Jacobs, a client of yours, is a partner in a retail establishment that has been experiencing difficult times. Shortly after deciding to liquidate the partnership, partner Williams offers to buy out the interests of the other partners. Jacobs is trying to decide whether it would be best for her to liquidate the partnership or accept the offer to sell her interest.
Prior to liquidation, the partnership has the following condensed balance sheet:
The partners’ profit and loss percentages are shown parenthetically after the above capital balances.
If the partnership is liquidated, the following information will be relevant:
1. Jacobs estimates that additional unrecorded liabilities of $12,000 will be discovered.
2. Noncash assets can be sold for approximately $232,000.
3. Liquidation expenses, including brokerage and professional fees, will be approximately $18,000.
4. Williams will require repayment of his loan to the partnership as soon as cash is available.
5. Harrington has a very weak financial situation with personal assets, excluding his interest in the partnership, of $145,000 and personal liabilities of $132,000. Harrington will agree to contribute his net personal assets to the partnership.
6. All remaining available cash will be distributed immediately upon conclusion of the liquidation process.
If the offer by Williams occurs, the following information will be relevant:
1. Total capital of the partnership will be reduced by $70,000 to reflect possible unrecorded liabilities and/or asset write-downs.
2. Jacobs and Harrington will be offered 60% of their capital balances after giving consideration to the above adjustments.
3. Williams will pay each of the partners 50% of the balance due as a down payment and the balance due will be paid over 24 months in equal installments bearing a 0% interest. A reasonable market rate of interest will be 6%.
Prepare appropriate schedules that can be presented to Jacobs in order to assist her in her decision regarding which course of action to follow.

  • CreatedApril 13, 2015
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