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1、 2009 Pearson Education, Inc. publishing as Prentice Hall 178 Chapter 16 PARTNERSHIP LIQUIDATION Chapter Outline PARTNERSHIP LIQUIDATION A A partnership liquidation is the termination of a partnership as a business entity. B Overview of liquidation process for a solvent partnership (partnership asse
2、ts are greater than partnership liabilities): 1 Noncash assets are converted into cash. 2 Gains and losses and liquidating expenses incurred during the liquidation period are recognized. 3 Liabilities are settled. 4 Cash is distributed to the partners according to the final balances in their capital
3、 accounts. C Order of distribution of assets in a liquidation of a partnership 1 Amounts owed to creditors other than partners 2 Amounts due to partners liquidating their capital balances upon conclusion of the liquidation of partnership assets and liabilities a All profits, losses, and drawing bala
4、nces are closed to capital accounts before any distributions are made. D Partnership liquidation statement is a summary of transactions and balances during the liquidation stage. E Debit capital balances in a solvent partnership may result from recognizing losses during the liquidation process. 1 Th
5、e partners with debit balances are normally obligated to use their personal assets to settle their partnership obligations. 2009 Pearson Education, Inc. publishing as Prentice Hall 179 2 If the partners with debit capital balances have inadequate personal assets, the partners with credit balances no
6、rmally assume losses equal to the debit capital balances and share the losses in their relative profit and loss sharing ratios. 3 If the partnership has a loan balance from an insolvent partner a No cash should be distributed for the loan without agreement from all partners. b A partners personal cr
7、editors have a prior claim on personal assets. SCHEDULE OF SAFE PAYMENTS (Illustration 16-1) A Safe payments are distributions to partners that can be made with the assurance that any resources distributed will not have to be returned to the partnership (assumes a worst-case scenario) B In calculati
8、ng safe payments, the following assumptions are made: 1 All partners are considered personally insolvent. 2 All noncash assets are considered losses. 3 Some cash may be withheld to cover liquidating expenses, unrecorded liabilities, and general contingencies. The cash withheld is considered a loss i
9、n determining safe payments. C The safe payments schedule for determining advance distributions to partners is prepared after non-partner liabilities have been paid. 1 The schedule begins with partners equity a Each partners capital account plus loans to the partnership and less loans from the partn
10、ership. 2 Possible losses (from noncash assets and cash withheld balances) are allocated to the partners in the profit and loss sharing ratios and deducted from the equity balances. 3 Any negative partner equity is allocated to partners with equity in their relative profit and loss sharing ratios. 4
11、 Step 3 is repeated until no remaining partner shows negative equity. 2009 Pearson Education, Inc. publishing as Prentice Hall 180 5 The amount shown for partners with equity will equal the cash available for distribution. 6 Advance distributions require approval from all partners. INSTALLMENT LIQUI
12、DATION A Installment liquidations involve the distribution of cash to partners as it becomes available during the liquidation period and before all liquidation gains and losses have been realized. 1 No cash is distributed to partners until all nonpartner liabilities have been paid. 2 Payments to par
13、tners can be determined by a safe payment schedule for each installment distribution. 3 When the partners capital accounts are aligned in the profit and loss sharing ratios, safe payment schedules will not be necessary. 4 Once all the partners are included in an installment distribution, future inst
14、allment payments to the partners will be in the profit sharing ratios. Thus, additional safe payment schedules are not necessary. PARNTER VULNERABILITY RANKING A Cash distribution plans involve ranking partners in terms of their vulnerability to possible losses, preparing a schedule of assumed loss
15、absorption, and preparing a cash distribution plan. B How vulnerable a partner is to possible losses (vulnerability ranking) is determined by dividing each partners equity by his or her profit sharing ratio. 1 This amount is the maximum loss that the partner could absorb without reducing his or her
16、equity below zero. C A schedule of assumed loss absorption is prepared using the vulnerability rankings. 1 The schedule begins with pre-liquidation equities and charges each partners equity with its share of the partnership loss that would exactly eliminate the equity of the most vulnerable partner.
17、 2009 Pearson Education, Inc. publishing as Prentice Hall 181 2 Each remaining partners equity is charged with its share of the loss that would exactly eliminate the equity of the next most vulnerable partner. 3 This process is repeated until the equities of all but the least vulnerable partner have
18、 been reduced to zero. D A cash distribution plan is prepared from the schedule of assumed loss absorption. 1 Under the plan, the first cash available for distribution goes to pay nonpartner liabilities. 2 Next, the least vulnerable partner will receive an amount of cash that will align that partner
19、s equity in the relative profit and loss sharing ratio with the next least vulnerable partner. 3 This process is repeated until all partners capital balances are aligned. 4 Remaining distributions are in the profit and loss sharing ratio. E A cash distribution schedule can be prepared from the cash
20、distribution plan. The schedule shows how cash is distributed as it becomes available. INSOLVENT PARTNERS AND PARTNERSHIPS A The RUPA specifies priorities for the distribution of partnership assets in liquidation and for the distribution of the personal assets. B Partnership creditors must first see
21、k recovery of their claims from partnership property. 1 Creditors of individual partners must first seek recovery of their claims from individual property. C Often with a solvent partnership, but insolvent partner: 1 Partnership creditors recover their claims from partnership property. 2 An insolven
22、t partners personal creditors have a claim against partnership assets to the extent of the insolvent partners equity in such assets. 3 Creditors of an insolvent partner with a credit capital balance may have a claim against the personal assets of a solvent partner with a debit capital balance to the
23、 extent of the debit capital balance. 2009 Pearson Education, Inc. publishing as Prentice Hall 182 4 Partners with debit capital balances are obligated to the partnership for the amount of the debit balance; however, if the partner with the debit balance is insolvent, that partners personal assets w
24、ill go to his personal creditors. Description of assignment material Minutes Questions (12) Exercises (14) E16-1 Folly/Frill Schedule of cash distribution 12 E16-2 Mike/Nancy/Okey Journal entries for liquidation events 12 E16-3 Fred/Ethel/Lucy Distribution of available cash (with contingency fund) 1
25、2 E16-4 Jan/Kim/Lee Distribution of available cash (loan to partner) 15 E16-5 Anita/Bernice/Colleen Correct capital balances prior to liquidation 5 E16-6 Ali/Bart/Carrie Correct capital balances prior to liquidation 5 E16-7 Evers/Freda/Grace Safe payments schedule to distribute cash (with 15 conting
26、ency fund) E16-8 Jerry/Joan/Jill Safe payment schedule and liquidation statement 20 E16-9 Alice/Betty/Carle Prepare a schedule for the phaseout of an insolvent 20 partnership (creditors recover from one of the partners) E16-10 Daniel/Eric/Fred Prepare a schedule to phaseout an insolvent partnership
27、20 and close books (creditors proceed against partners personal assets) E16-11 Ace/Ben/Cid/Don Liquidation statement involving recovery from 25 personal assets E16-12 Denver/Elsie/Fannie/George Prepare a safe payment schedule 20 E16-13 Quen/Reed/Stac 3 MC problem-type questions (vulnerability ranks
28、15 and distribution of available cash) E16-14 6 MC general and problem-type questions 25 Problems (12) P16-1 Barney/Betty/Rubble Journal entries (installment distributions) 20 P16-2 Chan/Dickerson/Grunther Prepare a cash predistribution plan 20 P16-3 Fred/Flint/Wilma Prepare a cash predistribution p
29、lan 20 P16-4 Gary/Henry/Illa/Joseph Prepare a cash distribution plan and calculate 35 the cash distribution after some assets are sold P16-5 Eli/Joe/Ned Prepare a statement of partnership liquidation 30 P16-6 Jones/Smith/Tandy Prepare a statement of partnership liquidation (simple 40 liquidation) P1
30、6-7 Len/Mary/Nell Prepare cash distribution plan and determine cash 50 distribution after some assets are sold P16-8 Jason/Kelly/Becky Statement of partnership liquidation and safe payment Schedule 45 P16-9 Roger/Susan/Tom Prepare a statement of partnership liquidation with 45 2009 Pearson Education
31、, Inc. publishing as Prentice Hall 183 supporting schedules for each distribution P16-10 Rob/Tom/Val Prepare a statement of partnership liquidation 55 P16-11 Jee/Moore/Olsen Closing entries, cash distribution plan and cash 50 distribution schedule P16-12 Beams/Plank/Timbers Statement of partnership
32、liquidation (safe 70 payments schedules used) Internet Assignment: Perform an internet search and find an investment club organized as a partnership. Review the by-laws and provisions made for the death/retirement of a partner and the ultimate liquidation of the partnership. 2009 Pearson Education,
33、Inc. publishing as Prentice Hall 184 Illustration 16-1 PARTNERSHIP DISSOLUTION AND LIQUIDATION Jas, Kal, and Lou decide to dissolve their partnership on May 1, 20X7 and to liquidate their partnership as soon as possible after May 1. A condensed balance sheet with profit sharing percentages is as fol
34、lows: Condensed Balance Sheet as of May 1, 20X7 Assets Equities Cash $ 50,000 Accounts payable $120,000 Inventory (per books) 100,000 Jas capital 20% 40,000 Other assets (per books) 130,000 Kal capital 40% 80,000 Goodwill 20,000 Lou capital 40% 60,000 $300,000 $300,000 Additional information * The i
35、nventory was sold for $70,000 during May. * Other assets with a book value of $90,000 were sold for $50,000. * On June 1 the partners agree to distribute available cash immediately except for a $10,000 contingency fund. Appropriate distributions are based on a Statement of Partnership Liquidation an
36、d a Safe Payments Schedule. 2009 Pearson Education, Inc. publishing as Prentice Hall 185 Jas, Kal, and Lou Partnership Statement of Partnership Liquidation from May 1 to June 1, 20X7 Cash Noncash Assets Priority Claims Jas Capital 20% Kal Capital 40% Lou Capital 40% Balances: May 1 $50,000 $250,000
37、$120,000 $40,000 $80,000 $60,000 Goodwill write-off (20,000) (4,000) (8,000) (8,000) Sale of inventory 70,000 (100,000) (6,000) (12,000) (12,000) Sale of other assets 50,000 (90,000) (8,000) (16,000) (16,000) Predistribution balances 170,000 40,000 120,000 22,000 44,000 24,000 Cash distribution: Pri
38、ority claims Partners (120,000) (40,000) (120,000) (12,000) (24,000) (4,000) Balances $10,000 $40,000 0 $10,000 $20,000 $20,000 Jas, Kal, and Lou Partnership Safe Payments Schedule from May 1 to June 1, 20X7 Jas Capital-20% Kal Capital-40% Lou Capital-40% Total Partner equities $22,000 $44,000 $24,000 $90,000 Loss on noncash assets (8,000) (16,000) (16,000) (40,000) Contingency fund (2,000) (4,000) (4,000) (10,000) Safe payments to partners $12,000 $24,000 $4,000 $40,000 Note the safe payment schedules assumption that all remaining noncash assets are losses.
