Problem

Installment liquidation, premature distributions, insolvent partners. Green Acres Enterp...

Installment liquidation, premature distributions, insolvent partners. Green Acres Enterprises is a partnership that constructs and sells assisted living facilities for the elderly. The firm has been in existence for seven years, and the partners have decided that the market for such facilities has become saturated and that the partnership should be liquidated. The partners Dvorak, Kelsen, and Morgan share profits and losses 30%, 30%, and 40%, respectively. The following information, presented in chronological order, is relevant to the liquidation of the partnership.

a. The following balances existed prior to the commencement of the liquidation:

b. Accounts receivable with a book value of $40,000 were collected in the amount of $30,000. The inventory was sold for $60,000.

c. All the prepaid amounts were refunded to the company with the exception of $2,000 that was forfeited.

d. The partners agreed that any additional available cash should be used to pay off the accounts payable rather than the contingent liability.

e. Office equipment with a book value of $15,000 and a fair value of $12,000 was distributed toMorgan. A vehicle with a book value of $10,000 and a fair value of $8,000 was distributed to Dvorak.

f. The office equipment and vehicles were sold for 80% of their book value.

g. The contingent liability was settled for $43,000.

h. The partners agreed that 90% of any available cash should be distributed to the partners in as safe a manner as possible. At this time, it was assumed that the value of noncash assets would be at least adequate to pay off the remaining liabilities.

i. The furniture and fixtures were consigned to a broker who sold them for net proceeds of $120,000.

j. The balance of the accounts receivable had been turned over to a collection agency, and the partnership received $5,000 upon final settlement of all accounts.

k. The assisted living home proved difficult to dispose of and was finally sold for $400,000. Furthermore, legal fees and brokers’ commissions totaling $25,000 were incurred in connection with the sale. The note payable—mortgage was paid off in full in addition to previously unrecorded interest in the amount of $5,000.

l. Prior to distributing the remaining cash, partners with deficit balances were required to make the necessary contribution from net personal assets. At that time, the net assets (liabilities) of the partners were as follows: Dvorak, ($8,000); Kelsen, $140,000; and Morgan, $10,000.

m. All available cash was distributed to the partners.

1. Prepare a liquidation schedule for the above partnership.

2. Determine whether the distributions of office equipment and vehicles to the individual partners were, in fact, ‘‘safe’’ distributions.

3. What is the nature of the claim solvent partners have against a partner who is not able to satisfy a deficit capital balance?

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Solutions For Problems in Chapter 14