©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Partnership Liquidation Chapter 16

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 1 Understand legal aspects of partnership liquidation.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Liquidation Process – Converting noncash assets into cash – Recognizing gains and losses and liquidating expenses incurred during the liquidation period – Distributing cash to partners according to the final balances in their capital accounts – Settling all liabilities

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Rank Order of Payments I – Amounts owed to creditors other than partners II – Amounts owed to partners other than for capital and profits III – Amounts due to partners with respect to their capital interests IV – Amounts to partners with respect to profits

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 2 Apply simple partnership liquidation computations and accounting.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Simple Partnership Liquidation Holmes and Kaiser Balance Sheet December 31, 2003 Assets Liabilities and Equity Cash$ 10,000Accounts payable $ 40,000 A/R, net 30,000Loan from Holmes 10,000 Inventory 30,000Holmes, capital 25,000 Plant assets, net 40,000Kaiser, capital 35,000$110,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Simple Partnership Liquidation Profits and losses are distributed as follows: 70% to Holmes and 30% to Kaiser They agreed to liquidate the partnership as soon as possible after January 1, Inventory items are sold for $25,000, plant assets are sold for $30,000, $22,000 is collected from accounts receivable.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Simple Partnership Liquidation Holmes and Kaiser Balance Sheet January 5, 2004 Assets Liabilities and Equity Cash$87,000Accounts payable $40,000 A/R, netLoan from Holmes 10,000 InventoryHolmes, capital 8,900 Plant assets, net Kaiser, capital 28,100$87,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Simple Partnership Liquidation Order of Payment ITo creditors for accounts payable$40,000 IITo Holmes for his loan balance 10,000 IIITo Holmes for his capital balance 8,900 To Kaiser for his capital balance 28,100 Total distribution$87,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Debit Capital Balances in a Solvent Partnership The partnership of Jay, Jim, and Joe is in the process of liquidation. Debit Credit Cash$25,000 Jay, capital (40%) 3,000 Jim, capital (40%)$16,000 Joe, capital (20%) 12,000 Total$28,000$28,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Debit Capital Balances in a Solvent Partnership If Jay is unable to pay $3,000 to the partnership, his debit balance represents a loss to be charged to Jim and Joe. Jim’s share: 4/6 × $3,000 = $2,000 Joe’s share: 2/6 × $3,000 = $1,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 3 Perform safe payment computations.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Safe Payments to Partners The calculation of safe payments is based on the following assumptions: All partners are personally insolvent.All noncash assets represent possible losses.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Application of Safe Payments Schedule (000) Debits Credits Cash$ 80Loan payable to Nancy $20 Loan due from Maxine 10Buzz, capital (50%) 50 Land 20Maxine, capital (30%) 70 Building, net 140Nancy, capital (20%) 110$250

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Safe Payment Schedule Partners’ equities (capital ± loan balances Possible loss on noncash assets Book value of land and buildings Possible loss on contingencies Cash withheld for contingencies $ $50 (80) (30) (5) (35) $60 (48) 12 (3) 9 $130 (32) 98 (2) 96 Possible Losses Buzz Equity (50%) Maxine Equity (30%) Nancy Equity (20%)(000)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Safe Payment Schedule Possible loss from Buzz Buzz’s debit balance allocated 60:40 to Maxine and Nancy Possible loss from Maxine Maxine’s debit balance assigned to Nancy 35 0 (21) (12) 12 0 (14) 82 (12) $ 70 Possible Losses Buzz Equity (50%) Maxine Equity (30%) Nancy Equity (20%)(000)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Safe Payment Schedule Loan payable to Nancy20,000 Nancy, Capital50,000 Cash70,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Account Balances (000) Debits Credits Cash$ 10Buzz, capital (50%)$ 50 Loan due from Maxine 10Maxine, capital (30%) 70 Land 20Nancy, capital (20%) 60 Building, net 140$180

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Advance Distribution Any distribution to partners before all gains and losses have been realized and recognized requires approval of all partners.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 4 Understand installment liquidations.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Installment Liquidation An installment liquidation involves the distribution of cash to partners as it becomes available during the liquidation period and before all liquidation gains and losses have been realized.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Installment Liquidation Illustration The partnership of Duro, Kemp, and Roth is to be liquidated as soon as possible after December 31, All cash on hand, except for $20,000 is to be distributed at the end of each month. Profit and losses are shared 50%, 30%, and 20% to Duro, Kemp, and Roth.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Installment Liquidation Illustration Duro, Kemp, and Roth Balance Sheet December 31, 2003 (000) Assets Liabilities and Equity Cash$ 240Accounts payable$ 300 A/R, net 280Note payable 200 Loan to Roth 40Loan from Kemp 20 Inventories 400Duro, capital (50%) 340 Land 100Kemp, capital (30%) 340 Equipment, net 300Roth, capital (20%) 200 Goodwill 40$1,400

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Installment Liquidation Illustration Balances January 1 Offset Roth loan Write-off of goodwill Collection of receivables Sale of inventory items Predistribution balances January 31 January distribution Creditors Kemp Balances February 1 $ $640 (500) (120) $ 20 $1,160 (40) (200) (160) $ 720 $500 (500) $ 0 $340 (20) 20 $340 Cash Non- cash Assets Priority Liabil- ities 50% Duro Capital Statement of Partnership Liquidation for the Period 1/1/2004 to 2/1/2002 (000) $20 (20) $ 0 $340 (12) 12 $340 (100) $240 $200 (40) (8) 8 $160 Kemp Loan 30% Kemp Capital 20% Roth Capital

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Installment Liquidation Illustration Partners’ equities January 31, 2004 Possible loss on noncash assets Possible loss on contingencies: cash withheld Possible loss from Duro: debit balance allocated 60:40 $ $340 (360) $ (20) (10) $ (30) 30 — $360 (216) $144 (6) $138 (18) $120 $160 (144) $ 16 (4) $ 12 (12) — Possible Losses 50% Duro Capital 30% Kemp Capital and Loan 20% Roth Capital First Installment – Schedule of Safe Payments January 31, 2004 (000)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn February Liquidation Events Cash 60,000 Duro, Capital 10,000 Kemp, Capital 6,000 Roth, Capital 4,000 Equipment, net 80,000 To record sale of equipment at a $20,000 loss Cash180,000 Duro, Capital 30,000 Kemp, Capital 18,000 Roth, Capital 12,000 Inventories240,000 To record sale of remaining inventory items at a $60,000 loss

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn February Liquidation Events Duro, Capital2,000 Kemp, Capital1,200 Roth, Capital 800 Cash4,000 To record payment of liquidation expenses Duro, Capital4,000 Kemp, Capital2,400 Roth, Capital1,600 Accounts Payable8,000 To record identification of an unrecorded liability

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn February Liquidation Events Accounts Payable 8,000 Cash 8,000 To record payment of accounts payable Duro, Capital84,000 Kemp, Capital86,400 Roth, Capital57,600 Cash228,000 To record distribution of cash to partners

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 5 Learn about cash distribution plans for installment liquidations.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Cash Distribution Plans The development of a cash distribution plan for the liquidation of a partnership involves ranking the partners in terms of their vulnerability to possible losses. $$$

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Vulnerability Ranking Duro$340÷0.5=$ 6801 Kemp 360÷0.3= 1,2003 Roth 160÷0.2= 8002 Partner’s Equity Profit Sharing Ratio Loss Absorption Potential Vulnerability Ranking (1 most vulnerable)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Assumed Loss Absorption A schedule of assumed loss absorption is prepared as a second step in developing the cash distribution plan.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Assumed Loss Absorption Preliquidation equities Assumed loss to absorb Duro’s equity (allocated 50:30:20) Balances Assumed 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 Assumed Loss Absorption (000)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Cash Distribution Plan First $500,000100% Next $20, % Next $100,000100% Next $60, % Remainder 50% 3020 Priority Liabilities Kemp LoanDuroKempRoth

©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.

©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 separate property of a bankrupt partner: II Those owing to partnership creditors I Those owing to separate creditors

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Partnership Solvent – One or More Partners Personally Insolvent In the liquidation of a solvent partnership, partnership creditors are entitled to recover the full amount of their claims from partnership property. West, York, and Zeff are partners sharing profits 30%, 30%, and 40%, respectively. West is personally insolvent with personal assets of $50,000 and personal liabilities of $100,000.

©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$21,000 York, capital (30%) 18,000 27,000 9,000 Zeff, capital (40%) 24,000 9,000 12,000 Case ACase BCase C

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Insolvent Partnership When a partnership is insolvent, the cash available is not enough to pay partnership creditors. Creditors will obtain partial recovery from partnership assets and will call upon individual partners to use their personal resources to satisfy remaining claims.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn End of Chapter 16