Question

Sid, Bailey, Brian, and Rick formed a general partnership to operate a Chinese restaurant. Their written partnership agreement provided that the profits would be divided so that Sid would receive 40%, Bailey, 30%, Brian, 20%, and Rick 10%. There was no provision in the agreement about how to allocate losses.

Answer the following questions:

1) In the first year, Bill sued the partnership getting a judgment of $100,000. From whom can Bill collect the judgment? Can he choose which of them to come after? Is there a particular order that he should pursue?

2) If in the second year, Bailey paid the entire $100,000 to Bill, what rights does she have? Be specific.

3) At the end of the fifth year, the partnership had a loss of $200,000. The capital accounts of the partners before allocation of the loss was Sid, $120,000, Bailey, $100,000,Brian $75,000, and Rick $11,000. What would be the balance in the capital account of each partner after allocation of the loss? Be sure to show and clearly label your work.

4) At the end of the fifth year, the partnership decided to terminate. After all assets had been sold and all liabilities paid, the partnership was left with a cash balance of $106,000. Using the ending capital account balances from question #3, how much should each partner receive assuming that Rick refuses to make any further contribution to the partnership? Hint: if any partner has a deficit in his/her capital account at the time of winding up, the deficit is treated as a loss to be allocated per the partnership agreement to the remaining partners. Be sure to show and clearly label all your work.

Answer 1

Answer 1:

Bill can collect the amount of judgement from all the partners of the business and the same would be collected according to the percentage of shares being held by them. Bill cannot choose the sequence of the partners for the payment of the judgement. It will be the partners who would be deciding that in what ratio the partners would be paying the judgement and it would generally follow the sequence of Sid, Bailey, Brian, and Rick as per the shares of their profits.

Answer 2:

If Bailey had paid the entire judgement amount of $100000, then she is entitled to compensate herself of receiving the $100000 from the profits of the business for that year before actually sharing the profits between anyone of them.

Answer 3:

Loss will be shared among the partners in the following ratio:

Loss to Sid = 40 % of 200000 = (40/100) x 200000 = $80000

Loss to Bailey = 30% of 200000 = (30/100) x 200000 = 60000

Loss to Brian = 20 % of 200000 = (20/100) x 200000 = $40000

Loss to Rick = 10 % of 200000 = (10/100) x 200000 = $20000

Capital account of Sid = $120000 - $80000 = $40000

Capital account of Bailey = $100000 - $60000 = $40000

Capital account of Brian = $75000 - $40000 = $35000

Capital account of Rick = $11000 - $20000 = - $9000 (business has a liability to pay to Rick)

Answer 4:

Since the capital account of Rick was deficit of $9000, thus after liquidation, his $9000 will be paid initially before distributing the liquidation amount.

Liquidation amount left = $106000-$9000 = $97000

Sid would receive = 40% of $97000 = (40/100) x 97000 = $38800

Bailey would receive = 30% of $97000 = (30/100) x 97000 = $29100

Brian would receive = 20% of $97000 = (20/100) x 97000 = $9400

Rick would receive = 10% of $97000 = (10/100) x 97000 = $9700