LIQUIDATION OF A PARTNERSHIP
ACE COMPANY
Balance Sheet
April 15, 2003
Assets
Cash
$5,000
Accounts Receivable
15,000
Inventory
18,000
Equipment
35,000
Accumulated Amort. Equip. (8000)
$65,000
Liabilities and Partners’ Equity
Notes Payable
$15,000
Accounts Payable
16,000
R. Aube, Capital
15,000
P. Chordia, Capital
17,800
W. Elliott, Capital
1,200
$65,000
EXAMPLE: NO CAPITAL DEFICIENCY
The partners of Ace Company agree to liquidate the partnership on the following
terms:
(1) The non-cash assets will be sold to Moriyama Enterprises for $75,000
cash, and
(2) The partnership will pay its partnership liabilities
The income ratios of the partners are 3:2:1 for Aube, Chordia, and Elliott. The
steps in the liquidation process are as follows:
1.
The non-cash assets are sold on April 18 for $75,000. The net book value
of the assets is $60,000 (15,000 + 18,000 + $35,000 - $8,000). This is a
gain of $15,000 and the following entry would be made:
April 18
2.
Cash
75,000
Accumulated Amort. Equip.
8,000
Accounts Receivable
Inventory
Equipment
Gain on Realization
To record the realization of non-cash assets
15,000
18,000
35,000
15,000
The gain on realization of $15,000 is allocated to the partners based on
their income ratios (3/6, 2/6,1/6).
April 18
Gain on Realization
15,000
R. Aube, Capital
7,500
P. Chordia, Capital
5,000
W. Elliott, Capital
2,500
To allocate gain to partners’ capital accounts
3.
Partnerships liabilities are paid in full on April 23 by a cash payment of
$31,000.
April 23
4.
Notes Payable
15,000
Accounts Payable
16,000
Cash
31,000
To record payment of partnership liabilities.
The remaining cash is distributed to the partners on April 25 based on their
capital balances. After the entries in the first three steps are posted the
only accounts that will have balances are the cash and capital accounts.
The remaining cash is then distributed based on their capital balances and
all of the accounts will be at zero.
April 25
R. Aube, Capital (15,000+7,500)
22,500
P. Chordia, Capital (17,800+5,000) 22,800
W. Elliott, Capital (1,200+2,500)
3,700
Cash (5,000+75,000-31,000)
49,000
To record distribution of cash to partners.
NOTE: Cash is NOT distributed to partners on the basis of their income-sharing
ratios.
EXAMPLE: CAPITAL DEFICIENCY
The partners of Ace Company are almost bankrupt and agree to liquidate the
partnership on the following terms:
(1) The non-cash assets will be sold at an auction for a substantial discount.
They only receive a total of $42,000 cash, and
(2) The partnership will pay its partnership liabilities.
The income ratios of the partners are 3:2:1 for Aube, Chordia, and Elliott. The
steps in the liquidation process are as follows:
1.
The non-cash assets are sold on April 18 for $42,000. The net book value
of the assets is $60,000 (15,000 + 18,000 + $35,000 - $8,000). This is a
loss of $18,000 and the following entry would be made:
April 18
Cash
42,000
Accumulated Amort. Equip.
8,000
Loss on Realization
18,000
Accounts Receivable
15,000
Inventory
18,000
Equipment
35,000
To record the realization of non-cash assets
2.
The loss on realization of $18,000 is allocated to the partners based on
their income ratios (3/6, 2/6, 1/6).
April 18
3.
Partnerships liabilities are paid in full on April 23 by a cash payment of
$31,000.
April 23
4.
R. Aube, Capital
9,000
P. Chordia, Capital
6,000
W. Elliott, Capital
3,000
Loss on Realization
18,000
To allocate gain to partners’ capital accounts
Notes Payable
15,000
Accounts Payable
16,000
Cash
31,000
To record payment of partnership liabilities.
After the entries in the first three steps are posted the only accounts that will
have balances are the cash and capital accounts. W. Elliott, Capital has a
deficiency of $1,800 (1200 CR – 3000 DR = 1,800 DR). The other capital
accounts have a CR balance. W. Elliott owes the partnership $1,800. He
can either pay the deficiency or the other partners must absorb the loss.
PAYMENT OF THE DEFICIENCY
5.
Elliott pays the $1,800 to the partnership on April 24
April 24
Cash
1,800
W. Elliott, Capital
1,800
To record payment of capital deficiency of Elliott.
6.
The cash balance of $17,800 (5,000 + 42,000 – 31,000 + 1,800) is now
equal to the other two partners’ capital accounts. It can now be distributed
to them on April 25.
April 25
R. Aube, Capital (15,000-9,000)
6,000
P. Chordia, Capital (17,800-6,000) 11,800
Cash
17,800
To record distribution of cash to partners.
After this is posted, all of the accounts will have a zero balance.
NONPAYMENT OF DEFICIENCY
5.
Elliott is unable to pay the $1,800 to the partnership so the other partners
must absorb the loss. The loss is allocated on the basis of their income
ratios.
April 24
6.
R. Aube, Capital (1,800 X 3/5)
1,080
P. Chordia, Capital (1,800 X 2/5)
720
W. Elliott, Capital
To record write-off of capital deficiency.
1,800
The cash balance of $16,000 (5,000 + 42,000 – 31,000) is now equal to the
other two partners capital accounts. It can now be distributed to them on
April 25.
April 25
R. Aube, Capital (15,000-9,000-1080)
4,920
P. Chordia, Capital (17,800-6,000-720) 11,080
Cash
16,000
To record distribution of cash to partners.
After this is posted, all of the accounts will have a zero balance.