Lois Allen and Barbara Brett established a limited liability partnership and shared net income…

Lois Allen and Barbara Brett established a limited liability partnership and shared net income and losses equally. Although the partners began business with equal capital account balances, Allen made more frequent authorized cash withdrawals than Brett, with the result that her capital account balance became the smaller of the two. The partners decided to liquidate the partnership on June 30, 2005; on that date the accounting records were closed and financial statements were prepared. The balance sheet included capital of $40,000 for Allen and $60,000 for Brett, as well as a $10,000 loan payable to Brett.

The liquidation of the partnership was managed by Allen, because Brett was hospitalized by illness on July 1, 2005, the day after partnership operations were suspended. The procedures followed by Allen were as follows: (1) realize all the noncash assets at the best amounts obtainable; (2) pay the outside creditors in full; (3) pay Brett’s loan; and (4) divide all remaining cash between Brett and herself in the 40 : 60 ratio represented by their capital account balances.

When Brett was released from the hospital on July 5, 2005, Allen informed her that through good luck and hard work, she had been able to realize the noncash assets and complete the liquidation during the five days of Brett’s hospitalization. Thereupon, Allen delivered two partnership checks to Brett. One check was for $10,000 in payment of the loan; the other was in settlement of Brett’s capital account balance.

Instructions

a. Do you approve of the procedures followed by Allen in the liquidation? Explain.

b. Assume that the liquidation procedures followed resulted in the payment of $24,000 to Brett in addition to the payment of her loan in full. What was the partnership’s gain or loss on the realization of assets? If you believe that other methods should have been followed in the liquidation, explain how much more or less Brett would have received under the procedure you recommend.

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