Post on 20-Dec-2015
16 - 1©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Partnership Liquidation
Chapter 16
16 - 2©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Installment Liquidation
An installment liquidation involvesthe distribution of cash to partnersas it becomes available during theliquidation period and before all
liquidation gains and losseshave been realized.
16 - 3©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Installment LiquidationIllustration
The partnership of Duro, Kemp, and Rothis to be liquidated as soon as possible
after December 31, 2003.
All cash on hand, except for $20,000 is tobe distributed at the end of each month.
Profit and losses are shared 50%, 30%,and 20% to Duro, Kemp, and Roth.
16 - 4©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Installment LiquidationIllustration
Duro, Kemp, and Roth Balance SheetDecember 31, 2003 (000)
Assets Liabilities and EquityCash $ 240 Accounts payable $ 300A/R, net 280 Note payable 200Loan to Roth 40 Loan from Kemp 20Inventories 400 Duro, capital (50%) 340Land 100 Kemp, capital (30%) 340Equipment, net 300 Roth, capital (20%) 200Goodwill 40
$1,400 $1,400
16 - 5©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Installment LiquidationIllustration
Balances January 1Offset Roth loanWrite-off of goodwillCollection of receivablesSale of inventory itemsPredistribution balances
January 31January distribution
CreditorsKemp
Balances February 1
$240
200 200
$640
(500)(120)$ 20
$1,160 (40) (40) (200) (160)
$ 720
$ 720
$500
$500
(500)
$ 0
$340
(20)
20
$340
$340
Cash
Non-cash
Assets
PriorityLiabil-
ities
50%Duro
Capital
Statement of PartnershipLiquidation for the Period1/1/2004 to 2/1/2002 (000)
$20
$20
(20) $ 0
$340
(12)
12
$340
(100)$240
$200 (40) (8)
8
$160
$160
KempLoan
30%Kemp
Capital
20%Roth
Capital
16 - 6©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Installment LiquidationIllustration
Partners’ equities January 31, 2004Possible loss on noncash assets
Possible loss on contingencies:cash withheld
Possible loss from Duro: debitbalance allocated 60:40
$720
20
$340 (360) $ (20) (10) $ (30)
30 —
$360 (216) $144
(6) $138
(18) $120
$160 (144) $ 16
(4) $ 12
(12) —
PossibleLosses
50%Duro
Capital
30% KempCapital
and Loan
20%Roth
Capital
First Installment –Schedule of Safe Payments
January 31, 2004 (000)
16 - 7©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
February Liquidation Events
Cash 60,000Duro, Capital 10,000Kemp, Capital 6,000Roth, Capital 4,000
Equipment, net 80,000To record sale of equipment at a $20,000 lossCash 180,000Duro, Capital 30,000Kemp, Capital 18,000Roth, Capital 12,000
Inventories 240,000To record sale of remaining inventory items at a $60,000 loss
16 - 8©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
February Liquidation Events
Duro, Capital 2,000Kemp, Capital 1,200Roth, Capital 800
Cash 4,000To record payment of liquidation expenses
Duro, Capital 4,000Kemp, Capital 2,400Roth, Capital 1,600
Accounts Payable 8,000To record identification of an unrecorded liability
16 - 9©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
February Liquidation Events
Accounts Payable 8,000Cash 8,000
To record payment of accounts payable
Duro, Capital 84,000Kemp, Capital 86,400Roth, Capital 57,600
Cash 228,000To record distribution of cash to partners
16 - 10©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 5
Learn about cash distribution
plans for installment
liquidations.
16 - 11©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Cash Distribution Plans
The development of a cash distribution planfor the liquidation of a partnership involves
ranking the partners in terms of theirvulnerability to possible losses.
$$$
16 - 12©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Vulnerability Ranking
Duro $340 ÷ 0.5 = $ 680 1Kemp 360 ÷ 0.3 = 1,200 3Roth 160 ÷ 0.2 = 800 2
Partner’sEquity
ProfitSharing
Ratio
LossAbsorptionPotential
VulnerabilityRanking (1 most
vulnerable)
16 - 13©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Assumed Loss Absorption
A schedule of assumed lossabsorption is prepared as asecond step in developingthe cash distribution plan.
16 - 14©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Assumed Loss Absorption
Preliquidation equitiesAssumed loss to absorb Duro’s
equity (allocated 50:30:20)BalancesAssumed loss to absorb Roth’s
equity (allocated 60:40) Balances
$340
(340) —
$360
(204)$156
(36)
$120
$160
(136)$ 24
(24)
—
$860
(680)$180
(60)
$120
Duro(50%)
Kemp(30%)
Roth(20%) Total
Schedule of AssumedLoss Absorption (000)
16 - 15©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Cash Distribution Plan
First $500,000 100%Next $20,000 100%Next $100,000 100%Next $60,000 60 40%Remainder 50% 30 20
PriorityLiabilities
KempLoan Duro Kemp Roth
16 - 16©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 6
Comprehend liquidations when
either the partnership or
partners are insolvent.
16 - 17©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
III Those owing to partners by way of contribution
Insolvent Partners and Partnerships
Ranking for claims against the separateproperty of a bankrupt partner:
II Those owing to partnership creditors
I Those owing to separate creditors
16 - 18©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Partnership Solvent – One or MorePartners Personally Insolvent
In the liquidation of a solvent partnership,partnership creditors are entitled to recover
the full amount of their claimsfrom partnership property.
West, York, and Zeff are partners sharingprofits 30%, 30%, and 40%, respectively.
West is personally insolvent with personal assetsof $50,000 and personal liabilities of $100,000.
16 - 19©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Partnership Account Balances
Cash $60,000 — —West, capital (30%) 18,000 $18,000 $21,000York, capital (30%) 18,000 27,000 9,000Zeff, capital (40%) 24,000 9,000 12,000
Case A Case B Case C
16 - 20©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Insolvent Partnership
When a partnership is insolvent, the cash availableis not enough to pay partnership creditors.
Creditors will obtain partial recovery frompartnership assets and will call upon
individual partners to use their personalresources to satisfy remaining claims.
16 - 21©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
End of Chapter 16