Jeter AA 4e SolutionsManual Ch16

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.
com
CHAPTER 16
ANSWERS TO QUESTIONS
1. Realization gains or losses are allocated to partners in their profit and loss ratio because the changes
in asset values are the result of risk assumed by the partnership. Also, because it may be difficult to
separate gains and losses that result from liquidation from the under- or over-statement in book
values that result from accounting policies followed in prior years.
2. The final cash distribution is based on capital balances, not on profit and loss ratios, since the
capital balance represents the partners' "residual claims" to the assets remaining after settlement of
partnership obligations.
3. Because the UPA order of payment ranks partnership obligations to a partner ahead of asset
distributions to a partner for capital investments, a debit balance in a partner's capital account will
create problems when that partner has an outstanding loan balance. Other partners will have a
claim against this partner for the amount of his/her debit balance which is considered to be an asset
of the partnership by the UPA. If the partner with a debit balance settles his/her obligation with the
partnership, there is no problem. However, if he/she can't settle, the other partners must absorb the
deficit as a loss, even though the partner with the debit balance had received cash for his/her
outstanding loan balance. To avoid this inequity, the courts have recognized the right of the
partnership to offset the loan balance against the debit capital balance.
4. Maintaining separate accounts for outstanding loan and capital accounts recognizes the legal
distinction between the two. This would be important if the liquidation is carried on over an
extended period, since the UPA provides that a partner is entitled to accrued interest on the loan
balance.
5. When the equity interest of one partner is inadequate to absorb realization losses several alternative
outcomes are possible. If the partner is personally solvent, he may pay the partnership for the
amount he is liable. If he/she is personally insolvent then the other partners must absorb his/her
debit balance in their respective profit and loss ratio. If the other partners are unsure of what the
partner with the debit balance will do, but still wish to distribute cash, they can assume the worst
(absorbing their share of the debit balance) to determine what amount of cash can be safely
distributed.
6. Cash should not be distributed to any partner until all liquidation losses are recognized in the
accounts or are provided for in determining a safe cash payment.
7. The classification of assets into personal and partnership categories in recognition of the rights of
both partnership creditors and creditors of the individual partners is referred to as "marshalling of
assets."
8. To the extent that personal creditors do not recover from personal assets they can seek recovery
from those partnerships assets still available after partnership obligations have been met. This
recovery, however, is limited to the extent that the partner involved has a credit interest in
partnership assets.
16 - 1
To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
9. Because in an installment liquidation the amount of cash to be received from the unsold assets and
the resulting gain or loss is unknown, the partners should view each cash distribution as if it were
the final distribution.
10. The three assumptions upon which a safe cash distribution is determined are (1) any loan balances
to partners are offset against their capital accounts, (2) the remaining noncash assets will not
generate any more cash, and (3) any partner with a deficit capital balance will not settle his/her
obligation to the partnership. In other words, assume the worst.
The safe cash balance is computed as the difference between the current capital balances and the
balance required to maintain the above assumptions.
11. Unexpected costs are added to the book value of noncash assets. When the potential loss on the
noncash assets is allocated in the determination of a safe payment, these costs are also included.
12. The objective of the procedure is to bring the balance of the partners' capital accounts into the
agreed profit and loss ratio as soon as possible so that no one partner is placed in a better position
than any other partner.
13. The "loss absorption potential" is determined by dividing the partners' net capital balances by their
respective profit ratio. This determines the maximum amount of loss each partner can absorb.
14. The Uniform Partnership Act provides that the liabilities of the partnership shall rank in order of
payment as follows:
(1) Those owing to creditors other than partners,
(2) Those owing to partners other than for capital and profits,
(3) Those owing to partners in respect of capital,
(4) Those owing to partners in respect of profits.
Business Ethics Solution
Business ethics solutions are merely suggestions of points to address. The objective is to raise the
students' awareness of the topics, and to invite discussion. In most cases, there is clear room for
disagreement or conflicting viewpoints.
1) Partnership laws grant each partner the right to information about the firms business. This
allows each partner to monitor the firms activities. Given the circumstances of the case, it
would be your duty to inspect any questionable transaction. Furthermore, you should ask the
partner to explain the reason for increasing the cost by $10,000. This would give you the
opportunity to raise the concern regarding the presence of the previously undetected rock. If the
additional charge is not based on fact, the cost should be removed.
2) In the present scenario, it appears that the partner might be experiencing personal financial
pressures. However, the firms reputation and future implications of the action must be
considered for the benefit of the partnership. Your loyalty to your partner does not alter these
responsibilities. You may wish to find other, more constructive ways to offer assistance to your
partner in meeting his personal obligations, and surviving what may be a difficult time in his
life. However, ignoring the situation is dishonest to the client and is likely to result in more
serious long-term consequences.
Reference: http://www.lrc.ky.gov/KRS/362-01/403.PDF
16 - 2
ANSWERS TO EXERCISES
Exercise 16-1
Part A
Capital balances
Loan balances
Net interest
Potential loss - $50,000
Potential loss - $5,000
Cash distribution
Part B
(30%)
Cook
$(30,000)
_______
(30,000)
15,000
(15,000)
3,000
$(12,000)
(50%)
Parks
$(10,000)
(10,000)
(20,000)
25,000
5,000
(5,000)
$ -0-
Liabilities
Cash
25,000
Cook, Capital
Argo, Capital
Cash
12,000
3,000
Cash
Cook, Capital ($35,000 0.30)
Parks, Capital ($35,000 0 50)
Argo, Capital ($35,000 0.20)
Other Assets
15,000
10,500
17,500
7,000
Parks, Loan
Parks, Capital
10,000
25,000
15,000
50,000
10,000
Parks, Capital ($10,000 - $17,500 + $10,000)

Cook, Capital
Argo, Capital
Cash
16 - 3
2,500
7,500
5,000
15,000
(20%)
Argo
$(15,000)
______
(15,000)
10,000
(5,000)
2,000
$(3,000)
Exercise 16-2
Part A
Account balances
Sale of assets
Payment to creditors
Cash distribution
Cash
$70,000
270,000
340,000
(98,000)
242,000
(242,000)
$ -0-
Noncash
Assets
Liabilities
$260,000
$(98,000)
(260,000) _______
0
(98,000)
_______
98,000
0
_______
_______
$ -0$ -0-
Part B 1. Cash
John
$(90,000)
(3,000)
(93,000)
_______
(93,000)
93,000
$ -0-
270,000
Other Assets
John, Capital
Jake, Capital
Joe, Capital
260,000
3,000
4,000
3,000
2. Liabilities
Cash
98,000
3. John, Capital
Jake, Capital
Joe, Capital
Cash
93,000
82,000
67,000
Exercise 16-3
Capital balances
Estimated loss on sale of assets ($45,000)
Allocate debit balance
Estimated cash payment
98,000
242,000
(1/3)
Doug
$(55,000)
15,000
(40,000)
11,500
$(28,500)
(1/3)
Dave
$(50,000)
15,000
(35,000)
11,500
$(23,500)
16 - 4
(1/3)
Dan
$8,000
15,000
23,000
(23,000)
$ -0-
Capital Balances
Jake
$(78,000)
(4,000)
(82,000)
_______
(82,000)
82,000
$ -0-
Joe
$(64,000)
(3,000)
(67,000)
_______
(67,000)
67,000
$ -0-
Exercise 16-4
Capital balances
Drawing account
Loans
Operating loss
Liquidation loss
Allocate debit balance
Cash distribution
(1/5)
Amos
$(49,000)
10,000
4,200
2,400
(32,400)
733
$(31,667)
(2/5)
Boone
$(18,000)
15,000
(8,000)
8,400
4,800
2,200
(2,200)
$0
(2/5)
Childs
$(10,000)
20,000
(25,000)
8,400
4,800
(1,800)
1,467
$(333)
The first $40,000 is paid to satisfy the claims of creditors.

Exercise 16-5
Account balances
Sale of inventory, collect accounts receivable - allocate loss
Payment to partners (Schedule 1)
Cash
$10,000
38,000
48,000
(18,000)
30,000
(30,000)
$
0
Noncash
Assets
$130,000
(43,000)
87,000
87,000
_______
$87,000
Schedule 1
Capital balances
Allocation of potential loss
Allocation of deficit
Safe Payment
Brink
Davis
Olsen
$(43,000)
$(25,000)
$(49,000)
34,800
34,800
17,400
(8,200)
9,800
(31,600)
6,533
(9,800)
3,267
$(1,667) $ - 0 $(28,333)
16 - 5
Liabilities
$(18,000)
_______
(18,000)
18,000
0
_______
$
0
Capital Balances
Brink
Davis
Olsen
40%
40%
20%
$(45,000) $(27,000) $(50,000)
2,000
2,000
1,000
(43,000) (25,000) (49,000)
_______ _______ _______
(43,000) (25,000) (49,000)
1,667
28,333
$(41,333) $(25,000) $(20,667)
Exercise 16-6
Part A
Balances
Sale of other assets and allocation of loss
Cash
$15,000
30,000
45,000
Noncash
Assets
$110,000
(110,000)
0
Liabilities
$(42,000)
0
(42,000)
Allocate Zack's debit balance

45,000
14,286
59,286
(42,000)
17,286
(17,286)
$0
Investment by Tom
Payment to Pete
(42,000)
(42,000)
42,000
0
Capital Balances
Pete
Tom
Zack
40%
30%
30%
$(55,000) $(14,000) $(14,000)
32,000
24,000
24,000
(23,000)
10,000
10,000
5,714
4,286
(10,000)
(17,286)
14,286
0
(14,286)
(17,286)
0
0
(17,286)
17,286
$0
$0
$0
Pete receives $17,286.
Tom makes an additional investment of $14,286.
Zack receives zero and cannot make an investment in the partnership because he is personally insolvent.
Part B
Personal
Assets
$55,000
30,000
30,000
Pete
Tom
Zack
Exercise 16-7
1. c
2. c
3. a
4. d
5. d
Personal
Liabilities
$80,000
10,000
50,000
Exercise 16-8
1. c; X =
2. b
3. d
4. c
5. d
($690,000 + X); X = $230,000
16 - 6
Excess
(Deficiency)
$(25,000)
20,000
(20,000)
0
$0
Distribution from
Partnership
$17,286
-----
0
$0
Total Payable
to Creditors
$72,286
10,000
30,000
Exercise 16-9
Part A The partnership creditors will receive payment before any distributions are made to the partners. The creditors can seek recovery
from Q and S's personal assets after their personal creditors have been paid from their personal assets.
Part B The personal creditors have first claim to the personal assets. If they have not fully recovered the amount owed, they have a right
to partnership assets after partnership creditors to the extent the partner has a credit interest in the partnership.
Part C
Cash
Balances
Investment by Q
Payment of Liabilities
Allocation of T's deficit
Investment by S
Payment to partners
Liabilities
$(2,000)
_______
(2,000)
2,000
0
______
0
0
2,000
2,000
(2,000)
0
______
0
7,000
(7,000) ______
$
0
$
0 $
Q
$(500)
(2,000)
(2,500)
______
(2,500)
2,000
(500)
500
0
Part D & E
R
T
Personal Assets
$8,000
6,000
Partnership Distribution
$6,500
---
16 - 7
Total
$14,500
6,000
Capital Balance
R
S
T
$(7,500)
$6,000
$4,000
______
______ ______
(7,500)
6,000
4,000
______
______ ______
(7,500)
6,000
4,000
1,000
1,000
(4,000)
(6,500)
7,000
0
(7,000)
6,500
______ ______
$
0
$
0
$
0
Exercise 16-10
Part A Net capital interest
Profit-loss ratio
Loss absorption potential
Order of cash distribution
Matt
Allen
Dave
$54,000
0.45
$120,000
1
$30,000
0.30
100,000
2
$18,000
0.25
$72,000
3
Loss Absorption Potential
Matt
Allen
Dave
0.45
0.30
0.25
$120,000 $100,000 $72,000
Profit-loss ratio
Net capital interest
Distribution to Matt to reduce loss potential to Allen's
Balance after distribution
Distribution to Matt and Allen to reduce loss potential to Dave's
20,000
100,000
28,000
$72,000
______
100,000
28,000
$72,000
Remainder of assets distributed

Cash Distribution Plan
Order of Cash Distribution
1. First
$18,000
2. Next
$9,000
3. Next
$21,000
4. Remainder
Liabilities
100%
Part B
First $9,000 available to partner
Next $21,000
Total
Matt
45
Allen
30
Dave
25
100%
60%
45%
40%
30%
25%
Matt
$9,000
12,600
21,600
Allen
Dave
$8,400
$8,400
Matt, Loan
Matt, Capital
Allen, Capital
Cash
_______
$ -0-
10,000
11,600
8,400
30,000
16 - 8
______
72,000
______
$72,000
Assets Distribution
Matt
Allen
Dave
0.45
0.30
0.25
$54,000
9,000
45,000
12,600
$32,400
0.45
$30,000 $18,000
______ ______
30,000 18,000
8,400 ______
$21,600 $18,000
0.30
0.25
ANSWERS TO PROBLEMS
Problem 16-1
Part A - 1
DISCOUNT PARTNERSHIP
Schedule of Partnership Liquidation
January 14, 2008
Explanation
Balances before realization
Sales of noncash assets
Balances
Payment of liabilities
Balances
Allocation of Hardin's debit balance
Balances
Distribution of cash to partners
Balances
Cash
$25,000
60,000
85,000
Other Assets Liabilities

$120,000 $(40,000)
(120,000)
0
(40,000) __________
45,000
0
______
(40,000)
Capital Balances
Dawson
Feeney
Hardin
$(31,000) $(65,000) $(9,000)
18,000
(13,000)
18,000
9,000
40,000 ________ ________ ________

0
(13,000)
(41,000)
9,000
______ __________
45,000
0
______
0
3,857
(9,143)
(45,000) __________
$
0
$
0
______
$
0
9,143
$
0
16 - 9
24,000
(41,000)
5,143
(35,857)
(9,000)
0
35,857 ________
$
0
$
0
Problem 16-1 (continued)

January 14, 2008
Part A - 2
Explanation
Balances
Balances
Cash investment by Hardin
Balances
Balances
Cash Other Assets

$25,000
$120,000
60,000
85,000
(120,000)
0
(40,000)
45,000
9,000
54,000
(54,000)
$0
16 - 10
$0
Capital Balances
Liabilities
Dawson
Feeney
Hardin
$(40,000) $(31,000) $(65,000) $(9,000)
(40,000)
18,000
(13,000)
24,000
(41,000)
18,000
9,000
40,000
0
(13,000)
(41,000)
9,000
(13,000)
(41,000)
(9,000)
0
$0
13,000
$0
41,000
$0
$0

Part A 3
Explanation
Balances
Balances
Cash investment by Hardin
Balances
Allocation of Hardin's deficit
Balances
Balances
Part B
January 14, 2008
Capital Balances
Cash Other Assets Liabilities
Dawson
Feeney
Hardin
$25,000
$120,000 $(40,000) $(31,000) $(65,000) $(9,000)
50,000
75,000
(120,000)
0
(40,000)
21,000
(10,000)
28,000
(37,000)
21,000
12,000
(40,000)
35,000
40,000
0
(10,000)
(37,000)
12,000
8,000
43,000
(10,000)
(37,000)
2,286
(34,714)
(4,000)
0
34,714
$0
$0
43,000
(43,000)
$0
$0
$0
8,286
$0
60,000
18,000
24,000
18,000
Liabilities
Cash
40,000
120,000
40,000
9,000
Hardin, Capital
Dawson, Capital
Feeney, Capital
Cash
1,714
(8,286)
Cash
Dawson, Capital
Feeney, Capital
Hardin, Capital
Other Assets
Cash
(8,000)
4,000
9,000
13,000
41,000
54,000
16 - 11
Problem 16-2
Balances
Sale of asset and allocation of gain
Sale of assets and allocation of gain
Sale of assets and allocation of loss
Payment to partners
Sale of asset and allocation of loss
Payment to partners
Cash
$5,000
16,000
21,000
(20,000)
1,000
(1,000)
0
12,000
12,000
(12,000)
0
10,000
10,000
(10,000)
0
2,000
2,000
(2,000)
$0
Other
Assets
Liabilities
$60,000
$(20,000)
(12,000)
--48,000
(20,000)
--20,000
48,000
0
----48,000
0
(10,000)
--38,000
0
----38,000
0
(20,000)
--18,000
0
----18,000
0
(18,000)
--0
0
----$0
$0
Capital & Loan Balances

Nelson
Parker
Rice
0.40
0.30
$(20,000)
$(12,000) $(13,000)
(1,600)
(1,200) (1,200)
(21,600)
(13,200) (14,200)
------(21,600)
(13,200) (14,200)
1,000
--(20,600)
(13,200) (14,200)
(800)
(600)
(600)
(21,400)
(13,800) (14,800)
6,200
2,400
3,400
(15,200)
(11,400) (11,400)
4,000
3,000
3,000
(11,200)
(8,400) (8,400)
4,000
3,000
3,000
(7,200)
(5,400) (5,400)
6,400
4,800
4,800
(800)
(600)
(600)
800
600
600
$0
$0
$0
Schedules to Compute Safe Payments

Schedule 1
Capital Balance
Allocation of potential loss ($48,000)
Allocation of deficit balance
Safe payment
Nelson
$(21,600)
19,200
(2,400)
1,400
$(1,000)
Parker
$(13,200)
14,400
1,200
(1,200)
$0
Rice
$(14,200)
14,400
200
(200)
$0
Nelson
$(21,400)
15,200
$(6,200)
Parker
$(13,800)
11,400
$(2,400)
Rice
$(14,800)
11,400
$(3,400)
Schedule 2
Capital Balance
Safe payment
16 - 12
Problem 16-3
Beginning Balances
3/15 asset sale
3/16 A/R sale
3/16 pay creditors
3/18 cash distribution (Schedule 1)
3/19 adjustment to fair value
3/19 withdrawal by Murphey
3/21 sale allocate loss
3/25 assign lease
3/25 cash distribution (Schedule 2)
4/1 adjustment to fair value
4/1 withdrawal by Hamm
4/5 sale and allocate loss
4/6 investment by Hamm
4/6 final distribution
Cash
$10,000
80,000
90,000
26,000
116,000
(110,000)
6,000
(5,000)
1,000
--1,000
--1,000
30,000
31,000
12,000
43,000
(43,000)
0
--0
--0
4,000
4,000
2,000
6,000
(6,000)
$0
Other
Assets
Liabilities
$218,000
$(110,000)
(90,000)
--128,000
(110,000)
(30,000)
--98,000
(110,000)
--110,000
98,000
0
----98,000
0
3,000
--101,000
0
(13,000)
--88,000
0
(50,000)
--38,000
0
----38,000
0
----38,000
0
(2,000)
--36,000
0
(8,000)
--28,000
0
(28,000)
--0
0
----0
0
----$0
$0
16 - 13
Capital & Loan Balances

Hann
Murphey
Ryan
0.50
0.30
0.20
$(50,000)
$(42,000) $(26,000)
5,000
3,000
2,000
(45,000)
(39,000) (24,000)
2,000
1,200
800
(43,000)
(37,800) (23,200)
------(43,000)
(37,800) (23,200)
--4,200
800
(43,000)
(33,600) (22,400)
(1,500)
(900)
(600)
(44,500)
(34,500) (23,000)
--13,000
--(44,500)
(21,500) (23,000)
10,000
6,000
4,000
(34,500)
(15,500) (19,000)
(6,000)
(3,600) (2,400)
(40,500)
(19,100) (21,400)
21,500
7,700
13,800
(19,000)
(11,400) (7,600)
1,000
600
400
(18,000)
(10,800) (7,200)
8,000
----(10,000)
(10,800) (7,200)
12,000
7,200
4,800
2,000
(3,600) (2,400)
(2,000)
----0
(3,600) (2,400)
--3,600
2,400
$0
$0
$0

Schedules to Compute Safe Payments
Schedule 1
Capital balances
Allocation of deficit balance
Safe cash payment
Hann
0.50
$(43,000)
49,500
6,500
(6,500)
$0
Murphey
0.30
$(37,800)
29,700
(8,100)
3,900
$(4,200)
Ryan
0.20
$(23,200)
19,800
(3,400)
2,600
$(800)
Schedule 2
Capital balance
Safe cash distribution
Problem 16-4
Part A Balances before realization

Sale of assets
Hann
Murphey
$(40,500)
$(19,100)
19,000
11,400
$(21,500)
$(7,700)
Ryan
$(21,400)
7,600
$(13,800)
MARY, PAULA, AND RAY

Cash
$10,000
20,000
30,000
Other
Assets
Liabilities
$100,000
$(40,000)
(100,000)
0
(40,000)
0
(40,000)
Mary
0.40
$(50,000)
32,000
(18,000)
8,000
(10,000)
(40,000)
40,000
$0
(10,000)
10,000
$0
Allocate Ray's debit balance

Investment by Paula
Distribution of cash
30,000
20,000
50,000
(50,000)
$0
$0
Paula
0.30
$(10,000)
24,000
14,000
6,000
20,000
(20,000)
0
Mary will receive $10,000.

Paula must invest $20,000.
Ray is personally insolvent and cannot make an investment in the partnership to eliminate the deficit balance.
16 - 14
$0
Ray
0.30
$(10,000)
24,000
14,000
(14,000)
0
0
$0

Part B
Payments to Personal Creditors

Personal
$50,000
10,000
30,000
Mary
Paula
Ray
Partnership
Distribution
$10,000
0
0
Total
$60,000
10,000
30,000
Problem 16-5
Part A Capital and loan balances
Profit and loss ratio
Order of cash distribution
Profit and loss rates

Net capital interest
Reduce loss absorption potential of Baker
Reduce loss absorption potential of
-Baker
-Weak
Baker
$55,000
.40
$137,500
1
Strong
$45,000
.40
$112,500
3
Weak
$24,000
.20
$120,000
2
Loss Absorption Potential

Baker
Strong
Weak
.40
.40
.20
$137,500
$112,500
$120,000
17,500
120,000
112,500
120,000
Weak
.20
$45,000
$24,000
45,000
24,000
$45,000
0.40
1,500
$22,500
0.20
3,000
$112,500
7,500
$112,500
Remainder
$17,000
7,000
4,500
Cash Distribution
Strong
.40
$55,000
7,000
48,000
7,500
$112,500
First
Next
Next
Remainder
Baker
.40
Creditors
100%
$45,000
0.40
Cash Distribution
Baker
Strong
Weak
100%
67%
40%
33%
20%
16 - 15
40%

To Creditors
To Baker
To Baker and Weak
Remainder -Profit and Loss Ratio
Part B
July
Account balances
Collection of accounts receivable
Sale of inventory
Paid liquidation expenses
Cash distribution (Schedule 1)
Account balances (end of July)
August
Paid liquidation expenses
Gain on equipment
Withdrawal on equipment
Cash distribution (Schedule 2)
Account balances (end of August)
September
Sale of equipment
Paid liquidation expense
Balances
Cash distribution
Total
$17,000
7,000
4,500
77,500
$106,000
Creditors
$17,000
Cash Distribution
Baker
Strong
Weak
$7,000
3,000
$1,500
31,000
$41,000
$17,000
$31,000
$31,000
15,500
$17,000
Accounts
Plant and Accounts
Baker
Strong
Weak
Cash Receivable Inventory Equipment
Payable
0.40
0.40
0.20
$6,000
$22,000 $14,000
$99,000 $(17,000) $(55,000) $(45,000) $(24,000)
16,500
(22,000)
2,200
2,200
1,100
10,000
(14,000)
1,600
1,600
800
(1,000)
400
400
200
(23,500)
17,000
6,500
8,000
0
0
99,000
0 (44,300) (40,800) (21,900)
(1,500)
600
(2,400)
600
(2,400)
3,750
(42,350)
250
(42,350)
(12,800)
0
0
$0
8,000
400
(33,950)
33,950
$0
8,000
400
(33,950)
33,950
$0
4,000
200
(8,600)
8,600
$0
6,000
(10,000)
(4,000)
2,500
75,000
(1,000)
76,500
(76,500)
$0
95,000
(95,000)
0
0
$0
16 - 16
0
0
$0
0
0
$0
300
(1,200)
10,000

Schedule 1
Total
Creditors
$17,000
$17,000
6,500_______
$23,500
$17,000
First $17,000
Up to $7,000
0.4
Baker
0.4
Strong
0.2
Weak
$6,500
$6,500
Schedule 2
Capital balances
Potential loss of $95,000 plus
Cash retained 97,500 0.4 =
97,500 0.4 =
97,500 0.2 =
$(46,100)
39,000
______
_______
(7,100)
(3,600)
3,350
_______
$(3,750)
Capital balances, 1/1/2008

Add: Investments
Net income allocation*
Totals
Less: Withdrawals
Capital balances, 12/31/2008
$60,000
$60,000
$60,000
Malone
$
0
140,000
21,000
161,000
30,000
$131,000
($140,000/$400,000)
($160,000/$400,000)
($100,000/$400,000)
Part B Malone, Capital

Malone, Drawing
Patton
$
0
160,000
24,000
184,000
0
$184,000
Spencer
$
0
100,000
15,000
115,000
0
$115,000
$21,000
24,000
15,000
$60,000
30,000
30,000
Income Summary
Malone, Capital
Patton, Capital
Spencer, Capital
60,000
21,000
24,000
15,000
16 - 17
19,500
6,700
(6,700)
3,350 _______
$(250)
$0
MALONE, PATTON, AND SPENCER

Statement of Changes in Partners' Capital
For the Year Ended December 31, 2008
Part A
* Malone
Patton
Spencer
Total
$(12,800)
39,000
Allocate Weak's potential deficit

1/2
1/2
Problem 16-6
$(42,600)
Total
$
0
400,000
60,000
460,000
30,000
$430,000

Part C On next page
Part D Cash
Malone, Capital
Patton, Capital
Spencer, Capital
Accounts Receivable
Inventory
Furniture and Fixtures
243,000
36,400
41,600
26,000
Accounts Payable
Cash
74,000
Patton, Capital
Mortgage Payable
Land
Building
120,000
145,000
129,000
188,000
30,000
74,000
85,000
180,000
Malone, Capital
Patton, Capital
Spencer, Capital
Cash
94,600
22,400
89,000
206,000
16 - 18

Part C
MALONE, PATTON, AND SPENCER

January 2, 2009
Explanation
Capital Balances
Malone
Patton
Spencer
Other Assets Liabilities
35%_
40%_
25%_
$612,000 $(219,000) $(131,000) $(184,000) $(115,000)
Cash
$37,000

Balances
243,000
280,000
(347,000)
265,000
________
(219,000)
36,400
(94,600)
41,600
(142,400)
26,000
(89,000)
Payment of accounts payable

Balances
(74,000)
206,000
__________
265,000
74,000
(145,000)
________
(94,600)
________
(142,400)
________
(89,000)
Distribution of land, bldg., and assumption of mortgage

Balances
________
206,000
(265,000)
0
145,000
0
________
(94,600)
120,000
(22,400)
________
(89,000)
Distribution to partners
Balances
(206,000)
$0
__________
$0
________
$0
94,600
$0
22,400
$0
89,000
$0
Accounts Receivable
Inventory
Furniture/Fixtures
Total
Sales Price
$ 92,000
141,000
10,000
$243,000
Book Value
$129,000
188,000
30,000
$347,000
16 - 19
Problem 16-7
Part A Valuation Adjustment
Accumulated Depreciation
Office Equipment
Allowance for Uncollectibles
Jan, Loan
2,700
12,600
14,200
900
200
Jan, Loan
Jan, Capital
6,600
Jan, Capital
Sue, Capital
Valuation Adjustment
1,350
1,350
6,600
2,700
Part B Jan, Capital ($29,400 + $6,600 - $1,350)

Sue, Capital ($28,000 $1,350)
Capital Stock (400 $100)
Additional Paid-in Capital
Proof
Cash
Accounts receivable
Allowance for uncollectibles
Prepaid insurance
Office equipment
Total stockholders' equity
34,650
26,650
40,000
21,300
$15,000
32,400
(2,900)
800
16,000
$61,300
16 - 20
Problem 16-8
Part A 1. Starnes, Capital
Cash
Partners 1-9, Capital ($50,000 90/95)
Partner 10, Capital ($50,000 5/95)
Cash
125,000
75,000
47,368
2,632
150,000
Norwood, Capital ($2,500,000 5%)

125,000
23,684
1,316
2. Because Alan is now a partner in the partnership, it is more difficult to determine the
exact amount of his compensation because he will be taxed on his "share of partnership
earnings" reported to him on his Schedule K-1 from BSM. While this share of earnings
will most likely bear a relationship to the draws taken by Alan, it will undoubtedly be
more or less than $216,000 ($18,000
12). Alan must also consider the following
additional expenses which correspond to his increased compensation and status as a
partner:
(a)
Increased individual income tax to correspond to his increased earnings.
(b)
Self-employment tax. As an employee this was withheld from wages at a rate of

7.65% (2002 rate; with a ceilings of $84.900 for 6.2% of the tax). Now that Alan is
a partner, he must pay these taxes himself at a rate of 15.3% with the same ceiling,
and with an offsetting deduction for 50% of the self-employment tax. This
additional tax must be remitted with Alan's individual income tax return.
(c)
Alan has invested $150,000 in the partnership. If he borrowed the funds to join, he
must make interest and principal payments on the debt. The amount of required
annual payments depends of course on the interest rate and term of the loan. If he
used his own funds (say from a mutual fund earning 10%) for the investment, he has
traded the earning power of the funds for earnings from the partnership. He has
given up $15,000 in income from the former investment.
3. Alan should be concerned about the true value of a 5% interest in the partnership since
Mr. Starns was paid $75,000 for his 5% interest while within the same time frame, Alan is
expected to pay $150,000 for an equivalent interest. There may be mitigating
circumstances (e.g. Mr. Starns contributes little to the firm, Alan lacks sufficient ability to
bring in new clients), but Alan has a clear signal of a discrepancy which should prompt
him to ask questions before investing in the partnership.
16 - 21

Part B 1. This matter is sometimes addressed in employment contracts. Some professional firms
require employees to agree not to actively recruit clients upon their departure from the
firm. Barring such a specific agreement or firm precedent (and profession-related
guidelines), Alan and Mary must determine the basis on which they can rely to call a
BSM client "their client". This may involve such issues as whether Alan or Mary were
involved in bringing the client to BSM originally, or it may involve the extent to which
the BSM clients were served by the firm as opposed to exclusively by Alan or Mary.
Further, if the client's interests are better served by BSM as a larger firm or by Alan and
Mary in a smaller firm, that should enter the decision made by the departing employees.
2. It may be difficult to block actions by Alan and Mary if a written agreement is not in
existence. Clearly, the BSM partners can enlighten clients to any benefits of remaining a
BSM client.
Part C 1. Current Net income

Partners 1-9, Capital ($25,000 90%)
Partners 10-11, Capital ($25,000 10%)
Cash
25,000
22,500
2,500
8,000,000
Accounts Receivable
8,000,000
Liabilities - Outside
Starns, Loan
Cash
7,490,000
10,000
7,500,000

Starns, Capital ($125,000 - $130,000 + $1,250 = $3,750)
3,553
197
3,750
Partners 1-9, Capital ($2,395,000 90/95)

2,268,947
Partner 10, Capital ($2,395,000 5/95)
126,053
Cash
2,395,000
($2,025,000 - $130,000 + $8,000,000 - $7,500,000 = $2,395,000)
2. Yes. The debit balance in the Starns capital account is considered a partnership asset.
Judicial precedent exists to allow offset of the liability by the debit capital account
balance. The net payment to the partner with the debit capital account leaves both the
partnership and partner's obligations fully paid without "endangering" the capital of other
partners.
16 - 22

Jeter AA 4e SolutionsManual Ch16

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Jeter AA 4e SolutionsManual Ch16

Uploaded by

Copyright:

Available Formats

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.

Parks, Capital ($10,000 - $17,500 + $10,000)

The first $40,000 is paid to satisfy the claims of creditors.

Allocate Zack's debit balance

($690,000 + X); X = $230,000

Remainder of assets distributed

Other Assets Liabilities

40,000 ________ ________ ________

Problem 16-1 (continued)

Cash Other Assets

Problem 16-1 (continued)

Capital & Loan Balances

Schedules to Compute Safe Payments

Capital & Loan Balances

Problem 16-3 (continued)

Part A Balances before realization

MARY, PAULA, AND RAY

Allocate Ray's debit balance

Mary will receive $10,000.

Problem 16-4 (continued)

Payments to Personal Creditors

Profit and loss rates

Loss Absorption Potential

Problem 16-5 (continued)

Problem 16-5 (continued)

Capital balances, 1/1/2008

Part B Malone, Capital

MALONE, PATTON, AND SPENCER

Allocate Weak's potential deficit

Problem 16-6 (continued)

Problem 16-6 (continued)

MALONE, PATTON, AND SPENCER

Balances before realization

Sales of noncash assets

Payment of accounts payable

Distribution of land, bldg., and assumption of mortgage

Part B Jan, Capital ($29,400 + $6,600 - $1,350)

Norwood, Capital ($2,500,000 5%)

Increased individual income tax to correspond to his increased earnings.

Self-employment tax. As an employee this was withheld from wages at a rate of

Problem 16-8 (continued)

Part C 1. Current Net income

Partners 1-9, Capital ($3,750 90/95)

Partners 1-9, Capital ($2,395,000 90/95)

You might also like

40,000