1. Chapter Fifteen Partnerships: Termination and Liquidation Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. Reasons for Termination Termination of business activities followed by liquidation of partnership property occurs for a variety of reasons:  Personality disputes between partners  Retirement  Death  Changed business environment  Other opportunities  Low profits  Bankruptcy (either the business or a partner) 15-2

3. Termination & Liquidation When the partners wish to terminate the business:  Convert all assets to cash.  Allocate all gains or losses to the partner capital balances.  Pay all liabilities and expenses.  Distribute remaining cash to partners. LO 1 15-3

4. Termination & Liquidation - Example According to their agreement, Morgan & Houseman divide profits 6:4 respectively. On 6/1, the inventory is sold for $15,000. Note that the loss on the sale of inventory of $7,000 is assigned $4,200 ($7,000 x 60%) Morgan and $2,800 ($7,000 x 40%) to Houseman. LO 2 15-4

5. Deficit Capital Balance Deficit balances can be resolved two ways:  The deficit partner can make a contribution to make up the deficit.  The remaining partners can absorb the deficit.  (The deficit partner may pay later or can be sued for the deficit amount.) LO 3 15-5

6. Any payments by Holland will be split 2/3 to Dozier and 1/3 to Ross. Deficit Capital Balance -- Contribution by Deficit Partner Contributions made by the deficit partner(s) are distributed to the non- deficit partners based on their relative profit sharing percentages. 15-6

7. Deficit Capital Balance - Remaining Partners Absorb Deficit Capital balances after distribution of Holland’s loss: 15-7

8. Preliminary Distribution of Assets Debts owed to personal creditors. Debts owed to partnership creditors. Debts owed to the other partners. Under the Uniform Partnership Act, a priority ranking of creditors having claims against individual partners is recognized: LO 4 15-8

9. Predistribution Plan Used by accountants to guide the distribution of cash resulting from the liquidation process. Examine the Balance Sheet below. Assume the income sharing % is Rubens 50%, Smith 20%, and Trice 30%. LO 5 15-9

10. Predistribution Plan First, determine the maximum loss that each partner can absorb. Divide each partner’s capital balance by their respective income sharing %. 15-10

11. Predistribution Plan Since Rubens can ONLY absorb a partnership loss of $60,000, new balances are computed assuming that the partnership has a $60,000 loss. 15-11

12. Predistribution Plan With Rubens wiped out, continue calculating maximum absorbable losses using income sharing percentages of Smith, 20% (2/5) and Trice 30% (3/5). 15-12

13. Predistribution Plan As earlier, compute the maximum absorbable loss by dividing the capital balances by the relative income sharing %. 15-13

14. Predistribution Plan Trice can only absorb a loss of $55,000. Now determine new capital balances for a loss of $55,000. 15-14

15. Predistribution Plan With Rubens and Trice both wiped out, and Smith left as the only remaining partner, the predistribution plan can be prepared. 15-15

16. Predistribution Plan To inform all parties of the pattern by which available cash will be disbursed, the predistribution plan should be formally prepared in a schedule format prior to beginning liquidation. 15-16