176164339 chapter 16 solution manual

8/18/2019 176164339 Chapter 16 Solution Manual

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Chapter 16 - Partnerships: Liquidation

CHAPTER 16

PARTNERSHIPS: LIQUIDATION

ANSWERS TO QUESTIONS

Q16-1 The major causes of a dissolution are:

a. Withdrawal or death of a partner b. The specified term or task of the partnership has been completedc. All partners agree to dissolve the partnershipd. An individual partner is bankrupte. By court decree:

i. the partnership cannot achieve its economic purpose(typically defined as seeking a profit

ii. a partner seriously breaches the partnership agreementthat makes it impracticable to continue the partnership

businessiii. !t is not practicable to carry on the partnership in conformity

with the terms of the partnership agreement

The accounting implications of a dissolution are to determine each partner"s capitalbalance on the date of dissolution of the partnership.

Q16-2 The #$A %&&' states that a partnerships liabilities to individual partners have thesame legal status as liabilities to outside parties. )owever* as a practical matter* partnersoften subordinate their loans to the partnership to other debts.

Q16-3 The implications that arise for partners + and , are that both of the partners willbe re-uired to contribute a portion of their capital balances or personal assets to satisfypartnership creditors. $artners + and , will share this contribution according to their relative loss ratio.

Q16-4 !n an at will/ partnership (one without a partnership agreement that states adefinite time period or specific undertaking for the partnership* a partner may simplywithdraw from the partnership. 0any partnerships have a provision in their partnershipagreement for a buyout of an at will/ partner who wishes to leave the partnership.

!n a partnership that has a definite term or a specific undertaking specified in thepartnership agreement* a partner who simply withdraws has committed a wrongfuldissociation. !f the partnership incurs any damages* the partnership may sue the partner who withdraws for the recovery of those damages.

Q16-5 A lump1sum li-uidation of a partnership is one in which all assets are convertedinto cash within a very short time* creditors are paid* and a single* lump1sum payment ismade to the partners for their capital interests. An installment li-uidation is one thatre-uires several months to complete and includes periodic* or installment* payments tothe partners during the li-uidation period.

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Q16-6 A deficit in a partner"s capital account (relating to an insolvent partner iseliminated by distributing the deficit to the other solvent partners in their resulting lossratio.

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Q16-7 The 234 $artnership is insolvent because the liabilities of the partnership(56%*777 e8ceed the assets of the partnership (599*777. The liabilities of thepartnership are calculated as follows:

Assets 1 iabilities ;


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SOLUTIONS TO CASES

C16-1 Ca! D"#$"%"'( #' Pa$#()$

The issue is that the partnership is being li-uidated and Bull desires cash to bedistributed as it becomes available* while Bear wishes no cash to be distributed until all

assets are sold and the liabilities are settled.

0ost partnership li-uidations are installment li-uidations in which cash is distributedduring the li-uidation. This provides for the partners" li-uidity needs while also providingfor the e8tended time period so the partnership may seek the best price for its assets.T. Bear may desire to hold up cash payments in order to encourage a prompt li-uidationof the assets or to ensure that all liabilities are paid. A compromise may be reached tomeet the needs of both partners.

An agreement may be used to specify the date or other restrictions under which theassets must be li-uidated and the liabilities settled. !n addition* the necessary amountsto settle actual* and anticipated* liabilities (including all li-uidation costs may beescrowed with a trustee* such as a local bank. The remaining cash may then be

distributed.

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C16-2 Ca! D"#$"%"'( #' Pa$#()$

A&"(+ #$",# &) ' UPA 1997:: Ge8t 57*777 to Adam 7*777Etep F: Any additional distributions in the partners loss percentages 97D 97D

This schedule shows that the partnerships loan payable to Bard has the same legalstatus as the liabilities to third parties. Bard will be paid for his loan to the partnership prior to any final distributions to the partners. Adam may be able to negotiate that he will pay

the 5%7*777 for the partnerships loan receivable with him from other cash received in adistribution from the partnership. )owever* the partnership* including Bard* can obtain acourt decree and judgment against Adam if Adam refuses to pay the partnership the5%7*777 to settle the loan he received from the partnership. After the liabilities areprovided for* any remaining cash is paid as shown in the cash distribution plan above* with

Adam receiving the first 57*777 and then additional distributions will be made in thepartners loss sharing ratio.

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C16-2 (continued

A&"(+ a .$a,#",a/ a..$'a,!: Although #$A %&&' specifically states that partnership debt is considered e-ual tooutside debt* most loans from partners are subordinated to outside debt. Typically this is

done at the re-uest of the outside creditors. !n addition* loans to@from partners aretreated as an e8tension of their capital accounts. Hiven these assumptions* the followingis a cash distribution plan for the partnership:

Adam and Bard $artnershipash 2istribution $lan

oss Absorption $ower apital accounts AdamC Bard AdamC Bard

oss sharing percentages 97D 97D

$reli-uidation capital balances (?7*777 (7*777

oan to (from partner %7*777 (%77*777Total ('7*777 (%7*777

oss absorption power (A$ (%7*777 (>?7*777 (capital balance @ loss percentage2ecrease highest A$ to ne8t level: 2ecrease Adam by 5%7*777 %7*777 (ash distribution: 5%7*777 8 7.97 ; 5'7*777 C C'7*777

(%7*777 (%7*777 ('7*777 ('7*777

2ecrease remaining A$s bydistributing cash in profit and

loss sharing percentages 97D 97D

Eummary of ash 2istribution $lanEtep %: 4irst 5F7*777 to creditorsI 5F7*777Etep >: Ge8t 5'7*777 to Bard(applied first to loan '7*777Etep F: Any additional distributions in the partners loss percentages 97D 97D

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C16-3* I(,'$.'$a#"'( ' a Pa$#()$!".

a. omparison of balance sheets

The partnerships balance sheet will report the assets and liabilities at their book valueswhile the corporations balance sheet will report the fair values of these items at the point

of incorporation. The incorporation of the partnership results in a new accounting entity*for which fair values are appropriate.


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C16-4 S!a$"(+ L') &$"(+ L"&"a#"'(

a. i-uidation loss allocation procedures in the #niform $artnership Act of %&&':Eection 7% of the #niform $artnership Act of %&&' specifies that 3ach partner isentitled to an e-ual share of the partnership profits and is chargeable with a share of thepartnership losses in proportion to the partners share of the profits./

!n the absence of a partnership agreement for the sharing of profits* and for the sharingof losses* all partners have e-ual rights in the management and conduct of the business.!n the case* it is not clear that the partners intend to share losses in the same :F:> ratioused to share profits. A court may decide that the :F:> ratio should be used* or alternatively* in the absence of a specific partnership agreement* that the #$As e-ualprovision should be used. This uncertainty should increase the partners willingness toagree among themselves at the beginning of the partnership how losses should beshared.

b. Assessment of each partners position:)iller may feel it is best not to get into negative/ types of discussion when thepartnership is attempting to get under way. )owever* if the partners are not able to agree

at this point in time* it may be best not to move forward with the formation of thepartnership. Eimply putting off an important issue is not going to eliminate its possibleimportance later in time. While not discussing the issue now removes a possiblycontentious issue from the discussion* it does not solve the problem.

unas argument of e-uality for responsibility of a failure of the partnership is humanistic*but may not be true.


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C16-5 A(a/" ' a C'&$# D),""'( '( a Pa$#()$!". L"&"a#"'(

This case asks -uestions about the 0attfield v Kramer Brothers court case decided by the0ontana Eupreme ourt on 0ay F%* >779. The court case is a really interestingpresentation of some of the major types of problems that can occur in a family partnership.

Etudents may obtain a copy of the court decision by several alternatives as presented in thecase information in the te8tbook. '$ #!) "(#$&,#'$ %)()"# a ,'. ' #!) ,'&$#),""'( " .$'") a# #!) )( ' #!) '/"'( '$ #!" ,!a.#)$

4aculty might decide to make copies for the students or place copies on reserve in thelibrary used by the accounting students in their advanced accounting classes. ourt casesare within the public domain and can be printed verbatim without re-uesting permission.

Answers to the -uestions posed in the te8tbooks %619 are presented in the followingparagraphs.

a. Summary of history of Kramer Brothers Co-Partnership. The partnership began in theearly %&?7s with the father* Laymond Kramer* Er.* providing the initial capital* land* and

cattle. The four brothers were 2on* 2ouglas* William and Lay. !n %&?9* Bill stated his desireto dissociate from the partnership. The other three brothers continued the partnership* but2on was limited as a result of a car accident. !n Muly %&&* 2on left 0ontana but returned in%&&9. !n %&&'* Laymond Er. (the father died which resulted in the four brothers* including2on* discussing the distribution of their fathers interest in the partnership. 777* 2on filed a suit demanding a formal accounting of thepartnership* li-uidation of its assets* and distribution of real property held by the partners astenants in common. 4rom that point* a number of suits and motions went back and forthbetween 2oug* Lay* ydia (their mother* and 2on. 77>* the 2istrict ourtdecided in favor of 2oug* Lay* and ydia* but only for those claims accruing before 0ay >F*%&&9* the five1year period covered by the statute of limitations. F* %&&9. This motionwas rejected by the court* setting up the appeal to 0ontanas Eupreme ourt.

b. Type of partnership. The four brothers and their father had an oral agreement to form thefarming operation. This typically evidences an at will partnership because there is no writtenagreement for a definite term or a specific undertaking. The ensuing difficulties of thepartnership indicate that a formal* written agreement might have avoided some of theproblems. A written agreement could specify a term of e8istenceI might include theprocedures to be used if a partner wished to dissociateI the process of determining adissociated partners partnership buyout price* perhaps involving a neutral valuation and

arbitration e8pert* and other matters the family felt were important based on past events ande8periences among the family. 4or a business of this apparent siJe* it is also recommendedthat they seek advice from an attorney who has e8perience in preparing partnershipagreements. Working out the issues before forming a partnership* and getting theseresolutions into a formal agreement* can really help minimiJe and* perhaps even avoidfuture problems.

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C16-5 (continued

c. Bill Kramer’s economic interest in partnership. Bill dissociated from the partnership in%&?9* soon after it was formed. The information presented in the courts decision does notstate if Bill received a buyout from the partnership. !n addition* Bill received a partial interest

from the estate of his father. The appeal motion included Bill as one of the defendants. Thus*it seems clear from the information given that Bill did have a continuing economic interest asof the time the motion was filed on Mune >F* >77.

d. Legal recourse of other partners at time Don dissociated. 2ons dissociation appeared tobe wrongful for which the other partners could seek damages* and to assure that thedissociated partner is obligated for his or her share of the partnerships liabilities at the timeof the dissociation. This normally re-uires a scheduling of all liabilities as of the dissociationdate* something accountants can provide for the partnership. !n addition to filing a revisedEtatement of $artnership Authority with the Eecretary of Etate and the local court clerk* theremaining partners should also ensure that creditors and other third1party vendors with thepartnership are given notice that the dissociated partner no longer has the authority to bind

the partnership. The remaining partners could also have a new partnership agreement* thistime in writing* to provide written evidence that they are continuing the business. Theimportant thing is that the remaining partners have sufficient documentation and evidence of 2ons partnership interest as of the date he dissociated.

e. Reuest for Ray’s and Doug’s personal ta! returns. This was probably an effort todetermine the profit or loss of the partnership from the date the partnership was formed toMuly %&&* when 2on left 0ontana. !n addition* 2ons attorney also asked for the accountingrecords for that same time period. The stated reason for this re-uest was to accomplish anaccurate accounting/ of the partnership and to determine the amount the partnership owed2on. #nder the partnership form of business* the partners recogniJe their share of thepartnerships profit or loss on their personal income ta8 returns. The partnership is not a

separate ta8able entity. The re-uest for the personal ta8 returns of Lay and 2oug may alsohave been made to try to gain leverage in negotiating 2ons buyout offer. Gevertheless* thisre-uest indicates the intertwining of a partnership and its individual partners.

f. T"o ma#or things learned. 0any students will state the need for a written partnershipagreement* but there are other interesting items in the court case. Etudents are probably notaware of the five1year statute of limitations on claims. The courts decision that 2onsrelocation to Ean 4rancisco in Muly %&& was a wrongful dissociation is interesting because*as a result of a car accident* 2on was not able to fully participate in the partnership. Theissue of when the five1year statute of limitations period began is interesting because thisshows the importance of the accountant having an accurate record of a partners interest inthe partnership as of specific* important times in the history of the partnership that may

serve as records of evidence in future legal actions. A great class discussion can begenerated from this -uestion.

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C16-6 R)");"(+ #!) L"&"a#"'( P$',) ' a L""#) Pa$#()$!".

a. !tem % of the %71K states that the limited partnership Nwas formed on August >F* %&?&*to ac-uire* own and operate 97 4airfield !nn by 0arriott properties (the !nns/* whichcompete in the economy segment of the lodging industry./

b. !tem % of the %71K states that the original general partner was 0arriott 4!B0 77%* A$14airfield H$ become the generalpartner.

4or the more adventurous students* you could recommend they look at the 4orm %71%>Hthat was filed on Manuary >&* %&&?* for additional details under !tem % of that 4orm for moredetail on the organiJation of the partnership at the time of formation. The general partner*0arriott !nternational* !nc. contributed 5?%*'?? for its %D general partnership interest. ,our

adventurous students will also find that between Govember %'* %&?&* and Muly F%* %&&7*?F*FF' limited partnership interests were sold in a public offering at the price of 5%*777 per unit.

c. The general partners profit percentage was %D* not including its limited partnership unitsshare of profits@losses. 0arriott !nternational !nc. (0!! had several apparent benefits of investing in the limited partnership. 4irst* 0!! was able to sell a number of its older hotelswhile still maintaining ownership of the land on which the hotels were constructed (groundrights/. 0!! would be receiving ground rent on the land. Eecondly* the initial propertymanagement provider was 4airfield 40 orporation* a wholly owned subsidiary of 0!!.Thus* 0!! would be providing similar types of services it was providing on its 0arriott )otels*and collecting management service fee from the limited partnership. Third* many limited

partnerships e8perience operating losses while still making capital distributions. AnalyJingthe Etatements of hanges in $artners 2eficits in !tem ? of the %71K* it can be seen that thegeneral partner and the limited partners have a capital deficit as of 2ecember F%* >777. Thismeans that operating losses and@or capital distributions to partners between the time of formation in %&?& and 2ecember F%* >777* were substantial. !nterestingly* the limitedpartnership did not make any distributions to partners in >77>* probably because of the poor financial position of the limited partnership at that time.

d. The Lestructuring $lan was approved by the limited partners via pro8y vote initiated onMuly %6* >77%* included a transfer of general partner interest on August %6* >77%* and wasfully implemented on Govember F7* >77%. The transfer of the general partner interest wasfrom 4!B0 77%* Eage 0anagement Lesources !!!* * beganproviding service to the !nns of the limited partnership* again as specified in the restructuringplan. The limited partnership entered into new franchise agreements with 0!!* modificationsof its ground leases with 0!! that resulted in substantially lower ground rents* agreed tocomplete the property improvement plans re-uired by 0!!* and waived 0!!s rights to receivethe deferred fees then owing to it. Also* the partnership sought 5>F million in subordinatednotes payable but that public offering filing with the E3 was withdrawn on Manuary 6* >77F*due to the continued financial difficulties of the partnership.

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C16-6 (continued

e. The $lan of i-uidation was the result of the partnership not being able to meet its debtservice re-uirements on the loan for its properties. The partnership was also in default under the ground lease agreements with 0!!. The plan of li-uidation was implemented beginningon 2ecember 9* >77F* and the partnership began its li-uidation process as of that date. The

!nns were to be sold and 0!! was to receive payments for its land under the !nns that weresold. There would be funds advanced to the partnership to invest in the !nns to enhancetheir marketability during the li-uidation process. 7* >77F* the partnershipengaged a national broker to market the inns for sale. The !nns continued to sell* but at aslower pace than anticipated and still had !nns as of 0ay %* >776.

f. The li-uidation basis of accounting used by the partnership is discussed in Gote >*Eummary of Eignificant Accounting $olicies. The li-uidation basis of accounting is not HAA$because HAA$ is based on the going concern concept. The partnership adopted theli-uidation basis of accounting for periods beginning after Eeptember F7* >77F* as a result of the adoption of the plan of li-uidation. The partnership adjusted the assets to their estimatednet realiJable value and the liabilities were adjusted to their estimated settlement costs*

including estimated costs associated with carrying out the li-uidation. (Etudents should notethat 4AEB Etatement Go. %6* Accounting for osts Associated with 38it or 2isposal

Activities/ OAS 146 ASC 420P now re-uires that a liability for a cost associated with ane8it or disposal activity should be recogniJed and measured at its fair value in the period inwhich the liability is incurred* not before* such as when a plan of li-uidation is approved.

g. These are presented in !tem ' of the %71K. The statements will be discussed in their order of presentation in the %71K.

%. Balance sheet (going concern basis to Etatement of net liabilities in li-uidation(li-uidation basis. The going concern balance sheet is not unusual for a company that isin a deficit position (assets less than liabilities. )owever* the li-uidation basis statementof net liabilities in li-uidation presents the properties held for sale at fair value* and

presents the liabilities owed and e8pected during li-uidation at their settlement values*such as the land purchase obligation to 0!!* and the estimated costs during the period of li-uidation. The focus is on the values of the assets and liabilities for li-uidationItherefore* partners capital accounts are not shown under the li-uidation basis.>. Etatement of operations (going concern basis end at the point the li-uidation basis of accounting is adopted because the statement of operations (statement of income is agoing concern statement. Thus* there is no statement of operations under the li-uidationbasis of accounting. The flow/ document prepared under the li-uidation basis is theEtatement of hanges in Get iabilities in i-uidation.F. The Etatement of ash 4lows is also a going concern statement and no comparablefinancial statement e8ists under li-uidation basis accounting.

h. 4orm %91%>H* filed on 0ay %* >776* is for termination of registration* acknowledging thepartnership will no longer be offering limited partnership units* or debt securities* to thepublic. This statement shuts the door/ of an entitys E3s filing re-uirements. Thus* aregistration statement such as the E1% or EF* that seeks to offer e-uity securities to thegeneral public* is the form for beginning the entitys E3s filing re-uirements and then thereis a form re-uired to end the entitys re-uired E3 filings.

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SOLUTIONS TO E*777 171 (>?*777 (?7*777

F. d $rior capital (%67*777 (9*777 (99*777 (>67*777oss on sale of inventory >*777 F7*777 6*777 67*777

(%F6*777 (%9*777 (&*777 (>77*777$ossible loss of remaining inventory 6*777 ?7*777 %6*777 %67*777

('>*777 69*777 (FF*777 (7*777 Allocate harles" potential capital deficit: 9>*777 (69*777 %F*777

(>7*777 171 (>7*777 (7*777

. d The safe payments computations include consideration of the partners lossabsorption power and the priority of intervening cash distributions before thelast cash distribution.

9. c The loan payable to Adam has the same legal status as the partnershipsother liabilities according to the #$A of %&&'* but is likely subordinated to thepartnerships outside liabilities. After payment of the accounts payable* thedeficit balance in Adams capital account needs to be remedied either

through cash contribution or setoff against the loan. !f Adam were tocontribute additional cash to eliminate his deficit* answer a/ would becorrect. )owever* since the problem does not mention a cash contribution*setoff is the only remedy for the deficit and answer c/ is the best solution.

6. d $artnership creditors have first claim to partnership assets

'. a After the settlement of accounts* partners are re-uired to make additionalcontributions to the partnership to satisfy partnership obligations.

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E16-2 =&/#"./)-C!'",) Q&)#"'( '( Pa$#()$!". L"&"a#"'(>AICPA Aa.#)?

%. a asey 2ithers 3dwards

$rofit and loss ratio 9 F >

Beginning capital (?7*777 (&7*777 ('7*777 Actual loss on assets %9*777 &*777 6*777$otential loss on other assets 97*777 F7*777 >7*777Balances (%9*777 (9%*777 (*777Eafe payments %9*777 9%*777 *777

>. b

F. d Art Blythe ooper

$rofit and loss ratio 7D 7D >7D

apital balances (F'*777 (69*777 (?*777

oss absorption power (&>*977 (%6>*977 (>7*777oss to reduce to B: (''*977 8 7.>7 ; %9*977 ''*977Balances (&>*977 (%6>*977 (%6>*977oss to reduce B Q to A: (B:'7*777 8 7.7 ; >?*777 '7*777(:'7*777 8 7.>7 ; %*777 '7*777

Balances (&>*977 (&>*977 (&>*977

ash of 5>7*777 after settlement of liabilities: ooper receives first 5%9*977Iremaining 5*977 split >@F to Blythe and %@F to ooper.

. d ash of 5%'*777: ooper receives first 5%9*977I remaining 5%*977 split >@F toBlythe and %@F to ooper.

9. a !f all partners received cash after the second sale* then the remaining 5%>*777is distributed in the loss ratio.

6. a Arnie Bart Kurt

$rofit and loss ratio 7D F7D F7D

apital balances (7*777 (%?7*777 (F7*777oss of 5%77*777 7*777 F7*777 F7*777Lemaining e-uities 171 (%97*777 171

Arnie will receive nothingI the entire 5%97*777 will be paid to Bart.

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E16-3 C'."(+ A/#)$(a#") Ca! D"#$"%"'( #' Pa$#()$

apital Balances

Bracken ouden 0enser

7D F7D F7D

a apital balances before sale of e-uipment (>9*777 (9*777 (%7*777

3-uipment sold for 5F7*777I

allocation of 5%7*777 loss *777 F*777 F*777

apital balances after sale (>%*777 (>*777 ('*777

4inal distribution of cash >%*777 >*777 '*777

b. apital balances before sale of e-uipment (>9*777 (9*777 (%7*777

3-uipment sold for 5>%*777I

allocation of 5%&*777 loss '*677 9*'77 9*'77

apital balances after sale (%'*77 '77 (*F77 Allocate capital deficit of ouden: ('77

@' 8 5'77 77

F@' + 5'77 CCCCCC CCCCCC C F77

apital balances after allocation of ouden"s deficit (%'*777 CCCC171 C(*777

4inal distribution of cash %'*777 C171 *777

c. apital balances before sale of e-uipment (>9*777 (9*777 (%7*777

3-uipment sold for 5'*777I

allocation of 5FF*777 loss %F*>77 &*&77 &*&77

apital balances after sale (%%*?77 *&77 (%77

Allocate capital deficit of ouden: (*&77

@' 8 5*&77 >*?77

F@' + 5*&77 CCCCCC CCCCCC >*%77

apital balances after allocation of ouden"s deficit (&*777 171 >*777

Allocate capital deficit of 0enser: (>*777

@ 8 5>*777 >*777 CCCCC CCCCC

apital balances after allocation of 0enser"s deficit ('*777 CCC171 CCC171

4inal distribution of cash '*777 171 171

($arentheses indicate credit amount.

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E16-4 L&.-S& L"&"a#"'(

a.BH and 2evelopment ompany

Etatement of $artnership LealiJation and i-uidationump1Eum 2istribution

apital BalancesGoncash Accounts 0itchell* 0atthews 0itchell 0ichaels

ash Assets $ayable oan 97D F7D >7D

Balances >7*777 %97*777 (F7*777 (%7*777 (?7*777 (F6*777 (%*777Eale of assets at a 57*777 loss %%7*777 (%97*777 >7*777 %>*777 ?*777

%F7*777 171 (F7*777 (%7*777 (67*777 (>*777 (6*777$ayment to creditors *777 (6*777

$ayment to partners (&7*777 67*777 >*777 6*777Balances 171 171 171 171 171 171 171


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E16-4 (continued

b. (% ash %%7*7770atthews* apital >7*7770itchell* apital %>*7770ichaels* apital ?*777

Goncash Assets %97*777 Eell noncash assets at a loss of 57*777.

(> Accounts $ayable F7*7770itchell* oan %7*777 ash 7*777 $ay creditors* including 0itchell.

(F 0atthews* apital 67*7770itchell* apital >*7770ichaels* apital 6*777 ash &7*777 4inal lump1sum distribution to partners.

E16-5 S,!)&/) ' Sa) Pa)(#

a) '( #$",# '%)$a(,) ' UPA 1997Kitchens Must 4or ,ou

Echedule of Eafe $ayments to $artners

Terry $hyllis onnie C (F7DC CC(97DC CC(>7DC

apital balances* Eeptember %* >7+& (%>*777 (F6*777 (9*777

Write1off of 5>?*777 in goodwill ?*77 %*777 9*677Write1off of 5%>*777 of receivables F*677 6*777 >*77oss of 5*777 on sale of 5>*777 of inventory (one1half of 5?*777 book value %*>77 >*777 ?77apital balances* Eeptember F7* >7+& (R ; deficit %*>77R (%*777 (9*>77$ossible loss of 5%&*777 for remaining receivables (including 5&*777 receivable from Terry and 5>*777 for remaining inventory %>*&77 >%*977 ?*677$ossible li-uidation costs of 56*777 %*?77 F*777 %*>77Balances (R ; potential deficit %9*&77R %7*977R (F9*772istribute Terrys and $hyllis potential deficits to onnie* the only partner with a capital credit (%9*&77 (%7*977 >6*77Eafe payments to partners* Eeptember F7* >7+& 171 171 &*777


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E16-5 (continued

a) '( .$a,#",a/ a..$'a,!:Kitchens Must 4or ,ou


Terry $hyllis onnie C (F7DC CC(97DC CC(>7DC

apital balances* Eeptember %* >7+& (%>*777 (F6*777 (9*777oans to (from partner &*777 (%9*777Total (F*777 (F6*777 (6&*777

Write1off of 5>?*777 in goodwill ?*77 %*777 9*677Write1off of 5%>*777 of receivables F*677 6*777 >*77oss of 5*777 on sale of 5>*777 of inventory (one1half of 5?*777 book value %*>77 >*777 ?77apital balances* Eeptember F7* >7+& (R ; deficit %7*>77R (%*777 (67*>77$ossible loss of 5%&*777 for remaining

receivables (including 5&*777 receivable from Terry and 5>*777 for remaining inventory %>*&77 >%*977 ?*677$ossible li-uidation costs of 56*777 %*?77 F*777 %*>77Balances (R ; potential deficit >*&77R %7*977R (97*772istribute Terrys and $hyllis potential deficits to onnie* the only partner with a capital credit (>*&77 (%7*977 F9*77Eafe payments to partners* Eeptember F7* >7+& 171 171 %9*777


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E16-6 S,!)&/) ' Sa) Pa)(# #' Pa$#()$

0aness and Moiner $artnershipombined Etatement of LealiJation and Echedule of Eafe $ayments

apital Accounts 0aness Moiner

ash !nventory $ayable ?7D >7D

Balances >9*777 %>7*777 (%9*777 (69*777 (69*777

Eale of inventory 7*777 (67*777 %6*777 *777

$ayment to creditors (%7*777 %7*77799*777 67*777 (9*777 (&*777 (6%*777

$ayments to partners (Echedule % (97*777 %*777 &*777

9*777 67*777 (9*777 (?*777 (%>*777

Eale of inventory F7*777 (67*777 >*777 6*777

$ayment to creditors (9*777 9*777F7*777 171 171 (>*777 (6*777

$ayments to partners (F7*777 CCCCCC >*777 6*777Balances 171 171 171 171 171

Echedule % Eafe payments at end of first month:0aness Moiner

?7D >7Dapital balances (&*777 (6%*777$otential loss of 567*777 on remaining inventory ?*777 %>*777Eafe payments to partners (%*777 (&*777


Gote that the 59*777 cash remaining after safe payments at the end of the first month is theamount re-uired to li-uidate the remaining accounts payable. #sing just the partners capitalbalances to compute safe payments indirectly includes both the assets and the liabilities of thepartnership.

16-19


20/54


E16-7 A/#)$(a#") P$'"# a( L' S!a$"(+ Ra#"' "( a Pa$#()$!". L"&"a#"'(

Gelson :> e-uals percentages of: F7D F7D >7D >7D

Allocation of 5&7*777 loss on sale of noncash assets >'*777 >'*777 %?*777 %?*777

apital balances after allocation of loss %>*777 (?*777 (9'*777(%>*777

2istribution of deficit of insolvent partner: (%>*777

*777 F*>?

Suincy: >7@'7 8 5%>*777 F*>&

apital balances after distribution of Gelson deficit 171 (>*?9' (9F*9'> (?*9'%

$ayment to partners 171 >*?9' 9F*9'> ?*9'%

b. $artnership ratio of F:%:F:F e-uals percentages of: F7D %7D F7D F7D

Allocation of 5&7*777 loss on sale of noncash assets >'*777 &*777 >'*777 >'*777

apital balances after allocation of loss %>*777 (66*777 (?*777 (F*777

2istribution of deficit of insolvent partner: (%>*777

*777 9*%F

apital balances after distribution of Gelson deficit 171 (6*>?6 (>*?9' >*%F

2istribution of deficit of insolvent partner: (>*%F

*%F 9F6

$eters: F7@7 8 5>*%F %*67'

apital balances after distribution of Suincy deficit 171 (6F*'97 (%*>97 171

$ayment to partners 171 6F*'97 %*>97 171

c. $artnership ratio of F:%:>: e-uals percentages of: F7D %7D >7D 7D

Allocation of 5&7*777 loss on sale of noncash assets >'*777 &*777 %?*777 F6*777

apital balances after allocation of loss %>*777 (66*777 (9'*777 6*777

2istribution of deficits of two insolvent partners: (%>*777 (6*777

7@F7 8 5%?*777 %>*777

apital balances after distribution of capital deficits 171 (67*777 (9*777 171$ayment to partners 171 67*777 9*777 171

$arentheses indicate credit amount.

!n case c. both Gelson and Suincy are personally insolvent so their capital deficits resultingfrom the allocation of the loss can be added together and distributed to the two solventpartners. )owever* if Suincy had been personally solvent* then he would be re-uired toremedy any capital deficit* including one that was distributed to him because of the insolvencyof another partner* as from the distribution of Gelsons capital deficit in case b.

16-20


21/54


16-21


22/54


E16-8 Ca! D"#$"%"'( P/a(

a) '( #$",# '%)$a(,) ' UPA 1997: A$B $artnership

ash 2istribution $lan

oss Absorption $ower apital Accounts

Adams $eters Blake Adams $eters Blake

$rofit and loss percentages >7D F7D 97D

$reli-uidation capital balances (99*777 ('9*777 ('7*777

oss absorption power (apital balances @ oss percentage (>'9*777 (>97*777 (%7*777

2ecrease highest A$ to ne8t highest: Adams (5>9*777 8 7.>7 >9*777 9*777

(>97*777 (>97*777 (%7*777 (97*777 ('9*777 ('7*777

2ecrease A$s to ne8t highest: Adams (5%%7*777 8 7.>7 %%7*777 >>*777

$eters (5%%7*777 8 7.F7 %%7*777 FF*777

(%7*777 (%7*777 (%7*777 (>?*777 (>*777 ('7*777Gote: $arentheses indicate credit amount.

Eummary of ash 2istribution $lan

Adams $eters Blake4irst 597*777 to creditorsGe8t 59*777 %77DGe8t 599*777 7D 67D

Any additional >7D F7D 97D

Gote that the receivable from Adams is not included in the ash 2istribution $lan. The #$A %&&'does not include any offsets of receivables from partners against capital accounts. Thus* thepartnership should treat the receivable from Adams as any other partnership asset.

!f the partnership were to prepare a schedule of safe payments* it would include a provision for apossible loss on any unpaid loan receivables with partners just as with other unrealiJedpartnership assets.

16-22


23/54


E16-8 (continued:

a) '( .$a,#",a/ a..$'a,!: A$B $artnership

ash 2istribution $lan


Adams $eters Blake Adams $eters Blake

$rofit and loss percentages >7D F7D 97D

$reli-uidation capital balances (99*777 ('9*777 ('7*777oan to Adams %7*777Total (9*777 ('9*777 ('7*77

oss absorption power (apital balances @ oss percentage (>>9*777 (>97*777 (%7*777

2ecrease highest A$ to ne8t highest: Adams (5>9*777 8 7.>7 >9*777 '*977

(>>9*777 (>>9*777 (%7*777 (9*777 (6'*977 ('7*777

2ecrease A$s to ne8t highest:

Adams (5%%7*777 8 7.>7 ?9*777 %'*777$eters

(5%%7*777 8 7.F7 ?9*777 >9*977(%7*777 (%7*777 (%7*777 (>?*777 (>*777 ('7*777

Gote: $arentheses indicate credit amount.

Eummary of ash 2istribution $lan

Adams $eters Blake4irst 597*777 to creditorsGe8t 5'*977 %77DGe8t 5>*977 7D 67D

Any additional >7D F7D 97D

16-23


24/54

E16-9 C'("$a#"'( ' Ca! D"#$"%"'( P/a(

a) '( #$",# '%)$a(,) ' UPA 1997: A$B $artnership

Etatement of $artnership LealiJation and i-uidation!nstallment i-uidation

apital Adams* Goncash Adams* $eters* Blake*

ash oan Assets iabilities >7D F7D 97D

Balances 7*777 %7*777 >77*777 (97*777 (99*777 ('9*777 ('7*777

Eale of assets 69*777 (?9*777 *777 6*777 %7*777$ayment to creditors (>%*777 >%*777

?*777 %7*777 %%9*777 (>&*777 (9%*777 (6&*777 (67*777

$ayment to partners (Ech. % (99*777 >9*777 F7*777 171

>&*777 %7*777 %%9*777 (>&*777 (>6*777 (F&*777 (67*777

Eale of assets '&*777 (%%9*777 '*>77 %7*?77 %?*777ollection of Adams loan %7*777 (%7*777$ayment to

creditors (>&*777 >&*777?&*777 171 171 171 (%?*?77 (>?*>77 (>*777$ayment to partners (?&*777 %?*?77 >?*>77 >*777Balances 171 171 171 171 171 171 171



25/54

E16-9 (continued

Echedule %: A$B $artnership


Adams $eters Blake >7DCC F7D CC 97DCC

apital balances* end of first month (9%*777 (6&*777 (67*777$ossible loss of 5%>9*777 on noncashassets (5%7*777 loan and 5%%9*777 other >9*777 F'*977 6>*977

(>6*777 (F%*977 >*977 Allocate Blakes potential deficit: (>*977 >7@97 8 5>*977 %*777 F7@97 8 5>*977 CCCCCCC CC%*977 CCC CC Eafe payment to partners >9*777 F7*777 171


26/54

E16-9 (continued

a) '( .$a,#",a/ a..$'a,!: A$B $artnership

Etatement of $artnership LealiJation and i-uidation!nstallment i-uidation

apital

Adams* Goncash Adams* $eters* Blake*ash oan Assets iabilities >7D F7D 97D

Balances 7*777 %7*777 >77*777 (97*777 (99*777 ('9*777 ('7*777 Adams loan write1off (%7*777 %7*777Eale of assets 69*777 (?9*777 *777 6*777 %7*777$ayment to creditors (>%*777 >%*777

?*777 171 %%9*777 (>&*777 (%*777 (6&*777 (67*777

$ayment to partners (Ech. % (99*777 %?*777 F*977 >*977

>&*777 171 %%9*777 (>&*777 (>F*777 (F*977 (9'*977

Eale of assets '&*777 (%%9*777 '*>77 %7*?77 %?*777$ayment to creditors (>&*777 >&*777

'&*777 171 171 171 (%9*?77 (>F*'77 (F&*977

$ayment to partners ('&*777 %9*?77 >F*'77 F&*977Balances 171 171 171 171 171 171 171



27/54

E16-9 (continued

Echedule %: A$B $artnership


Adams $eters Blake >7DCC F7D CC 97DCC

apital balances* end of first month (%*777 (6&*777 (67*777$ossible loss of 5%%9*777 on assets >F*777 F*977 9'*977

(%?*777 (F*977 (>*977

Eafe payment to partners %?*777 F*977 >*977


28/54

E16-10* I(,'$.'$a#"'( ' a Pa$#()$!".

a. $artnership"s Books

(% Alice* apital (5%%*>77 8 7.67 6*'>7Betty* apital (5%%*>77 8 7.7 *?7

Accounts Leceivable ?77 !nventory F*>77 3-uipment '*>77 To record revaluation of assets.

(> !nvestment in A Q B orporation Etock ?9*>77 Accounts $ayable %'*>77 ash ?*777 Accounts Leceivable >%*677 !nventory F>*?77 3-uipment 7*777 To record transfer of net assets to A Q B corporation.

(F Alice* apital (56>*77 1 56*'>7 99*6?7Betty* apital (5F*777 1 5*?7 >&*9>7 !nvestment in A Q B orporation Etock ?9*>77 To record distribution of stock to prior partners.

b. A Q B orporation"s Books

ash ?*777 Accounts Leceivable >%*677!nventory F>*?773-uipment 7*777 Accounts $ayable %'*>77

ommon Etock '%*777 Additional $aid1!n apital %*>77 To record receipt of net assets from partnership.


29/54

E16-11A =&/#"./)-C!'",) Q&)#"'( '( P)$'(a/ "(a(,"a/ S#a#))(# >AICPAAa.#)?

%. b

>. a

F. a %7*777 shares 8 (5>9 1 5%7 ; 5%97*777 options fair value 8 7.69 net1of1ta8 rate5 &'*977 value* net1of1ta8=77*777 pre1option net worth5&'*977 net worth

. d

9. a

6. c

'. b

?. c

&. d

%7. b

%%. d


30/54

E16-12A P)$'(a/ "(a(,"a/ S#a#))(#

eonard and 0ichelleEtatement of hanges in Get Worth4or the ,ear 3nded August F%* >7+F

LealiJed increases in net worth: Ealaries 5 *F774arm income 6*'772ividends and interest income %*77

5 9>*77LealiJed decreases in net worth: !ncome ta8es 5 %%*77$ersonal e8penditures F*977oss on sale of marketable securities F77 (%

!nterest e8pense *677 (>5(9&*?77

Get realiJed decrease in net worth 5 ('*77

#nrealiJed increases in net worth: Lesidence 5 '*F77!nvestment in 4arm &*F77 (F

5 %6*677#nrealiJed decreases in net worth: 0arketable securities 5 77 (% !ncrease in estimated income ta8es on the difference between the estimated current values of assets and liabilities and their ta8 bases F*>77

5 F*677

Get unrealiJed increase in net worth 5 %F*777

Get increase in net worth: LealiJed and unrealiJed changes in net worth 5 9*677Get worth at beginning of period 67*?77

Get worth at end of period 5 66*77

(% LealiJed loss: 5%%*777 1 5%7*'77 ; 5F77 #nrealiJed loss on remaining securities: (5%6*F77 1 5%%*777 1 5*&77 ; 577

(> 0ortgage payable: 5'6*777 1 5'%*777 ; 59*777 principal payment

5&*777 paid 1 59*777 ; 5*777 interest payment ife insurance loan: 5*777 8 7.%9 ; 5677 interest payment(F #nrealiJed holding gain on farm land 5&*&77

#nrealiJed holding loss on net farm e-uipment (5>>*77 1 5&*777 1 5%*777 (677

5&*F77


31/54

SOLUTIONS TO PROLE=S

P16-13 L&.-S& L"&"a#"'(

a.2H $artnership

Etatement of LealiJation and i-uidationump1sum i-uidation on 2ecember %7* >7+6

apital BalancesGoncash arlos 2an Hail

ash Assets iabilities >7D 7D 7D

$reli-uidation balances >9*777 '9*777 (>'7*777 (%>7*777 (97*777 (67*777

Eale of assets and distribution of 5>%9*777 loss >67*777 ('9*777 F*777 ?6*777 ?6*777

>?9*777 171 (>'7*777 (''*777 F6*777 >6*777ash contributed by Hail to e8tent of positive net worth >9*777 (>9*777

F%7*777 171 (>'7*777 (''*777 F6*777 %*7772istribution of deficit of insolvent partner: (%*777 >7@67(5%*777 FFF

7@67(5%*777 66'F%7*777 171 (>'7*777 ('6*66' F6*66' 171

ontribution by 2an to remedy deficit F6*66' (F6*66'F6*66' 171 (>'7*777 ('6*66' 171 171

$ayment to creditors (>'7*777 >'7*777'6*66' 171 171 ('6*66' 171 171

$ayment to partner ('6*66' '6*66'

$ostli-uidation balances 171 171 171 171 171 171



32/54

P16-13 (continued

b.2H $artnership

Get Worth of $artners2ecember %7* >7+6

arlos 2an Hail $ersonal assets* e8cluding partnership capital interests >97*777 F77*777 F97*777

$ersonal liabilities (>F7*777 (>7*777 (F>9*777$ersonal net worth* e8cluding partnership capital interests* 2ec. %* >7+6 >7*777 67*777 >9*777ontribution to partnership (F6*66' (>9*777i-uidating distribution from partnership '6*66' 171 171Get worth* 2ecember %7* >7+6 &6*66' >F*FFF 171

This computation assumes that no other events occurred in the %71day period that changed any of the partners personalassets and personal liabilities. !n practice* the accountant must be sure that a computation of net worth is current and timely.

The table shows the effects of the transactions between the partnership and each partner. A presumption of this table isthat the personal creditors of 2an or Hail would not seek court action to block the settlement transactions with thepartnership. #pon winding up and li-uidation* the partnership does not have any priority to the partners personal assets.Thus* the personal creditors may seek to block the transactions with the partnership in order to provide more resources fromwhich they can be paid. A partner who fails to remedy his or her deficit can be sued by the other partners who had to makeadditional contributions or even by a partnership creditor if the failed partner is liable to the partnership creditor. But thoseclaims are not superior to the other claims to the partners individual assets.

When accountants provide professional services to partnerships and to its partners* the accountant should e8pect* atsome time* legal suits involving the partnership and@or individual partners. A strong and thorough understanding of the legaland accounting foundations of partnerships will be very important to that accountant.


33/54

P16-14 I(#a//)(# L"&"a#"'( >AICPA Aa.#)?

AB $artnershipEtatement of $artnership LealiJation and i-uidation

4or the period from Manuary %* >7+%* through 0arch F%* >7+% apital Balances

7D

Balances before li-uidation* Manuary %* >7+% %?*777 F7'*777 (9F*777 (??*777 (%%7*777 ('*777Manuary transactions:

%. ollection of accounts receivable at a lossof 5%9*777 9%*777 (66*777 '*977 *977 F*777>. Eale of inventory at a loss of 5%*777 F?*777 (9>*777 '*777 *>77 >*?77F. i-uidation e8penses paid (>*777 %*777 677 77. Ehare of credit memorandum F*777 (%*977 (&77 (6779. $ayments to creditors (97*777 97*777

99*777 %?&*777 171 ('*777 (%7%*677 (6?*77Eafe payments to partners (Echedule % (9*777 >6*677 %?*77

%7*777 %?&*777 171 ('*777 ('9*777 (97*7774ebruary transactions:6. i-uidation e8penses paid (*777 >*777 %*>77 ?77

6*777 %?&*777 171 ('>*777 ('F*?77 (&*>77Eafe payments to partners (Echedule > 171 171 171 171

6*777 %?&*777 171 ('>*777 ('F*?77 (&*>770arch transactions:?. Eale of 0Q3-. at a loss of 5F*777 %6*777 (%?&*777 >%*977 %>*&77 ?*677&. i-uidation e8penses paid (9*777 >*977 %*977 %*777

%'*777 171 171 (?*777 (9&*77 (F&*677%7. $ayments to partners (%'*777 ?*777 9&*77 F&*677

Balances at end of li-uidation* 0arch F%* >7+% 171 171 171 171 171 171($arentheses indicate credit amount.


34/54

P16-14 (continued

AB $artnershipEchedules of Eafe $ayments to $artners

Art Bru hou

Echedule %: Manuary F%* >7+% 97D F7D >7D

apital balances ('*777 (%7%*677 (6?*77$ossible loss: 7+%apital balances ('>*777 ('F*?77 (&*>77$ossible loss: 7+% 171 171 171

Gote that the computation of safe payments on 4ebruary >'* >7+%* resulted in no payments topartners. This is due to the large book value of


35/54

P16-15 Ca! D"#$"%"'( P/a(

$3T $artnershipash 2istribution $lan

Mune F7* >7+%


$en 3van Torves $en 3van Torves$rofit and loss percentages 97D F7D >7D

$reli-uidation capital balances (99*777 (9*777 (>*777

oss absorption $ower (apital

balances @ oss percent (%%7*777 (%97*777 (%>7*777

2ecrease highest A$ to ne8t highest: 3van (5F7*777 8 7.F7 F7*777 &*777

(%%7*777 (%>7*777 (%>7*777 (99*777 (F6*777 (>*777

2ecrease A$s to ne8t highest: 3van (5%7*777 8 7.F7 %7*777 F*777

Torves (5%7*777 8 7.>7 %7*777 >*777

(%%7*777 (%%7*777 (%%7*777 (99*777 (FF*777 (>>*777

Eummary of ash 2istribution(!f 7D

ash available 5%76*7774irst (%'*777 5%'*777Ge8t (&*777 5 &*777Ge8t (9*777 F*777 5 >*777

Additional paid in $Q ratio ('9*777 CCCCCC 5F'*977 >>*977 %9*7775 171 5%'*777 5F'*977 5F*977 5%'*777


36/54

P16-16 I(#a//)(# L"&"a#"'(

$3T $artnership

Etatement of $artnership i-uidation and LealiJation

4rom Muly %* >7+%* through Eeptember F7* >7+%

apital Goncash Accounts $en 3van Torves

ash Assets $ayable 97D F7D >7D

$reli-uidation balances 6*777 %F9*777 (%'*777 (99*777 (9*777 (>*777

Muly: Assets LealiJed >6*977 (F6*777 *'97 >*?97 %*&77$aid li-uidation costs (%*777 977 F77 >77$aid creditors (%'*777 %'*777

%*977 &&*777 171 (&*'97 (%*?97 (>%*&77Eafe $ayments (Ech. % (6*977 6*977

?*777 &&*777 171 (&*'97 (F9*F97 (>%*&77

August: 3-uipment withdrawn (*777 (F*777 (%*?77 ?*?77

(allocate 56*777 gain $aid li-uidation costs (%*977 '97 97 F77

6*977 &9*777 171 (9>*777 (F6*'77 (%>*?77Eafe $ayments (Ech. > (*777 *777

>*977 &9*777 171 (9>*777 (F>*'77 (%>*?77

Eeptember: Assets LealiJed '9*777 (&9.777 %7*777 6*777 *777$aid li-uidation costs (%*777 977 F77 >77

'6*977 171 171 (%*977 (>6*77 (?.677 $ayments to partners ('6*977 %*977 >6*77 ?*677$ostli-uidation balances 171 171 171 171 171 171$arentheses indicate credit amount


37/54

P16-16 (continued

$3T $artnershipEchedules of Eafe $ayments to $artners

$en 3van Torves

Echedule %: Muly F%* >7+% 97D F7D >7D

apital balances (&*'97 (%*?97 (>%*&77$ossible loss on noncash assets (5&&*777 &*977 >&*'77 %&*?77ash retained (5?*777 *777 >*77 %*677

F*'97 (&*'97 (977 Absorption of $en"s potential deficit (F*'97 3van: 5F*'97 8 [email protected] >*>97

Torves: 5F*'97 8 7.>[email protected] %*977171 ('*977 %*777

Absorption of Torves potential deficit (%*777 3van: 5%*777 8 [email protected] %*777Eafe payment 171 (6*977 171

Echedule >: August F%* >7+%

apital balances (9>*777 (F6*'77 (%>*?77$ossible loss on noncash assets (5&9*777 '*977 >?*977 %&*777ash retained (5>*977 %*>97 '97 977

(F*>97 ('*97 6*'77 Absorption of Torves potential deficit (6*'77 $en: 56*'77 8 7.97@7.?7 *%??

3van: 56*'77 8 7.F7@7.?7 >*9%>&F? (*&F? 171

Absorption of $en"s potential deficit (&F? 3van: 5&F? 8 [email protected] &F?Eafe payment 171 (*777 171


38/54

P16-17 I(#a//)(# L"&"a#"'(

2E $artnershipEtatement of $artnership LealiJation and i-uidation U !nstallment i-uidation

4rom Muly %* >7+9* through Eeptember F7* >7+9

apital BalancesGoncash 2 E ash Assets iabilities 97D F7D >7D

$reli-uidation balances*Mune F7

97*777 6'7*777 (79*777 (%77*777 (%7*777 ('9*777

Muly* >7+9: Eale ofassets and distributionof 5%>7*777 loss F&7*777 (9%7*777 67*777 F6*777 >*777

7*777 %67*777 (79*777 (7*777 (%7*777 (9%*777i-uidation e8penses (>*977 %*>97 '97 977

F'*977 %67*777 (79*777 (F?*'97 (%7F*>97 (97*977$ayment to creditors (79*777 79*777

F>*977 %67*777 171 (F?*'97 (%7F*>97 (97*977

Eafe payments topartners (Ech. % (>>*977 >>*977

%7*777 %67*777 171 (F?*'97 (?7*'97 (97*977 August* >7+9: Eale of

assets and distributionof 5%F*777 loss >>*777 (F9*777 6*977 F*&77 >*677

F>*777 %>9*777 171 (F>*>97 ('6*?97 ('*&77i-uidation e8penses (>*977 %*>97 '97 977

>&*977 %>9*777 171 (F%*777 ('6*%77 ('*77Eafe payments topartners (Ech. > (%&*977 %F*'77 9*?77

%7*777 %>9*777 171 (F%*777 (6>*77 (%*677Eeptember* >7+9: Ealeof assets anddistribution of 5'7*777loss 99*777 (%>9*777 F9*777 >%*777 %*777

69*777 171 171 *777 (%*77 (>'*677 Allocate 2"s deficit to E

and (*777 >*77 %*677

69*777 171 171 171 (F&*777 (>6*777i-uidation e8penses (>*977 %*977 %*777

6>*977 171 171 171 (F'*977 (>9*777$ayments to partners (6>*977 171 F'*977 >9*777

$ostli-uidation balances 171 171 171 171 171 17($arentheses indicate credit amount


39/54

P16-17 (continued

2E $artnershipEchedule of Eafe $ayments to $artners

2 E Echedule %* Muly F%* >7+9: 97D F7D >7Dapital balances* Muly F%* Before cash distribution (F?*'97 (%7F*>97 (97*977

Assume full loss of 5%67*777 on remaining noncash assets and 5%7*777 in possible future li-uidation e8penses ?9*777 9%*777 F*777

6*>97 (9>*>97 (%6*977 Assume 2"s potential deficit must be absorbed by E and : (6*>97 F7@97 8 56*>97 >'*'97

>7@97 8 56*>97 %?*977

171 (>*977 >*777 Assume "s potential deficit must be absorbed by E completely >*777 (>*777Eafe payments to partners on Muly F%* >7+9 171 (>>*977 171

Echedule >* August F%* >7+9:

apital balances* August F%* before cashdistribution (F%*777 ('6*%77 ('*77

Assume full loss of 5%>9*777 on remainingnoncash assets and5%7*777 in possibleli-uidation e8penses 6'*977 7*977 >'*777

F6*977 (F9*677 (>7*77

Assume 2"s potential deficit must be absorbedby E and : (F6*977

F7@97 8 5F6*977 >%*&77>7@97 8 5F6*977 %*677

Eafe payments to partners 171 (%F*'77 (9*?77($arentheses indicate credit amount


40/54

P16-18 Ca! D"#$"%"'( P/a(2E $artnership

ash 2istribution $lan Mune F7* >7+9


2 E 2 E

$rofit and loss sharing ratio 97D F7D >7D

$reli-uidation capital balances (%77*777 (%7*777 ('9*777oss absorption power (A$ capital accounts @ loss sharing percentage (>77*777 (66*66' (F'9*777

2ecrease highest A$ to ne8t highest A$: 2ecrease E by 5&%*66' &%*66'

(ash distribution: 5&%*66' 8 7.F7 >'*977(>77*777 (F'9*777 (F'9*777 (%77*777 (%%>*977 ('9*777

2ecrease A$ to ne8t highest level: 2ecrease E by 5%'9*777 %'9*777

(ash distribution: 5%'9*777 8 7.F7 9>*9772ecrease by 5%'9*777 %'9*777(ash distribution: 5%'9*777 8 7.>7 F9*777

(>77*777 (>77*777 (>77*777 (%77*777 (67*777 (7*7772ecrease A$s by distributing cash in the $@ sharing ratio 97D F7D >7D


41/54

P16-18 (continuedEummary of ash 2istribution $lan

(3stimated on Mune F7* >7+9 i-uidation

reditors 38penses 2 E %. 4irst 579*777 %77D

>. Ge8t 5%7*777 %77DF. Ge8t 5>'*977 %77D. Ge8t 5?'*977 67D 7D9. Any additional distributions

in the partners" profitand loss ratio 97D F7D >7D

b. onfirmation of cash distribution plan

2E $artnershipapital Account Balances

Mune F7* >7+9* through Eeptember F7* >7+92 E

$rofit and loss ratio 97D F7D >7D$reli-uidation balances* Mune F7 (%77*777 (%7*777 ('9*777Muly loss of 5%>7*777 on disposal of assets and 5>*977 paid in li-uidation costs 6%*>97 F6*'97 >*977

(F?*'97 (%7F*>97 (97*977Muly F% distribution of 5>>*977 of available cash to partners (Ech. % 4irst 5>>*977 of 5>'*977 layer: %77D to E >>*977

(F?*'97 (?7*'97 (97*977 August loss of 5%F*777 on disposal of assets and 5>*977 paid in li-uidation costs '*'97 *697 F*%77

(F%*777 ('6*%77 ('*77

August F% distribution of 5%&*977 of available cash to partners (Ech. > Lemaining 59*777 of 5>'*977 layer of which 5>>*977 paid on Muly F%: %77D to E 9*777

Ge8t 5%*977 of 5?'*977 layer: 67D to E ?*'77

7D to 9*?77(F%*777 (6>*77 (%*677

Eeptember loss of 5'7*777 on disposal of assets and 5>*977 paid in li-uidation costs F6*>97 >%*'97 %*977

9*>97 (7*697 (>'*%772istribution of 2"s deficit (9*>97 F*%97 >*%77

171 (F'*977 (>9*777Eeptember F7 distribution of 56>*977 of available cash to partners (Ech. F Ge8t 56>*977 of 5?'*977 layer of which 5%*977 paid on August F%: 67D to E F'*977

7D to >9*777$ostli-uidation balances 171 171 171


42/54

P16-18 (continued

Echedule %* Muly F%* >7+9: omputation of 5>>*977 of cash available to be distributed topartners on Muly F%* >7+9:

ash balance* Muly %* >7+9 5 97*777ash from sale of noncash assets F&7*777ess: $ayment of actual li-uidation e8penses (>*977

ess: $ayments to creditors (79*777 ess: Amount held for possible future li-uidation e8penses (%7*777 ash available to partners* Muly F%* >7+9 5 >>*977

Echedule >* August F%* >7+9: omputation of 5%&*977 of cash available to be distributedto partners on August F%* >7+9:

ash balance* August %* >7+9 5%7*777ash from sale of noncash assets >>*777

ess: $ayment of actual li-uidation e8penses (>*977 ess: Amount held for possible future li-uidation e8penses (%7*777 ash available to partners* August F%* >7+9 5 %&*977

Echedule F* Eeptember F7* >7+9: omputation of 56>*977 of cash available to bedistributed to partners on Eeptember F7* >7+9:

ash balance* Eeptember %* >7+9 5%7*777ash received from sale of noncash assets 99*777ess: $ayment of actual li-uidation e8penses (>*977

ash available to partners* Eeptember F7* >7+9 56>*977


43/54

P16-19 =a#,!"(+

%. 4

>. 2

F. A

. M

9. K

6.

'. 3

?. B

&. )

%7. !


44/54

P16-20 Pa$#()$!". A+$)))(# I&) >AICPA Aa.#)?

Pa$# A:%. , The admission of a new partner re-uires the consent of all e8isting partners.

>. , The withdrawal of a partner causes the dissolution of the partnership. But a

termination and li-uidation can be avoided by having the other partnersagree to continue the partnership and buy out okes partnership interest.

F. , A third1party beneficiary is not a party to a contract* but is a beneficiary of it.

. G The liability of a withdrawing partner may be limited by an agreementbetween the partners* but that agreement is not binding on third partiesunless they join in on the agreement.

9. , A partner may retire at any time if there is no specified term of e8istence orundertaking for the partnership.

Pa$# :

6. , A new partner is personally liable for all partnership debts incurredsubse-uent to entry into the partnership.

'. , ontinuation of the partnership does not release the partnership from theliabilities e8isting prior to the admission of the new partner.

?. , White is liable for debts prior to his admission only to the e8tent of his capitalcontribution.

&. G As in item ?* White is liable for pre1e8isting debts only to the e8tent of hiscapital contribution.

%7. G A partner may dissociate at any time there is no specified term of e8istencefor the partnership* and there is no minimum time period before a partner issubject to personal liability for the partnerships obligations incurred while apartner.


45/54

Ca) 16-5: =a##")/ @$a)$ $'#!)$ 2005 =T 126 N

A copy of the 0ontana Eupreme ourts decision is on the following eight pages. Eupremeourt cases are within the public domain and can be printed verbatim without re-uestingpermissions. The decision of the court includes a summary of the disputes and lower courtdecisions.

,our students can obtain the case via an internet search. Alternatively* the case may beobtained* along with the legal briefs from each side* at the Etate aw ibrary of 0ontana site:http:@@courts.mt.gov@library and then click on ases to get to case number 7F1'&6 or use the te8tterm of 0attfield. The Etate of 0ontana is continually revising its libraries of legal documents sodoing a Hoogle search may be the most efficient method for your students.

http://courts.mt.gov/libraryhttp://courts.mt.gov/library


46/54

No. 03-796

N !"# $%P'# C(%&! () !"# $!*!# () '(N!*N*

2005 '! 136N

++ '*!!)#L, and CLN!(N &*'#& as Per/anent)u Co-Conserators o the Person and #state o ,(N*L, ,.&*'#& an napaitated and Proteted Person

Paintis and *ppeants

.

&*'#& &(!"#&$ C(-P*&!N#&$"P LL*' &*'#&

Co-Partner &*'(N, &*'#& Co-Partner ,(%+L*$&*'#& Co-Partner LL*' &*'#& &*'(N, &*'#&and ,(%+L*$ &*'#& as Co-Persona &epresentaties o the#$!*!# () &*'(N, &*'#& and L,* &*'#& ndiidua

,eendants and &espondents.

*PP#*L )&(': ,istrit Court o the !ent-$eond udiia ,istritn and )or the Count o Car;on Cause No. ,< 2000-40"onora;e air ones Presidin= ud=e

C(%N$#L () C(&,:

)or *ppeants:

)od *. roer roer La )ir/ &oundup 'ontana

)or &espondents:

Phiip P. '+i/pse '+i/pse La )ir/ iin=s 'ontana

iia/ ra/er pro se Laure 'ontana

$u;/itted on ries: une 23 2004

,eided: 'a 31 2005

)ied:


47/54

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Cer?

ustie i/ &ie deiered the (pinion o the Court.

a.Pursuant to $etion Para=raph 3@A o the 'ontana $upre/e Court 1996 nterna (peratin=

&ues the ooin= deision sha not ;e ited as preedent. t sha ;e ied as a pu;i

dou/ent ith the Cer? o the $upre/e Court and sha ;e reported ; ase tite $upre/e

Court ause nu/;er and resut to the $tate &eporter Pu;ishin= Co/pan and to est +roup in

the quarter ta;e o nonita;e ases issued ; this Court.

b.,onad ,. ra/er @,onA appeas ro/ the su//ar Bud=/ent entered on *u=ust 21 2003 in

the !ent-$eond udiia ,istrit Court Car;on Count in aor o the ra/er rothers Co-

Partnership @PartnershipA and aso haen=es the order entered ; the ourt on *u=ust 30 2002

dis/issin= ,ons ai/s aruin= prior to u 23 1995 as ti/e ;arred. e air/.

c.e restate the issue on appea as oos:

d.,id the ,istrit Court err in =rantin= su//ar Bud=/ent to the ra/er rothers Co-

PartnershipD

FACTUAL AND PROCEDURAL BACKGROUND

e.n the ear 1980s the ra/er ;rothers ,on ,ou=as @,ou=A iia/ @iA and &a/ond

@&aA and their ather &a/ond ra/er $r. @&a/ondA ora or/ed a ar/in=

f.operation partnership ith &a/ond urnishin= the initia apita rea estate and head o

atte.


48/54

g.n 1985 i deter/ined to dissoiate ro/ the Partnership and requested distri;ution o his

interest under the &eised %nior/ Partnership *t @&%P*A.a !hereater &a/ond ,ou= &a

and ,on a;eit i/ited in his /ana=e/ent responsi;iities due to a neuropshoo=ia

untionin= i/pair/ent resutin= ro/ a ar aident in 1984 ontinued under the ori=ina

partnership a=ree/ent unti u 1994 hen ,on et 'ontana to reside in $an )raniso. ,on

returned to 'ontana in 1995 ;ut did not assoiate ith the Partnership nor did he initia see?

an re/ed as a dissoiated partner as set orth under the &%P*. n at ,on oud not ie an

ation a=ainst the Partnership unti 'a 23 2000 ater /an aied atte/pts to ne=otiate a ;u-

out oer o his interest in the Partnership ith &a and ,ou=.

h.n 1997 &a/ond died and the ra/er ;rothers disussed distri;ution o their athers assets

inudin= distri;ution o &a/onds interest in the Partnership propert. !his as the irst ti/e

,on had an ontat ith the Partnership sine his return ro/ $an )raniso. ,on had

preious onsuted ith attorne )od *. roer @roerA re=ardin= his interest in the

Partnership as a dissoiated partner and requested roers assistane in representin= hi/ in the

distri;ution o his athers persona estate and interest in the Partnership.

a*thou=h the 1993 Le=isature did not a/end the tite o the %nior/ Partnership*t it adopted the han=es e/;odied ithin the &eised %nior/ Partnership *t@E&%P*EA and thereore e sha reer to the at throu=hout this opinion as F&%P*.GSee McCormick v. Brevig 2004 '! 179 H 37 n.1 322 'ont. 112 H 37 n.1 96 P.3d 697 H 37 n.1.


49/54

i.(n )e;ruar 27 1998 roer requested opies o the Partnerships aountin= reords ro/

the date o its ineption unti u 1994 hen ,on departed to $an )raniso and opies o

&as and ,ou=s persona taI returns ro/ attorne Caro "ard @"ardA ho represented the

Partnership. roer stated in his etter that "ards o/piane ith his request as ruia as

this inor/ation as neessar to Fao/pish an aurate aountin=G o the Partnerships

reords to deter/ine an /onies oed to ,on and indiated that he oud ie suit a=ainst the

j.Partnership i the request as not honored ithin ten das. "ard did not respond to roers

etter unti 'arh 9 1998 ;ut roer did not then ie a o/paint.

k.(n ,ee/;er 9 1998 &a and ,ou= oered to purhase ,ons interest in the Partnership.

%nder the oer ,on as to reeie ninet head o atte or the assi=n/ent o his interest in the

Partnerships ;rand na/e. "oeer ,on reBeted the oer and thereater the parties ontinued

to ne=otiate ith no resoution.

l."oeer it as not unti 'a 23 2000 that ,on ied suit de/andin= a or/a aountin= o

the Partnership iquidation o the Partnerships assets and diision o the rea propert hed ;

partners as tenants in o//on. &a and ,ou= responded ; iin= a /otion see?in= Boinder o

the #state o &a/ond ra/er @&a/onds #stateA as a neessar part ;eause &a/ond had

hed an interest in the Partnerships rea propert as a o-tenant. !he ourt ordered ,on to Boin

the neessar parties and on *u=ust 10 2000 ,on ied an a/ended o/paint na/in=

&a/onds #state and Ldia ra/er @LdiaA /other o the our ra/er


50/54

m. ;rothers ho as /arried to &a/ond unti his death.

n.(n ,ee/;er 18 2001 ,ou= &a and Ldia ied a /otion to dis/iss ,ons ai/s under

the &%P* as ti/e ;arred under the =enera ie-ear i/itation proision J 27-2-231 'C*

hih /otion as Boined ; i. n response +re= 'attied @'attiedA ho had ;een

preious appointed as ,ons te/porar u =uardian and onserator /oed or eae to

a/end ,ons a/ended o/paint to su;stitute hi/se or ,on as the rea part in interest

pursuant to &ue 17 '.&.Ci.P. and to raise the air/atie deenses o aier ahes and

equita;e estoppe ar=uin= that he had no opportunit to respond to the statute o i/itations

deense raised ; the ,eendants in their /otion to dis/iss.

o.(n *u=ust 30 2002 the ,istrit Court =ranted the ,eendants /otion to dis/iss ;ut on as

to those ai/s aruin= prior to 'a 23 1995. !he ourt onuded that ,ons reoation to $an

)raniso in u 1994 onstituted a ron=u ithdraa ro/ the Partnership and that the ie-

ear statute o i/itations period on his partnership ai/s ;e=an to run at that ti/e requirin= an

ation to ;e ied ; u 1999. ,on had ied his ation on 'a 23 2000 and the ,istrit Court

thereore onuded that ,ons ai/s ere ti/e ;arred uness it oud ;e de/onstrated that a

ai/ had arued ater 'a 23 1995 ie ears prior to the iin= o this ation. !he ourt

denied 'attieds /otion or eae to a/end the o/paint. !he ,istrit Court then set a

sheduin= onerene to address an re/ainin= ai/s hih had suried its order appin= the

ti/e ;ar.

p.(n (to;er 17 2002 the parties entered into a /utua reease sette/ent and eIhan=e

a=ree/ent re=ardin= the rea propert hed ; the parties as tenants in o//on and the rea

propert hih the parties oned as partners. Pursuant to the a=ree/ent &a and ,ou=

purhased ,ons share o the Partnerships interest in rea propert or K487500.00 to ;e paid to


51/54

q.,ons onseratorship.

r.(n Noe/;er 15 2002 Ldia and &a/onds #state requested an order dis/issin= the/ as

deendants in the /atter upon the ourts approa o the rea propert sette/ent a=ree/ent.

'attied and Cinton ra/er @+uardiansA ho ; then had ;een appointed as ,ons per/anent

i/ited o-=uardians and per/anent u o-onserators responded ; iin= a /otion a=ain

assertin= the air/atie deenses o aier ahes and equita;e estoppe and requestin= the

,istrit Court to reonsider its *u=ust 2002 order. !he ar=ued that a =uardianship proeedin=

onduted su;sequent to the entr o the *u=ust 2002 order had deter/ined the eItent and

seerit o ,ons /enta inapait hih shoud retroatie to the ie-ear statute o

i/itations period enored ; the ,istrit Courts *u=ust 2002 order. &a and ,ou= then ied a

/otion or Bud=/ent on the peadin=s and a /otion to dis/iss the +uardians /otion raisin=

deenses and see?in= reonsideration. !he asserted that ,on aied to ie an ation ithin 120

das o their initia ;u-out oer as required ; J 35-10-619@5A 'C* o the &%P* and thus

an o ,ons ai/s that had arued ater 'a 23 1995 ere aso ti/e ;arred under this

proision.

s.(n anuar 28 2003 the ,istrit Court =ranted the /otion ied ; Ldia and &a/onds

#state to dis/iss the/ as parties to the ation. (n anuar 30 2003 Ldia and &a/onds #state

ied a notie o entr o Bud=/ent on ;oth the anuar 2003 and *u=ust 2002 orders.

t.(n une 18 2003 the ,istrit Court issued an order onertin= &a and ,ou=s /otion or

Bud=/ent on the peadin=s and their /otion to dis/iss the +uardians /otion raisin= deenses to

a /otion or su//ar Bud=/ent pursuant to &ue 12@;A and @A '.&.Ci.P. )urther the ,istrit

Court denied the +uardians /otion or reonsideration o its *u=ust 2002 order and


52/54

u.resered a deter/ination on their /otion raisin= deenses pendin= urther proeedin=s.

v.(n *u=ust 21 2003 the ,istrit Court =ranted &a and ,ou=s /otion or su//ar Bud=/ent

on ,ons re/ainin= ai/s inudin= an aountin= o the Partnerships reords ro/ 1994

throu=h 1997 the Partnerships aiure to proper ;u out his interest or an other ai/ he

oud hae raised as a dissoiated partner under the &%P*. ,on appeas therero/.

STANDARD OF REVIEW

w. (ur reie o a su//ar Bud=/ent order is de noo. R.C. Hobbs Enter., LLC v. J.G.L.

Distrib., Inc. 2004 '! 396 H 20 325 'ont. 277 H 20 104 P.3d 503 H 20. e reie su//ar

Bud=/ent to deter/ine i the distrit ourt orret deter/ined no =enuine issue o /ateria ats

eIisted and i it appied the a orret. R.C. Hobbs Enter. H 20.

DISCUSSION

x.Did the District Court err in granting summary judgment to the Kramer Brothers Co

!artnership"


53/54

y.

#.

aa.*s a prei/inar /atter e /ust deter/ine hether ,ons appea is proper ;eore the

Court. !he Partnership ontends that ,ons ai/s ere disposed o ; the ,istrit Courts

*u=ust 2002 order hih onuded that ai/s aruin= prior to 'a 23 1995 ere ti/e

;arred and are not proper ;eore this Court or deter/ination. !he Partnership notes that ,on

as =ien notie o the entr o Bud=/ent on the *u=ust 2002 order dis/issin= his ai/s on

anuar 30 2003 ;ut did not appea unti $epte/;er 17 2003 ei=ht /onths ater. e o;sere

that the appea as ta?en ooin= the ,istrit Courts su//ar Bud=/ent order on *u=ust 21

2003 hih purported disposed o an re/ainin= ai/s. !hus the appea as ta?en ithin

thirt das pursuant to &ue 5@aA@1A '.&.*pp.P. ater the su//ar Bud=/ent order ;ut ei=ht

/onths ater the notie o entr o Bud=/ent on the ourts *u=ust 2002 order dis/issin= ai/s.

e a=ree ith the Partnership. *thou=h urther proeedin=s ere onduted ooin= the

,istrit Courts *u=ust 2002 order the purpose o those proeedin=s as to deter/ine hether

an ai/s had suried the appiation o the ti/e ;ar. !he ,istrit Court had onuded in its

*u=ust 2002 order that ,on eIpress ithdre ro/ the Partnership upon his reoation to $an

)raniso in u 1994 and thereore his ri=ht to /aintain an ation or an aountin=

distri;ution or an other ai/ under the &%P* arued at that ti/e. *thou=h the ,istrit Court

addressed seera /otions ater the *u=ust 2002 order the on su;stantie question hih

re/ained as hether ,on had an ai/s or hih he oud sti /aintain an ation. n


54/54

bb.its su//ar Bud=/ent order o *u=ust 21 2003 the ourt athou=h addressin= the parties

ne ar=u/ents onuded that none o ,ons asserted ai/s had suried its *u=ust 2002 order

appin= the ie-ear statute o i/itationsessentia a restate/ent o its earier hodin=. !hus

an ri=ht to an aountin= or distri;ution o the Partnerships assets that /a hae eIisted

cc.outside the issues setted ; the parties (to;er 2002 sette/ent a=ree/ent had ;een resoed

; the earier order ro/ hih appea as not ti/e ta?en.

dd.

ee.e air/ the Bud=/ent entered ; the ,istrit Court.

M$M ' &C#

e Conur:

M$M *&L* '. +&*M$M ("N *&N#& M$M . LL*' L#*P"*&!

176164339 chapter 16 solution manual

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