Question

The partnership of Frick, Wilson, and Clarke has elected to cease all operations and liquidate its business property. A balance sheet drawn up at this time shows the following account balances:

Cash	$	71,000		Liabilities	$	39,000
Noncash assets		291,000		Frick, capital (60%)		177,000
				Wilson, capital (20%)		47,000
				Clarke, capital (20%)		99,000
Total assets	$	362,000		Total liabilities and capital	$	362,000

Part A

Prepare a predistribution plan for this partnership

Part B

The following transactions occur in liquidating this business:

1. Distributed cash based on safe capital balances immediately to the partners. Liquidation expenses of $9,000 are estimated as a basis for this computation.
2. Sold noncash assets with a book value of $118,000 for $71,000.
3. Paid all liabilities.
4. Distributed cash based on safe capital balances again.
5. Sold remaining noncash assets for $63,000.
6. Paid actual liquidation expenses of $7,000 only.
7. Distributed remaining cash to the partners and closed the financial records of the business permanently.

Produce a final statement of liquidation for this partnership using the predistribution plan to determine payments of cash to partners based on safe capital balances.

Part C

Prepare journal entries to record the liquidation transactions reflected in the final statement of liquidation.

Answer 1

Part A:

Particulars Beginning Balance Assumed loss of 235,000 (See Schedule 1) (6:2:2) Step 1 Balance Assumed loss of 48,000 (See Schedule II) (6:2) Step 2 Balance Frick 177,000 -141,000 36,000 -36,000 0 Wilson 47,000 -47,000 0 Clarke 99,000 -47,000 52,000 - 12,000 40,000 0

Frick, Wilson and Clarke Predistribution Plan Available Cash Receipient First $39,000 Creditor* Next $40,000 Clarke Next $48,000 Frick & Clarke (in 6:2) Remaining Frick, Wilson & Clarke (in 6:2:2)

*Liquidation expense assumed to be 0.

Schedule Partner Capital Balance/ Loss Allocation Frick Wilson Clarke 177,000/60% 47,000/20% 99,000/20% Maximum Loss that can be absorbed 295,000 235,000 495,000 Most vulnerable

Schedule II Partner Capital Balance/Loss Allocation Maximum Loss that can be absorbed 48,000 69,333 Most Vulnerable Frick Clarke 36,000/ (6/8) 52,000/ (6/8)

Part B:

Cash Final Balances Noncash Liabilities Assets 2,91,000 39,000 71,000 -71000 0 Frick, Capital (60%) 1,77,000 -38,907 1,38,093 -28200 1,09,893 Clarke, Capital (20%) 99,000 -21,762 77,238 -9400 67,838 39,000 Wilson, Capital (20%) 47,000 -10,331 36,669 -9400 27,269 0 27,269 2,91,000 -118000 1,73,000 71000 71.000 -39000 32,000 39,000 -39000 0 0 1,73,000 1,09,893 67,838 -32000 -17,154 -4,257 -10,589 Beginning balances Distribution Updated balances Noncash assets sold Updated balances All liabilities are paid Updated balances First (remainder of first distribution) Updated balances Noncash assets sold Updated balances Paid liquidation expenses Updated balances Final distribution based on ending capital account balances Ending balance 1,73,000 -173000 63000 63,000 -7000 56,000 92,739 -58,967 33,772 -4200 29,572 23,012 -14,632 8,380 -1400 6,980 57,249 -36,401 20,848 -1400 19,448 -56000 -29572 -6980 -19448 O 0 0 0

Part C:

Credit ($) 1 Frick, Capital Wilson, Capital Clarke, capital Cash Journal Entries Debit ($) 38,907 10.331 21.762 71,000 2 Cash Frick, Capital Wilson, Capital Clarke, capital Non Cash Assets 71000 28200 9400 9400 118000 39000 3 Liabilities Cash 39000 4 Frick, Capital Wilson, Capital Clarke, capital Cash 17,154 4,257 10,589 32000 5 Cash Frick, Capital Wilson, Capital Clarke, capital Non Cash Assets 63000 58,967 14,632 36,401 173000 6 Frick, Capital Wilson, Capital Clarke, capital Cash 4200 1400 1400 7000 7 Frick, Capital Wilson, Capital Clarke, capital Cash 29,572 6,980 19,448 56,000