Question

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P14.17 Evaluation of Partnership Opportunities Reitmyer, Simon, and Trybus are partners in a real es tate partnership. The partnership's balance sheet shows: Cash Rental properties, net..... $ 20,000 700,000 Mortgages payable.... Capital, Reitmyer (40%).... Capital, Simon (40%)... Capital, Trybus (20%)... Total liabilities and capital. $300,000 200,000 150,000 70,000 $720,000 Total assets ........ ..... $720,000 The partners are contemplating terminating their business, as they no longer wish to spend the time in- volved in managing the properties. Further, several properties are in need of renovation. They believe that the properties could be sold on a piecemeal basis for a total of S1,200,000. After paying off the mortgage debt, the remaining cash would be distributed to the partners. Don and Mary Usher have approached the partnership with a proposal. Don is experienced at prop- erty maintenance and renovation, and Mary is experienced in property management. They are interested in getting into the real estate rental business. Both are currently employed, but they have little capital to invest. They offer $50,000 to be admitted as a 40 percent partner, the three existing partners woulo con tinue as partners, but would be relieved of all operating responsibilities. Each year for the next ten years, each old partner would receive a "salary" of $40,000 out of partnership earnings, though they would not be expected to render any services, Because they would retain a collective 60 percent ownership, they could block any actions by Don and Mary that they deemed inadvisable. Their interests would be further protected by a security interest in the rental properties, though it would be subordinated to any present and future mortgage debt. At the end of the ten years, their remaining partnership interests would be transferred to the Ushers for $1,000 each. The Ushers could accelerate the process at any time by prepaying the future payments, at a 10 percent discount rate. The existing partners could terminate the agreement at any time and buy out the Ushers for a price of $50,000 times the number of years the agreement had been in effect. However, if the existing ive their specified salanes for two years, they could terminate the agreement without any payment due the Ushers.

Answer 1

Answer to Question (a):

It is assumed that Properties are sold on piece meal basis in same year (1st year) it self

Total Assets Realised:

Cash Balance $20,000

Sale value of Properties $12,00,000

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Total amount realised $12,20,000

Less : Mortagages Payable ($3,00,000)

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Total amount remaining   $9,20,000

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Distribution to Partners :

Reitmyer (40%) : $3,68,000 ($9,20,000*40%)

Simon (40%) : $3,68,000 ( $9,20,000*40%)

Trybus (20%) : $ 1,84,000 ($9,20,000*20%)