Chapter 15, Problem 9P

To determine

Identify the correct option for the amount of cash that person B will receive before any of the other partners collect any cash.

Answer to Problem 9P

Option c. The amount of cash that person B will receive before any of the other partners collect any cash is $17,000.

Explanation of Solution

Calculate the amount of cash available:

$\begin{array}{c}\text{Cash}\text{available}=\text{Assets}-\text{Liabilities}-\text{Liquidation}\text{expenses}\\ =\$400,000-\$234,000-\$20,000\\ =\$400,000-\$254,000\\ =\$146,000\end{array}$

Calculate the maximum allocated loss to each partner:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{K}=\frac{\$59,000}{40\%}\\ =\$59,000\times \frac{100}{40}\\ =\frac{\$5,900,000}{40}\\ =\$147,500\end{array}$

Now, find for all the other partners:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person M}=\frac{\$39,000}{30\%}\\ =\$39,000\times \frac{100}{30}\\ =\frac{\$3,900,000}{30}\\ =\$130,000\end{array}$

Now, find for partner B:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person B}=\frac{\$34,000}{10\%}\\ =\$34,000\times \frac{100}{10}\\ =\frac{\$3,400,000}{10}\\ =\$340,000\end{array}$

Now, find for partner J:

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{J}=\frac{\$34,000}{20\%}\\ =\$34,000\times \frac{100}{20}\\ =\frac{\$3,400,000}{20}\\ =\$170,000\end{array}$

Person M shares a minimum amount of loss and is in the most feasible condition with 30% share and maximum allocated loss of $130,000.

Calculate the distribution of loss of $130,000 to all the partners

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{K}=\$130,000\times 40\%\\ =\$52,000\\ \text{Loss}\text{to}\text{person}\text{M}=\$130,000\times 30\%\\ =\$39,000\end{array}$

Now, loss to other partners

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{B}=\$130,000\times 10\%\\ =\$13,000\\ \text{Loss}\text{to}\text{person}\text{J}=\$130,000\times 20\%\\ =\$26,000\end{array}$

Loss distribution to all the partners

Particulars	Person K	Person M	Person B	Person J
Beginning balance	$    59,000	$   39,000	$  34,000	$  34,000
Loss	$  (52,000)	$ (39,000)	$ (13,000)	$ (26,000)
Ending balance	$      7,000	$            -	$  21,000	$    8,000

Table: (1)

Calculate maximum allocated loss to other three partners

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{K}=\frac{\$7,000}{\frac{4}{7}}\\ =\$7,000\times \frac{7}{4}\\ =\frac{\$49,000}{4}\\ =\$12,250\end{array}$

Now, find for partner B

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person B}=\frac{\$21,000}{\frac{1}{7}}\\ =\$21,000\times 7\\ =\$147,000\end{array}$

Now, find for partner J

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{J}=\frac{\$8,000}{\frac{2}{7}}\\ =\$8,000\times \frac{7}{2}\\ =\frac{\$56,000}{2}\\ =\$28,000\end{array}$

Person K shares a minimum amount of loss and is in the most feasible condition with 40% share and maximum allocated loss of $12,250.

Calculate the distribution of loss of $12,250 to all the partners

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{K}=\$12,250\times \frac{4}{7}\\ =\$7,000\end{array}$

Now, loss to other partners

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{B}=\$12,250\times \frac{1}{7}\\ =\$1,750\\ \text{Loss}\text{to}\text{person}\text{J}=\$12,250\times \frac{2}{7}\\ =\$3,500\end{array}$

Loss distribution to all the partners

Particulars	Person K	Person B	Person J
Beginning balance	$      7,000	$   21,000	$    8,000
Loss	$    (7,000)	$   (1,750)	$   (3,500)
Ending balance	$              -	$   19,250	$    4,500

Table: (2)

Calculate maximum allocated loss to other two partners

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person B}=\frac{\$19,250}{\frac{1}{3}}\\ =\$19,250\times 3\\ =\$57,750\end{array}$

Now, find for partner J

$\begin{array}{c}\text{Maximum}\text{allocated}\text{loss}\text{to}\text{person}\text{J}=\frac{\$4,500}{\frac{2}{3}}\\ =\$4,500\times \frac{3}{2}\\ =\frac{\$13,500}{2}\\ =\$6,750\end{array}$

Person J shares a minimum amount of loss and is in the most feasible condition with 20% share and maximum allocated loss of $6,750.

Calculate the distribution of loss of $6,750 to all the partners

$\begin{array}{c}\text{Loss}\text{to}\text{person}\text{B}=\$6,750\times \frac{1}{3}\\ =\$2,250\\ \text{Loss}\text{to}\text{person}\text{J}=\$6,750\times \frac{2}{3}\\ =\$4,500\end{array}$

Loss distribution to all the partners

Particulars	Person B	Person J
Beginning balance	$    19,250	$     4,500
Loss	$    (2,250)	$   (4,500)
Ending balance	$    17,000	$            -

Table: (3)

a.

$12,250 is the incorrect option because this is not the amount of cash that person B will receive before any of the other partners collect any cash.

b.

$14,750 is the incorrect option because this is not the amount of cash that person B will receive before any of the other partners collect any cash.

c.

$17,000 is the correct option because this is the amount of cash that person B will receive before any of the other partners collect any cash.

d.

$19,500 is the incorrect option because this is not the amount of cash that person B will receive before any of the other partners collect any cash.