Nelson, Parker, and Rice are partners who share profits 4:3:3, respectively. Parker decides that it would be more profitable for him to operate as a sole proprietor. Nelson and Rice are in agreement that life would be more rewarding if Parker were to enter into direct competition with them. Nelson and Rice make repeated attempts to acquire Parker’s interest in the partnership. Unable to reach an agreement, the partners mutually agree that their association should be dissolved. A condensed balance sheet before realization of assets shows the following balances:
Question: Nelson, Parker, and Rice are partners who share profits 4:3:3, respectively. Parker decides that it would be more profitable for him to operate as a sole proprietor. Nelson and Rice are in agreement that life would be more rewarding if Parker were to enter into direct competition with them. Nelson and Rice make repeated attempts to acquire Parker’s interest in the partnership. Unable to reach an agreement, the partners mutually agree that their association should be dissolved. A condensed balance sheet before realization of assets shows the following balances: Assets Cash 5000 Other assets 60000 Total 65000 Liabilities and Capital Liabilities 20000 Nelson, Capital 20000 Parker, Capital 12,000 Rice, Capital 13000 Total 65000 Asset realization is accomplished in four stages as follows: Stage Sales Price Book Value 1 $16,000 $12,000 2 12,000 10,000 3 10,000 20,000 4 2,000 18,000 The partners prefer that cash be distributed as soon as it is available. Required: Prepare a summary in columnar form of the partnership realization and liquidation. You should prepare supporting schedules of safe payments before each cash distribution. Solution: supporting schedules of safe payments before each cash distribution. Sales Price Book value Profit/ loss = sales - book value Nelsons Share (4 or 40%) Parker Share(3 or 30%) Rice Share (3 or 30%) Stage 1 $ 16,000 $ 12,000 $ 4,000 $ 1,600 $ 1,200 $ 1,200 Stage 4 $ 12,000 $ 10,000 $ 2,000 $ 800 $ 600 $ 600 Stage 3 $ 10,000 $ 20,000 $ (10,000) $ (4,000) $ (3,000) $ (3,000) Stage 4 $ 2,000 $ 18,000 $ (16,000) $ (6,400) $ (4,800) $ (4,800) Share of loss on realization of asset $ (8,000) $ (6,000) $ (6,000) Columnar form of the partnership realization and liquidation. Particulars Cash + Noncash = Liabilities + Nelsons Capital + Parker Capital + Rice Capital Balance before liquidation $ 5,000 + $ 60,000 = $ 20,000 + $ 20,000 + $ 12,000 + $ 13,000 Sales of non cash assets and allocation of loss/ gain $ 40,000 + $ (60,000) = + $ (8,000) + $ (6,000) + $ (6,000) New Balances $ 45,000 + $ - = $ 20,000 + $ 12,000 + $ 6,000 + $ 7,000 Pay Liabilities $ (20,000) + = $ (20,000) + + + New Balances $ 25,000 + $ - = $ - + $ 12,000 + $ 6,000 + $ 7,000 Cash Distibutions to partners $ (25,000) + = + $ (12,000) + $ (6,000) + $ (7,000) Final Balances $ - + $ - = $ - + $ - + $ - + $ -