Partnership Liquidation
Chapter 16
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 1
Learning Objective 1
Understand legal aspects of
partnership liquidation.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 2
The Liquidation Process
– Converting noncash assets into cash
– Recognizing gains and losses and liquidating
expenses incurred during the liquidation period
– Settling all liabilities
– Distributing cash to partners according to
the final balances in their capital accounts
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 3
Rank Order of Payments
I – Amounts owed to creditors other than partners
II – Amounts owed to partners other
than for capital and profits
III – Amounts due to partners with
respect to their capital interests
IV – Amounts to partners with respect to profits
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 4
Learning Objective 2
Apply simple partnership
liquidation computations
and accounting.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 5
Simple Partnership Liquidation
Holmes and Kaiser Balance Sheet
December 31, 2003
Assets
Liabilities and Equity
Cash
$ 10,000 Accounts payable
$ 40,000
A/R, net
30,000 Loan from Holmes
10,000
Inventory
30,000 Holmes, capital
25,000
Plant assets, net
40,000 Kaiser, capital
35,000
$110,000
$110,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 6
Simple Partnership Liquidation
Profits and losses are distributed as follows:
70% to Holmes and 30% to Kaiser
They agreed to liquidate the partnership
as soon as possible after January 1, 2004.
Inventory items are sold for $25,000,
plant assets are sold for $30,000, $22,000
is collected from accounts receivable.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 7
Simple Partnership Liquidation
Holmes and Kaiser Balance Sheet
January 5, 2004
Assets
Liabilities and Equity
Cash
$87,000 Accounts payable
$40,000
A/R, net
Loan from Holmes
10,000
Inventory
Holmes, capital
8,900
Plant assets, net
Kaiser, capital
28,100
$87,000
$87,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 8
Simple Partnership Liquidation
Order of Payment
I To creditors for accounts payable
II To Holmes for his loan balance
III To Holmes for his capital balance
To Kaiser for his capital balance
Total distribution
$40,000
10,000
8,900
28,100
$87,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 9
Debit Capital Balances
in a Solvent Partnership
The partnership of Jay, Jim, and Joe
is in the process of liquidation.
Debit
Credit
Cash
$25,000
Jay, capital (40%)
3,000
Jim, capital (40%)
$16,000
Joe, capital (20%)
12,000
Total
$28,000
$28,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 10
Debit Capital Balances
in a Solvent Partnership
If Jay is unable to pay $3,000 to the partnership,
his debit balance represents a loss
to be charged to Jim and Joe.
Jim’s share: 4/6 × $3,000 = $2,000
Joe’s share: 2/6 × $3,000 = $1,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 11
Learning Objective 3
Perform safe payment
computations.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 12
Safe Payments to Partners
The calculation of safe payments is
based on the following assumptions:
All partners are personally insolvent.
All noncash assets represent possible losses.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 13
Application of Safe
Payments Schedule
(000)
Debits
Cash
$ 80
Loan due from Maxine 10
Land
20
Building, net
140
$250
Credits
Loan payable to Nancy
Buzz, capital (50%)
Maxine, capital (30%)
Nancy, capital (20%)
$20
50
70
110
$250
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 14
Safe Payment Schedule
(000)
Buzz Maxine Nancy
Possible Equity Equity Equity
Losses (50%) (30%) (20%)
Partners’ equities
(capital ± loan balances
$60
$130
Possible loss on noncash assets
Book value of land and buildings $160 (80) (48)
(30) 12
(32)
98
Possible loss on contingencies
Cash withheld for contingencies
$50
10
(5) (3)
(35) 9
(2)
96
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 15
Safe Payment Schedule
(000)
Possible loss from Buzz
Buzz’s debit balance allocated
60:40 to Maxine and Nancy
Possible loss from Maxine
Maxine’s debit balance assigned
to Nancy
Buzz Maxine Nancy
Possible Equity Equity Equity
Losses (50%) (30%) (20%)
35
0
(21) (14)
(12) 82
12
0
(12)
$ 70
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 16
Safe Payment Schedule
Loan payable to Nancy
Nancy, Capital
Cash
20,000
50,000
70,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 17
Account Balances
(000)
Debits
Credits
Cash
$ 10 Buzz, capital (50%)
Loan due from Maxine 10 Maxine, capital (30%)
Land
20 Nancy, capital (20%)
Building, net
140
$180
$ 50
70
60
$180
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 18
Advance Distribution
Any distribution to partners
before all gains and losses
have been realized and
recognized requires
approval of all partners.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 19
Learning Objective 4
Understand installment
liquidations.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 20
Installment Liquidation
An installment liquidation involves
the distribution of cash to partners
as it becomes available during the
liquidation period and before all
liquidation gains and losses
have been realized.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 21
Installment Liquidation
Illustration
The partnership of Duro, Kemp, and Roth
is to be liquidated as soon as possible
after December 31, 2003.
All cash on hand, except for $20,000 is to
be distributed at the end of each month.
Profit and losses are shared 50%, 30%,
and 20% to Duro, Kemp, and Roth.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 22
Installment Liquidation
Illustration
Duro, Kemp, and Roth Balance Sheet
December 31, 2003 (000)
Assets
Liabilities and Equity
Cash
$ 240
Accounts payable
$ 300
A/R, net
280
Note payable
200
Loan to Roth
40
Loan from Kemp
20
Inventories
400
Duro, capital (50%)
340
Land
100
Kemp, capital (30%)
340
Equipment, net
300
Roth, capital (20%)
200
Goodwill
40
$1,400
$1,400
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 23
Installment Liquidation
Illustration
Statement of Partnership
Liquidation for the Period
1/1/2004 to 2/1/2002 (000)
Balances January 1
Offset Roth loan
Write-off of goodwill
Collection of receivables
Sale of inventory items
Predistribution balances
January 31
January distribution
Creditors
Kemp
Balances February 1
Non- Priority 50%
30% 20%
cash Liabil- Duro Kemp Kemp Roth
Cash Assets ities Capital Loan Capital Capital
$240 $1,160 $500 $340 $20 $340 $200
(40)
(40)
(40)
(20)
(12)
(8)
200
(200)
200
(160)
20
12
8
$640
(500)
(120)
$ 20
$ 720
$500
$340
$20
$340
$160
$340
(20) (100)
$ 0 $240
$160
(500)
$ 720
$ 0
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 24
Installment Liquidation
Illustration
First Installment –
Schedule of Safe Payments
January 31, 2004 (000)
Partners’ equities January 31, 2004
Possible loss on noncash assets
Possible loss on contingencies:
cash withheld
Possible loss from Duro: debit
balance allocated 60:40
50% 30% Kemp 20%
Possible Duro Capital Roth
Losses Capital and Loan Capital
$720
20
$340 $360
(360) (216)
$ (20) $144
$160
(144)
$ 16
(10)
(6)
$ (30) $138
(4)
$ 12
30
—
(18)
$120
(12)
—
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 25
February Liquidation Events
Cash
60,000
Duro, Capital
10,000
Kemp, Capital
6,000
Roth, Capital
4,000
Equipment, net
80,000
To record sale of equipment at a $20,000 loss
Cash
180,000
Duro, Capital
30,000
Kemp, Capital
18,000
Roth, Capital
12,000
Inventories
240,000
To record sale of remaining inventory items at a $60,000 loss
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 26
February Liquidation Events
Duro, Capital
2,000
Kemp, Capital
1,200
Roth, Capital
800
Cash
To record payment of liquidation expenses
4,000
Duro, Capital
4,000
Kemp, Capital
2,400
Roth, Capital
1,600
Accounts Payable
8,000
To record identification of an unrecorded liability
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 27
February Liquidation Events
Accounts Payable
8,000
Cash
To record payment of accounts payable
Duro, Capital
84,000
Kemp, Capital
86,400
Roth, Capital
57,600
Cash
To record distribution of cash to partners
8,000
228,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 28
Learning Objective 5
Learn about cash distribution
plans for installment
liquidations.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 29
Cash Distribution Plans
The development of a cash distribution plan
for the liquidation of a partnership involves
ranking the partners in terms of their
vulnerability to possible losses.
$$$
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 30
Vulnerability Ranking
Profit
Partner’s Sharing
Equity
Ratio
Duro
Kemp
Roth
$340 ÷ 0.5
360 ÷ 0.3
160 ÷ 0.2
Loss
Vulnerability
Absorption Ranking (1 most
Potential
vulnerable)
= $ 680
= 1,200
=
800
1
3
2
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 31
Assumed Loss Absorption
A schedule of assumed loss
absorption is prepared as a
second step in developing
the cash distribution plan.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 32
Assumed Loss Absorption
Schedule of Assumed
Loss Absorption (000)
Preliquidation equities
Assumed loss to absorb Duro’s
equity (allocated 50:30:20)
Balances
Assumed loss to absorb Roth’s
equity (allocated 60:40)
Balances
Duro
(50%)
Kemp
(30%)
Roth
(20%)
$340
$360 $160 $860
Total
(340) (204) (136) (680)
— $156 $ 24 $180
(36)
(24) (60)
$120 —
$120
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 33
Cash Distribution Plan
Priority
Liabilities
First $500,000 100%
Next $20,000
Next $100,000
Next $60,000
Remainder
Kemp
Loan Duro
Kemp
Roth
100%
60
30
40%
20
100%
50%
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 34
Learning Objective 6
Comprehend liquidations when
either the partnership or
partners are insolvent.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 35
Insolvent Partners and Partnerships
Ranking for claims against the separate
property of a bankrupt partner:
I Those owing to separate creditors
II Those owing to partnership creditors
III Those owing to partners by way of contribution
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 36
Partnership Solvent – One or More
Partners Personally Insolvent
In the liquidation of a solvent partnership,
partnership creditors are entitled to recover
the full amount of their claims
from partnership property.
West, York, and Zeff are partners sharing
profits 30%, 30%, and 40%, respectively.
West is personally insolvent with personal assets
of $50,000 and personal liabilities of $100,000.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 37
Partnership Account Balances
Case A
Case B
Case C
Cash
$60,000
West, capital (30%) 18,000
York, capital (30%) 18,000
Zeff, capital (40%)
24,000
—
—
$18,000
27,000
9,000
$21,000
9,000
12,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 38
Insolvent Partnership
When a partnership is insolvent, the cash available
is not enough to pay partnership creditors.
Creditors will obtain partial recovery from
partnership assets and will call upon
individual partners to use their personal
resources to satisfy remaining claims.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 39
End of Chapter 16
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 40