CHAPTER 14

UNDERSTANDING THE ISSUES

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

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 partnerships 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
partnerships capital will not result in the incoming partner having a 30% interest in the
starting capital of the new partnership. For
example, if the existing capital of a partnership 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 partners 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 partnership, even after adjusting to fair value,
will represent 70% of the new partnerships
value; therefore, it should be used as a basis to suggest the value of a 30% interest.

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 converted into a distributable form. Second, as
assets become available for distribution,
the order of priority as established by
RUPA should be followed. A practical exception 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 importance 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 remaining 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
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 partners
balance. Although the absorbing partners
may have a personal claim against the deficit 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 possible 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 partners. Those creditors may move against
any partner's assets; therefore, a partner

2. The first step would be to determine the fair

value of the net assets of the original partnership. This would include a valuation of
existing net assets as well as the recognition that there may be other net values that
are not captured on the financial statements. 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 partnership 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 entity ($400,000 80% = $500,000). The
suggested value of the acquired interest is
the difference between the value of the new

633

with personal wealth could end up having

to contribute additional assets to the partnership. 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.

634

Ch. 14Exercises

EXERCISES
EXERCISE 14-1
(1)
Inventory...................................................................................
Accounts Receivable ..........................................................
Warranty Obligations ..........................................................
Pearson, Capital .................................................................
Murphy, Capital...................................................................
To adjust book values to market values.

58,000

Cash .........................................................................................
Goodwill....................................................................................
Pearson, Capital .................................................................
Murphy, Capital...................................................................
Warner, Capital...................................................................
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.

84,000
56,000

18,000
10,000
18,000
12,000

33,600
22,400
84,000

(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 adjusted 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 conveyed in the transaction.

635

Ch. 14Exercises

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
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 personal 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.

636

Ch. 14Exercises

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 recognizing 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 under the bonus method when intangibles, including goodwill, are traceable to the new incoming 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 goodwill may occur using a profit and loss percentage that is different from an original partners
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 As 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 partners interest in profits is different from his/her
initial interest in capital.

637

Ch. 14Exercises

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 partnership. The total net increase in the value is $9,000 ($24,000 less $15,000). Petersens
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 Petersens 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 Petersens 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 associated with Petersens 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 Petersens 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 Petersens
25% (one-half of a total 50% interest) interest in goodwill with an imputed total goodwill value of $31,000. Prior to sale, Petersens 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, Petersens 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 necessary 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 Petersens interest, then Jacobsen could achieve a controlling
interest in the remaining partnership without using her personal funds.

638

Ch. 14Exercises

EXERCISE 14-5
(1)

Partnership

Fair market value of original partnership:

Assets at book value .........................
Liabilities at book value and fair
market value...................................
(a) Book value of original partnership.....
Asset appreciation (depreciation)......
(b) Net assets .........................................

$ 500,000

$ 600,000

$ 800,000

(369,500)
$ 130,500
(50,000)
$ 80,500

(410,000)
$ 190,000
125,000
$ 315,000

(558,000)
$ 242,000
50,000
$ 292,000

Percent of new partnership represented

by the:
(c) Investment of new partner.................
(d) Fair value of the original partnership.
(e)

(f)
(g)

30%
70%

Fair value of new partnership

suggested by the fair value of
the original partnership [(b) (d)] ...
Fair value of original partnership.......
Fair value of consideration that
should be conveyed by the
new partner [(e) (f)]......................

(b)
(h)
(j)

20%
80%

$ 115,000
80,500

$ 420,000
315,000

$ 365,000
292,000

$ 34,500

$ 105,000

$ 73,000

(2)

(h)
(i)

25%
75%

Partnership
Amount of consideration to be conveyed:
Value of land .....................................
Value of cash ....................................
Total consideration............................
Fair value of new partnership
suggested by the fair value of the
new partners investment [(h) (c)]
Fair value of the original
partnership .....................................
Investment of new partner.................
Adjusted value of new partnership
excluding goodwill [(d) + (h)] ..........
If (i) exceeds (j), goodwill is
traceable to ....................................
In the amount of [(i) (j)]...................
If (j) exceeds (i), goodwill is
traceable to ....................................
In the amount of [(e) (j)]..................

$ 50,000
4,000
$ 54,000

$ 50,000
60,000
$ 110,000

$ 50,000
15,000
$ 65,000

$ 180,000

$ 440,000

$ 325,000

$ 80,500
54,000

$ 315,000
110,000

$ 292,000
65,000

$ 134,500

$ 425,000

$ 357,000

Original
Partners
$ 45,500

Original
Partners
$ 15,000
New
Partner
$ 8,000

639

Ch. 14Exercises

Exercise 14-5, Concluded

Proof:
Book value of original partnership.....
Asset appreciation (depreciation)......
Goodwill traceable to original
partnership .....................................
Goodwill traceable to new partner.....
(h) Investment of new partner.................
Total capital of new partnership ........
(c) New partners interest in capital ........
New partners capital balance ...........
(a)

$130,500
(50,000)
45,500
54,000
$180,000

30%
$ 54,000

$190,000
125,000

$242,000
50,000

15,000
110,000
$440,000

25%
$110,000

8,000
65,000
$365,000

20%
$ 73,000

EXERCISE 14-6
1.
Cash

Noncash
Assets

Liabilities

Combined Capital
and Loan Balances
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.
Cash

Noncash
Assets

Liabilities

Combined Capital
and Loan Balances
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 ................. ZeroThere is not enough cash to even cover the liabilities.

640

Ch. 14Exercises

Exercise 14-6, Concluded

3.
Noncash
Assets

Cash

Liabilities

Combined Capital
and Loan Balances
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 personally 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 Crawfords 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 Jensens offer for several reasons. First,
Crawfords 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 A
Partial Liquidation
Assets

Crawford
50%

$ 230,000
(140,000)
$ 90,000

$ 55,000
(70,000)
$ (15,000)

Profit and loss percentages .........

Beginning balances......................
Adjust net assets..........................
Balances ......................................

641

Meyer
30%
$115,000
(42,000)
$ 73,000

Jensen
20%
$ 60,000
(28,000)
$ 32,000

Ch. 14Exercises

EXERCISE 14-8
(1) Allocation of typical profits under the original partnerships agreement:

Salaries.................................
Bonus to A*...........................
Remaining profits..................
Total......................................

A
$30,000
12,000
10,000
$52,000

B
$30,000

C
$40,000

4,000
$34,000

6,000
$46,000

Cumulative
Total
$100,000
112,000
132,000

*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:

Salaries.......................................
Remaining profits* ......................
Bonus to Dawson**.....................
Total............................................

A
$30,000
42,000

B
$30,000
14,000

C
$40,000
42,000

$72,000

$44,000

$82,000

D
$30,000
42,000
20,000
$92,000

Cumulative
Total
$130,000
270,000
290,000

*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 agreement.
(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 partnerships 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.

642

Ch. 14Exercises

Exercise 14-8, Concluded

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

Beginning balances .......

Recognition of liability....
Vehicle transfer..............
Sales of assets ..............
Payment of liabilities......
Balances........................
Contribution of assets....
Allocation of deficit.........
Balances........................

Noncash
Offset Capital Balances
Cash
Assets Liabilities
Arnold
Bower
Chambers
$
0 $ 680,000 $ 430,000 $ 50,000 $140,000 $ 60,000
4,000
(2,000)
(800)
(1,200)
(20,000)
(2,500)
(16,000)*
(1,500)
515,000 (660,000)
(72,500)
(29,000)
(43,500)
(434,000)
(434,000)
$ 81,000 $
0 $
0 $ (27,000) $ 94,200 $ 13,800
12,000
12,000
15,000
(6,000)
(9,000)
0 $
0 $
0 $ 88,200 $ 4,800
$ 93,000 $

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

643

Ch. 14Exercises

EXERCISE 14-9
Installment Liquidation Schedule
Date

Circumstance

Cash

June 1, 2017 Beginning balance .....................

June 15, 2017 Sale of assets ............................
Balance......................................
July 1, 2017 Contribution of personal assets .
Balance......................................
Distribution of assets .................
Balance......................................
Sale of assets ............................
Payment of liabilities ..................
Balance......................................
Distribution to partners
(see Schedule A).................
Balance......................................

Noncash
Capital and Loan Balance
Assets Liabilities Coleman
Moore
Ramsey

$ 8,000

$ 96,000 $ 63,000 $ 47,000 $ (9,000)

(30,000) (20,000)
(6,000)
(2,000)
$ 8,000 $ 66,000 $ 43,000 $ 41,000 $(11,000)
9,000
9,000
$ 17,000 $ 66,000 $ 43,000 $ 41,000 $ (2,000)
(20,000)
(21,200)
600
$ 17,000 $ 46,000 $ 43,000 $ 19,800 $ (1,400)
54,000
(40,000)
8,400
2,800
(43,000)
(43,000)
$ 28,000 $ 6,000 $
0 $ 28,200 $ 1,400
(28,000)
$
0 $ 6,000

$ 3,000
(2,000)
$ 1,000
$ 1,000
600
$ 1,600
2,800
$ 4,400

(24,600)
(200) (3,200)
$ 3,600 $ 1,200 $ 1,200

Schedule A
Schedule of Safe Payments
Coleman
Profit and loss percentages ...........................
60%
Combined capital and loan balance
before distribution .............................
Maximum loss possible............................
Safe payments .........................................

644

$28,200
(3,600)
$24,600

Moore
Ramsey
20%
20%
July Distribution
$ 1,400
(1,200)
$ 200

$ 4,400
(1,200)
$ 3,200

Total
100%

$34,000
(6,000)
$28,000

Ch. 14Exercises

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:

Cash
Beginning balance .......................
Sale of assets ..............................
Payment of liabilities....................
Balance........................................
Assume assets are worthless......
Balance........................................

$ 12,000
70,000
(35,000)
$ 47,000
$ 47,000

Noncash
Assets
Liabilities

Partners Loan
and Capital Balance
A
B
C

$ 180,000 $ 35,000 $ 60,000 $ 70,000 $ 27,000

(60,000)
5,000
3,000
2,000
(35,000)
$ 120,000 $
0 $ 65,000 $ 73,000 $ 29,000
(120,000)
(60,000) (36,000) (24,000)
$
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 receive 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 remaining assets would have to sell for $160,000 in order to produce a gain of $50,000.

Cash
Beginning balance .......................
Sale of assets ..............................
Payment of liabilities....................
Balance........................................
Assume assets are worthless......
Balance........................................
Absorb deficit balance .................
Absorb deficit balance .................
Balance........................................

$ 12,000
50,000
(35,000)
$ 27,000
$ 27,000

$ 27,000

645

Noncash
Assets
Liabilities

Partners Loan
and Capital Balance
A
B
C

$ 180,000 $ 35,000 $ 60,000 $ 70,000 $ 27,000

(70,000)
(10,000)
(6,000)
(4,000)
(35,000)
$ 110,000 $
0 $ 50,000 $ 64,000 $ 23,000
(110,000)
(55,000) (33,000) (22,000)
$
0 $
0 $ (5,000) $ 31,000 $ 1,000
5,000
(3,000)
(2,000)
(1,000)
1,000
$
0 $
0 $
0 $ 27,000 $
0

Ch. 14Problems

PROBLEMS
PROBLEM 14-1

Balances as of December 31, 2014........

Withdrawal of Stansbury ............................
Allocation of 2015 income (see
Schedule A)..........................................
Quarterly withdrawals in 2015....................
Balances as of December 31, 2015...........
Withdrawal of bonus amount .....................
Allocation of first six months of 2016
income (see Schedule A) .....................
Quarterly withdrawals through June 30 .....
Balances as of June 30, 2016....................
Acquisition of Laidlaws interest .................
Allocation of second six months of
2016 income (see Schedule A) ............
Quarterly withdrawals through December 31
Balances as of December 31, 2016...........
Admit Wilson to partnership
($144,000/60% = $240,000) ................
Allocation of 2017 income (see
Schedule A)..........................................
Quarterly withdrawals in 2017....................
Balances as of December 31, 2017...........
Allocation of first six months of 2018
income (see Schedule A) .....................
Quarterly withdrawals through June 30 .....
Balances as of June 30, 2018....................
Withdrawal of Carlton:
Recognition of goodwill ........................
Payment of $160,000 ...........................
Balances as of July 1, 2018 .......................

Carlton
$ 120,000

Weber
$ 70,000

100,000
(120,000)
$ 100,000

87,500
(90,000)
$ 67,500
(12,500)

40,000
(60,000)
$ 80,000
(8,000)

35,000
(45,000)
$ 45,000
(6,000)

36,500
(20,000)
$ 88,500

36,500
(20,000)
$ 55,500

Capital Balances
Stansbury
Laidlaw
$ 80,000
(80,000)
$ 80,000

Wilson

112,500
(90,000)
$102,500
(37,500)

270,000

45,000
(45,000)
$ 65,000
(65,000)

Total
$270,000

190,000

144,000
$ 96,000

140,000
(120,000)
$ 108,500

140,000
(120,000)
$ 75,500

85,000
(60,000)
$ 133,500

85,000
(60,000)
$ 100,500

26,500
(160,000)
$
0

140,000
(120,000)
$ 116,000

300,000

85,000
(60,000)
$ 141,000

375,000

26,500
$ 127,000

646

26,500
$

$ 167,500

294,500

Ch. 14Problems

Problem 14-1, Concluded

Schedule AAllocation of Net Income
2015

Salary .....................................
Bonus (Note A).......................
Subtotal ..................................
Remaining profit (loss) ...........
Total .......................................

Carlton
$120,000
$120,000
(20,000)
$100,000

Weber
$ 90,000
12,500
$102,500
(15,000)
$ 87,500

Laidlaw
$ 90,000
37,500
$127,500
(15,000)
$112,500
$ 45,000
15,000
$ 60,000
(15,000)
$ 45,000

Wilson

Total
$300,000
50,000
$350,000
(50,000)
$300,000

1st 6 mos.
2016 Salary .....................................
Bonus (Note B).......................
Subtotal ..................................
Remaining profit (loss) ...........
Total .......................................

$ 60,000
(20,000)
$ 40,000

$ 45,000
5,000
$ 50,000
(15,000)
$ 35,000

2nd 6 mos.
2016 Per profit and loss
percentages......................

$ 36,500

$ 36,500

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

2017

$ 60,000

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

647

$150,000
20,000
$170,000
(50,000)
$120,000

$ 73,000

Ch. 14Problems

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). Therefore, Rowes 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 partnerships 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) Rowes capital = $80,000 $36,800 $2,880 = $40,320 based on the following entries:
Capital, Kravitz ...................................................................
Capital, Rowe .....................................................................
Net Assets ....................................................................
To recognize write-down of net assets.

55,200
36,800

Cash ...................................................................................
Capital, Kravitz ...................................................................
Capital, Rowe .....................................................................
Capital, New Partner.....................................................
To recognize investment of new partner.

60,000
4,320
2,880

92,000

67,200*

*($108,000 + $60,000) 40%

(4) Rowes capital = $80,000 $36,800 = $43,200.
If the goodwill method were employed, the difference between the new partners cash contribution 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 partners capital = 30% ($108,000 + $55,000) = $48,900.

648

Ch. 14Problems

PROBLEM 14-3
(1)
Pre-sale capital balance ........................
Sale to Grossman..................................
Post-sale capital balance.......................
(2)
Pre-sale capital balance ........................
Recognize only decreases in the
value of existing assets .....................
Sale to Grossman..................................
Post-sale capital balance.......................
(3)
Pre-sale capital balance ........................
Recognize only decreases in the
value of existing assets .....................
Sale to partnership ................................
Post-sale capital balance.......................
(4)
Pre-sale capital balance ........................
Recognize only decreases in the
value of existing assets .....................
Recognition of Zeigler's goodwill ...........
Sale to partnership ................................
Post-sale capital balance.......................
(5)
Pre-sale capital balance ........................
Recognize only decreases in the
value of existing assets .....................
Recognition of all suggested goodwill ...
Sale to partnership ................................
Post-sale capital balance.......................
(6)
Pre-sale capital balance ........................
Recognize all changes in the
value of existing assets .....................
Recognition of all suggested goodwill ...
Sale to partnership ................................
Post-sale capital balance.......................

Grossman

Casper

$125,000
150,000
$275,000

$200,000
$200,000

Grossman

Casper

Ziegler

Total

$125,000

$200,000

$ 150,000

$ 475,000

(15,750)

Ziegler

Total

$ 150,000 $ 475,000
(150,000)

$
$ 475,000

(12,250)
143,000
$255,750

(7,000)
(35,000)
(143,000)

$
$ 440,000

$184,250

Grossman

Casper

Ziegler

Total

$125,000

$200,000

$ 150,000

$ 475,000

(14,000)
(8,500)
$102,500

(14,000)
(7,000)
(35,000)
(8,500) (143,000) (160,000)
$177,500 $
$ 280,000

Grossman

Casper

Ziegler

Total

$125,000

$200,000

$ 150,000

$ 475,000

(14,000)

(14,000)

(7,000)
(35,000)
17,000
17,000
(160,000) (160,000)
$
$ 297,000

$111,000

$186,000

Grossman

Casper

Ziegler

Total

$125,000

$200,000

$ 150,000

$ 475,000

(14,000)
34,000

(14,000)
34,000

(7,000)
(35,000)
17,000
85,000
(160,000) (160,000)
$
$ 365,000

$145,000

$220,000

Grossman

Casper

Ziegler

Total

$125,000

$200,000

$ 150,000

$ 475,000

8,000
12,000

8,000
12,000

$145,000

$220,000

4,000
20,000
6,000
30,000
(160,000) (160,000)
$
$ 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 accepted accounting principles.

649

Ch. 14Problems

PROBLEM 14-4
(1)

Capital Balances
Murray
Clay
Rayburn

Davis
Balances as of
December 31, 2013................
Distribution of Clays 2013 bonus
(see Schedule A)....................
Distribution of 2013 other income
(see Schedule A; 80%
$144,000) ...............................
Allocation of 2014 income* (see
Schedule A)............................
Quarterly distributions ..................
Balances as of
December 31, 2014................
Admission of Rayburn (see
Schedule B)............................
Distribution of Clays 2014 bonus
(see Schedule A)....................
Distribution of 2014 other income
(see Schedule A; 80%
$24,000) .................................
Allocation of 2015 income* (see
Schedule A)............................
Subtotal ........................................
Withdrawal of Davis**...................
Balances as of
December 31, 2015................
Distribution of Clays 2015 bonus
(see Schedule A)....................
Distribution of 2015 other income
(see Schedule A)....................
Allocation of 2016 income* (see
Schedule A)............................
Balances as of June 30, 2016......

$ 50,000

$ 80,000

Total

$ 70,000
(36,000)

(38,400)

(38,400)

(38,400)

108,000
(100,000)

108,000
(100,000)

84,000
(70,000)

$ 19,600
(3,300)

$ 49,600
(3,300)

$ 9,600
(3,300)

$ 78,800
$ 68,900

(6,000)

(6,400)

(6,400)

(6,400)

50,000
50,000
$ 59,900 $ 89,900
4,500
(59,900)

36,100
$ 30,000
4,500

5,900
$ 74,800
1,500

$ 34,500

$ 76,300

$ 94,400

205,200

(1,100)

0
0

40,948
$ 135,348

40,948
$ 74,348

28,104
$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)

650

Ch. 14Problems

Problem 14-4, Continued

Schedule A
Allocation of Profits and Losses
2013 Income
Profit and loss percentages...
Salaries .................................
Bonus (see Note A)...............
Remaining profits ..................
Total ......................................
2014 Income
Salaries .................................
Bonus (see Note B)...............
Remaining profits ..................
Total ......................................
2015 Income
Salaries .................................
Interest ..................................
Bonus (see Note C)...............
Remaining profits ..................
Total ......................................
2016 Income
Salaries .................................
Interest (10% $76,300) ......
Remaining profits ..................
Total ......................................

Davis
33.3%

Murray
33.3%

$100,000

$100,000

48,000
$148,000

48,000
$148,000

$100,000

$100,000

8,000
$108,000

Clay
33.3%

Rayburn

Cumulative
Total

$ 70,000
36,000
48,000
$154,000

$270,000
306,000
450,000

8,000
$108,000

$70,000
6,000
8,000
$84,000

270,000
276,000
300,000

$50,000

$50,000

$35,000

0
$50,000

0
$50,000

1,100
0
$36,100

$ 5,900

0
0

40,948
$40,948

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

651

40,948
$40,948

0
5,900

0
7,630
20,474
$28,104

135,000
140,900
142,000
142,000

0
7,630
110,000

Ch. 14Problems

Problem 14-4, Concluded

Schedule B
Changes in Partnership Interests
Admission of Rayburn:
Total capital of previous partners ...........................................................
Investment of Rayburn ...........................................................................
Total capital of new partnership .............................................................
50% interest allocated to Rayburn .........................................................
Balance allocated to previous partners ..................................................
Investment of Rayburn ...........................................................................
Balance of negative bonus to previous partners ....................................

$ 78,800
59,000
$137,800
68,900
$ 68,900
59,000
$ 9,900

(2) Distribution of Available Cash on September 15, 2016

Available cash (see Schedule C) ......
Payment of liabilities .........................
Payment to partners (see Note D) ....
Total ..................................................

Cash
$ 277,000
(84,000)
(183,000)
$ 10,000

Liabilities

Murray

Clay

Rayburn

$112,908
$112,908

$1,908
$1,908

$68,184
$68,184

$84,000
$84,000

Schedule C
Partial Liquidation Schedule

Balances at June 30, 2016 .....

August 1 sale of assets ..........
September 1 sale of assets ....
Balances .................................

Note D:

Noncash
Loan from
Capital Balances
Cash
Assets Liabilities Murray
Murray
Clay
Rayburn
$ 15,000 $433,100 $84,000 $50,000 $135,348 $74,348 $104,404
180,000 (220,000)
(16,000) (16,000)
(8,000)
82,000
(70,000)
4,800
4,800
2,400
$277,000 $143,100 $84,000 $50,000 $124,148 $63,148 $ 98,804

Schedule of Safe Payments

Profit and loss percentages...........................

Combined capital and loan balances ............
Estimated cash reserve.................................
Maximum loss possible .................................
Safe payment ................................................

652

Murray
40%
$174,148
(4,000)
(57,240)
$112,908

Clay
Rayburn
40%
20%
$ 63,148
(4,000)
(57,240)
$ 1,908

Total
100%

$ 98,804 $ 336,100
(2,000)
(10,000)
(28,620) (143,100)
$ 68,184 $ 183,000

Ch. 14Problems

PROBLEM 14-5
If the partnership is liquidated, Jacobs capital balance and resulting distribution will be as follows:

Cash
Profit and loss percentages ....................
Beginning balances.................................
Discovery of liabilities..............................
Sale of assets .........................................
Payment of liabilities ...............................
Liquidation expenses ..............................
Payment of Williams loan.......................
Balances .................................................
Contribution by Harrington ......................
Absorb Harrington's deficit ......................
Payment of Williams loan.......................

$ (15,000)
232,000
(172,000)
(18,000)
(25,000)
$ 2,000
13,000
$ 15,000

Noncash
Assets
$ 322,000

Liabilities
$ 160,000
12,000

(322,000)

Combined Loan and Capital Balances

Jacobs
Williams
Harrington
30%
$ 52,000
(3,600)
(27,000)

30%
$ 65,000
(3,600)
(27,000)

40%
$ 30,000
(4,800)
(36,000)

(172,000)
(5,400)
$

$ 16,000

(5,400)
(25,000)
$ 4,000

(2,500)
$ 13,500

(2,500)
1,500

(7,200)
$ (18,000)
13,000
5,000
$

If the partnership is liquidated, Jacobs will receive $13,500 of cash and a claim against Harrington for $2,500. The claim against Harrington will appear to be of questionable collectibility.
If the offer by Williams is accepted, the amount received by Jacobs will be determined as follows:

Cash
Profit and loss percentages ....................
Beginning balances.................................
Adjustment for uncertainties ...................
Balances .................................................

$ (15,000)
$ (15,000)

Noncash
Assets
$ 322,000
(70,000)
$ 252,000

653

Liabilities
$ 160,000
$ 160,000

Combined Loan and Capital Balances

Jacobs
Williams
Harrington
30%
$ 52,000
(21,000)
$ 31,000

30%
$ 65,000
(21,000)
$ 44,000

40%
$ 30,000
(28,000)
$ 2,000

Ch. 14Problems

Problem 14-5, Concluded

Payment due Jacobs:
Capital balance ..................................................
Percent to be paid ..............................................
Total payment ....................................................
Less down payment ...........................................
Remaining balance ............................................
Number of installments ......................................
Installment payment ...........................................
Net present value of installments when:
Payment is ...................................................
Number of months is ....................................
Monthly interest rate is .................................
Net present value .........................................
Total payment ....................................................
Less imputed interest:
Stated payments ..........................................
NPV of payments .........................................
Net consideration received...........................

31,000
50%
15,500
(3,100)
12,400

24
516.67

516.67
24
0.50%
$11,657.48
$15,500.00
$ 12,400
11,657.48

742.52
$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 collectibility of the installment payments from Williams.

654

Ch. 14Problems

PROBLEM 14-6
Capital Balances
Reinartz
Hepburn

Murphy

2016

2017

2018

2019

Balance as of
December 31, 2015 ...........
Allocation of profits
(see Note A).......................
Distributions ...........................
Year-end balance...................

$ 54,000

$ 76,000

127,600
102,400
(100,000) (100,000)
$ 81,600 $ 78,400

Beginning balance..................
Admission of Hepburn
(see Note C) ......................
Allocation of profits
(see Note A).......................
Distributions ...........................
Year-end balance...................

$ 81,600

$ 78,400

30,000

20,000

Pioso

Total

$ 130,000

230,000
(200,000)
$ 160,000
$ 160,000

$ 70,000

120,000

145,250
98,875
(80,000)
(80,000)
$ 176,850 $ 117,275

85,875
(80,000)
$ 75,875

330,000
(240,000)
$ 370,000

Beginning balance..................
Sale of interest to Reinartz .....
Allocation of profits
(see Note A).......................
Distributions ...........................
Year-end balance...................

$ 176,850 $ 117,275
(176,850)
176,850

$ 75,875

Beginning balance..................
Adjustment of net assets........
Recognition of Reinartz
goodwill (see Note C) ........
Sale of interest by Reinartz ....
Subtotal ..................................
Admission of Pioso
(see Note C) ......................
Ending balance ......................

100,000
(60,000)
$ 334,125

100,000
(80,000)
$ 95,875

$ 334,125
(5,000)

$ 95,875
(5,000)

$ 90,875

21,625
$112,500

75,000
$ 75,000

20,875
(350,000)
$

$ 370,000

200,000
(140,000)
$ 430,000
$ 430,000
(10,000)
20,875
(350,000)
$ 90,875
96,625
$ 187,500

Note A:
2016 Allocation Profit
Profit and loss percentages .............................
Salary ..............................................................
Bonus (see Note B) .........................................
Balance............................................................
Totals...............................................................

655

Murphy
40%
$ 80,000
46,000
1,600
$127,600

Reinartz
60%
$100,000
2,400
$102,400

Cumulative
Total
$180,000
226,000
230,000

Ch. 14Problems

Problem 14-6, Concluded

2017 Allocation
Profit and loss percentages ..
Salary ...................................
Bonus (see Note B) ..............
Balance.................................
Totals....................................

2018 Allocation
Profit and loss percentages ..
Balance.................................
Totals....................................
Note B:
Partner
Murphy

Murphy
30%
$ 80,000
66,000
(750)
$145,250

Murphy

Reinartz
45%
$100,000
(1,125)
$ 98,875

Reinartz
50%
$100,000
$100,000

Hepburn
25%
$70,000
16,500
(625)
$85,875

Hepburn
50%
$100,000
$100,000

Cumulative
Total
$250,000
332,500
330,000

Cumulative
Total
$200,000

2016 Bonus
Percent of
Income
20%

Income
$230,000

Bonus
$46,000

2017 Bonus
Partner
Murphy
Hepburn

Note C:

Percent of
Income
20%
5%

Income
$330,000
330,000

Bonus
$66,000
16,500
$82,500

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 traceable 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 traceable to the original partnership. The goodwill is allocated to the original partners per
their profit percentages (in this case, Hepburn gets 100%).

656

Ch. 14Problems

PROBLEM 14-7
If the partnership were liquidated on March 31, 2016, Klaproth would receive $48,750, determined as
follows:

Event/Circumstance

Noncash
Assets

Cash

Liabilities

Profit and loss percentages .......

Beginning balances ...................
Liquidation of assets..................
Settlement of liabilities...............
Unrecorded contingent
liabilities ................................
Payment of liquidation
expenses...............................
Subtotal......................................
Contribution of personal assets .
Absorption of deficit ...................
Subtotal......................................
Final payment to partners..........
Final balances............................

Partners Capital Balances

Klaproth
Stone
Jackson
35%

$ 120,000 $1,500,000 $1,400,000

1,380,000 (1,500,000)
.
(1,350,000)
(1,400,000)
(60,000)
(25,000)
65,000 $
12,500

$ 77,500 $
(77,500)
$
$

30%

35%

$110,000
(42,000)
17,500

$ 20,000
(36,000)
15,000

$ 90,000
(42,000)
17,500

(21,000)

(18,000)

(21,000)

(7,500)
$ (26,500)
12,500
14,000
$

(8,750)
$ 35,750

(8,750)
$ 55,750

(7,000)
$ 48,750
(48,750)
$

(7,000)
$ 28,750
(28,750)
$

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:

Event/Circumstance

Cash

Noncash
Assets

Liabilities

Profit and loss percentages .......

Beginning balances ...................
Allocation of 2016 net income
(see Note A)..........................
Partnership draws......................
Investment of capital..................
Allocation of 2017 net income
(see Note B)..........................
Partnership draws......................
Subtotal......................................
Adjustment of receivables and
Inventory to market value .....
Final balances............................

Partners Capital Balances

Klaproth
Stone
Jackson
35%

$120,000 $1,500,000 $1,400,000 $ 110,000

(80,000)
80,000

120,000

32,000
(20,000)
50,000

35%
$ 90,000

46,000
(40,000)
30,000

42,000
(20,000)

200,000
56,900
(60,000)

$ 60,000 $1,820,000 $1,400,000 $ 228,900

62,200
(40,000)
$ 78,200

80,900
(20,000)
$ 172,900

(350,000)
(122,500)
$ 60,000 $1,470,000 $1,400,000 $ 106,400

(105,000)
$ (26,800)

(122,500)
$ 50,400

657

30%
$ 20,000

Ch. 14Problems

Problem 14-7, Concluded

Note A
Allocation of 2016 income:
Profit and loss percentages .......
Salary .........................................
Bonus as a percent of sales.......
Balance ......................................
Totals .........................................

Klaproth
35%
$100,000
30,000
(98,000)
$ 32,000

Stone
30%
$130,000

(84,000)
$ 46,000

Jackson
35%
$ 90,000
50,000
(98,000)
$ 42,000

Cumulative
Total
$320,000
400,000
120,000

Note B
Allocation of 2017 income:
Profit and loss percentages .......
Salary .........................................
Bonus as a percent of sales.......
Balance ......................................
Totals .........................................

Klaproth
35%
$100,000
36,000
(79,100)
$ 56,900

Stone
30%
$130,000

(67,800)
$ 62,200

Jackson
35%
$ 90,000
70,000
(79,100)
$ 80,900

Cumulative
Total
$320,000
426,000
200,000

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, continuing in the partnership appears to be the best alternative.

658

Ch. 14Problems

PROBLEM 14-8
(1)

Installment Liquidation Schedule

Event/Circumstance

Cash

Noncash
Assets

Liabilities

Partners Loan and Capital Balance

Dvorak
Kelsen
Morgan

Profit and loss percentages..............

Beginning balances..........................
Liquidate receivables and
inventory ....................................
Refund of prepaids...........................
Balances...........................................
Payoff of accounts payable ..............
Balances...........................................
Distribution of assets to partners .....
Sale of office
equipment/vehicles....................
Settle contingent liability...................
Balances...........................................
Payment to partners
(see Schedule A) .......................
Balances...........................................
Sale of furniture and fixtures ............
Collection agency proceeds .............
Sale of home and payoff of loan ......
Balances...........................................
Contribution of deficit partners .........
Allocation of deficit balances............
Final payment to partners ................
Balances...........................................

30%

30%

40%

$ 15,000

$ 722,000 $ 613,000

$ 20,000

$ 87,000

$ 17,000

90,000
10,000
$115,000
(80,000)
$ 35,000

(130,000)
(12,000)
$ 580,000 $ 613,000
(80,000)
$ 580,000 $ 533,000
(25,000)

(12,000)
(600)
$ 7,400

(12,000)
(600)
$ 74,400

(16,000)
(800)
$
200

$ 7,400
(9,500)

$ 74,400
(1,500)

(83,000)
$ 520,000 $ 450,000

(2,100)
12,000
$ 7,800

(2,100)
12,000
$ 82,800

(2,800)
16,000
$ (600)

$ 520,000 $ 450,000
(150,000)
(20,000)
(350,000) (450,000)
$
0 $
0

$ 7,800
(9,000)
(4,500)
6,000
$
300

(18,000)
$ 64,800
(9,000)
(4,500)
6,000
$ 57,300

28,000
(43,000)
$ 20,000
(18,000)
2,000
120,000
5,000
(80,000)
$ 47,000
10,000
$

(35,000)

(300)
(57,000)
$
0

659

0 $

(300)
(57,000)
$
0

200
(14,000)

(600)
(12,000)
(6,000)
8,000
$ (10,600)
10,000
600
$

Ch. 14Problems

Problem 14-8, Concluded

Schedule A
Schedule of Safe Payments
Profit and loss percentages ......................
Combined capital and loan balances........
Cash retained/expenses anticipated ........
Maximum loss possible
($520,000 $450,000) ........................
Balances ...................................................
Allocation of deficits ..................................
Safe payments..........................................

Dvorak
Kelsen
Morgan
30%
30%
40%
$ 7,800 $ 82,800 $ (600)
(600)
(600)
(800)
(21,000)
$ (13,800)
13,800
$
0

(21,000)
$ 61,200
(43,200)
$ 18,000

(28,000)
$ (29,400)
29,400
$
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 capital 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.

660

Ch. 14Problems

PROBLEM 14-9
Other
Assets

Cash
Profit and loss percentages ....................
Beginning balances.................................
June 30 sale of assets ............................
Balances .................................................
Contribution of assets .............................
Payment of liabilities ...............................
Balances .................................................
July 28 sale of assets..............................
Balances .................................................
Contribution of assets .............................
Payment of liabilities ...............................
Balances .................................................
Adams contribution .................................
Payment of liabilities ...............................
Balances .................................................
Chenery contribution...............................
Payment of liabilities ...............................
Balances .................................................
Allocation of Beyer deficit (3:4) ...............
Balances .................................................
Allocation of Chenery deficit ...................
Balances .................................................

$ 25,000
120,000
$ 145,000
6,000
(131,000)
$ 20,000
10,000
$ 30,000
24,000
(54,000)
$

12,000
(12,000)
$

3,000
(3,000)
$

$ 240,000
(160,000)
$ 80,000

$ 80,000
(80,000)
$

Liabilities
$ 200,000
$ 200,000
(131,000)
$ 69,000
$ 69,000

(54,000)
$ 15,000

(12,000)
3,000

(3,000)

661

Partners Capital Balance

Adams
Beyer
Chenery
30%
$ 50,000
(12,000)
$ 38,000

30%
$ (10,000)
(12,000)
$ (22,000)
6,000

40%
$ 25,000
(16,000)
$ 9,000

$ 38,000
(21,000)
$ 17,000

$ (16,000)
(21,000)
$ (37,000)
5,000

$ 17,000
12,000

$ (32,000)

$ 29,000

$ (32,000)

3,000

$ 29,000
(13,714)
$ 15,286
(15,286)
$

$ (32,000)
32,000
$

9,000
(28,000)
$ (19,000)
19,000

3,000
(18,286)
$ (15,286)
15,286
$

Ch. 14Problems

Problem 14-9, Concluded

Allocation of Adams' personal assets:
Personal liabilities.....................................................................
Unsatisfied partnership creditors ..............................................
Total claims against personal assets........................................

$22,500
15,000
$37,500

Assets to be contributed to partnership (40% $30,000) ........

$12,000

Allocation of Chenery's personal assets:

Personal liabilities.....................................................................
Unsatisfied partnership creditors ..............................................
Total claims against personal assets........................................

$27,000
3,000
$30,000

Assets to be contributed to partnership (10% $30,000) ........

$3,000

60%
40
100%

90%
10
100%

(Note: The $30,000 of assets is $49,000 less the $19,000 previously contributed to the partnership.)

662

Ch. 14Problems

PROBLEM 14-10
Installment Liquidation Schedule

Event/Circumstance
Profit and loss percentages........
Beginning balance......................
Additional adjustment.................
Conveyance of vehicles .............
Sale of assets.............................
Balance ......................................
Payment of liabilities ..................
Balance ......................................
Sale of assets.............................
Payment of subcontractor ..........
Bill customer for subcontractor ..
Balance ......................................
Payment of liabilities (see Note A)
Balance ......................................
Payment to partners
(see Schedule A) .................
Balance ......................................
Conveyance of vehicles .............
Settle liabilities ...........................
Collect receivables .....................
Balance ......................................
Payment to partners
(see Schedule A) .................
Final sale of assets ....................
Payment of professional fees.....
Balance ......................................
Contribution of capital ................
Payment to partners...................
Balance ......................................

Cash

Noncash
Assets

$ 12,000

$228,000

70,000
$ 82,000
(82,000)
$
0
92,000
(15,000)
$ 77,000
(42,400)
$ 34,600
(16,600)
$ 18,000
(10,000)
20,000
$ 28,000
(28,000)
24,000
(6,000)
$ 18,000
9,720
(27,720)
$
0

(14,000)
(90,000)
$124,000
$124,000
(80,000)
20,000
$ 64,000
$ 64,000

$ 64,000
(8,000)

Liabilities
$120,000
17,400

$137,400
(82,000)
$ 55,400

$ 55,400
(42,400)
$ 13,000

$ 13,000
(13,000)

(20,000)
$ 36,000

(36,000)
$

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

663

Partners Loan
and Capital Balance
Ziegler
Nolan
Petersen
30%
30%
40%
$ 20,000
$ 50,000
$ 50,000
(5,220)
(5,220)
(6,960)
(20,300)
2,700
3,600
(6,000)
(6,000)
(8,000)
$(11,520)
$ 41,480
$ 38,640
$(11,520)
3,600
(4,500)
6,000
$ (6,420)

$ 41,480
3,600
(4,500)
6,000
$ 46,580

$ 38,640
4,800
(6,000)
8,000
$ 45,440

$ (6,420)

$ 46,580

$ 45,440

0
$ (6,420)
1,200
900

(14,257)
$ 32,323
1,200
900

(2,343)
$ 43,097
(10,400)
1,200

$ (4,320)

$ 34,423

$ 33,897

0
(3,600)
(1,800)
$ (9,720)
9,720

(17,143)
(3,600)
(1,800)
$ 11,880

(10,857)
(4,800)
(2,400)
$ 15,840

(11,880)
$
0

(15,840)
$
0

Ch. 14Problems

Problem 14-10, Concluded

Schedule A
Schedule of Safe Payments
Profit and loss percentages ..............................................

Ziegler
30%

Nolan
30%

Petersen
40%

July 15 Distribution
Combined capital and loan balance..................................
Cash retained/expenses anticipated.................................
Maximum loss possible.....................................................
Balance .............................................................................
Allocation of deficits ..........................................................
Safe payments ..................................................................

$ (6,420)
(1,500)
(19,200)
$(27,120)
27,120
$
0

$ 46,580
(1,500)
(19,200)
$ 25,880
(11,623)
$ 14,257

$ 45,440
(2,000)
(25,600)
$ 17,840
(15,497)
$ 2,343

August 1 Distribution
Combined capital and loan balance..................................
Cash retained/expenses anticipated.................................
Maximum loss possible.....................................................
Balance .............................................................................
Allocation of deficits ..........................................................
Safe payments ..................................................................

$ (4,320)
0
(10,800)
$(15,120)
15,120
$
0

$ 34,423
0
(10,800)
$ 23,623
(6,480)
$ 17,143

$ 33,897
0
(14,400)
$ 19,497
(8,640)
$ 10,857

664