balance + $3,000 cash collected +
$4,000 for inventory sold - $7,000 of accounts payable
- $2,000 for expenses)
11.
d
Equities,Jun 30
Inventory loss
Contingency fund
Subtotals
Possible losses on
remaining assets
Subtotals
$
(
(
Eliminate Warle’s
Deficit
Cash distribution
$
Xin
15,000
3,000 )
600 )
11,400
$
(
(
Yates
6,000
$
5,000 ) (
1,000 ) (
0
Total
29,000
10,000 )
2,000 )
17,000
15,000 )
2,000
(
3,000 ) (
2,600
$
4,500 ) (
6,900
$(
7,500 ) (
7,500 ) $
(
(
3,000 ) (
400 )
4,500 )
2,400
7,500
0
$
Eliminate Yates’s
Deficit
Subtotals
Warle
8,000
$
2,000 ) (
400 ) (
5,600
400
0
(
$
400 )
2,000
$
0
2,000
$
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16-14
2,000
12.
b
Losses
Equities
Possible loss on
remaining assets
Contingencies
Subtotals
40%
Hara
135,000
$
200,000
10,000
$
$
(
(
$
80,000 ) (
4,000 ) (
51,000
$
60,000 ) (
3,000 ) (
153,000
$(
Eliminate Jack’s
debit balance
(
8,000 ) (
6,000 )
Safe payments
$
13.
$
30%
Ives
216,000
43,000
$
147,000
30%
Jack
49,000
60,000 )
3,000 )
14,000 )
14,000
$
0
a
Equities
Distribute inventory to
Lane and:
recognize $20,000 loss
Possible losses on plant
Subtotal
Eliminate Jade’s debit
balance to Kahl & Lane
Balance
14.
b
15.
b
16.
a
$
(
(
$(
$
40%
Jade
79,000
$
(
20%
Lane
140,000
60,000 )
8,000 ) (
92,000 ) (
21,000 ) $
8,000 ) (
92,000 ) (
40,000
$
4,000 )
46,000 )
30,000
21,000
0
14,000 ) (
26,000
$
7,000 )
23,000
$
(
$
40%
Kahl
140,000
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16-15
17.
c
Vulnerability ranks:
Lang equity ($70,000 - $40,000)/.25 = $120,000
Maas equity ($80,000 + $50,0000/.25 = $520,000
Neal equity ($150,000/.5)
= $300,000
= 1
= 3
= 2
Assumed loss absorption:
Equities
Loss to eliminate
Lang
Subtotals
Loss to eliminate
Neal
Subtotals
18.
d
19.
a
20.
d
25%
Lang
30,000
$
(
$
25%
Maas
130,000
$
50%
Neal
150,000
$
Total
310,000
30,000 ) (
0
$
30,000 ) (
100,000
$
60,000 ) (
90,000
$
120,000 )
190,000
(
$
45,000 ) (
55,000
$
90,000 ) (
0
$
135,000 )
55,000
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16-16
Exercise 1
Alba, Blick, and Calvo Partnership
Partnership Liquidation Schedule
NonFirst
20%
40%
40%
Cash
Cash
Rank
Alba
Blick
Calvo
Assets
Debt
Equity
Equity
Equity
Jan 1 Balance
$ 2,000 $ 13,000 $ 4,010 $
1,490 $
4,500 $ 5,000
Sale of assets
5,000 ( 8,000 )
(
600 ) ( 1,200 ) ( 1,200)
Subtotal
$ 7,000 $ 5,000 $ 4,010 $
890 $ 3,300 $ 3,800
Safe Payments Schedule
Partners’ pre-distribution balances
Possible losses on non-cash assets
Write off Alba 50-50
Cash distribution to partners
$
(
(
$
Alba
Blick
Calvo
Equity
Equity
Equity
890 $
3,300 $
3,800
1,000) (
2,000) (
2,000 )
110)
1,300
1,800
110 (
55) (
55 )
0 $
1,245 $ 1,745
Cash distribution plan on January 31:
First $4,010 goes to priority creditors, and then Blick receives
$1,245 and Calvo receives $1,745.
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Exercise 2
Dale, Edgar, and Fred Partnership
Final Statement of Partnership Liquidation
Dale
Edgar
Fred
Cash
Capital
Capital
Capital
Total
10,000 $(
20,000) $(
10,000) $
40,000 $ 10,000
Balance, July 1 $
Dale’s
personal
contribution
15,000
25,000
(
25,000
$
Write-off Dale
Edgar’s personal
contribution
15,000
5,000) (
5,000 (
0 (
10,000
35,000
(
35,000
$
Write-off Edgar
Distribute cash
(
$
10,000 )
2,500 ) (
12,500 )
40,000
2,500 )
37,500
10,000
2,500 )
2,500 (
0
37,500
2,500 )
35,000
35,000)
0
(
$
15,000
25,000
25,000
10,000
35,000
35,000
35,000 ) ( 35,000)
0 $
0
Exercise 3
Omar, Paolo, and Quek
Schedule of Partnership Liquidation
November 30, 2006
Assets
$
210,000 $
10,000
(
26,000)
Debts
96,000
194,000
22,000)
96,000) (
76,000
96,000
Balance, Nov. 1
Inventory sold
Sale of plant
Balances before
distribution
Offset loans
(
Pay creditors
(
Partner equity
$
Possible loss:
Plant assets
(
Distribution
$
10,000)
66,000
(
40%
Omar
24,000 $
4,000
10,400 ) (
(
17,600
8,000 )
$
9,600
(
$
4,000 )
5,600
$
25%
35%
Paolo
Quek
26,000 $ 64,000
2,500
3,500
6,500 ) ( 9,100)
22,000
58,400
( 14,000)
$
22,000
$ 44,400
(
$
2,500 )
19,500
( 3,500)
$ 40,900
96,000)
(Cash Distribution: $58,000 + $70,000 + $34,000 - $96,000 = $66,000)
Nov. 1 Inventory
Plant
Creditors Nov. 30
©2009 Pearson Education, Inc. publishing as Prentice Hall
16-18
Exercise 4
First $250,000
Next $100,000
Next $150,000
Last $350,000
Total $850,000
$
Priority
Creditors
250,000
Folger
$
$
250,000 $
Glover
70,000 $
110,000
70,000
250,000 $
Hale
30,000
$
122,500
152,500 $
40,000
157,500
197,500
Exercise 5
Jody, Kane, and Lark
Schedule of Partnership Liquidation
May 30, 2006
Assets
$
250,000 $
10,000
(
6,000)
Balance, May 1
Plant sold
Inventory sold
Balances before
distribution
Offset loans
(
Pay creditors
(
Partner equity $
Possible loss:
Plant assets
(
Distribution
$
254,000
26,000)
88,000) (
140,000
60,000)
80,000
Debts
88,000 $
(
88,000
(
88,000)
$
(
$
30%
Jody
32,000 $
3,000
1,800 ) (
45%
25%
Kane
Lark
90,000 $ 40,000
4,500
2,500
2,700 ) ( 1,500)
33,200
10,000 )
91,800
41,000
( 16,000)
91,800
$ 25,000
23,200
$
18,000) (
5,200 $
27,000) ( 15,000 )
64,800 $ 10,000
(Cash Distribution: $54,000 + $54,000 + $60,000 - $88,000 = $80,000)
May 1 Inventory
Plant Creditors May 30
©2009 Pearson Education, Inc. publishing as Prentice Hall
16-19
Exercise 6
Nebe, Oak, and Pang Partnership
Partnership Liquidation Schedule
NonFirst
30%
20%
50%
Cash
Cash
Rank
Oak
Nebe
Pang
Assets
Debt
Equity
Equity
Equity
Jan 1 Balance $ 3,000 $ 33,000 $ 9,000 $ 2,000 $ 4,000 $ 21,000
Sale of assets
17,000 ( 15,000 )
600
400
1,000
Subtotal
20,000
18,000
9,000
2,600
4,400
22,000
Safe Payments Schedule
Partners’ pre-distribution balances
Possible losses on non-cash assets
Write off Oak 2/7 and 5/7
Cash distribution to partners
$
(
(
$
Oak
Nebe
Pang
Equity
Equity
Equity
2,600 $
4,400
22,000
5,400) (
3,600) ( 9,000 )
2,800)
800
13,000
2,800 (
800) ( 2,000 )
0 $
0 $ 11,000
Cash distribution plan on October 31:
First $9,000
$11,000.
goes
to
priority
creditors,
and
then
Pang
receives
©2009 Pearson Education, Inc. publishing as Prentice Hall
16-20
Exercise 7
Hanly, Ide, and Jen Partnership
Final Statement of Partnership Liquidation
Ide
Hanly
Jen
Cash
Capital
Capital
Capital
Total
50,000 $(
60,000) $
4,000 $ 106,000 $ 50,000
Balance, Aug. 1 $
Ide’s
personal
contribution
40,000
90,000
Write-off Ide
90,000
Hanly’s personal
contribution
40,000
( 20,000)
20,000 (
$
0 $(
2,000
(
$
92,000
(
92,000
$
92,000)
0
106,000
12,500 )
93,500
2,000
Write-off Hanly
Distribute cash
4,000
7,500 ) (
3,500 )
40,000
90,000
90,000
2,000
1,500 )
1,500 (
0
(
$
93,500
1,500 )
92,000
92,000
92,000
92,000 ) ( 92,000)
0 $
0
©2009 Pearson Education, Inc. publishing as Prentice Hall
16-21
Exercise 8
Loss absorption potential:
Luis
Mac
Nel
Oma
Partners’
Equity
$
20,000
9,000
7,000
4,000
Profit
and Loss
Ratio
40%
25%
25%
10%




$
$
$
$
Loss
Absorption
Potential
50,000
36,000
28,000
40,000
Vulnerability
Ranking
4
2
1
3
Schedule of assumed loss absorption:
40%
Luis
Partnership
equity
Assumed loss
to absorb Nel
Assumed loss
to absorb Mac
Assumed loss
to absorb Oma
$
20,000
25%
Mac
$
9,000
25%
Nel
$
( 11,200 ) (
8,800
7,000 ) (
2,000
(
3,200 ) (
5,600
2,000 )
0
(
$
1,600 )
4,000
7,000
10%
Oma
$
7,000 ) (
0
4,000
Total
$ 40,000
2,800 ) ( 28,000 )
1,200
12,000
(
800 ) (
400
6,000 )
6,000
(
$
400 ) (
0
$
2,000 )
4,000
Cash distribution plan:
First $44,000 pays the priority creditors;
Next $4,000 goes to Luis;
Next $2,000 goes $1,600 to Luis, and $400 to Oma;
Next $6,000 goes $3,200 to Luis, $2,000 to Mac, and $800 to Oma;
Remainder goes 40% to Luis, 25% to Mac, 25% to Nel, and 10% to Oma.
©2009 Pearson Education, Inc. publishing as Prentice Hall
16-22
Exercise 9
Loss absorption potential:
Quan
Ray
Sen
Tad
$
Partners’
Equity
12,000
5,000
18,000
4,000
Profit
and Loss
Ratio
30%
20%
35%
15%




$
$
$
$
Loss
Absorption
Potential
40,000
25,000
51,429
26,667
Vulnerability
Ranking
3
1
4
2
Schedule of assumed loss absorption:
30%
Quan
Partnership
equity
Assumed loss
- absorb Ray
Assumed loss
to absorb Tad
Assumed loss
to absorb Quan
$
15%
Tad
12,000
$
20%
Ray
4,000
$
(
7,500 ) (
4,500
3,750 ) (
250
$
(
500 ) (
4,000
$
250 )
0
(
$
4,000 )
0
35%
Sen
5,000
$ 18,000
5,000 ) (
0
Total
$ 39,000
8,750 ) ( 25,000 )
9,250
14,000
(
583 ) (
8,667
1,333 )
12,667
(
$
4,667 ) (
4,000
$
8,667 )
4,000
Cash distribution plan:
First $42,000 pays the priority creditors;
Next $4,000 goes to Sen;
Next $8,667 goes $4,667 to Sen, and $4,000 to Quan;
Next $1,333 goes $583 to Sen, $500 to Quan, and $250 to Tad;
Remainder goes 35% to Sen, 30% to Quan, 20% to Ray, and 15% to Tad.
Exercise 10
First
Next
Next
Last
Total
$100,000
$180,000
$270,000
$150,000
$700,000
$
Priority
Creditors
100,000
Upton
$
$
100,000 $
79,200 $
60,000
16,500
155,700 $
Valenta
18,000 $
30,000
66,000
114,000 $
Walker
82,800
180,000
67,500
330,300
©2009 Pearson Education, Inc. publishing as Prentice Hall
16-23