14-27.

Following is the current balance sheet for a local partnership of doctors:

Cash and current

assets . . . . . . . . . . . . . . . . . . . . $ 30,000
Land 180,000
Building and Equipment (net) 100,000
Totals . . . . . . . . . . . . . . . $ 310,000

Liabilities . . . . . . . . . . . . . . . $ 40,000
A, capital . . . . . . . . . . . . . . 20,000
B, capital . . . . . . . . . . . . . . . 40,000
C, capital . . . . . . . . . . . . . . 90,000
D, capital . . . . . . . . . . . . . . 120,000
Totals . . . . . . . . . . . . . . . . .$ 310,000

The following questions represent independent situations:

a. E is going to invest enough money in this partnership to receive a 25 percent interest. No goodwil

b. E contributes $36,000 in cash to the business to receive a 10 percent interest in the partnership.
Goodwill is to be recorded. Profits and losses have previously been split according to the following p
percent. After E makes this investment, what are the individual capital balances?

c. E contributes $42,000 in cash to the business to receive a 20 percent interest in the partnership.
Goodwill is to be recorded. The four original partners share all profits and losses equally. After E mak

d. E contributes $55,000 in cash to the business to receive a 20 percent interest in the partnership.
No goodwill or other asset revaluation is to be recorded. Profits and losses have previously been spli
C, 20 percent; and D, 40 percent. After E makes this investment, what are the individual capital bala

e. C retires from the partnership and, as per the original partnership agreement, is to receive cash e
asset revaluation is to be recognized. All partners share profits and losses equally. After the withdraw
partners?
 ors:

cent interest. No goodwill or bonus is to be recorded. How much should E invest?

erest in the partnership.

ording to the following percentages: A, 30 percent; B, 10 percent; C, 40 percent; and D, 20
nces?

erest in the partnership.

sses equally. After E makes this investment, what are the individual capital balances?

erest in the partnership.

have previously been split according to the following percentages: A, 10 percent; B, 30 percent;
he individual capital balances?

ment, is to receive cash equal to 125 percent of her final capital balance. No goodwill or other
qually. After the withdrawal, what are the individual capital balances of the remaining
 20

percent;

other
Answer

14-27. a. Exact amount of investment can only be computed algebraically:

E Investment = 25% (Original Capital + E Investment)

El = .25 ($270,000 + El)
El = $67,500 + .25 El
.75 El = $67,500
E Investment = $90,000

b. Implied value of partnership ($36,000 10%) $360,000

Total capital after investment by E ($270,000 + $36,000) 306,000
Goodwill $ 54,000
Allocation of Goodwill:
A (30%) $16,200
B (10%) 5,400
C (40%) 21,600
D (20%) 10,800
Total $54,000

CAPITAL BALANCES
A B C D E
Original balances $20,000 $40,000 $ 90,000 $120,000 $0
Goodwill (above) 16,200 5,400 21,600 10,800 0
Investment 0 0 0 0 36,000
Capital balances $ 36,200 $45,400 $111,600 $130,800 $36,000

c. Because E's investment of $42,000 is less than 20% of the resulting capital ($312,000). E is appar
that must be computed:

E Investment = 20% (Original Capital + E Investment)

$42,000 + Goodwill = .20 ($270,000 + $42,000 + Goodwill)
$42,000 + Goodwill = $62,400 + .20 Goodwill
.80 Goodwill = $20,400
Goodwill = $25,500

E's investment is, therefore, $42,000 in cash and $25,500 in goodwill for a total capital balance of $
capital of $67,500 is 20% of the new total capital $337,500 ($270,000 + $67,500).

d. Total capital after investment ($270,000 + $55,000) $325,000

Amount acquired by E 20%
E's capital balance $ 65,000
E's payment 55,000
Bonus being given to E $ 10,000

Bonus from:
A (10%) $1,000
B (30%) 3,000
C (20%) 2,000
D (40%) 4,000 $10,000

CAPITAL BALANCES
A B C D E
Original balances $20,000 $40,000 $90,000 $120,000 $0
Investment 0 0 0 0 55,000
Bonus (above) (1,000) (3,000)(2,000) (4,000) 10,000
Capital balances $19,000 $37,000 $88,000 $116,000 $65,000
 B (30%) 3,000
C (20%) 2,000
D (40%) 4,000 $10,000

CAPITAL BALANCES
A B C D E
Original balances $20,000 $40,000 $90,000 $120,000 $0
Investment 0 0 0 0 55,000
Bonus (above) (1,000) (3,000)(2,000) (4,000) 10,000
Capital balances $19,000 $37,000 $88,000 $116,000 $65,000

e. C's capital balance $ 90,000

C's collection (125%) 112,500
Bonus being paid to C $ 22,500

Bonus from:
A (1/3) $7,500
B (1/3) 7,500
D (1/3) 7,500 $22,500

CAPITAL BALANCES
A B C D
Original balances $20,000 $40,000 $ 90,000 $120,000
Bonus (above) (7,500) (7,500)22,500 (7,500)
Payment 0 0 (112,500) 0
Capital balances $12,500 $32,500 $ 0 $112,500
:

estment = $90,000

36,000
000

al ($312,000). E is apparently bringing some other attribute to the partnership (goodwill)

otal capital balance of $67,500; the other capital accounts remain unchanged. Note that E's
7,500).

10,000
 10,000

0)
15-25. The following information concerns two different partnerships. These problems should be vie

Part A
The partnership of Ross, Milburn, and Thomas has the following account balances:

Cash . . . . . . . . . . . . . . . . . . $ 36,000 Liabilities . . . . . . . . . . . . . . . $ 17,000

Noncash assets . . . . . . . . . . 100,000 Ross, capital . . . . . . . . . . . . . 69,000
Milburn, capital . . . . . . . . . . (8,000) (deficit)
Thomas, capital . . . . . . . . . . 58,000

This partnership is being liquidated. Ross and Milburn are each entitled to 40 percent of all profits an
a. What is the maximum amount that Milburn might have to contribute to this partnership because o
b. How should the $19,000 cash that is presently available in excess of liabilities be distributed?
c. If the noncash assets are sold for a total of $41,000, what is the minimum amount of cash that Th

Part B
The partnership of Sampson, Klingon, Carton, and Romulan is being liquidated. It currently holds cas
$24,000. The capital balances are as follows:

Sampson . . . . . . . . . . . . . . . $ 9,000
Klingon . . . . . . . . . . . . . . . . (17,000)
Carton . . . . . . . . . . . . . . . . . 5,000
Romulan . . . . . . . . . . . . . . . (12,000)

Profits and losses are allocated on the following basis: Sampson, 40 percent, Klingon, 20 percent, Ca

a. If both Klingon and Romulan are personally insolvent, how much money must Carton contribute to

b. If only Romulan is personally insolvent, how much money must Klingon contribute? How will these
c. If only Klingon is personally insolvent, how much money should Sampson receive from the liquida
e problems should be viewed as independent situations.

ances:

00
00
) (deficit)
00

0 percent of all profits and losses with the remaining 20 percent to Thomas.
his partnership because of the deficit capital balance?
lities be distributed?
m amount of cash that Thomas could receive?

ed. It currently holds cash of $9,000 but no other assets. Liabilities amount to

, Klingon, 20 percent, Carton, 30 percent, and Romulan, 10 percent.

must Carton contribute to this partnership?

ontribute? How will these funds be disbursed?

receive from the liquidation?
Answer

25. Part A. Partner with Deficit Capital Balance

(a) $48,000. Maximum losses of $100,000 on the noncash assets would increase Milburn's deficit ba

(b) All $19,000 should go to Thomas. As Ross and Thomas view the current situation, maximum pote
assets and $8,000 on Milburn's deficit balance. In determining safe capital balances, these assumed
Ross and $36,000 to Thomas. Since such a loss would entirely eliminate Ross' capital account, only T

(c) The minimum cash payment to Thomas would be $35,667.

A loss of $59,000 on the noncash assets would result in the following capital balances:

Ross: $ 45,400 = $69,000 (40% x $59,000)

Milburn: $(31,600) = $(8,000) (40% x $59,000)
Thomas: $ 46,200 = $58,000 (20% x $59,000)

Milburns deficit further reduces the remaining partner's balances as follows:

Ross: $24,333 = $45,400 (4/6 x $31,600)

Thomas: $35,667 = $46,200 (2/6 x $31,600)

Part B. Partners with Deficit Capital Balances; Insolvent Partner

(a) Carton will have to contribute $7,429. The $29,000 in deficits will have to be absorbed by Samps
allocated $12,429 of this amount which creates a deficit for this partner of $7,429 ($5,000 - $12,429

(b) Klingon will have to contribute $19,667 [$17,000 + (20/90 x $12,000)] that will be distributed as

Creditors $15,000
Sampson $ 3,667
Carton $ 1,000

Since Romulan is insolvent, the remaining partners will have to absorb the $12,000 deficit on a 4:2:3
of $12,000 or $2,667. Klingon must contribute an amount equal to the new deficit balance of $19,66
after the $9,000 in partnership cash is distributed. The remaining $4,667 is distributed to the two pa
balances after absorbing Romulan's loss, 4/9 to Sampson and 3/9 to Carton. Sampson has a positive
($12,000 x 4/9)] and Carton has a positive capital balance of $1,000 [$5,000 ($12,000 x 3/9)].

(c) Sampson should receive $500. If Klingon is insolvent, the $17,000 deficit balance will have to be
basis. This loss would decrease Sampson's capital balance by $8,500 (4/8 x $17,000) to $500.
rease Milburn's deficit balance by $40,000 (40%).

situation, maximum potential losses total $108,000: $100,000 on the noncash

balances, these assumed losses would be allocated on a 4:2 basis or $72,000 to
ss' capital account, only Thomas has a safe capital balance at the current time.

l balances:

follows:

o be absorbed by Sampson and Carton on a 4:3 basis. Thus, Carton will be

$7,429 ($5,000 - $12,429).

hat will be distributed as follows:

$12,000 deficit on a 4:2:3 basis. This allocation increases Klingon's deficit by 2/9
deficit balance of $19,667. The first $15,000 will go to the creditors that remain
distributed to the two partners in accordance with their remaining positive capital
Sampson has a positive capital balance of $3,667 [$9,000
00 ($12,000 x 3/9)].

t balance will have to be absorbed by the remaining three partners on a 4:3:1

$17,000) to $500.