Partnership Liquidation
Chapter 16
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Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 1

Learning Objective 1
Understand legal aspects of partnership liquidation.
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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
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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
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Learning Objective 2
Apply simple partnership liquidation computations and accounting.
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Simple Partnership Liquidation
Holmes and Kaiser Balance Sheet
December 31, 2003
Cash
A/R, net
Assets Liabilities and Equity
$ 10,000 Accounts payable $ 40,000
30,000 Loan from Holmes 10,000
Inventory 30,000 Holmes, capital
Plant assets, net 40,000 Kaiser, capital
$110,000
25,000
35,000
$110,000
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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.
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Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 7

Simple Partnership Liquidation
Cash
A/R, net
Assets
Inventory
Plant assets, net
Holmes and Kaiser Balance Sheet
January 5, 2004
Liabilities and Equity
$87,000 Accounts payable $40,000
Loan from Holmes 10,000
$87,000
Holmes, capital
Kaiser, capital
8,900
28,100
$87,000
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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
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Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 9

Debit Capital Balances in a Solvent Partnership
Cash
The partnership of Jay, Jim, and Joe is in the process of liquidation.
Credit
Jay, capital (40%)
Jim, capital (40%)
Joe, capital (20%)
Total
Debit
$25,000
3,000
$28,000
$16,000
12,000
$28,000
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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
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Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 11

Learning Objective 3
Perform safe payment computations.
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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.
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Application of Safe
Payments Schedule
(000) Debits Credits
Cash $ 80 Loan payable to Nancy $20
Loan due from Maxine 10 Buzz, capital (50%) 50
Land
Building, net
20 Maxine, capital (30%)
140 Nancy, capital (20%)
70
110
$250 $250
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Safe Payment Schedule
(000)
Partners’ equities
(capital ± loan balances
Possible
Losses
Buzz
Equity
(50%)
Maxine
Equity
(30%)
Nancy
Equity
(20%)
$50 $60 $130
Possible loss on noncash assets
Book value of land and buildings $160 (80)
(30)
(48)
12
Possible loss on contingencies
Cash withheld for contingencies 10 (5)
(35)
(3)
9
(32)
98
(2)
96
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Safe Payment Schedule
(000)
Possible loss from Buzz
Buzz’s debit balance allocated
60:40 to Maxine and Nancy
Possible
Losses
Buzz
Equity
(50%)
Maxine
Equity
(30%)
Nancy
Equity
(20%)
35
0
(21)
(12)
(14)
82
Possible loss from Maxine
Maxine’s debit balance assigned to Nancy 12
0
(12)
$ 70
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Safe Payment Schedule
Loan payable to Nancy 20,000
Nancy, Capital
Cash
50,000
70,000
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Account Balances
(000) Debits Credits
Cash $ 10 Buzz, capital (50%)
Loan due from Maxine 10 Maxine, capital (30%)
Land
Building, net
20 Nancy, capital (20%)
140
$180
$ 50
70
60
$180
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Advance Distribution
Any distribution to partners before all gains and losses have been realized and recognized requires approval of all partners.
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