Nelson, Parker, and Rice are partners who share profits 4:3:3, respectively. Parker decides that it would be more profitable for him to operate as a sole proprietor. Nelson and Rice are in agreement that life would be more rewarding if Parker were to enter into direct competition with them. Nelson and Rice make repeated attempts to acquire Parker’s interest in the partnership. Unable to reach an agreement, the partners mutually agree that their association should be dissolved. A condensed balance sheet before realization of assets shows the following balances:Question:

 

Nelson, Parker, and Rice are partners who share profits 4:3:3, respectively. Parker decides
that it would be more profitable for him to operate as a sole proprietor. Nelson and Rice are
in agreement that life would be more rewarding if Parker were to enter into direct competition
with them. Nelson and Rice make repeated attempts to acquire Parker’s interest in the
partnership. Unable to reach an agreement, the partners mutually agree that their association
should be dissolved. A condensed balance sheet before realization of assets shows the
following balances:

Assets

Cash 5000

Other assets 60000

Total 65000

Liabilities and Capital

Liabilities 20000

Nelson, Capital 20000

Parker, Capital 12,000

Rice, Capital 13000

Total 65000

Asset realization is accomplished in four stages as follows:

Stage Sales Price Book Value

1 $16,000 $12,000

2 12,000 10,000

3 10,000 20,000

4 2,000 18,000

The partners prefer that cash be distributed as soon as it is available.
Required:
Prepare a summary in columnar form of the partnership realization and liquidation. You
should prepare supporting schedules of safe payments before each cash distribution.

Solution:

supporting schedules of safe payments before each cash distribution.

Â	Sales Price	Book value	Profit/ loss = sales - book value	Nelsons Share (4 or 40%)	Parker Share(3 or 30%)	Rice Share (3 or 30%)
Stage 1	$ 16,000	$ 12,000	$          4,000	$    1,600	$    1,200	$    1,200
Stage 4	$ 12,000	$ 10,000	$          2,000	$        800	$        600	$        600
Stage 3	$ 10,000	$ 20,000	$     (10,000)	$ (4,000)	$ (3,000)	$ (3,000)
Stage 4	$    2,000	$ 18,000	$     (16,000)	$ (6,400)	$ (4,800)	$ (4,800)
Share of loss on realization of asset				$ (8,000)	$ (6,000)	$ (6,000)

Columnar form of the partnership realization and liquidation.

Particulars	Cash	+	Noncash	=	Liabilities	+	Nelsons Capital	+	Parker Capital	+	Rice Capital
Balance before liquidation	$         5,000	+	$         60,000	=	$        20,000	+	$        20,000	+	$        12,000	+	$        13,000
Sales of non cash assets and allocation of loss/ gain	$        40,000	+	$       (60,000)	=	Â	+	$        (8,000)	+	$        (6,000)	+	$        (6,000)
New Balances	$        45,000	+	$                - Â	=	$        20,000	+	$        12,000	+	$          6,000	+	$          7,000
Pay Liabilities	$     (20,000)	+	Â	=	$     (20,000)	+	Â	+	Â	+	Â
New Balances	$        25,000	+	$                - Â	=	$              - Â	+	$        12,000	+	$          6,000	+	$          7,000
Cash Distibutions to partners	$     (25,000)	+	Â	=	Â	+	$     (12,000)	+	$        (6,000)	+	$        (7,000)
Final Balances	$               - Â	+	$                   - Â	=	$                 - Â	+	$                 - Â	+	$                 - Â	+	$                 - Â