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 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.
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
partnership and that of the original
partnership ($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
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.
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
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
121
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 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.
122
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.
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.
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.
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.
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)
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)].....................
30%
70%
(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
Ch. 14Exercises
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%)

Sale of noncash assets.........
53,000 (213,000)
(80,000) (48,000)
(32,000)
Pay liabilities.........................
(92,000)
(92,000)
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. 14Exercises
Distribution to B is................. ZeroThere is not enough cash to even cover the liabilities.
Ch. 14Exercises

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

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)
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.......................................
Meyer
30%
$115,000
(42,000)
$ 73,000
Jensen
20%
$ 60,000
(28,000)
$ 32,000
Ch. 14Exercises
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.......................................
$130,000
Remaining profits*.......................
270,000
Bonus to Dawson**.....................
290,000
Total............................................
Cumulative
D
A
Total
$30,000
$30,000
$40,000
$30,000
42,000
14,000
42,000
42,000
20,000
$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
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.
Ch. 14Exercises

(3) If the partnership were liquidated as described, Bower would receive additional cash of
$88,200, determined as follows:
Noncash
Cash
Assets
Chambers
Beginning balances........ $
0 $ 680,000
60,000
Recognition of liability....
(1,200)
Vehicle transfer..............
(20,000)
(1,500)
Sales of assets...............
515,000 (660,000)
(43,500)
Payment of liabilities...... (434,000)
Balances........................ $ 81,000 $
0
13,800
Contribution of assets....
12,000
Allocation of deficit.........
(9,000)
Balances........................ $ 93,000 $
0
4,800
Offset Capital Balances

Liabilities
Arnold
Bower
$ 430,000
$ 50,000
$140,000
4,000
(2,000)
(800)
(2,500)
(16,000)*
(72,500)
(29,000)
(434,000)
$
0 $ (27,000) $ 94,200
12,000
15,000
$
*$15,000 fair value + (20% $5,000 book value vs. fair value) = $16,000
(6,000)
$ 88,200
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
Moore
Ramsey
20%
20%
July Distribution
Combined capital and loan balance
before distribution.............................
$34,000
Maximum loss possible............................
(6,000)
Safe payments.........................................
$28,000
$28,200
(3,600)
$24,600
$ 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
Total
Profit and loss percentages............................
60%
100%
$ 3,000
(2,000)
$ 1,000
$ 1,400
(1,200)
$
200
$ 4,400
(1,200)
$ 3,200
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
Noncash
Assets
Liabilities
Partners Loan
and Capital Balance
A
B
C
$ 180,000 $ 35,000 $ 60,000 $ 70,000

(70,000)
(10,000)
(6,000)
(35,000)
$ 110,000 $
0 $ 50,000 $ 64,000
(110,000)
(55,000) (33,000)
$
0 $
0 $ (5,000) $ 31,000
5,000
(3,000)
(1,000)
$
0 $
0 $
0 $ 27,000
$ 27,000
(4,000)
$ 23,000
(22,000)
$ 1,000
(2,000)
1,000
$
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
Admit Wilson to partnership
($144,000/60% = $240,000)................
Allocation of 2017 income (see
Schedule A).........................................
Quarterly withdrawals in 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
26,500
$
$ 167,500
294,500
Ch. 14Problems
Problem 14-1, Concluded

Schedule AAllocation of Net Income
2015
Salary.....................................
$300,000
Bonus (Note A).......................
50,000
Subtotal..................................
$350,000
Remaining profit (loss)............
(50,000)
Total........................................
$300,000
1st 6 mos.
2016 Salary.....................................
$150,000
Bonus (Note B).......................
20,000
Subtotal..................................
$170,000
Remaining profit (loss)............
(50,000)
Total........................................
$120,000
2nd 6 mos.
2016 Per profit and loss
percentages......................
73,000
2017
Per profit and loss

percentages......................
420,000
1st 6 mos.
2018 Per profit and loss
percentages......................
255,000
Carlton
Total
$120,000
$120,000
(20,000)
Weber
Laidlaw
$ 90,000
$ 90,000
12,500
37,500
$102,500
$127,500
(15,000)
(15,000)
$100,000
$ 87,500
$112,500
$ 60,000
$ 45,000
$ 45,000
5,000
15,000
$ 50,000
$ 60,000
$ 60,000
(20,000)
(15,000)
Wilson
(15,000)
$ 40,000
$ 35,000
$ 36,500
$ 36,500
140,000
140,000
$140,000
85,000
85,000
85,000
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
$ 45,000
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.
Ch. 14Problems
PROBLEM 14-3
(1)
Pre-sale capital balance........................
Sale to Grossman..................................
Post-sale capital balance......................
(2)
Recognize only decreases in the
value of existing assets.....................
Sale to Grossman..................................
(3)
Sale to partnership................................
(4)
Recognition of Zeigler's goodwill...........
(5)
Recognition of all suggested goodwill....
(6)
Recognize all changes in the
Recognition of all suggested goodwill....
Grossman
Casper
$125,000
150,000
$275,000
$200,000
Grossman
Casper
Ziegler
Total
$125,000
$200,000
$ 150,000
$ 475,000
$200,000
(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.
Ch. 14Problems
PROBLEM 14-4
(1)
Capital Balances
Murray
Clay
Rayburn
Davis
Total
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................
78,800
Admission of Rayburn (see
Schedule B)............................
(see Schedule A)....................
(see Schedule A; 80%
$24,000).................................
Schedule A)............................
Subtotal........................................
Withdrawal of Davis**...................
Balances as of
December 31, 2015................
205,200
(see Schedule A)....................
(see Schedule A)....................
Schedule A)............................
Balances as of June 30, 2016......
314,100
$ 50,000
$ 80,000
$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)
$
$ 68,900
(6,000)
(6,400)
(6,400)
(6,400)
50,000
50,000
$ 59,900 $ 89,900
(59,900)
4,500
36,100
$30,000
4,500
5,900
$ 74,800
1,500
$34,500
$ 76,300
$ 94,400
(1,100)
0
0
40,948
$ 135,348
40,948
$ 74,348
28,104
$104,404
*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. 14Problems
Problem 14-4, Continued

Schedule A
Allocation of Profits and Losses
2013 Income
Total
Profit and loss percentages...
Davis
Salaries.................................
$270,000
Bonus (see Note A)...............
Total......................................
$100,000
2014 Income
Salaries.................................
Bonus (see Note B)...............
Total......................................
2015 Income
Salaries.................................
Interest..................................
Bonus (see Note C)...............
Total......................................
2016 Income
Salaries.................................
Interest (10% $76,300).......
Total......................................
Murray
33.3%
Cumulative
Rayburn
Clay
33.3%
33.3%
$100,000
$ 70,000
48,000
$148,000
48,000
$148,000
36,000
48,000
$154,000
306,000
450,000
$100,000
$100,000
8,000
$108,000
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
0 135,000
5,900 140,900
142,000
142,000
$ 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% ($300,000 $270,000)
Bonus = 20% ($30,000)
Bonus = $6,000
Note C:

Bonus = 20% ($142,000 $135,000)
Bonus = 20% ($7,000)
Bonus = $1,400 but limited to available net income
40,948
$40,948
0
0
7,630
7,630
20,474 110,000
$28,104
Ch. 14Problems

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

Rayburn
Available cash (see Schedule C)......
Payment of liabilities.........................
Payment to partners (see Note D).....
$68,184
Total..................................................
$68,184
Cash
Liabilities
$ 277,000
(84,000)
(183,000)
$84,000
$ 10,000
$84,000
Murray
Clay
$112,908
$1,908
$112,908
$1,908
Schedule C
Partial Liquidation Schedule
Noncash
Loan from
Cash
Assets Liabilities
Rayburn
Balances at June 30, 2016..... $ 15,000 $433,100 $84,000
$104,404
August 1 sale of assets........... 180,000 (220,000)
(8,000)
September 1 sale of assets....
82,000
(70,000)
2,400
Balances................................. $277,000 $143,100 $84,000
98,804
Note D:
Capital Balances
Murray
Murray
Clay
$50,000 $135,348
$74,348
(16,000)
(16,000)
4,800
4,800
$50,000 $124,148
$63,148 $

Murray
Total
Profit and loss percentages..........................
Combined capital and loan balances............
336,100
Estimated cash reserve................................
(10,000)
40%
$174,148
(4,000)
Clay
40%
$ 63,148
(4,000)
Rayburn
20%
$ 98,804
(2,000)
100%
$
Ch. 14Problems
Maximum loss possible.................................

(143,100)
Safe payment...............................................
183,000
(57,240)
$112,908
(57,240)
$
1,908
(28,620)
$ 68,184
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
Adjustment for uncertainties...................
Balances.................................................
$ (15,000)
$ (15,000)
Noncash
Assets
$ 322,000
(70,000)
$ 252,000
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

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.
Ch. 14Problems
PROBLEM 14-6
Capital Balances
Reinartz
Hepburn
Murphy
Total
Balance as of
December 31, 2015............ $ 54,000 $ 76,000
130,000
2016 Allocation of profits
(see Note A).......................
127,600
102,400
230,000
Distributions............................ (100,000) (100,000)
(200,000)
Year-end balance................... $ 81,600 $ 78,400
160,000
2017 Beginning balance.................. $ 81,600 $ 78,400
160,000
Admission of Hepburn
(see Note C).......................
30,000
20,000
120,000
Allocation of profits
(see Note A).......................
145,250
98,875
330,000
Distributions............................
(80,000)
(80,000)
(240,000)
Year-end balance................... $ 176,850 $ 117,275
370,000
Pioso
$
$
$ 70,000
85,875
(80,000)
$ 75,875
2018 Beginning balance.................. $ 176,850 $ 117,275

370,000
Sale of interest to Reinartz...... (176,850)
176,850
Allocation of profits
(see Note A).......................
100,000
200,000
Distributions............................
(60,000)
(140,000)
Year-end balance................... $
$ 334,125
430,000
$ 75,875
$ 95,875
2019 Beginning balance.................. $

430,000
Adjustment of net assets.........
(10,000)
Recognition of Reinartz
goodwill (see Note C).........
Sale of interest by Reinartz.....
(350,000)
$ 95,875
$ 334,125
(5,000)
20,875
(350,000)
100,000
(80,000)
(5,000)
20,875
Ch. 14Problems
Subtotal.................................. $
90,875
Admission of Pioso
(see Note C).......................
96,625
Ending balance....................... $
187,500
$ 90,875
21,625
75,000
$112,500
$ 75,000
Note A:
2016 Allocation Profit
Profit and loss percentages.............................
Salary..............................................................
$180,000
Bonus (see Note B).........................................
Balance...........................................................
Totals..............................................................
Murphy
40%
$ 80,000
Reinartz
60%
$100,000
46,000
1,600
$127,600
2,400
$102,400
Cumulative
Total
226,000
230,000
Ch. 14Problems
2017 Allocation
Salary....................................
$250,000
Bonus (see Note B)...............
Balance.................................
Totals....................................
2018 Allocation
Balance.................................
$200,000
Totals....................................
Note B:
Partner
Murphy
Murphy
30%
$ 80,000
Reinartz
45%
$100,000
Hepburn
25%
$70,000
66,000
(750)
$145,250
(1,125)
$ 98,875
16,500
(625)
$85,875
Reinartz
50%
$100,000
Hepburn
50%
$100,000
$100,000
$100,000
Murphy
Cumulative
Total
332,500
330,000
Cumulative
Total
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%).
Ch. 14Problems
PROBLEM 14-7
If the partnership were liquidated on March 31, 2016, Klaproth would receive $48,750, determined as
follows:
Noncash
Event/Circumstance
Jackson
Profit and loss percentages........
35%
Beginning balances....................
90,000
Liquidation of assets..................
(42,000)
Settlement of liabilities...............
17,500
Unrecorded contingent
liabilities.................................
(21,000)
Payment of liquidation
expenses...............................
(8,750)
Subtotal......................................
35,750
Contribution of personal assets..
Absorption of deficit....................
(7,000)
Subtotal......................................
28,750
Final payment to partners..........
(28,750)
Final balances............................
Cash
Partners Capital Balances
Assets
Liabilities
Klaproth
Stone
35%
$ 120,000 $1,500,000 $1,400,000
1,380,000
(1,500,000)
(36,000)
17,500
15,000
(60,000)
(21,000)
(18,000)
(25,000)
(8,750)
(7,500)
(1,400,000)
65,000 $
$ 55,750
12,500
$ (26,500)
77,500 $
$.
$ 48,750
(48,750)
$
12,500
14,000
(7,000)
(77,500)
$
$ 20,000
(42,000)
(1,350,000)
$110,000
30%
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
Event/Circumstance
Jackson
35%
Beginning balances....................
90,000
Allocation of 2016 net income
(see Note A)..........................
42,000
Partnership draws......................
(20,000)
Cash
Assets
Partners Capital Balances

Liabilities
Klaproth
35%
$120,000 $1,500,000 $1,400,000 $ 110,000
(80,000)
120,000
Stone
30%
$ 20,000
32,000
46,000
(20,000)
(40,000)
Ch. 14Problems
Investment of capital..................
Allocation of 2017 net income
(see Note B)..........................
80,900
Partnership draws......................
(20,000)
Subtotal......................................
172,900
Adjustment of receivables and
Inventory to market value......
(122,500)
Final balances............................
80,000
200,000
(60,000)
50,000
30,000
56,900
62,200
$ 60,000 $1,820,000 $1,400,000 $ 228,900
(350,000)
(122,500)
$ 60,000 $1,470,000 $1,400,000 $ 106,400
(40,000)
$ 78,200
(105,000)
$ (26,800)
$ 50,400
Ch. 14Problems

Note A
Cumulative
Allocation of 2016 income:
Salary.........................................
Bonus as a percent of sales.......
Balance......................................
Totals.........................................
Klaproth
Total
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
$320,000
400,000
120,000
Note B
Cumulative
Allocation of 2017 income:
Salary.........................................
Bonus as a percent of sales.......
Balance......................................
Totals.........................................
Klaproth
Total
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
$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.
Ch. 14Problems
PROBLEM 14-8
(1)

Event/Circumstance
Profit and loss percentages..............

40%
Beginning balances..........................
17,000
Liquidate receivables and
inventory....................................
(16,000)
Refund of prepaids...........................
(800)
Balances...........................................
200
Payoff of accounts payable...............
Balances...........................................
200
Distribution of assets to partners......
(14,000)
Sale of office
equipment/vehicles....................
(2,800)
Settle contingent liability...................
16,000
Balances...........................................
(600)
Payment to partners
(see Schedule A)........................
Balances...........................................
(600)
Sale of furniture and fixtures.............
(12,000)
Collection agency proceeds..............
(6,000)
Sale of home and payoff of loan.......
8,000
Balances...........................................
(10,600)
Contribution of deficit partners..........
10,000
Allocation of deficit balances............
600
Final payment to partners.................
Balances...........................................
0
Cash
Noncash
Assets
Liabilities
Partners Loan and Capital Balance

Dvorak
Kelsen
Morgan
30%
$ 15,000
$ 722,000 $ 613,000
$ 20,000
30%
$ 87,000
90,000
(130,000)
(12,000)
(12,000)
10,000
(12,000)
(600)
(600)
$115,000
$ 580,000 $ 613,000
$ 7,400
$ 74,400
(80,000)
$ 35,000
(80,000)
$ 580,000 $ 533,000
$ 7,400
$ 74,400
(25,000)
(9,500)
(1,500)
(35,000)
(2,100)
(2,100)
12,000
12,000
$ 520,000 $ 450,000
$ 7,800
$ 82,800
$ 520,000 $ 450,000
$ 7,800
(18,000)
$ 64,800
28,000
(43,000)
$ 20,000
(18,000)
2,000
(83,000)
120,000
(150,000)
(9,000)
(9,000)
5,000
(20,000)
(4,500)
(4,500)
(80,000)
(350,000)
6,000
6,000
300
$ 57,300
$ 47,000
0 $
(450,000)
0
10,000
(300)
$
(57,000)
0
0 $
(300)
$
(57,000)
0
Ch. 14Problems

Schedule A
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.
Ch. 14Problems
PROBLEM 14-9
Other
Assets
Cash
June 30 sale of assets............................
Balances.................................................
Contribution of assets.............................
Balances.................................................
July 28 sale of assets.............................
Balances.................................................
Contribution of assets.............................
Balances.................................................
Adams contribution.................................
Balances.................................................
Chenery contribution...............................
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)
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

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

Schedule A
Ziegler
30%
Profit and loss percentages...............................................

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

Fischer11e SMChap14 Final

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Fischer11e SMChap14 Final

Hochgeladen von

Copyright:

Verfügbare Formate

CHAPTER 14

UNDERSTANDING THE ISSUES

in a suggested value of the new partnership

2. The first step would be to determine the fair

4. If a fellow partner has a deficit capital

be eliminated or reduced. It is also possible

by the partners with credit (surplus) capital

From: Student, CPA

Issues involving goodwill and the liquidation of a partnership

Exercise 14-2, Concluded

Fair market value of original partnership:

Percent of new partnership represented

Fair value of new partnership

Exercise 14-5, Concluded

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

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

Exercise 14-6, Concluded

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

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

*Bonus = 10% (Net Income Bonus)

Exercise 14-8, Concluded

Offset Capital Balances

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

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

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

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

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

Problem 14-1, Concluded

Per profit and loss

Bonus = 20% (Net Income Bonus)

Bonus = 20% (Net Income Bonus)

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

*Not yet distributed

Problem 14-4, Continued

Bonus = 20% (Net Income Salaries)

Bonus = 20% (Net Income Salaries)

Bonus = 20% (Net Income Salaries)

Problem 14-4, Concluded

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

Schedule of Safe Payments

Maximum loss possible.................................

Combined Loan and Capital Balances

Combined Loan and Capital Balances

Problem 14-5, Concluded

2018 Beginning balance.................. $ 176,850 $ 117,275

2019 Beginning balance.................. $

Problem 14-6, Concluded

Partners Capital Balances

Partners Capital Balances

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

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

$ 60,000 $1,470,000 $1,400,000 $ 106,400

Problem 14-7, Concluded

Installment Liquidation Schedule

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

Partners Loan and Capital Balance

Problem 14-8, Concluded

Partners Capital Balance

Problem 14-9, Concluded

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

Allocation of Chenery's personal assets:

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

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

Problem 14-10, Concluded