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:Item Book Value Market ValueCash . . . . . . . . . . . . . . . . . . . . . . . . $ 120,000 $ 120,000Noncash assets . . . . . . . . . . . . . . . . 1,500,000 1,380,000Liabilities . . . . . . . . . . . . . . . . . . . . . 1,400,000 1,350,000Klaproth, capital . . . . . . . . . . . . . . . 110,000Stone, capital . . . . . . . . . . . . . . . . . 20,000Jackson, capital . . . . . . . . . . . . . . . . 90,000Unrecorded contingent liabilities. . . — 60,000Estimated liquidation expense. . . . . 25,000 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:Component Klaproth Stone JacksonSalaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 $130,000 $90,000Bonus as a percent of traceable net sales . 5% 0% 10%Profit and loss percentages . . . . . . . . . . . . . . 35% 30% 35%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:2016 Factors Klaproth Stone JacksonTraceable net sales . . . . . . . . . . . . . $600,000 $800,000 $500,000Annual draws . . . . . . . . . . . . . . . . . 20,000 40,000 20,000Investment of capital . . . . . . . . . . . . 50,000 30,000 —Net income is $120,0002017 FactorsTraceable net sales . . . . . . . . . . . . . $720,000 $1,000,000 $700,000Annual draws . . . . . . . . . . . . . . . . . — 40,000 20,000Net income is $200,000As of year-end 2017, receivables and inventory are forecasted to be as follows: Book Value Market Value AdjustmentReceivables . . . . . . . . . . . . . . . . . . . $ 350,000 $ 300,000 $ (50,000)Inventory of raw materials . . . . . . . 220,000 190,000 (30,000)Work in process . . . . . . . . . . . . . . . 610,000 500,000 (110,000)Finished goods . . . . . . . . . . . . . . . . 600,000 440,000 (160,000)Total. . . . . . . . . . . . . . . . . . . . . . . . . $1,780,000 $1,430,000 $(350,000)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.
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
Item Book Value Market Value
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 120,000 $ 120,000
Noncash assets . . . . . . . . . . . . . . . . 1,500,000 1,380,000
Liabilities . . . . . . . . . . . . . . . . . . . . . 1,400,000 1,350,000
Klaproth, capital . . . . . . . . . . . . . . . 110,000
Stone, capital . . . . . . . . . . . . . . . . . 20,000
Jackson, capital . . . . . . . . . . . . . . . . 90,000
Unrecorded
Estimated liquidation expense. . . . . 25,000
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:
Component Klaproth Stone Jackson
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 $130,000 $90,000
Bonus as a percent of traceable net sales . 5% 0% 10%
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:
2016 Factors Klaproth Stone Jackson
Traceable net sales . . . . . . . . . . . . . $600,000 $800,000 $500,000
Annual draws . . . . . . . . . . . . . . . . . 20,000 40,000 20,000
Investment of capital . . . . . . . . . . . . 50,000 30,000 —
Net income is $120,000
2017 Factors
Traceable net sales . . . . . . . . . . . . . $720,000 $1,000,000 $700,000
Annual draws . . . . . . . . . . . . . . . . . — 40,000 20,000
Net income is $200,000
As of year-end 2017, receivables and inventory are
Book Value Market Value Adjustment
Receivables . . . . . . . . . . . . . . . . . . . $ 350,000 $ 300,000 $ (50,000)
Inventory of raw materials . . . . . . . 220,000 190,000 (30,000)
Work in process . . . . . . . . . . . . . . . 610,000 500,000 (110,000)
Finished goods . . . . . . . . . . . . . . . . 600,000 440,000 (160,000)
Total. . . . . . . . . . . . . . . . . . . . . . . . . $1,780,000 $1,430,000 $(350,000)
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.
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