Question

Gonda, Herron, and Morse is considering possible liquidation because partner Morse is personally insolvent. The partners have the following capital balances: $60,000, $70,000, and $40,000, respectively, and share profits and losses 30%, 45%, and 25%, respectively. The partnership has $200,000 in noncash assets that can be sold for $150,000. The partnership has $10,000 cash on hand, and $40,000 in liabilities. What is the minimum that partner Morse's creditors would receive if they have filed a claim for $50,000? Please show the work.

A. $0.

B. $27,500.

C. $45,000.

D. $47,500.

E. $50,000.

Answer 1

\(\mathrm{M}\) is personally insolvent.

M's profit sharing ratio is \(25 \%\)

Claim amount is \(\$ 50,000\)

Calculate the minimum amount that partner M's creditors would receive if they have filed a claim for \(\$ 50,000\)

M's creditors would receive the amount \(=(\$ 40,000-(\$ 50,000 \times 25 \%)\)

$$ \begin{aligned} &=\$ 40,000-\$ 12,500 \\ &=\$ 27,500 \end{aligned} $$