Let's **prepare a step-by-step predistribution plan** for the liquidation, showing which partner will receive cash first and how much. ## Step 1: **List Beginning Capital Balances** | | Chen | Korhonen | Lebuca | Swid | |------------|--------|----------|--------|--------| | Beginning balances | $79,000 | $32,700 | $62,000 | $25,700 | **Profit & Loss Sharing Ratio:** Chen : Korhonen : Lebuca : Swid = 4 : 3 : 2 : 1 --- ## Step 2: **Determine the loss absorption per $10,000 assumed loss** The total ratio parts = 4 + 3 + 2 + 1 = **10** - For each $10,000 loss: - Chen absorbs $4,000 - Korhonen absorbs $3,000 - Lebuca absorbs $2,000 - Swid absorbs $1,000 --- ## Step 3: **Find Who Will Be Eliminated First** We must find which partner's capital will reach zero first as losses are applied in the profit and loss sharing ratio. - **Swid:** $25,700 ÷ $1,000 = 25.7 rounds - **Korhonen:** $32,700 ÷ $3,000 ≈ 10.9 rounds - **Lebuca:** $62,000 ÷ $2,000 = 31 rounds - **Chen:** $79,000 ÷ $4,000 ≈ 19.75 rounds **Korhonen** will be eliminated first (lowest rounds). ### Calculate the maximum loss until Korhonen is at zero: - $32,700 ÷ $3,000 = 10.9 rounds - Total assumed loss: 10.9 × $10,000 = **$109,000** --- ## Step 4: **Apply $109,000 Loss in Ratio** | | Chen | Korhonen | Lebuca | Swid | |------------|------------|------------|------------|------------| | Beginning | $79,000 | $32,700 | $62,000 | $25,700 | | Assumed loss | -$43,600 | -$32,700 | -$21,800 | -$10,900 | | Balances | $35,400 | $ | $40,200 | $14,800 | > **Calculation for each:** > - Chen: $109,000 × 4/10 = $43,600 > - Korhonen: $109,000 × 3/10 = $32,700 > - Lebuca: $109,000 × 2/10 = $21,800 > - Swid: $109,000 × 1/10 = $10,900 --- ## Step 5: **Next, Apply Loss to Remaining Partners (Chen, Lebuca, Swid)** Now, Korhonen is out, so new ratio for remaining: Chen : Lebuca : Swid = 4 : 2 : 1 Total = 7 parts - Chen: 4/7 - Lebuca: 2/7 - Swid: 1/7 ### Next, calculate who will be eliminated next: - Swid: $14,800 ÷ 1/7 = $103,600 (but that's the total loss, let's check per $7,000 loss) - Swid: $14,800 ÷ ($1,000 per $7,000) = 14.8 rounds - Lebuca: $40,200 ÷ ($2,000 per $7,000) = 20.1 rounds - Chen: $35,400 ÷ ($4,000 per $7,000) = 8.85 rounds So **Chen** will be eliminated next. ### Calculate the assumed loss until Chen hits zero: - $35,400 ÷ (4/7) = $61,950 --- ### Distribute $61,950 in the new ratio: Each $7,000 loss: - Chen: $4,000 - Lebuca: $2,000 - Swid: $1,000 So, over $61,950: - Chen: $61,950 × 4/7 = $35,400 (hits zero) - Lebuca: $61,950 × 2/7 = $17,700 - Swid: $61,950 × 1/7 = $8,850 #### Update balances after this loss: | | Chen | Korhonen | Lebuca | Swid | |------------|----------|----------|--------|--------| | Balances | $ | $ | $22,500 | $5,950 | --- ## Step 6: **Now Only Lebuca and Swid Remain** Ratio: 2:1 - Lebuca: $22,500 - Swid: $5,950 Swid will be eliminated next. - $5,950 ÷ (1/3) = $17,850 Distribute $17,850: - Lebuca: $17,850 × 2/3 = $11,900 - Swid: $17,850 × 1/3 = $5,950 Update balances: | | Chen | Korhonen | Lebuca | Swid | |------------|----------|----------|--------|--------| | Balances | $ | $ | $10,600 | $ | --- ## Step 7: **Final Predistribution Plan Table** | | Chen | Korhonen | Lebuca | Swid | |--------------|--------|----------|--------|--------| | Beginning | 79,000 | 32,700 | 62,000 | 25,700 | | Assumed loss | -43,600| -32,700 | -21,800| -10,900| | Balances | 35,400 | | 40,200 | 14,800 | | Assumed loss | -35,400| | -17,700| -8,850 | | Balances | | | 22,500 | 5,950 | | Assumed loss | | | -11,900| -5,950 | | Balances | | | 10,600 | | --- ## **Summary and Final Answer** - **Korhonen** will be the first to receive any cash from liquidation, but strictly, **Chen** is the first to receive cash, up to the point where their adjusted capital is equal to Korhonen's (i.e., after reducing capital by assumed losses). - The maximum amount that **Korhonen** can receive before others is **$32,700**, which zeroes out their capital. - **After Korhonen, Chen receives cash up to $35,400**, then Lebuca, then Swid, as per remaining balances. --- ### **Final Table (Predistribution Plan)** | | Chen | Korhonen | Lebuca | Swid | |--------------|--------|----------|--------|--------| | Beginning | 79,000 | 32,700 | 62,000 | 25,700 | | Assumed loss | -43,600| -32,700 | -21,800| -10,900| | Balances | 35,400 | | 40,200 | 14,800 | | Assumed loss | -35,400| | -17,700| -8,850 | | Balances | | | 22,500 | 5,950 | | Assumed loss | | | -11,900| -5,950 | | Balances | | | 10,600 | | **Korhonen is the first to receive cash ($32,700) before others receive any cash.**