Chapter 16 Test Bank

DISSOLUTION AND LIQUIDATION OF A PARTNERSHIP

Multiple Choice Questions

LO1
1. Which statement is correct in describing the rank order of
payments as specified by the Uniform Partnership Act?

a. Payments to partners with loans to the partnership are

ranked equally with payments to other creditors.
b. Payments to partners with loans to the partnership are
ranked ahead of payments to partners without loans to the
partnership.
c. Payments to other creditors are ranked ahead of payments to
partners with loans to the partnership.
d. After payments are made to other creditors and partners
with loans to the partnership, payment can be made to
partners with capital interests.
LO1
2. Which of the following procedures is acceptable when accounting
for a deficit balance in a partners capital account during
partnership liquidation?

a. A partner with a negative capital balance must contribute

personal assets to the partnership that are sufficient to
bring the capital account to zero.
b. If a partner with a negative capital balance is personally
insolvent, the negative capital balance may be absorbed by
those partners having a positive capital balance according
to the residual profit and loss sharing ratios that apply
to all the partners.
c. If a partner with a negative capital balance is personally
insolvent, the negative capital balance may be absorbed by
those partners having a positive capital balance according
to the residual profit and loss sharing ratios that apply
to those partners having positive balances.
d. All the above procedures are acceptable.

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LO1
3. A partnership dissolution differs from a liquidation in that

a. *payments are made to creditors before partners receive

value.
b. *periodic payments to partners are made when cash becomes
available.
c. **a partner withdraws from the business and the enterprise
continues to function.
d. *with full payment is made to all outside creditors before
remaining cash is distributed to partners in a final lump
sum payment.
LO1
4. A partnership in liquidation has converted all assets into cash
and paid all liabilities. According to the Uniform Partnership
Act, the order of payment

a. *will have amounts due to partners with respect to their

capital accounts take precedence over amounts owed by
partners other than for capital and profits
b. * be according to the partners residual profit and loss
sharing ratios
c. **will have amounts owed by partners other than for capital
and profits take precedence over amounts due to partners
with respect to their capital accounts
d. * be by any manner that is both reasonable and rational for
the partnership
LO1
5. In partnership liquidation, how are partner salary allocations
treated?

a. Salary allocations take precedence over creditor payments.

b. Salary allocations take precedence over amounts due to
partners with respect to their capital interests but not
profits.
c. Salary allocations take precedence over amounts due to
partners with respect to their capital profits but not
capital interests.
d. *Salary allocations are disregarded.
LO1
6. A simple partnership liquidation requires:

a. *periodic payments to creditors and partners determined by

a safe payments schedule.
b. **requires partnership assets to be converted into cash
with full payment made to all outside creditors before
remaining cash is distributed to partners in a lump sum
payment.
c. *creditors to be paid in an orderly manner along.
d. *periodic payments to partners as cash becomes available.

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LO2
7. In a simple partnership liquidation, the last remaining cash
distribution should be made according to the ratio of:

a. individual partners profit and loss agreement

b. individual partner's capital accounts, increased by partner
loans to the partnership.
c. individual partners capital accounts, increased by
partnership loans to the partners and decreased by partner
loans to the partnership.
d. individual partners capital accounts, decreased by
partnership loans to the partners and increased by partner
loans to the partnership.
LO2
8. If conditions produce a debit balance in a partners capital
account when liquidation losses are allocated?

a. The partner receives further allocations of liquidation

losses, but not gains.
b. The partner receives no further allocation of liquidation
losses and gains.
c. The partner is no longer obligated to partnership
creditors.
d. The partner has an obligation of personal net assets to the
other partners.

Use the following information for questions 9, 10 and 11.

On June 30, 2006, the Warle, Xin, and Yates partnership had the
following fiscal year-end balance sheet:

Cash $ 4,000 Accounts payable $ 7,000

Accounts receivable 6,000 Loan from Xin 5,000
Inventory 14,000 Warle, capital(20%) 14,000
Plant assets-net 12,000 Xin, capital(30%) 10,000
Loan to Warle 6,000 Yates, capital(50%) 6,000
Total assets $ 42,000 Total liab./equity $ 42,000

The percentages shown are the residual profit and loss sharing
ratios. The partners dissolved the partnership on July 1, 2006,. and
began the liquidation process. During July the following events
occurred:

* Receivables of $3,000 were collected.

* The inventory was sold for $4,000.
* All available cash was distributed on
July 31, except for $2,000 that was
set aside for contingent expenses.

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LO2
9. The book value of the partnership equity (i.e., total equity of
the partners) on June 30, 2006 is:

a. $60,000.
b. $29,000.
c. $30,000.
d. $42,000.
LO2
10. The cash available for distribution to the partners on July 31,
2006 is:

a. $ 2,000.
b. $ 4,000.
c. $ 7,000.
d. $11,000.
LO2
11. How much cash would Xin receive from the cash that is available
for distribution on July 31?

a. $ 0
b. $ 600
c. $1,000
d. $2,000
LO2
12. Hara, Ives, and Jack are in the process of liquidating their
partnership. Since it may take several months to convert the
other assets into cash, the partners agree to distribute all
available cash immediately, except for $10,000 that is set
aside for contingent expenses. The balance sheet and residual
profit and loss sharing percentages are as follows:

Cash $ 400,000 Accounts payable $ 200,000

Other assets 200,000 Hara, capital (40%) 135,000
Ives, capital (30%) 216,000
Jack, capital (30%) 49,000

Total assets $ 600,000 Total liab./equity $ 600,000

How much cash should Ives receive in the first distribution?

a. $146,000
b. $147,000
c. $153,000
d. $156,000

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LO2
13. Jade, Kahl, and Lane are in the process of liquidating their
partnership. Lane has agreed to accept the inventory, which has
a fair value of $60,000, as part of her settlement. A balance
sheet and the residual profit and loss sharing percentages are
as follows:

Cash $ 198,000 Accounts payable $ 149,000

Inventory 80,000 Jade, capital (40%) 79,000
Plant assets 230,000 Kahl, capital (40%) 140,000
Lane, capital (20%) 140,000

Total assets $ 508,000 Total liab./equity $ 508,000

If the partners then distribute the available cash, Lane will

receive:

a. $ 0.
b. $23,000.
c. $30,000.
d. $34,000.
LO2
14. Under the rule of offset, what is the proper disposition of a
partnership loan that was made from a partner who has a debit
balance?

a. The loan is first paid to the debtor partner before cash

payments are made to partners.
b. The loan is written off as a partnership loss if the
partner does not have the cash to cover the debit balance.
c. The loan is charged off to the capital accounts of all the
partners in their profit and loss sharing ratios.
d. The loan is charged off to the capital account of the
debtor partner.
LO3
15. In partnership liquidations, what are safe payments?

a. the amounts of distributions that can be made to the

partners, after all creditors have been paid in full
b. the amounts of distributions that can be made to the
partners with assurance that such amounts will not have to
be returned to the partnership
c. the amounts of distributions that can be made to the
partners, after all non-cash assets have been adjusted to
fair market value
d. all the above are examples of the safe payments concept

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LO4
16. If all partners are included in the first installment of an
installment liquidation, then in future installments

a. *cash will be distributed according to the residual profit

and loss sharing ratio.
b. cash should not be distributed until all non-cash assets
are converted into cash.
c. a safe payments schedule must be prepared before each cash
distribution to avoid excessive payments to partners.
d. a cash distribution plan must be prepared so that partners
will know when they will be included in cash distributions.

LO5*&
17. The year-end balance sheet and residual profit and loss sharing
5. percentages for the Lang, Maas, and Neal partnership at
December 31, 2005, are as follows:

Cash $ 30,000 Accounts payable $ 200,000

Loan to Lang 40,000 Loan from Maas 50,000
Other assets 480,000 Lang, capital (25%) 70,000
Maas, capital (25%) 80,000
Neal, capital (50%) 150,000
Total assets $ 550,000 Total liab./equity $ 550,000

The partners agree to liquidate the business and distribute

cash when it becomes available. A cash distribution plan for
the Lang, Maas, and Neal partnership will show that cash
available, after outside creditors are paid, will initially go
to:

a. Lang in the amount of $20,000.

b. Maas in the amount of $45,000.
c. Maas in the amount of $55,000.
d. Neal in the amount of $90,000.
LO5
18. In a schedule of assumed loss absorptions,

a. the partner with lowest loss absorption is eliminated last

b. it is necessary to have a cash distribution plan first
c. the least vulnerable partner is eliminated first
d. the most vulnerable partner is eliminated first

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LO5
19. Which partner is considered the most vulnerable as a result of
a computation of vulnerability rankings?

a. The partner with the lowest vulnerability ranking who also

has the lowest loss absorption potential.
b. The partner with the lowest vulnerability ranking who also
has the highest loss absorption potential.
c. The partner with the highest vulnerability ratio who also
has the lowest loss absorption potential.
d. The partner with the highest vulnerability ranking who also
has the highest loss absorption potential.
LO6
20. The rank order is for claims against a bankrupt partner of
I.Those owing to partners by way of contribution
II.Those owing to separate creditors
III.Those owing to partnership creditors

a. II first; I second and III third

b. III first; II second and I third
c. I first; III second and II third
d. II first; III second and I third

120
LO2
Exercise 1

The balance sheet of the Alba, Blick, and Calvo partnership on

January 1, 2006 (the date of partnership dissolution) was as follows:

Cash $ 2,000 Liabilities $ 4,010

Other assets 13,000 Loan from Alba 500
Loan to Calvo 1,000 Alba, capital (20%) 990
Blick, capital(40%) 4,500
Calvo, capital(40%) 6,000
Total assets $ 16,000 Total liab./equity $ 16,000
In January, other assets with a book value of $8,000 were sold for
$5,000 in cash.

Required:

Determine how the available cash on January 31, 2006 will be

distributed.

LO2
Exercise 2

The partnership of Dale, Edgar, and Fred was dissolved, and by July
1, 2006, all assets had been converted into cash and all partnership
liabilities were paid. The partnership balance sheet on July 1, 2006
(with partner residual profit and loss sharing percentages) was as
follows:

Cash $ 10,000 Fred,capital(30%) $ 40,000

Dale, capital(40%) (20,000)
Edgar, capital(30%) (10,000)

Total assets $ 10,000 Total equity $ 10,000

The value of partners' personal assets and liabilities on July 1,

2006 were as follows:

Dale Edgar Fred

Personal assets $ 45,000 $ 30,000 $ 25,000
Personal liabilities 30,000 20,000 10,000

Required:

Prepare the final statement of partnership liquidation.

121
LO2
Exercise 3

The balance sheet of the Omar, Paolo, and Quek partnership on

November 1, 2006 (before commencement of partnership liquidation) was
as follows:

Cash $ 58,000 Accounts payable $ 34,000

Inventory 60,000 Notes payable 62,000
Loan to Omar 8,000 Omar, capital(40%) 24,000
Loan to Quek 14,000 Paolo, capital(25%) 26,000
Plant assets-net 70,000 Quek, capital (35%) 64,000

Total assets $ 210,000 Total liab./equity $ 210,000

Liquidation events in November were as follows:

- The inventory was sold for $10,000 above book value;
- Plant assets with a book value of $60,000 were sold for $34,000.

Required:

Determine how the available cash on November 31, 2006 should be

distributed.

LO2
Exercise 4

A cash distribution plan for the Folger, Glover, and Hale partnership
was as follows:

Priority
Creditors Folger Glover Hale
First $250,000 100%
Next $100,000 70% 30%
Next $150,000 11/15 4/15
Remainder 20% 35% 45%

Required:

If $850,000 of cash was distributed by the partnership, how much was

received respectively by the priority creditors, Folger, Glover, and
Hale?

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LO2
Exercise 5

The balance sheet of the Jody, Kane, and Lark partnership on May 1,
2006 (before commencement of partnership liquidation) was as follows:

Cash $ 54,000 Accounts payable $ 28,000

Inventory 60,000 Notes payable 60,000
Loan to Jody 10,000 Jody, capital (30%) 32,000
Loan to Lark 16,000 Kane, capital (45%) 90,000
Plant assets-net 110,000 Lark, capital (25%) 40,000

Total assets $ 250,000 Total liab./equity $ 250,000

Liquidation events in May were as follows:

- The inventory was sold for $6,000 below book value;
- Plant assets with a book value of $50,000 were sold for $60,000.

Required:

Determine how the available cash on April 30, 2006 should be distributed.

LO2
Exercise 6

The balance sheet of the Nebe, Oak, and Pang partnership on October
1, 2006 (the date of partnership dissolution) was as follows:

Cash $ 3,000 Liabilities $ 9,000

Other assets 33,000 Loan from Nebe 1,000
Loan to Oak 4,000 Nebe, capital (20%) 3,000
Oak, capital (30%) 6,000
Pang, capital (50%) 21,000
Total assets $ 40,000 Total liab./equity $ 40,000

In October, other assets with a book value of $15,000 were sold for
$17,000 in cash.

Required:

Determine how the available cash on October 31, 2006 will be

distributed.

123
LO2
Exercise 7

The partnership of Hanly, Ide, and Jen was dissolved. By August 1,

2006, all assets had been converted into cash and all partnership
liabilities were paid. The partnership balance sheet on August 1,
2006 (with partner residual profit and loss sharing percentages) was
as follows:

Cash $ 50,000 Hanly, capital(30%) $ 10,000

Ide, capital(20%) (60,000)
Jen, capital(50%) 100,000

Total assets $ 50,000 Total equity $ 50,000

The value of partners' personal assets and liabilities on August 1,

2006 were as follows:

Hanly Ide Jen

Personal assets $ 74,000 $ 120,000 $ 56,000
Personal liabilities 72,000 80,000 60,000

Required:

Prepare the final statement of partnership liquidation.

124
LO5
Exercise 8

Luis, Mac, Nel, and Oma are partners who share profits and losses
40%, 25%, 25%, and 10%, respectively. The partnership will be
liquidated gradually over several months beginning January 1, 2006.
The partnership trial balance at December 31, 2005 is as follows:

Debits Credits
Cash $ 3,000
Accounts receivable 19,000
Inventory 25,000
Loan to Nel 5,000
Furniture 15,000
Equipment 10,000
Goodwill 12,000
Accounts payable $ 14,000
Note payable 30,000
Loan from Luis 5,000
Luis, capital (40%) 15,000
Mac, capital (25%) 9,000
Nel, capital (25%) 12,000
Oma, capital (10%) 4,000
Totals $ 89,000 $ 89,000

Required:

Prepare a cash distribution plan for January 1, 2006, showing how

cash installments will be distributed among the partners as it
becomes available.

125
LO5
Exercise 9

Quan, Ray, Sen, and Tad are partners who share profits and losses 30%, 20%,
35%, and 15%, respectively. The partnership will be liquidated gradually
over several months beginning January 1, 2006. The partnership trial
balance at December 31, 2005 is as follows:

Debits Credits
Cash $ 3,000
Accounts receivable 10,000
Inventory 25,000
Loan to Ray 4,000
Furniture 15,000
Equipment 18,000
Goodwill 10,000
Accounts payable $ 12,000
Note payable 30,000
Loan from Sen 6,000
Quan, capital (30%) 12,000
Ray, capital (20%) 9,000
Sen, capital (35%) 12,000
Tad, capital (15%) 4,000
Totals $ 85,000 $ 85,000

Required:

Prepare a cash distribution plan for January 1, 2006, showing how

cash installments will be distributed among the partners as it
becomes available.

LO5
Exercise 10

A cash distribution plan for the Upton, Valenta, and Walker

partnership was as follows:

Priority
Creditors Upton Valenta Walker
First $100,000 100%
Next $180,000 44% 10% 46%
Next $270,000 2/9 1/9 2/3
Remainder 11% 44% 45%

Required:

If $700,000 of cash was distributed by the partnership, how much was

received respectively by the priority creditors, Upton, Valenta, and
Walker?
126
127
SOLUTIONS

Multiple Choice Questions

1. c

2. c

3. a

4. c

5. d

6. b

7. a

8. d

9. b ($14,000 Warle capital + $10,000 Xin capital +

$6,000 Yates capital + $5,000 Loan from Xin -
$6,000 Loan to Warle)

10. a ($4,000 beginning balance + $3,000 cash collected +

$4,000 for inventory sold - $7,000 of accounts payable
- $2,000 for expenses)

11. d

Warle Xin Yates Total

Equities,Jun 30 $ 8,000 $ 15,000 $ 6,000 $ 29,000
Inventory loss ( 2,000 ) ( 3,000 ) ( 5,000 ) ( 10,000 )
Contingency fund ( 400 ) ( 600 ) ( 1,000 ) ( 2,000 )
Subtotals 5,600 11,400 0 17,000

Possible losses on
remaining assets ( 3,000 ) ( 4,500 ) ( 7,500 ) ( 15,000 )
Subtotals $ 2,600 $ 6,900 $( 7,500 ) $ 2,000

Eliminate Yatess
Deficit ( 3,000 ) ( 4,500 ) 7,500
Subtotals ( 400 ) 2,400 0 2,000

Eliminate Warles
Deficit 400 ( 400 )
Cash distribution $ 0 $ 2,000 $ 0 $ 2,000

128
12. b

Losses 40% 30% 30%

Hara Ives Jack
Equities $ 135,000 $ 216,000 $ 49,000
Possible loss on
remaining assets $ 200,000 ( 80,000 ) ( 60,000 ) ( 60,000 )
Contingencies 10,000 ( 4,000 ) ( 3,000 ) ( 3,000 )
Subtotals $ 51,000 $ 153,000 $( 14,000 )

Eliminate Jacks
debit balance ( 8,000 ) ( 6,000 ) 14,000

Safe payments $ 43,000 $ 147,000 $ 0

13. a

40% 40% 20%

Jade Kahl Lane
Equities $ 79,000 $ 140,000 $ 140,000
Distribute inventory to ( 60,000 )
Lane and:
recognize $20,000 loss ( 8,000 ) ( 8,000 ) ( 4,000 )
Possible losses on plant ( 92,000 ) ( 92,000 ) ( 46,000 )
Subtotal $( 21,000 ) $ 40,000 $ 30,000
Eliminate Jades debit
balance to Kahl & Lane 21,000 ( 14,000 ) ( 7,000 )
Balance $ 0 $ 26,000 $ 23,000

14. b

15. b

16. a

129
17. c

Vulnerability ranks:
Lang equity ($70,000 - $40,000)/.25 = $120,000 = 1
Maas equity ($80,000 + $50,0000/.25 = $520,000 = 3
Neal equity ($150,000/.5) = $300,000 = 2

Assumed loss absorption:

25% 25% 50%
Lang Maas Neal Total
Equities $ 30,000 $ 130,000 $ 150,000 $ 310,000
Loss to eliminate
Lang ( 30,000 ) ( 30,000 ) ( 60,000 ) ( 120,000 )
Subtotals 0 $ 100,000 $ 90,000 $ 190,000

Loss to eliminate
Neal ( 45,000 ) ( 90,000 ) ( 135,000 )
Subtotals $ 55,000 $ 0 $ 55,000

18. d

19. a

20. d

130
Exercise 1

Alba, Blick, and Calvo Partnership

Partnership Liquidation Schedule

Non- First 20% 40% 40%

Cash Cash Rank Alba Blick Calvo
Assets Debt Equity Equity Equity
Jan 1 Balance $ 2,000 $ 13,000 $ 4,010 $ 1,490 $ 4,500 $ 5,000
Sale of assets 5,000 ( 8,000) ( 600) ( 1,200) ( 1,200)
Subtotal $ 7,000 $ 5,000 $ 4,010 $ 890 $ 3,300 $ 3,800

Safe Payments Schedule

Alba Blick Calvo

Equity Equity Equity
Partners pre-distribution balances $ 890 $ 3,300 $ 3,800
Possible losses on non-cash assets ( 1,000)( 2,000)( 2,000)
( 110) 1,300 1,800
Write off Sam 50-50 110 ( 55)( 55)
Cash distribution to partners $ 0 $ 1,245 $ 1,745

Cash distribution plan on January 31:

First $4,010 goes to priority creditors, and then Blick receives

$1,245 and Calvo receives $1,745.

131
Exercise 2

Dale, Edgar, and Fred Partnership

Final Statement of Partnership Liquidation

Dale Edgar Fred

Cash Capital Capital Capital Total
Balance, July 1 $ 10,000 $( 20,000) $( 10,000) $ 40,000 $ 10,000
Dales personal
contribution 15,000 15,000 15,000
25,000 ( 5,000) ( 10,000) 40,000 25,000
Write-off Dale 5,000 ( 2,500) ( 2,500)
25,000 $ 0 ( 12,500) 37,500 25,000
Edgars personal
contribution 10,000 10,000 10,000
35,000 ( 2,500) 37,500 35,000
Write-off Edgar 2,500 ( 2,500)
35,000 $ 0 35,000 35,000
Distribute cash ( 35,000) ( 35,000) ( 35,000)
$ 0 $ 0 $ 0

Exercise 3

Omar, Paolo, and Quek

Schedule of Partnership Liquidation
November 30, 2006

40% 25% 35%

Assets Debts Omar Paolo Quek
Balance, Nov. 1 $ 210,000 $ 96,000 $ 24,000 $ 26,000 $ 64,000
Inventory sold 10,000 4,000 2,500 3,500
Sale of plant ( 26,000) ( 10,400) ( 6,500) ( 9,100)
Balances before
distribution 194,000 96,000 17,600 22,000 58,400
Offset loans ( 22,000) ( 8,000) ( 14,000)
Pay creditors ( 96,000) ( 96,000)
Partner equity $ 76,000 $ 9,600 $ 22,000 $ 44,400
Possible loss:
Plant assets ( 10,000) ( 4,000 ) ( 2,500 ) ( 3,500)
Distribution $ 66,000 $ 5,600 $ 19,500 $ 40,900

(Cash Distribution: $58,000 + $70,000 + $34,000 - $96,000 = $66,000)

Nov. 1 Inventory Plant Creditors Nov. 30

132
Exercise 4

Priority
Creditors Folger Glover Hale
First $250,000 $ 250,000
Next $100,000 $ 70,000 $ 30,000
Next $150,000 110,000 $ 40,000
Last $350,000 70,000 122,500 157,500
Total $850,000 $ 250,000 $ 250,000 $ 152,500 $ 197,500

Exercise 5

Jody, Kane, and Lark

Schedule of Partnership Liquidation
May 30, 2006

30% 45% 25%

Assets Debts Jody Kane Lark
Balance, May 1 $ 250,000 $ 88,000 $ 32,000 $ 90,000 $ 40,000
Plant sold 10,000 3,000 4,500 2,500
Inventory sold ( 6,000) ( 1,800) ( 2,700) ( 1,500)
Balances before
distribution 254,000 88,000 33,200 91,800 41,000
Offset loans ( 26,000) ( 10,000) ( 16,000)
Pay creditors ( 88,000)( 88,000)
Partner equity $ 140,000 $ 23,200 $ 91,800 $ 25,000
Possible loss:
Plant assets ( 60,000) ( 18,000) ( 27,000) ( 15,000)
Distribution $ 80,000 $ 5,200 $ 64,800 $ 10,000

(Cash Distribution: $54,000 + $54,000 + $60,000 - $88,000 = $80,000)

May 1 Inventory Plant Creditors May 30

133
Exercise 6

Nebe, Oak, and Pang Partnership

Partnership Liquidation Schedule

Non- First 30% 20% 50%

Cash Cash Rank Oak Nebe Pang
Assets Debt Equity Equity Equity
Jan 1 Balance $ 3,000 $ 33,000 $ 9,000 $ 2,000 $ 4,000 $ 21,000
Sale of assets 17,000 ( 15,000) 600 400 1,000
Subtotal 20,000 18,000 9,000 2,600 4,400 22,000

Safe Payments Schedule

Oak Nebe Pang

Equity Equity Equity
Partners pre-distribution balances $ 2,600 $ 4,400 22,000
Possible losses on non-cash assets ( 5,400)( 3,600)( 9,000)
( 2,800) 800 13,000
Write off Oak 2/7 and 5/7 2,800 ( 800)( 2,000)
Cash distribution to partners $ 0 $ 0 $ 11,000

Cash distribution plan on October 31:

First $9,000 goes to priority creditors, and then Pang receives

$11,000.

134
Exercise 7

Hanly, Ide, and Jen Partnership

Final Statement of Partnership Liquidation

Ide Hanly Jen

Cash Capital Capital Capital Total
Balance, Aug. 1 $ 50,000 $( 60,000) $ 4,000 $ 106,000 $ 50,000
Ides personal
contribution 40,000 40,000 40,000
90,000 ( 20,000) 4,000 106,000 90,000
Write-off Ide 20,000 ( 7,500)( 12,500)
90,000 $ 0 $( 3,500) 93,500 90,000
Hanlys personal
contribution 2,000 2,000 2,000

92,000 ( 1,500) 93,500 92,000

Write-off Hanly 1,500 ( 1,500)
92,000 $ 0 92,000 92,000
Distribute cash ( 92,000) ( 92,000) ( 92,000)
$ 0 $ 0 $ 0

135
Exercise 8

Loss absorption potential:

Profit Loss
Partners and Loss Absorption Vulnerability
Equity Ratio Potential Ranking
Luis $ 20,000 40% $ 50,000 4
Mac 9,000 25% $ 36,000 2
Nel 7,000 25% $ 28,000 1
Oma 4,000 10% $ 40,000 3

Schedule of assumed loss absorption:

40% 25% 25% 10%

Luis Mac Nel Oma Total
Partnership
equity $ 20,000 $ 9,000 $ 7,000 $ 4,000 $ 40,000
Assumed loss
to absorb Nel ( 11,200 ) ( 7,000 ) ( 7,000 ) ( 2,800 ) ( 28,000 )
8,800 2,000 0 1,200 12,000
Assumed loss
to absorb Mac ( 3,200 ) ( 2,000 ) ( 800 ) ( 6,000 )
5,600 0 400 6,000
Assumed loss
to absorb Oma ( 1,600 ) ( 400 ) ( 2,000 )
$ 4,000 $ 0 $ 4,000

Cash distribution plan:

First $44,000 pays the priority creditors;

Next $4,000 goes to Luis;
Next $2,000 goes $1,600 to Luis, and $400 to Oma;
Next $6,000 goes $3,200 to Luis, $2,000 to Mac, and $800 to Oma;
Remainder goes 40% to Luis, 25% to Mac, 25% to Nel, and 10% to Oma.

136
Exercise 9

Loss absorption potential:

Profit Loss
Partners and Loss Absorption Vulnerability
Equity Ratio Potential Ranking
Quan $ 12,000 30% $ 40,000 3
Ray 5,000 20% $ 25,000 1
Sen 18,000 35% $ 51,429 4
Tad 4,000 15% $ 26,667 2

Schedule of assumed loss absorption:

30% 15% 20% 35%

Quan Tad Ray Sen Total
Partnership
equity $ 12,000 $ 4,000 $ 5,000 $ 18,000 $ 39,000
Assumed loss
- absorb Ray ( 7,500 ) ( 3,750 ) ( 5,000 ) ( 8,750 ) ( 25,000 )
4,500 250 $ 0 9,250 14,000
Assumed loss
to absorb Tad ( 500 ) ( 250 ) ( 583 ) ( 1,333 )
4,000 $ 0 8,667 12,667
Assumed loss
to absorb Quan ( 4,000 ) ( 4,667 ) ( 8,667 )
$ 0 $ 4,000 $ 4,000

Cash distribution plan:

First $42,000 pays the priority creditors;

Next $4,000 goes to Sen;
Next $8,667 goes $4,667 to Sen, and $4,000 to Quan;
Next $1,333 goes $583 to Sen, $500 to Quan, and $250 to Tad;
Remainder goes 35% to Sen, 30% to Quan, 20% to Ray, and 15% to Tad.

Exercise 10

Priority
Creditors Upton Valenta Walker
First $100,000 $ 100,000
Next $180,000 $ 79,200 $ 18,000 $ 82,800
Next $270,000 60,000 30,000 180,000
Last $150,000 16,500 66,000 67,500
Total $700,000 $ 100,000 $ 155,700 $ 114,000 $ 330,300

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