Post on 02-Jan-2016
description
16-16-11
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Partnerships: Liquidation 16
Electronic Presentation by Douglas Cloud
Pepperdine University
Baker / Lembke / KingBaker / Lembke / King
16-16-22
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
TerminologyTerminology
Dissolution: A legal concept indicating a change in the legal relationship between partners.
Termination: The end of the normal business function of the partnership. The partnership is no longer a going concern.Liquidation: The sale of the partnership assets, payment of the partnership liabilities, and distribution of any remaining assets to the individual partners.
16-16-33
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
1. A new partner is admitted or a partner withdraws.
2. The specified term or task of the partnership has been completed.
3. All partners agree to dissolve the partnership.
4. The partnership or an an individual partner is bankrupt.
5. By court degree:a. A partner is declared insane.
b. A partner seriously breaches the partnership agreement.
c. The court determines that a partnership may be operated only at a loss.
Major Causes of a DissolutionMajor Causes of a Dissolution
16-16-44
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
A court so decrees. The partnership is
bankrupt. The partnership’s
business becomes illegal.
Partnership Terminates Immediately if--Partnership Terminates Immediately if--
16-16-55
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Partnership creditors other than partners.
Partners’ claims other than capital and profits, such as loans payable and accrued interest payable.
Partners’ claims to capital or profits, to the extent of credit balances in capital accounts.
Claims Against the Partnership AssetsClaims Against the Partnership Assets
16-16-66
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Personal creditors of individual partners.
For general partners, partnership creditors for unpaid partnership liabilities, regardless of partner’s capital balance in the partnership.
Claims Against Personal AssetsClaims Against Personal Assets
16-16-77
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Basic Facts at LiquidationBasic Facts at Liquidation
Partners Alt Blue Cha
Profit and loss percentage 40% 40% 20%Partnership capital account $34,000 $10,000 $12,000Partnership loan payable to
Cha 4,000
Alt Blue ChaPersonal assets 150,000$ 12,000$ 42,000$ Personal liabilities (86,000) (16,000) (14,000)
Net worth (deficit) 64,000$ (4,000)$ 28,000$
16-16-88
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Cautions About Offsetting Partners’ Cautions About Offsetting Partners’ Loans and CapitalLoans and Capital
16-8
It is important to maintain specific identification of a loan payable (receivable) between the partnership and a partner because of the following considerations:
1. If the loan payable (or receivable) continues to be interest-bearing during the liquidation process.
2. If the loan is secured by a property interest.
3. Actual offsetting of receivables from partners against partners’ capitals may be considered a cancellation of the receivable and should be performed with caution.
16-16-99
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Trial Balance on Liquidation DateTrial Balance on Liquidation Date
ABC PartnershipTrial BalanceMay 1, 20X5
Cash $ 10,000Noncash Assets 90,000Liabilities $ 40,000Loan Payable to Partner Cha 4,000Alt, Capital (40%) 34,000Blue, Capital (40%) 10,000Cha, Capital (20%) 12,000Total $100,000 $100,000
16-16-1010
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Case 1: Partnership Solvent--No DeficitsCase 1: Partnership Solvent--No Deficits
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s)
Preliquidation balances 10 90 (40) (4) (34) (10) (12)
Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
Sale of assets and distri-
bution of $10,000 loss 80 (90) 4 4 2
90 -0- (40) (4) (30) (6) (10)
Lump-sum payments to
partners:
Partner’s loan (4) 4
Partners’ capital (46) 30 6 10
Postliquidation balance -0- -0- -0- -0- -0- -0- -0-
Payment to o/s creditors (40) 40
50 -0- -0- (4) (30) (6) (10)
16-16-1111
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
May 15, 20X5Cash 80,000Alt, Capital 4,000Blue, Capital 4,000Cha, Capital 2,000
Noncash Assets 90,000Realization of all noncash assets of the ABC Partnership and distribution of $10,000 loss using profit and loss ratio.
Distribution of $10,000 loss
Case 1: Partnership Solvent--No DeficitsCase 1: Partnership Solvent--No Deficits
The noncash assets are sold for $80,000, at a $10,000 loss. The loss is distributed using the predetermined profit and loss ratio.
16-16-1212
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
May 30, 20X5Cha, Loan 4,000Alt, Capital 30,000Blue, Capital 6,000Cha, Capital 10,000
Cash 50,000Lump-sum payments to partners.
Case 1: Partnership Solvent--No DeficitsCase 1: Partnership Solvent--No Deficits
The remaining cash is distributed to the partners.
May 20, 20X5
Liabilities 40,000Cash 40,000
Pay outside creditors.
The partnership pays the outside creditors.
16-16-1313
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Case 2: Partnership Solvent--Deficit Case 2: Partnership Solvent--Deficit
The three partners’ personal financial statements are as follows:
Alt Blue Cha
Personal assets 150,000$ 12,000$ 42,000$ Personal liabilities (86,000) (16,000) (14,000) Net worth (deficit) 64,000$ (4,000)$ 28,000$
16-16-1414
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Case 2: Partnership Solvent--Deficit Case 2: Partnership Solvent--Deficit
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s) Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
Preliquidation balances 10 90 (40) (4) (34) (10) (12)
Payment to o/s creditors (40) 40
5 -0- -0- (4) (12) 12 (1)
Sale of assets and distri-
bution of $55,000 loss 35 (90) 22 22 11
45 -0- (40) (4) (12) 12 (1)
Distribution of deficit of
insolvent partner: (12)
40/60 x $12,000 8
20/60 x $12,000 4
(to next slide) 5 -0- -0- (4) (4) -0- 3
16-16-1515
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s) Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
(from previous slide) 5 -0- -0- (4) (4) -0- 3
Offset Cha’s deficit with
loan 3 (3)
5 -0- -0- (1) (4) -0- -0-Lump-sum payments to
partners:
Partner’s loan (1) -0- -0- 1
Partner’s capital (4) 4
Postliquidation balance -0- -0- -0- -0- -0- -0- -0-
Case 2: Partnership Solvent--Deficit Case 2: Partnership Solvent--Deficit
16-16-1616
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Case 3: Partnership Insolvent--DeficitCase 3: Partnership Insolvent--Deficit
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s) Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
Preliquidation balances 10 90 (40) (4) (34) (10) (12)Sale of assets and distri-
bution of $70,000 loss 20 (90) 28 28 14
30 -0- (40) (4) (6) 18 2
Offset deficit with loan 4 (4)
(to next slide) 30 -0- (40) -0- 6 -0- 4
Distribution of deficit of
insolvent partner: (18)40/60 x $18,000 12
20/60 x $18,000 6
30 -0- (40) (4) 6 -0- 8
16-16-1717
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s) Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
(from previous slide) 30 -0- (40) -0- 6 -0- 4 Contribution by Alt and
Cha 10 (6) (4)
40 -0- (40) -0- -0- -0- -0-Payment to outside
creditors (40) -0- 40 -0- -0- -0- -0-
Postliquidation balances -0- -0- -0- -0- -0- -0- -0-
Case 3: Partnership Insolvent--DeficitCase 3: Partnership Insolvent--Deficit
16-16-1818
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Installment Installment LiquidationsLiquidationsInstallment Installment
LiquidationsLiquidations
16-19
16-16-1919
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Installment LiquidationInstallment Liquidation
ABC PartnershipTrial BalanceMay 1, 20X5
Cash $ 10,000Noncash Assets 90,000Liabilities $ 40,000Loan Payable to Partner Cha 4,000Alt, Capital (40%) 34,000Blue, Capital (40%) 10,000Cha, Capital (20%) 12,000Total $100,000 $100,000
16-16-2020
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Installment Liquidation--May 20X5Installment Liquidation--May 20X5
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s) Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
Preliquidation balances 10 90 (40) (4) (34) (10) (12)
Sale of assets and distri-
bution of $10,000 loss 45 (55) 4 4 2
55 35 (40) (4) (30) (6) (10)Payment to o/s creditors (40) 40
15 35 -0- (4) (30) (6) (10)
Safe payment to partners (see Slide 21)
16-16-2121
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Schedule of Safe Payments to PartnersSchedule of Safe Payments to Partners
ABC PartnershipSchedule of Safe Payments to Partners, May 31, 20X5
Capital and loan balances, May 31,
before cash distribution (30,000) (6,000) (14,000)Assume full loss of $35,000 on remaining noncash assets and $10,000 in possible future liquidation expenses 18,000 18,000 9,000
(12,000) 12,000 (5,000)Assume Blue’s potential deficit must be absorbed by Alt and Cha: (12,000)
40/60 x $12,000 8,000 20/60 x $12,000 4,000
Safe payment to partners, May 31 (4,000) -0- (1,000)
Partner Alt. Blue Cha
40% 40% 20%
16-16-2222
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Installment Liquidation--May 20X5Installment Liquidation--May 20X5
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s) Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
Preliquidation balances 10 90 (40) (4) (34) (10) (12)
Sale of assets and distri-
bution of $10,000 loss 45 (55) 4 4 2
55 35 (40) (4) (30) (6) (10)Payment to o/s creditors (40) 40
15 35 -0- (4) (30) (6) (10)
Safe payment to partners (5) 1 4
(to next slide) 10 35 -0- 3 26 (6) (10)
16-16-2323
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Installment Liquidation--June 20X5Installment Liquidation--June 20X5
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s) Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
(from previous slide) 10 35 -0- (3) (26) (6) (10)Sale of assets and dis-
tribution of $15,000 loss 15 (30) 6 6 3
25 5 -0- (3) (20) -0- (7)
Safe payment to partners (see Slide 24)
16-16-2424
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Schedule of Safe Payments to PartnersSchedule of Safe Payments to PartnersABC Partnership
Schedule of Safe Payments to Partners, June 30, 20X5
Capital and loan balances, June 30 (20,000) -0- (10,000)Assume full loss of $5,000 on remaining noncash assets and $10,000 in possible future liquidation expenses 6,000 6,000 3,000
(14,000) 6,000 (7,000)Assume Blue’s potential deficit must be absorbed by Alt and Cha: (6,000)
40/60 x $6,000 4,000 20/60 x $6,000 2,000
Safe payment to partners, June 30 (10,000) -0- (5,000)
Partner Alt. Blue Cha
40% 40% 20%
16-16-2525
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Installment Liquidation--June 19X5Installment Liquidation--June 19X5
ABC PartnershipStatement of Partnership Realization and Liquidation
Lump-Sum Liquidation (in 000s) Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
(from Slide 23) 25 5 -0- (3) (20) -0- (7)
Safe payment to partners
(from Slide 24) (15) 3 10 2
10 5 -0- -0- (10) -0- (5)Sale of assets at book value 5 (5)
15 -0- -0- -0- (10) -0- (5)
Payment of $7,500 in liquidation cost (7.5) 3 3 1.5 (to next slide) 7.5 -0- -0- -0- (7) 3 (3.5)
ContinuedContinuedContinuedContinued
16-16-2626
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Installment Liquidation--July 19X5Installment Liquidation--July 19X5ABC Partnership
Statement of Partnership Realization and LiquidationLump-Sum Liquidation (in 000s)
Noncash Cha Alt, Cap. Blue, Cap Cha, Cap. Cash Assets Liab. Loan 40% 40% 20%.
(from previous slide) 7.5 -0- -0- -0- (7) -0- (3.5)Distribution of deficit of insolvent partner: (3)
40/60 x $3,000 2 20/60 x $3,000 1.0
7.5 -0- -0- -0- (5) -0- (2.5)Payment to partners (7.5) 5 2.5 Balance -0- -0- -0- -0- -0- -0- -0-
16-16-2727
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Loss Absorption PowerLoss Absorption Power
LAP Partner’s capital and loan account balancesPartner’s profit and loss share
=
LAP =$34,000
.40= $85,000
$85,000 x .40 = $34,000
16-16-2828
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Loss Absorption PowerLoss Absorption PowerAlt Blue Cha
Profit and loss sharing percentage 40% 40% 20%
Capital and loan balances (34,000) (10,000) (16,000)
Loss absorption power (LAP)
[(Capital + loan balances) Profit %] (85,000) (25,000) (80,000)
Decrease highest LAP to next-highest:
Decrease Alt by $5,000 5,000
(80,000) (25,000) (80,000)Decrease LAP to next-highest level:
Decrease Alt by $55,000, 55,000
Decrease Cha by $55,000 55,000
(25,000) (25,000) (25,000)
Distribute LAPs by distributing
cash in profit and loss sharing
percentages 40% 40% 20%
16-16-2929
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Capital and Loan AccountsCapital and Loan AccountsAlt Blue Cha
Profit and loss sharing percentage 40% 40% 20%
Capital and loan balances (34,000) (10,000) (16,000)Decrease highest LAP to next-highest:
Decrease Alt by $5,000
(cash distribution of $2,000) 2,000
(32,000) (10,000) (16,000)Decrease LAP to next-highest level:
Decrease Alt by $55,000,
(cash distribution of $22,000) 22,000
Decrease Cha by $55,000
(cash distribution of $11,000) 11,000
Further payments in profits and loss
sharing percentages (10,000) (10,000) ( 5,000)
16-16-3030
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Incorporation of a PartnershipIncorporation of a Partnership
Alt, Capital 4,000Blue, Capital 4,000Cha, Capital 2,000
Noncash Assets 10,000Recognize loss on reduction of assetsto market value.
Distribution of $10,000 loss
ABC Partnership decides to incorporate as Peerless Products Corporation. All the partnership’s assets and
liabilities are appraised and valued at their market values. The noncash assets have a market value of $80,000.
16-16-3131
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Incorporation of a PartnershipIncorporation of a Partnership
Cash 10,000Noncash Assets 80,000
Liabilities 40,000Loan Payable to Cha 4,000Common Stock 4,600Paid-In Capital in Excess of Par 41,400
Stock acquisition of partnership’s netassets.
The corporation makes an entry on its books for the issuance of 4,600 shares of $1 par common stock in
exchange for the partnership’s net assets.
16-16-3232
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Incorporation of a PartnershipIncorporation of a Partnership
Investment in Peerless Products Stock 46,000Liabilities 40,000Loan Payable to Cha 4,000
Cash 10,000Noncash Assets 80,000
Receipt of stock in Peerless Products for partnership’s net assets.
The partners make the following entry on the partnership’s books:
16-16-3333
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Incorporation of a PartnershipIncorporation of a Partnership
Alt, Capital 30,000Blue, Capital 6,000Cha, Capital 10,000
Investment in Peerless Products Stock 46,000
Distribution of Peerless Productsstock to partners.
When the stock is issued to the partners, the partnership’s books are closed by this final entry:
16-16-3434
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter SixteenChapter Sixteen
The The EndEnd