At the end of 2015, Klaproth finds himself in a difficult situation. He is a partner in a residential construction company, and the housing market has been adversely impacted by interest rates, mortgage defaults, and a surplus of existing homes for sale. As a result, Klaproth and certain other partners are considering ceasing operations as of year-end 2015 and liquidating the partnership. Values of liquidated net assets are estimated to be as follows:
As of March 31, 2016, the partners’ personal net assets (deficit) were $220,000, $12,500, and $100,000 for Klaproth, Stone, and Jackson, respectively. If a partner develops a deficit capital balance, they would likely contribute an amount equal to their net personal assets.
Certain partners feel that things will improve over the next two years and have made an alternative proposal to Klaproth. Under this proposal, Klaproth would continue his involvement in the company and continue to share profits and losses as before. On March 31, 2018, the partnership would buy Klaproth’s interest for 110% of his capital balance as of December 31, 2017, after adjusting receivables and inventory to their market values as of year-end 2017.
The partnership’s profit-sharing agreement is as follows:
If income is not sufficient to satisfy all provisions of the profit agreement, the profit and loss percentages are to be used to absorb any deficiencies. You are also to assume that all net income will be reinvested in noncash assets. It is anticipated that factors impacting the allocation of profits for the years 2016 and 2017 will be as follows:
As of year-end 2017, receivables and inventory are forecasted to be as follows:
In anticipation of a meeting with Klaproth, prepare a schedule that will help him with respect to which course of action might be most appropriate.