Partnership Liquidation

Chapter 16

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 1

 The Liquidation Process

– Converting noncash assets into cash

– Recognizing gains and losses and liquidating
expenses incurred during the liquidation period
– Settling all liabilities
– Distributing cash to partners according to
the final balances in their capital accounts

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 2

 Rank Order of Payments

I – Amounts owed to creditors other than partners

– Amounts owed to partners other
than for capital and profits
II – Amounts due to partners liquidating their
capital balance upon conclusion of the
liquidation of partnership assets and liabilities

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 3

 Simple Partnership Liquidation

Hol and Kir Balance Sheet

December 31, 2011
Assets Liabilities and Equity
Cash $ 10,000 Accounts payable $ 40,000
A/R, net 30,000 Loan from Hol 10,000
Inventory 30,000 Hol, capital 25,000
Plant assets, net 40,000 Kir, capital 35,000
$110,000 $110,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 4

 Simple Partnership Liquidation

Profits and losses are distributed as follows:

70% to Hol and 30% to Kir
They agreed to liquidate the partnership
as soon as possible after January 1, 2012.
In Jan 5, 2012 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 16 - 5

 Simple Partnership Liquidation

Hol and Kir Balance Sheet

January 5, 2012
Assets Liabilities and Equity
Cash $87,000 Accounts payable $40,000
A/R, net Loan from Hol 10,000
Inventory Hol, capital 8,900
Plant assets, net Kir, capital 28,100
$87,000 $87,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 6

 Simple Partnership Liquidation

Order of Payment

I To creditors for accounts payable $40,000

To Hol for his loan balance 10,000
II To Hol for his capital balance 8,900
To Kir for his capital balance 28,100
Total distribution $87,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 7

 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 16 - 8
 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 16 - 9

 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 16 - 10

 Application of Safe
Payments Schedule

(000) Debits Credits

Cash $ 80 Loan payable to Nan $20
Loan due from Max 10 Buz, capital (50%) 50
Land 20 Max, capital (30%) 70
Building, net 140 Nan, capital (20%) 110
$250 $250

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 11

 Safe Payment Schedule
Buz Max Nan
Possible Equity Equity Equity
(000) Losses (50%) (30%) (20%)
Partners’ equities
(capital ± loan balances) $50 $60 $130

Possible loss on noncash assets

Book value of land and buildings $160 (80) (48) (32)
(30) 12 98

Possible loss on contingencies

Cash withheld for contingencies 10 (5) (3) (2)
(35) 9 96
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 12
 Safe Payment Schedule
Buz Max Nan
Possible Equity Equity Equity
(000) Losses (50%) (30%) (20%)
Possible loss from Buz
Buz’s debit balance allocated
60:40 to Max and Nan 35 (21) (14)
0 (12) 82

Possible loss from Max

Max’s debit balance assigned
to Nan 12 (12)
0 $ 70

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 13

 Safe Payment Schedule

Loan payable to Nan 20,000

Nan, Capital 50,000
Cash 70,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 14

 Account Balances

(000) Debits Credits

Cash $ 10 Buz, capital (50%) $ 50
Loan due from Max 10 Max, capital (30%) 70
Land 20 Nan, capital (20%) 60
Building, net 140
$180 $180

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 15

 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 16 - 16

 Installment Liquidation
Illustration

The partnership of Duro, Kemp, and Roth

is to be liquidated as soon as possible
after December 31, 2011.
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 16 - 17

 Installment Liquidation
Illustration
Duro, Kemp, and Roth Balance Sheet
December 31, 2011 (000)
Assets Liabilities and Equity
Cash $ 240 Accounts payable $ 300
A/R, net 280 Note payable 200
Loan to Roth 40 Loan from Kemp 20
Inventories 400 Duro, capital (50%) 340
Land 100 Kemp, capital (30%) 340
Equipment, net 300 Roth, capital (20%) 200
Goodwill 40
$1,400 $1,400

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 18

 Installment Liquidation
Illustration
The loan to Roth is offset against his capital balance, the goodwill is
written off, $200,000 is collected on account, inventory items that cost
$160,000 are sold for $200,000, non-owner liabilities are settled at
recorded values, and cash is distributed. (January 2012)
Equipment with a book value of $80,000 is sold for $60,000, the
remaining inventory items are sold for $180,000, liquidation expenses
of $4,000 are paid, a liability of $8,000 is discovered and paid, and cash
is distributed. (February 2012)
The land is sold for $150,000, liquidation expenses of $5,000 are paid,
and cash is distributed. (March 2012)
Additional equipment is sold for $150,000, the remaining equipment
and receivables are written off, and all cash on hand is distributed in
final liquidation of the partnership. (April 2012)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 19

 Installment Liquidation
Illustration
Statement of Partnership Non- Priority 50% 30% 20%
Liquidation for the Period cash Liabil- Duro Kemp Kemp Roth
1/1/2012 to 2/1/2012 (000) Cash Assets ities Capital Loan Capital Capital
Balances January 1 $240 $1,160 $500 $340 $20 $340 $200
Offset Roth loan (40) (40)
Write-off of goodwill (40) (20) (12) (8)
Collection of receivables 200 (200)
Sale of inventory items 200 (160) 20 12 8
Predistribution balances
January 31 $640 $ 720 $500 $340 $20 $340 $160
January distribution
Creditors (500) (500)
Kemp (120) (20) (100)
Balances February 1 $ 20 $ 720 $ 0 $340 $ 0 $240 $160

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 20

 Installment Liquidation
Illustration
First Installment – 50% 30% Kemp 20%
Schedule of Safe Payments Possible Duro Capital Roth
January 31, 2012 (000) Losses Capital and Loan Capital
Partners’ equities January 31, 2012 $340 $360 $160
Possible loss on noncash assets $720 (360) (216) (144)
$ (20) $144 $ 16
Possible loss on contingencies:
cash withheld 20 (10) (6) (4)
$ (30) $138 $ 12
Possible loss from Duro: debit
balance allocated 60:40 30 (18) (12)
— $120 —

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 21

 Installment Liquidation
Illustration
The loan to Roth is offset against his capital balance, the goodwill is
written off, $200,000 is collected on account, inventory items that cost
$160,000 are sold for $200,000, non-owner liabilities are settled at
recorded values, and cash is distributed. (January 2012)
Equipment with a book value of $80,000 is sold for $60,000, the
remaining inventory items are sold for $180,000, liquidation expenses
of $4,000 are paid, a liability of $8,000 is discovered and paid, and cash
is distributed. (February 2012)
The land is sold for $150,000, liquidation expenses of $5,000 are paid,
and cash is distributed. (March 2012)
Additional equipment is sold for $150,000, the remaining equipment
and receivables are written off, and all cash on hand is distributed in
final liquidation of the partnership. (April 2012)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 22

 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
Cash 180,000
Duro, Capital 30,000
Kemp, Capital 18,000
Roth, Capital 12,000
Inventories 240,000
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 16 - 23
 February Liquidation Events

Duro, Capital 2,000

Kemp, Capital 1,200
Roth, Capital 800
Cash 4,000
To record payment of liquidation expenses
Duro, Capital 4,000
Kemp, Capital 2,400
Roth, Capital 1,600
Accounts Payable 8,000
To record identification of an unrecorded liability
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 24
 February Liquidation Events

Accounts Payable 8,000

Cash 8,000
To record payment of accounts payable
Duro, Capital 84,000
Kemp, Capital 86,400
Roth, Capital 57,600
Cash 228,000
To record distribution of cash to partners

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 25

 Installment Liquidation
Illustration
The loan to Roth is offset against his capital balance, the goodwill is
written off, $200,000 is collected on account, inventory items that cost
$160,000 are sold for $200,000, non-owner liabilities are settled at
recorded values, and cash is distributed. (January 2012)
Equipment with a book value of $80,000 is sold for $60,000, the
remaining inventory items are sold for $180,000, liquidation expenses
of $4,000 are paid, a liability of $8,000 is discovered and paid, and cash
is distributed. (February 2012)
The land is sold for $150,000, liquidation expenses of $5,000 are paid,
and cash is distributed. (March 2012)
Additional equipment is sold for $150,000, the remaining equipment
and receivables are written off, and all cash on hand is distributed in
final liquidation of the partnership. (April 2012)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 26

 March Liquidation Events
Cash 150,000
Duro, Capital 25,000
Kemp, Capital 15,000
Roth, Capital 10,000
Land 100,000
To record sale of land at a $50,000 gain
Duro, Capital 2,500
Kemp, Capital 1,500
Roth, Capital 1,000
Cash 5,000
To record payment of liquidation expenses

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 27

 March Liquidation Events

Duro, Capital 72,500

Kemp, Capital 43,500
Roth, Capital 29,000
Cash 145,000
To record March distribution of cash to partners

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 28

 Installment Liquidation
Illustration
The loan to Roth is offset against his capital balance, the goodwill is
written off, $200,000 is collected on account, inventory items that cost
$160,000 are sold for $200,000, non-owner liabilities are settled at
recorded values, and cash is distributed. (January 2012)
Equipment with a book value of $80,000 is sold for $60,000, the
remaining inventory items are sold for $180,000, liquidation expenses
of $4,000 are paid, a liability of $8,000 is discovered and paid, and cash
is distributed. (February 2012)
The land is sold for $150,000, liquidation expenses of $5,000 are paid,
and cash is distributed. (March 2012)
Additional equipment is sold for $150,000, the remaining equipment
and receivables are written off, and all cash on hand is distributed in
final liquidation of the partnership. (April 2012)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 29

 April Liquidation Events
Cash 150,000
Duro, Capital 35,000
Kemp, Capital 21,000
Roth, Capital 14,000
Equipment - net 220,000
To record sale of the remaining equipment at a $70,000 loss
Duro, Capital 40,000
Kemp, Capital 24,000
Roth, Capital 16,000
Account receivable 80,000
To record write off of remaining receivable

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 30

 April Liquidation Events

Duro, Capital 85,000

Kemp, Capital 51,000
Roth, Capital 34,000
Cash 170,000
To record distribution of cash to partners in final liquidation

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 31

 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 16 - 32

 Installment Liquidation
Illustration

The partnership of Duro, Kemp, and Roth

is to be liquidated as soon as possible
after December 31, 2011.
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 16 - 33

 Installment Liquidation
Illustration
Duro, Kemp, and Roth Balance Sheet
December 31, 2011 (000)
Assets Liabilities and Equity
Cash $ 240 Accounts payable $ 300
A/R, net 280 Note payable 200
Loan to Roth 40 Loan from Kemp 20
Inventories 400 Duro, capital (50%) 340
Land 100 Kemp, capital (30%) 340
Equipment, net 300 Roth, capital (20%) 200
Goodwill 40
$1,400 $1,400

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 34

 Vulnerability Ranking

Profit Loss Vulnerability

Partner’s Sharing Absorption Ranking (1 most
Equity Ratio Potential vulnerable)

Duro $340 ÷ 0.5 = $ 680 1

Kemp 360 ÷ 0.3 = 1,200 3
Roth 160 ÷ 0.2 = 800 2

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 35

 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 16 - 36

 Assumed Loss Absorption

Schedule of Assumed Duro Kemp Roth

Loss Absorption (000) (50%) (30%) (20%) Total
Preliquidation equities $340 $360 $160 $860
Assumed loss to absorb Duro’s
equity (allocated 50:30:20) (340) (204) (136) (680)
Balances — $156 $ 24 $180
Assumed loss to absorb Roth’s
equity (allocated 60:40) (36) (24) (60)

Balances $120 — $120

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 37
 Cash Distribution Plan

Priority Kemp
Liabilities Loan Duro Kemp Roth

First $500,000 100%

Next $20,000 100%
Next $100,000 100%
Next $60,000 60 40%
Remainder 50% 30 20

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 38

 Insolvent Partners and Partnerships

Ranking for claims against the separate

property of a bankrupt partner:

I Those owing to separate creditors

II Those owing to partnership creditors
III Those owing to partners by way of contribution

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 39

 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 16 - 40

 End of Chapter 16

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 41