Chapter 3
Partnership Liquisation and
Incorporation; Joint Ventures
All examples are from
textbook by Larsen
ACCT 501
Objectives of the Chapter
To learn the accounting procedures
for liquidation of limited liability
partnerships (LLPs).

To discuss accounting issues related
to incorporation of a LLP.

To discuss accounting for corporate
and unincorporated joint ventures.

Partnership Liquidation and Incorporation
2
Liquidation of a Partnership



The liquidation of a LLP means
discontinuing its activities.
The procedures usually include selling
assets, paying liabilities, and
distributing any remaining cash to the
partners.
The liquidation process often starts with
the realization of noncash assets.
Partnership Liquidation and Incorporation
3
Liquidation of a Partnership (contd.)



Any gains or losses resulting from the
assets realization are divided among
partners based on the income sharing
ratio.
The capital balances after the allocation
of gains/losses are the basis for
settlement.
No cash can be distributed to partners
until all liabilities are paid off.
Partnership Liquidation and Incorporation
4
Liquidation of a Partnership (contd.)

If cash of LLP is insufficient to pay
liabilities in full, an unpaid creditor may
collect from the personal assets of any
solvent partner whose actions caused
the partnership's insolvency, regardless
whether that partner has a credit or a
debit capital account balance.
Partnership Liquidation and Incorporation
5
Distribution of Cash or Other Assets
to Partners
 The Uniform partnership Act lists the
order for distribution of cash by a
liquidating partnership as:
1. Payment of creditors in full,
2. Payment of loans from partners, and
3. Payment of partners' capital account
credit balances.
Partnership Liquidation and Incorporation
6
Distribution of Cash or Other Assets
to Partners (contd.)


However, if a partner's capital account
has a deficit, that partner's loan to the
partnership must be offset against the
deficit in his/her capital account (referred
to as the right of offset).
Thus, the cash received by a partner is
the same as if loans to the partnership
had been recorded in the partner's
capital account.

Partnership Liquidation and Incorporation
7
Distribution of Cash or Other Assets
to Partners (contd.)


The existence of partner's loan account
will not advance the time of payment of
any partner during the liquidation.
Consequently,the loan to the partnership
is often treated as capital during the
liquidation.
Partnership Liquidation and Incorporation
8
Distribution of Cash or Other Assets
to Partners (contd.)


It is possible that partners are willing to
receive assets other than cash for
settlement.
Regardless whether assets other than
cash are distributed to partners, the
distribution rule must be followed (no
distribution of assets to partners until
after all outsider creditors have been paid
in full).
Partnership Liquidation and Incorporation
9
Payment to Partners of an LLP after
All Noncash Assets Realized

Five situations are discussed:
A. Equity of every partner is sufficient to
absorb loss from realization.
B. Equity of one partner is not sufficient to
absorb that partner's share of loss from
realization.
C. Equity of two partners are not sufficient
to absorb their shares of loss from
realization.
Partnership Liquidation and Incorporation
10
Payment to Partners of an LLP after
All Noncash Assets Realized(contd.)
D. Partnership is insolventa but
partners are solventb.
E. General partnership is insolvent
and partners are insolvent.
a.
The partnership is unable to pay all
outside creditors and at least one
partner has a deficit capital account.
Partnership Liquidation and Incorporation
11
Payment to Partners of an LLP after
All Noncash Assets Realized(contd.)
b. The partner has personal assets in
excess of liabilities.
Note: the partnership is solvent in
situations A, B and C.
Partnership Liquidation and Incorporation
12
Payment to Partners after All Noncash Assets realized
A. Equity of Each Partner is Sufficient to
Absorb Loss from Realization
Assume that Abra and Barg, who share
income/losses equally, decide to liquidate
Abra & Barg LLP. A balance sheet on
6/3/99, just prior to liquidation follows:

Partnership Liquidation and Incorporation
13
Payment to Partners after All Noncash Assets realized
A. Equity of Each Partner is Sufficient to
Absorb Loss from Realization (contd.)
ABRA & BARG LLP
Balance Sheet
June 30, 1999
Assets
Cash
Other assets
Total
Liabilities & Partners’ Capital
$10,000 Liabilities
$20,000
75,000 Loan payable to
20,000
Barg
Abra, capital
40,000
Barg, capital
5,000
$85,000
Total
$85,000
Partnership Liquidation and Incorporation
14
Payment to Partners after All Noncash Assets realized
A. Equity of Each Partner is Sufficient to
Absorb Loss from Realization (contd.)




Additional information:
The noncash assets with a carrying
amount of $75,000 realized cash of
$35,000.
The loss of $40,000 is divided equally by
the partners.
After the alloscation of realization loss,
Barg's capital has a deficit of $15,000.
Partnership Liquidation and Incorporation
15
statement of realization and
liquidation for Abra & Barg LLP
Assets
Cash
Balances before
liquidation
Realization of
other assets at a
loss of $40,000
Balances
Payment to
creditors
Balances
Offset Barg’s
capital deficit
against Barg’s
loan
Balances
Payments to
partners
Partner’ Capital
Other
Liabilities
Barg,
loan
$10,000 $75,000 $20,000 $20,000
35,000 (75,000)
Abra(50%) Barg (50%)
$40,000
$ 5,000
(20,000)
(20,000)
$45,000
(20,000)
$20,000 $20,000
(20,000)
$20,000 $(15,000)
$25,000
$20,000
(15,000)
$20,000 $(15,000)
15,000
$25,000
(25,000)
$5,000 $20,000
(5,000) (20,000)
Partnership Liquidation and Incorporation
$ -0$ -016
Note to the statement of realization and
liquidation for Abra & Barg LLP


Partners Abra and Barg received
$20,000 and $5,000, respectively,
after partnership creditors had been
paid in full.
The checks to both partners should
be delivered to the partners at the
same time.
Partnership Liquidation and Incorporation
17
Note to the statement of realization and
liquidation for Abra & Barg LLP


Thus, the legal priority of a partner's loan
account has no significance in
determining either the amount of cash
paid to a partner or the timing of cash
payments to partners during liquidation.
In the above statement, Barg's loan
account balance of $20,000 and capital
account balance of $5,000 can be
combined to obtain an equity of $25,000
for Barg prior to allocation/distribution.
Partnership Liquidation and Incorporation
18
Note to the statement of realization and
liquidation for Abra & Barg LLP (contd.)

In the following examples, a
partner's loan account balance (if
any) is combined with the partner's
capital account balance in the
statement of realization and
liquidation.
Partnership Liquidation and Incorporation
19
Payment to Partners after All Noncash Assets realized
B. Equity of One Partner is Not Sufficient to Absorb
That Partner's Share of Loss from realization


In this case, the loss on realization of
assets results in a deficit balance in the
capital account of one of the partners
(even after consider the loan from the partner).
Assume the balance sheet below for
Diel, Ebbs & Frey LLP just prior to
liquidation:
Partnership Liquidation and Incorporation
20
B. Equity of One Partner is Not Sufficient to Absorb
That Partner's Share of Loss from realization
(contd.)
Diel, Ebbs & Frey LLP
Balance Sheet
May 20, 1999
Assets
Cash
Other assets
Total
Liabilities & Partners’ Capital
$20,000 Liabilities
80,000 Diel, capital
Ebbs, capital
Frey, capital
$100,000
Total
Partnership Liquidation and Incorporation
$30,000
40,000
21,000
9,000
$100,000
21
B. Equity of One Partner is Not Sufficient to Absorb
That Partner's Share of Loss from realization
(contd.)




The income sharing ratio is Diel, 20%;
Ebbs; 40% and Grey, 40%.
The other assets with a carrying amount
of $80,000 realized $50,000 cash.
After dividing the loss of $30,000 among
the partners, Frey has a deficit of $3,000
in his capital account.
Assuming Frey pays the $3,000 to the
partnership immediately, the statement
of realization and liquidation is as
Partnership Liquidation and Incorporation
follows:
22
Statement of Realization and Liquidation for
Deil, Ebbs & Frey LLP (5/21 through 5/31/99)
Assets
Cash
Balances before
liquidation
Realization of
other assets at a
loss of $30,000
Balances
Payment to
creditors
Balances
Cash received
from Frey
Balances
Payments to
partners
Partner’ Capital
Other
Liabilities Diel(20%) Ebbs(40%)
$20,000 $80,000 $30,000 $40,000
Frey(40%)
$21,000
$ 9,000
(6,000)
(12,000)
(12,000)
$70,000
(30,000)
$30,000 $34,000
(30,000)
$9,000
$(3,000)
$40,000
3,000
$34,000
$9,000
$(3,000)
3,000
$43,000
(43,000)
$34,000
(34,000)
$9,000
(9,000)
$ -0$ -0-
50,000 (80,000)
Partnership Liquidation and Incorporation
23
B. Equity of One Partner is Not Sufficient to Absorb
That Partner's Share of Loss from realization
(contd.)

Assuming Grey was not able to pay
the $3,000 deficit to the partnership
immediately and the cash available
after payment to creditors is to be
distributed to Deil and Ebbs without a
delay, the statement of realization and
liquidation would be as follows:
Partnership Liquidation and Incorporation
24
Statement of Realization and Liquidation for
Deil, Ebbs & Frey LLP – Frey Cannot Pay
$3,000 immediately
Assets
Cash
Other
Partner’ Capital
Liabilities Diel(20%) Ebbs(40%)
Balances
$20,000 $80,000 $30,000 $40,000
before
liquidation
Realization of
50,000 (80,000)
(6,000)
other assets
at a loss of
$30,000
Balances
$70,000
$30,000 $34,000
Payment to
(30,000)
(30,000)
creditors
Balances
$40,000
$34,000
Payments to (40,000)
(33,000)
partners
Balances
$1,000
Frey(40%)
$21,000
$ 9,000
(12,000)
(12,000)
$9,000
$(3,000)
$9,000
(7,000)
$(3,000)
$2,000
$ (3,000)
Partnership Liquidation and Incorporation
25
Notes to the above Statemet


The possible additional loss if Frey is
unable to pay $3,000 is charged to Diel
and Ebbs in the ratio of 1/3 ($1,000)
and 2/3 ($2,000), respectively.
Therefore, the cash available of
$40,000 to partners is divided between
Diel and Ebbs in a manner that
reduces Deil's capital and Ebb's capital
to $1,000 and $2,000, respectively.
Partnership Liquidation and Incorporation
26
Notes to the above Statemet (contd.)



Thus, if Frey is not able to pay
$3,000, the loss can be all absorbed
by remaining partners based on
their income sharing ratio.
If the $3,000 is later collected from
Frey, this amount will be divided
$1,000 to Diel and $2,000 to Ebbs.
The forgoing statement then can be
completed as follows:
Partnership Liquidation and Incorporation
27
The Completion of the Statement of
Realization and Liquidation When $3,000
Collected from Frey
Assets
Cash
Balances (from page
22)
Cash received from
Frey
Payments to partners
Liabilities
Partner’ Capital
Diel
Ebbs
Frey
(20%)
(40%)
(40%)
$1,000 $2,000 $(3,000)
$3,000
(3,000)
3,000
(1,000)
(2,000)
Partnership Liquidation and Incorporation
28
The Completion of the Statement of
Realization and Liquidation When $3,000 is
Uncollectible from Frey
However, if the $3,000 is uncollectible, the
statement would be completed with the writeoff Frey's Capital as follows:
Assets
Cash
Balances (from page
85)
Additional loss from
Frey’s uncollectible
capital deficit
Liabilities
Partner’ Capital
Diel
Ebbs
Frey
(20%)
(40%)
(40%)
$1,000 $2,000 $(3,000)
(1,000)
(2,000)
Partnership Liquidation and Incorporation
3,000
29
Payment to Partners after All Noncash Assets realized
C. Equity of Two Partners Are Not Sufficient to
Absorb Their Shares of Loss from Realization



It is apparent that the inability to collect
deficit of a partner will result in additional
loss to the other partners as in example
B when $3,000 is uncollectible.
It is possible that one partner may have sufficient capital (and loan
accounts) to absorb any direct share of realization loss of noncash
assets, but not sufficient equity to absorb additional actual or
potential losses caused by inability of the partnership to collect the
deficit in another partner's capital.
This additional loss could cause a
second partner to have a deficit in the
capital account, which may or may not
be collectible. Partnership Liquidation and Incorporation
30
C. Equity of Two Partners Are Not Sufficient to
Absorb Their Shares of Loss from Realization
(contd.)


Example: Assume that Judd, Kamb.
Long and Marx, partners of Judd, ,
Kamb. Long & Marx LLP, share income
/losses 10%, 20%, 30% and 40%,
respectively.
Their capital account balances for the
period 8/1 through 8/15, 1999, are as
shown in the following statement of
realization and liquidation (p29),
supported by the exhibit that follows
(p30).
Partnership Liquidation and Incorporation
31
Statement of Realization and Liquidation
for Judd, Kamb, Long& Marx LLP (8/1
through 8/15/1999)
Assets
Cash
Balances
before
liquidation
Realization of
other assets
at a loss of
$80,000
Balances
Payment to
creditors
Balances
Payments to
partners
Balances
$20,000
Partners’ Capital
Other
Liabilities Judd
Kamb
Long
(10%)
(20%)
(30%)
$200,000 $120,000 $30,000 $32,000 $30,000
120,000 (200,000)
(8,000) (16,000) (24,000)
Marx
(40%)
$8,000
(32,000)
$140,000
(120,000)
$120,000 $22,000 $16,000
(120,000)
$6,000
$(24,000)
$20,000
(20,000)
$22,000 $16,000
(16,000) (4,000)
$6,000
$(24,000)
$6,000 $12,000
$6,000
$(24,000)
Partnership Liquidation and Incorporation
32
Exhibit: Computation of Cash Payments to
Partners of Judd, Kamb, Long & Marx LLP –
8/15/1999
Capital account
balances before
distribution of cash to
partners
Additional loss to Judd,
Kamb, and Long if
Marx’s deficit is
uncollectible (ratio of
10:20:30)
Balances
Additional Loss to Judd
and Kamb if Long’s
deficit is uncollectible
(ratio of 10:20)
Amounts that may be
paid to partners
Partners’ Capital
Judd(10%) Kamb(20%) Long(30%) Marx(40%)
$22,000
$16,000
$6,000 $(24,000)
(4,000)
(8,000)
(12,000)
$18,000
(2,000)
$8,000
(4,000)
$(6,000)
6,000
$16,000
$4,000
Partnership Liquidation and Incorporation
24,000
33
Payment to Partners after All Noncash Assets realized
D. Partnership Is Insolvent but Partners
Are Solvent


In the case of insolvency in a LLP, the
total of the capital account debit balance
will exceed the total of the credit
balances.
If the partner(s) with a deficit capital
balance pay off the deficit to the
partnership, the LLP will have sufficient
cash to pay its liabilities in full.
Partnership Liquidation and Incorporation
34
Payment to Partners after All Noncash Assets realized
D. Partnership Is Insolvent but Partners
Are Solvent (contd.)

The creditors of LLP may demand
payment from any solvent partner whose
actions caused the partnership's
insolvency, regardless of whether the
partner's capital had a debit or a credit
balance. (this is because in terms of relationships with creditors
(or from a legal point of view), the LLP is not a separate entity from
partners)

.
A partner who makes payments to
partnership creditors receives a credit to
his/her capital account.
Partnership Liquidation and Incorporation
35
Payment to Partners after All Noncash Assets realized
D. Partnership Is Insolvent but Partners
Are Solvent (contd.)
Example: Assume that Nehr, Ordo & Page
LLP, whose partners share net income/losses
equally,had the following balance sheet prior
to liquidation on 5/1/1999:

Assets
Cash
Other assets
Total
Liabilities & Partners’ Capital
$15,000 Liabilities
85,000 Nehr, capital
Ordo, capital
Page, capital
$100,000
Total
Partnership Liquidation and Incorporation
$65,000
18,000
10,000
7,000
$100,000
36
Payment to Partners after All Noncash Assets realized
D. Partnership Is Insolvent but Partners
Are Solvent
On 5/12/99, the other assets with a
carrying amount of $85,000 realize
$40,000 cash. The loss of $45,000 is to be
divided equally among the partners.
 The total cash of $55,000 is paid to the
creditors, which leaves unpaid liabilities of
$10,000.
 The capital balances of partner Nehr,
Ordo and Page are $3,000, ($5,000) and
($8,000), respectively after absorbing the
realization loss ofPartnership
noncash
assets.
Liquidation and Incorporation

37
Payment to Partners after All Noncash Assets realized
D. Partnership Is Insolvent but Partners
Are Solvent
Assuming that on 5/30/99, Ordo and Page
pay off their deficiencies, the LLP will use
$10,000 of the $13,000 available cash to
pay the remaining liabilities.
 The LLP will then distribute $3,000 to
Nehr.
 These events are summarized in the
statement of Realization and Liquidation
on the following page.

Partnership Liquidation and Incorporation
38
The Statement of Realization and
Liquidation of Nehr, Ordo & Page LLP
Assets
Cash
Other
Partner’ Capital
Liabilities Nehr(1/3)
Ordo(1/3)
Balances
$15,000 $85,000 $65,000 $18,000 $10,000
before
liquidation
Realization of
40,000 (85,000)
(15,000) (15,000)
other assets
at a loss of
$45,000
Balances
$55,000
$65,000 $3,000 $(5,000)
Payment to
(55,000)
(55,000)
creditors
Balances
$ -0$10,000 $3,000 $(5,000)
Cash invested 13,000
5,000
by Ordo and
Page
Balances
$2,000
Partnership Liquidation$1,000
and Incorporation
Page(1/3)
$ 7,000
(15,000)
$(8,000)
$(8,000)
8,000
$ (3,000)
39
Payment to Partners after All Noncash Assets realized
D. Partnership Is Insolvent but Partners
Are Solvent (contd.)
If the insolvency of the LLP is due to an
adverse award of damages in a lawsuit,
and the partner(s) responsible for the
damages are solvent, they alone must pay
the damages that the LLP is unable to
pay.
 However, if such partner(s) also are
insolvent, both they and the LLP may
have to file for liquidation under Chapter 7
of the U.S. Bankruptcy Code.

Partnership Liquidation and Incorporation
40
Payment to Partners after All Noncash Assets realized
E. General Partnership Is Insolvent and
Partners Are Insolvent



All the above cases applies to both LLP
and general partnership.
The case discussed here only applies to
the general partnership and both the
partnership and some partners are
insolvent.
The question raised here is the relative
rights of creditors of the partnership and
the partners.
Partnership Liquidation and Incorporation
41
Payment to Partners after All Noncash Assets realized
E. General Partnership Is Insolvent and
Partners Are Insolvent (contd.)


The rule provided by the UPA is that
assets of the partnership (including
partners' capital deficits) are first
available to creditors of the
partnership.
Assets of the partners are first
available to their creditors.
Partnership Liquidation and Incorporation
42
Payment to Partners after All Noncash Assets realized
E. General Partnership Is Insolvent and
Partners Are Insolvent (contd.)

After the liabilities of the partnership
have been paid in full, the creditors of
an individual partner have a claim
against the assets of the partnership
to the extent of that partner's equity in
the partnership.
Partnership Liquidation and Incorporation
43
Payment to Partners after All Noncash Assets realized
E. General Partnership Is Insolvent and
Partners Are Insolvent (contd.)



On the other hand, after the creditors of
a partner have been paid in full, any
remaining assets of that partner are
available to partnership creditors.
This principle applies regardless of
whether that partner's capital balance
has a credit or a debit balance.
One condition of this principle is that
these creditors are unable to obtain
payment from the partnership.
Partnership Liquidation and Incorporation
44
The Relative rights of Creditors of an Insolvent
General Partnership and Personal Creditors- An
Example
Assume that the Rich,Sand & Toll Partnership, a
general partnership whose partners share net
income and losses equally,has the partner- ship
balance sheet below prior to liquidation on
11/30/99:
Assets
Cash
Other assets
Total
Liabilities & Partners’ Capital
$10,000 Liabilities
100,000 Rich, capital
Sand, capital
Toll, capital
$110,000
Total
Partnership Liquidation and Incorporation
$60,000
5,000
15,000
30,000
$100,000
45
The Relative rights of Creditors of an Insolvent
General Partnership and Personal Creditors- An
Example (contd.)
Assume that on 11/30/99, the partners
have the following assets and liabilities
other than their equities in the
partnership:
Partner
Rich
Sand
Toll
Personal Assets
Personal Liabilities
$100,000
$25,000
50,000
50,000
5,000
60,000
Partnership Liquidation and Incorporation
46
The Relative rights of Creditors of an Insolvent
General Partnership and Personal Creditors- An
Example (contd.)
Assume that the realization of other
assets of the partnership results in a loss
of $60,000, as shown in the following
statement of realization and liquidation
for the period 12/1/ through 12/12/99:

Partnership Liquidation and Incorporation
47
The Statement of Realization and Liquidation
of Rich, Sand & Toll (12/1 through 12/12/99)
Assets
Cash
Partner’ Capital
Other
Liabilities
Rich(1/3)
Balances
$10,000 $100,000 $60,000
$5,000
before
liquidation
Realization of
40,000 (100,000)
(20,000)
other assets
at a loss of
$60,000
Balances
$50,000
$60,000 $(15,000)
Payment to
(50,000)
(50,000)
creditors
Balances
$10,000 $(15,000)
Sand(1/3)
Tall(1/3)
$15,000
$30,000
(20,000)
(20,000)
$(5,000)
$10,000
$(5,000)
$10,000
Partnership Liquidation and Incorporation
48
Notes to the Statement


There is still $10,000 liabilities unpaid
after exhausting all cash available in the
partnership.
The creditors of the partnership can
onlya collect these liabilities in full from
Rich (who is personally solvent)
regardless whether Rich's capital
balance has a debit or credit balance.
a. This is because the other two partners are either
just solvent (Sand) or insolvent (Toll)
Partnership Liquidation and Incorporation
49
The Statement of Realization and Liquidation
of Rich, Sand & Toll (12/1 through 12/12/99)(contd.)
The Statement is continued below (on p50 & 51)
to show Rich's Payment of the final $10,000
owed to partnership's creditors:
Balances (from above)
Payment by Rich to
partnership creditors
Balances
Cash invested by Rich
Balances
Payment to Toll (or
Toll’s creditors)
Balances
Partner’ Capital
Liabilities Rich(1/3) Sand(1/3) Toll(1/3)
$10,000 $(15,000) $(5,000) $10,000
(10,000)
10,000
Cash
$5,000
$5,000
(5,000)
$(5,000) $(5,000) $10,000
5,000
$(5,000) $10,000
(5,000)
$(5,000)
Partnership Liquidation and Incorporation
$5,000
50
The Statement of Realization and Liquidation
of Rich, Sand & Toll (12/1 through 12/12/99)(contd.)
Cash
Balances (from Page 50)
Write-off of Sand’s capital deficit
as uncollectible
Balances
Cash invested by Rich
Balances
Payment to Toll (or Toll’s
creditors)
$2,500
$2,500
(2,500)
Partner’ Capital
Rich
Sand
Toll
(1/3)
(1/3)
(1/3)
$(5,000) $5,000
$(2,500)
5,000 (2,500)
$(2,500)
2,500
Partnership Liquidation and Incorporation
$2,500
$2,500
(2,500)
51
Notes to the Statement on p50
1. Due to the abundant personal assets,
Rich is able to paid $5,000 needed to
offset its capital deficit in the partnership.
2. This $5,000 cash is paid to partner Toll
(or Toll's creditors), the only partner with
a credit balance of capital account.
Partnership Liquidation and Incorporation
52
Notes to the Statement on p51
1. The continued statement shows that
Sand owes $5,000 to the partnership.
2. Nevertheless, Sand's personal assets
are just sufficient to cover his personal
liabilities (based on UPA, all assets of Sand go to
Sand's personal creditors first).
3. Therefore, Sand's deficit of $5,000 in his
capital is a loss to the partnership and
will be absorbed by the other two
partners equally.
Partnership Liquidation and Incorporation
53
Notes to the Statement on p51 (contd.)
4. As a result, Rich and Toll have capital
balances of deficit $2,500 and credit
$2,500, respectively, after absorbing the
$5,000 loss from Sand's deficit in
capital.
5. Since Rich is personally solvent, he will
pay $2,500 to the partnership to offset
his deficit.
6. This $2,500 cash will go to Toll (or Toll's
creditors) since Toll is the one with
creditbalance inPartnership
capital.
Liquidation and Incorporation
54
Conclusions of this Liquidaiton
 The final result of this liquidation is that
the partnership creditors receives
payment in full due to the financial status
of Rich.
 The personal creditors of Sand are paid
in full.
 The personal creditors of Toll are paid
$12,500 (Toll's personal assets of
$5,000 + $7,500 from Rich's payment to
the partnership to cover Rich's deficit).
Partnership Liquidation and Incorporation
55
Installment Payments to Partners
 In all previous case, cash payments to
partners in liquidation are made only
after all noncash assets being realized
and realized losses being divided.
 Due to the liquidation process can extent
to several months, the partners may
want to receive cash as it becomes
available rather than waiting until all
noncash assets have been realized.
Partnership Liquidation and Incorporation
56
Installment Payments to Partners
(contd.)
 Installment payments to partners are
appropriate if necessary safeguards are
used to ensure that all partnership
creditors are paid in full.
 And that no partners are paid more than
the amount to which they would be
entitled after all losses on realization of
assets are known.
Partnership Liquidation and Incorporation
57
Installment Payments to Partners
(contd.)
Partnership Liquidation and Incorporation
58
P93-1
Liabilities & Partners’ Capital
$8,000 Liabilities
$61,000
192,000 Urne, capital
40,000
Vint, capital
45,000
Wahl, capital
54,000
$110,000
Total
$200,000
Assets
Cash
Other assets
Total
Partnership Liquidation and Incorporation
59
P93-2
Date
July 31
August 31
September
Totals
Carrying
Amount of
Assets
Realized
$62,000
66,000
64,000
$192,000
Loss on
Realization
Cash
Received by
Partnership
$13,500
36,000
31,500
$81,000
Partnership Liquidation and Incorporation
$48,500
30,000
32,500
$111,000
60
P93-3a
Urne
Vint
Wahl
$40,000 $45,000 $54,000
Capital account balances, July
5, 1999
Allocation of loss on July 31,
(6,000) (4,500) (3,000)
1999, realization of noncash
assets ($13,500)
Allocation of loss on Aug. 31,
(16,000) (12,000) (8,000)
1999, realization of noncash
assets ($36,000)
Capital account balances Aug.
$18,000 $28,500 $43,000
31, 1999
Allocation of maximum
(28,445) (21,333) (14,222)
potential loss on remaining
noncash assets ($64,000)
Portential capital account
$(10,445) $7,167 $28,778
Partnership Liquidation and Incorporation
balances
61
P93-3b
Allocation of potential loss
from uncollectibility of Urne’s
potential capital deficit in ratio
of 3:2
Appropriate cash payment to
partners, Aug. 31, 1999
Urne
10,445
Vint
(6,267)
$
$
0
Wahl
(4,178)
900 $ 24,600
Partnership Liquidation and Incorporation
62
P94
First
Next
Next
All over
Creditors
$61,000
100%
24,000
25,000
$110,000
Urne
4/9
Vint
Wahl
60%
3/9
100%
40%
2/9
Partnership Liquidation and Incorporation
63
P95a
Capital account balances before
liquidation
Income-sharing ratio
Divide capital account balances before
liquidation by income-sharing ratio to
obtain capital per unit of income (loss)
sharing for each partner
Required reduction in capital per unit of
income (loss) sharing for Partner Wahl to
reduce Wahl’s balance to equal the next
largest balances (for Partner Vint). This
is the amount of the first cash
distribution to a partner per unit of the
amount of the partner’s income (loss)
sharing. Because Wahl has 2 units of
income (loss) sharing, Wahl receives the
first $24,000 ($12,000X2=$24,000)
Urne
Vint
Wahl
$40,000 $45,000 $54,000
4
3
2
$10,000 $15,000 $27,000
Partnership Liquidation and Incorporation
(12,000)
64
P95b
Capital per unit of income (loss) sharing
after payment of $24,000 to Wahl
Required reduction in capital per unit of
income (loss) sharing for Partner Vint
and Wahl to reduce their balance to
equal Partner Urne’s balances, which is
the smallest capital per unit of income
(loss) sharing. The required reduction is
multiplied by each partner’s incomesharing ratio to compute the amount of
cash to be paid. Thus, Vint receives
$15,000 ($5,000X3=$15,000), and Wahl
receivers $10,000 ($5,000X2=$10,000)
Capital per unit of income (loss) sharing
after payment of $15,000 to Vint and
$34,000 to Wahl. Remaining cash may
be distributed in the income-sharing
ratio
Urne
Vint
Wahl
$10,000 $15,000 $15,000
(5,000)
(5,000)
$10,000 $10,000 $10,000
Partnership Liquidation and Incorporation
65