0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 17: Partnership Liquidation
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

1. Steps in Liquidation Process
Compute net income or loss up to the date of dissolution, allocate to partners
Convert assets into cash if necessary, record gain or loss and allocate to partners
Distribute assets to creditors and partners

2. Order of Payment creditors other than partners loans from partners
capitals of partners
profits of partners

3. Joint and Several Liability
legal action may be brought against all partners together or against any one or more of the partners in separate suits

4. Marshaling of Assets
recognition of the rights of partnership and personal creditors and the classification of assets into partnership and personal categories

5. Right of Offset
A partner with an outstanding loan to the partnership can offset the loan against his debit capital balance

6. Priorities of Claims against Partnership Assets
partnership creditors
personal creditors that did not recover their claims in full from personal assets
limited to the partner’s capital interest in the partnership

7. Priorities of Claims against Personal Assets
personal creditors
partnership creditors that did not recover their claims in full from partnership assets
regardless of the partner’s capital interest in the partnership
claims of partnership against the partner
i.e., a deficit equity interest

8. Simple Liquidation Sequence of events
sale of all noncash assets and allocation of loss
based on their profit and loss ratio
payment to creditors
offset loan against debit capital balance
allocate debit capital balance of insolvent partner
investment by partners
payment to partners
based on their capital balances

9. Installment Liquidation
noncash assets are sold over an extended period
partners receive cash in installments
problems:
distribution of cash to partners before total liquidation loss is known
potential wrongful distributions against the interest of creditors or individual partners

10. Safe Payment Approach Assumptions:
a loan to or from a partner will be combined with the partner’s capital account
remaining noncash assets will not provide additional cash
a partner with a deficit capital account will be unable to make additional investment

11. Safe Payment Approach Procedure
a safe payment schedule is prepared each time cash is to be distributed

12. Advance Cash Distribution Plan
A schedule that specifies
the order in which each partner will participate in cash distribution
the amount of cash each partner will receive as it becomes available for distribution

13. Advance Cash Distribution Plan - Steps
net capital interest of each partner = capital account +/- loans to (from) partnership
order of participation = ranking by:
loss absorption potential (= net capital interest / profit and loss ratio)
amount of cash distributed to each partner = (difference in loss absorption potentials of partner and next ranking partner) x (profit and loss ratio)

14. Incorporation of a Partnership
Advantages of incorporation
limited liability
continuity of existence
ability to raise resources

15. Incorporation of a Partnership
Procedures
assets and liabilities are transferred to the corporation
partners receive capital stock in settlement of their interests
partnership accounts restated to fair values

16. Incorporation of a Partnership
Accounting Steps
The partnership books may be retained for use by the corporation or
a new set of books may be established

17. Retention of Partnership Books
Valuation JE
Inventory 2,000
Land ,000
Equipment ,000
Accounts receivable
Valuation adjustment 5,600
To adjust assets and liabilities to fair value.
The gains and losses are accumulated in the
valuation adjustment account.

18. Retention of Partnership Books
Valuation-Closing JE
Valuation adjustment 5,600
Art, capital ,800
Beck, capital ,800
To close the valuation adjustment account to
the partners’ capital accounts by their
profit and loss ratio.

19. Retention of Partnership Books
Capital-Closing JE
Art, capital ,800
Beck, capital ,800
Capital stock ,600
To close the capital account upon transfer of capital stock

20. New Books Established All accounts in partnership books will be closed
the corporation records the assets received and liabilities assumed at fair value

21. Advanced Accounting by Debra Jeter and Paul Chaney
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