1.5.1) Marshaling of Assets Doctrine and Liquidation of A Partnership
1.5.1) Marshaling of Assets Doctrine and Liquidation of A Partnership
Additional Information:
BAKER is insolvent & personal creditors file Br 30,000 claim against this partner’s share
of partnership property.
Non-cash assets are sold for Br 100,000 (the book value is Br 150,000)
Partnership liabilities of Br 80,000 are then paid
An additional Br 5,000 should be forthcoming from ABLE to eradicate the single
negative balance. This raises cash to Br 55,000 (30,000 + 20,000 + 5,000). The
liquidation losses reduce Baker’s capital below Br 30,000 therefore; Baker’s creditors
will get only Br 25,000 despite the remaining Br 5,000 debt. No further claim against the
business.
Payment of Liabilities:
Liabilities (Partnership Liabilities)...............................80,000
Cash..................................................................... 80,000
Distribution of Cash to Partners:
BAKER, Capital (Creditors of BAKER)......................25,000
CANNON, Capital........................................................20,000
DUKE, Capital..............................................................10,000
Cash.................................................................... 55,000
The capital accounts for MORRIS and NEWTON report negative capital balances of Br 9,000
(Br 15,000 – Br 24,000) and Br 2,000 (Br 10,000 – 12,000), respectively.
NEWTON is personally solvent
MORRIS’s personal financial condition does not allow him for any further contribution
Absorbing loss from Morris’s Capital deficit:
NEWTON, Capital (1/3)...............................................3,000
OLSEN, Capital (1/3)....................................................3,000
PRINCE, Capital (1/3)..................................................3,000
MORRIS, Capital................................................ 9,000
Newton’s Cash Contribution
Cash ..............................................................................5,000
NEWTON, Capital.............................................. 5,000
Additional Information:
Personal financial condition
KELLER LEWIS MORGAN NORRIS
Capital Capital Capital Capital
Personal Assets...............................25,000 56,000 26,000 150,000
Personal Liabilities.........................45,000 56,000 29,000 60,000
Keller is personally insolvent thus the deficit is written-off
Loss or profit is shared equally
Example 1.20: AREGA and BELAY have been running a partnership together for a number of
years. The partnership had the following balance sheet on June 30, 200
AREGA and BELAY Partnership
Balance Sheet
June 30, 2000
Cash........................................... Br 10,000 Liabilities...................................Br 20,000
Other Assets............................... 75,000 Loan Payable to AREGA........... 20,000
AREGA, Capital (50%)............. 40,000
BALAY, Capital (50%)............. 5,000
Total Assets............................... 85,000 Total Liabilities and Capital....... 85,000
Instruction: Determine partners’ final capital balances assuming that the assets are sold at Br
35,000 and in accordance with the Right to offset Doctrine.
AREGA and BALAY Partnership
Statement of Partners’ Capital and Cash Balances
June 30, 2000
AREGA BALAY
Cash
Capital Capital
Beginning Balance....................................................
10,000 40,000 5,000
Loan Account ( + Loan from & - Loan to)............... –0– –0– 20,000
Adjusted Capital Balances........................................ 10,000 40,000 25,000
Assets sold................................................................
35,000 (20,000) (20,000)
Balances....................................................................
45,000 20,000 5,000
Payment of liabilities................................................
20,000 –0– –0–
Final Balances..........................................................
25,000 20,000 5,000
Example 1.21:
RICH, SAND & TOLL Partnership
Balance Sheet
June 30, 2000
Cash........................................... Br 10,000 Liabilities...................................Br 60,000
Loan to Toll............................... 5,000 Loan from Sand......................... 5,000
Other Assets............................... 100,000 Rich, Capital.............................. 5,000
Sand, Capital.............................. 10,000
Toll, Capital............................... 35,000
Total Assets............................... 115,000 Total Liabilities and Capital....... 115,000
Additional Information:
Partner Personal Assets Personal Liabilities
RICH 100,000 25,000
SAND 50,000 50,000
TOLL 40,000 60,000
Instruction: Determine partners’ final capital balances assuming that:
Other assets are sold for Br 40,000
Marshalling of assets doctrine
Right to offset doctrine
Equal sharing of profit or loss