Horngren’s Accounting, Volume 2, 11th Canadian Edition by Tracie Miller-Nobles Solution manual

*   Allocation of loss to partners:                                          ** Allocation of Pavelski deficiency to remaining partners:
    Loss:           $475,200 – $110,400         =                          ($364,800)     Ovechin:         ($32,480) ´ 0.20/0.40      =  ($16,240)
    Pavelski:     ($364,800) ´ 0.60                 =                          ($218,880)              Oh:         ($32,480) ´ 0.20/0.40      =  ($16,240)
    Ovechin:     ($364,800) ´ 0.20              =    ($72,960)
    Oh:              ($364,800) ´ 0.20              =   ($72,960)
 
Req. 2
If one partner has no capital and cannot personally cover the deficit, then the deficit must be covered by the other partners. They can then personally sue the partner for the deficit.
 
Challenge Problems
P12-1C
There are two issues:
•      If they borrow, what is the cost of the additional funds that must be met? The cost is tax deductible but they must service the debt. By taking on partners or by selling shares, they would not have to pay out an annual cost—i.e., if there are no profits, then there will be no distribution to partners or shareholders.
•      There would be a loss of control if they take on more partners or if they incorporate and sell shares, but no annual charge for funds would be needed.
They need not lose control if they issued preferred shares to the investors. They could also issue common shares and make their shares Class A shares with multiple votes and issue Class B shares with only one vote each.
I would recommend that they form a company with a structure so that they maintain the control but give the investors the inducement of sharing the profits.
 

P12-2C
 
 PerrierSalterPattenTotal
Total net income      $400,000
Capital @ 6%$13,725(a)$65,475(b)$29,475(c)$108,675
Service75,000 9,375 75,000   159,375
            268,050
Distribution52,780(d)26,390(e)52,780(d)131,950
 $141,505 $101,240 $157,255 $400,000
 
The student should suggest a new partnership agreement that will recognize the partner concerns.
Calculations for allocation to partners:
(a)    $228,750 ´ 0.06 = $13,725
(b)   $1,091,250 ´ 0.06 = $65,475
(c)    $491,250 ´ 0.06 = $29,475
(d)   ($400,000 – $268,050) ´ 0.40 = $52,780
(e)    ($400,000 – $268,050) ´ 0.20 = $26,390

Decision Problem
(10–15 min.) DP12-1
Req. 1
The ratio of partner capital balance at December 31, 2020, is Barclay 59.2 percent (that is, $152,500/$257,500) and Resultan 40.8 percent (that is, $105,000/$257,500). This approximately 3:2 (60:40) ratio of capital balances differs from the 2:1 ratio of partner investments and profit sharing because of partner withdrawals. Barclay has withdrawn a higher proportion of her partnership profits than Resultan has. Thus, Barclay’s capital balance is only approximately six-tenths of the total partnership capital rather than two-thirds.
Req. 2
Resultan may be unhappy because Barclay withdraws proportionately more of her partnership profits than Resultan does. Barclay’s withdrawals for personal use reduce the assets available for business use. Resultan, on the other hand, leaves a higher proportion of her profits in the business. Resultan may believe her contribution to revenues is not given enough weight in the profit sharing.