Partnership Liquidations What steps are required to record the liquidation of a partnership?

These are the steps required to account for a partnership liquidation Transfer the current period income or loss to the capital accounts of the partnership in accordance with their revenue sharing agreement. Record the sale of the noncash assets. The partnership will no longer need the assets. Any loss or gain is allocated to the partners based on the income and loss sharing agreement. Pay or settle all of the partnership liabilities. After these steps, usually there is either no capital deficiency or a capital deficiency on behalf of one or more of the partners Partner with deficiency pays the deficiency or Other partners absorb the deficiency Distribute remaining cash to partners based on their capital balances.

Liquidating the Partnership – No capital deficiency The partners share income and losses equally. After updating the partners’ capital accounts for current income/loss, the balance sheet accounts remaining: The next step is to sell the non-cash assets (land). If there is a liquidation loss, the JE is: If there is a liquidation gain, the JE is

If there was a liquidation loss: The loss or gain is then allocated using the income/loss sharing agreement. In this example, the partners are sharing income/loss equally according to their agreement. If there was a liquidation loss: If there was a liquidation gain:

Paying Liabilities and Updating Balances Next, the partnership pays its liabilities And updates the cash account as well as the partners’ equity balances to ready the final distribution of cash according to the capital balances

Division of the Remaining Cash The final distribution of cash will be based on the ratios of the partners’ capital balances.

What if there is a capital deficiency What if there is a capital deficiency? Liquidating the Partnership – Capital deficiency A capital deficiency means there is a debit balance in a partner’s capital account at the point of the final distribution journal entry. Can be the result of excessive withdrawals, recurring income statement losses, or liquidation losses. In this instance, Rotolo owes the partnership $3,000 and both Zachary and Plaisance have a legal claim against Rotolo’s personal assets. One or two things can happen Rotolo can either pay the partnership the $3,000 Or Rotolo does not pay the deficiency.

Partner pays the deficiency The journal entry for the payment would be Now the Balance Sheet is: Final distribution journal entry is:

Partner does not pay deficiency Partners absorb the deficiency according to the income/loss sharing agreement. In this instance, the partners are sharing income and losses equally; therefore, the journal entry would be: The new Balance Sheet And the final distribution journal entry would be: