Partnerships 21.ppt

1、Advanced Accounting II,Partnership Liquidation,1,Partnership Liquidation: Objectives,Understand the legal aspects of partnership liquidation. Apply simple partnership liquidation computations and accounting. Understand installment liquidations. Learn about cash distribution plans for installment liq

2、uidations. Comprehend liquidations when either the partnership or the partners are insolvent.,2,Legal Aspects of Liquidation,Partnership Liquidation,3,Process of Liquidation,Convert noncash assets to cash Recognize gains or losses and expenses Settle all liabilities Distribute cash to partners accor

3、ding to balances in capital accounts Assumes Business is solvent Partners have equity in net assets No partner loans Assets are converted to cash before cash is distributed to partners,4,Order of Payment,Amounts owed to creditors other than partners and amounts owed to partners other than for capita

4、l and profits Amounts due to partners liquidating their capital balance upon conclusion of the liquidation of partnership assets and liabilities,5,Simple Liquidation,Partnership Liquidation,6,Simple Liquidation,Converts all assets to cash Makes a single distribution to partners in final settlement G

5、ains and losses on conversion of assets are distributed to partners Use established profit and loss ratios Ignore salary, bonus, interest allowances,7,Example -data,Jane, Jack and Mark share profits & losses 3:1:1 After closing the books, general ledger contains:,8,Example-sale of non-cash assets at

6、 a gain,Sells non-cash assets for $150,000 = gain of $60,000 allocate to partners based on profit sharing ratio:,9,Example-sale of non-cash assets at a gain,Payoff liabilities:,10,Example-sale of non-cash assets at a gain,Remaining cash is paid to the partners according to their capital balances,11,

7、Example-sale of NCA at a gain,12,Example-sale of non-cash assets at a loss,Sells non-cash assets for $75,000 = loss of $15,000 allocate to partners based on profit sharing ratio:,13,Example-sale of non-cash assets at a loss,Payoff liabilities:,14,Example-sale of non-cash assets at a loss,Remaining c

8、ash is paid to the partners according to their capital balances,15,Example-sale of NCA at a loss,16,Debit Capital in Solvent Firm,One or more (not all) partners has a debit balance in capital Firm has sufficient cash and other assets of value to pay all creditors Partner with debit capital balance 1

9、 Contribute that amount to the firm 2 If unable, the debit balance is absorbed by the remaining partners Profit and loss ratios of remaining partners,17,Example-debit balance in partners account 1,Sells non-cash assets for $30,000 = loss of $60,000 allocate to partners: Marks capital account now has

10、 debit bal $2,000,18,Example-debit balance in partners account 1,Payoff liabilities:,19,Example-debit balance in partners account 1,Mark must repay $2,000,20,Example-debit balance in partners account 1,Remaining cash is paid to the partners according to their capital balances,21,Example-debit balanc

11、e in partners account 2,Sells non-cash assets for $30,000 = loss of $60,000 Marks capital account now has debit bal $2,000 but he cant pay,22,Example-debit balance in partners account 2,Payoff liabilities:,23,Example-debit balance in partners account 2,Other partners cover the shortfall:,24,Example-

12、debit balance in partners account 2,Remaining cash is paid to the partners according to their capital balances,25,Partnership Statement of Partnership Liquidation,Text, page 342 Beginning balances in cash, noncash assets, liabilities and partner accounts are adjusted as assets are converted to cash,

13、 and cash payments are made.,26,Installment Liquidations,Partnership Liquidation,27,Installment Liquidations,Involve distributions of cash to partners as it is available Before all gains and losses are realized Orderly liquidation of solvent partnership Liabilities are paid first Anticipate assets w

14、ill not be sold and extra losses incurred Capital deficits distributed to remaining partners Then, partners can receive distributions Prepare a safe payment schedule for each distribution,28,Installment Liquidations,A, B and C share profits & losses 2:2:1 Decided to liquidate partnership on May 1 Ge

15、neral ledger contains: B is personally insolvent,29,Installment Liquidations,During May: Assets with a book value of $55,000 are sold at a loss of $10,000 which is distributed to the partners All liabilities are paid Assume liquidation expenses of $10,000 Available cash is paid to partners Capital b

16、alances May 31 before distributions: A 12,000 B (12,000) C 3,000 How much could be paid to the partners? Need to calculate safe payments,30,Installment Liquidations,31,Installment Liquidations,Journal entries for May:,32,Installment Liquidations,Journal entries for May:,33,Installment Liquidations,D

17、uring June: Assets with a book value of $30,000 are sold at a loss of $15,000 which is distributed to the partners Available cash is paid to partners Capital balances June 30: A 15,000 B (6,000) C 6,000 How much could be paid to the partners? Need to calculate safe payments,34,Installment Liquidatio

18、ns,Safe payments for June:,35,Installment Liquidations,Journal entries for June:,36,Installment Liquidations,During July: Remaining assets ($5,000) sold at book value Liquidation costs of $7,500 paid Capital balances July 31: A 8,000 B (2,000) C 4,000 How much is finally distributed to the partners?

19、,37,Installment Liquidations,Payments and distributions for July:,38,Installment Liquidations,Journal entries for July:,39,Installment Liquidations,Journal entries for July:,40,Frequent Reports,A Statement of Partnership Liquidation is prepared showing Sale of noncash assets, distributions of P/L Pa

20、yment of creditors Distributions to partners Safe Payment Schedule is prepared Before distributions to partners An updated Statement of Partnership Liquidation is prepared New Safe Payment Schedule ,41,Liquidation Statement, Jan. 31,42,Kemps total investment is $360,Duro, Kemp and Roth,At Jan. 31, t

21、here is $640 in cash. Liabilities still due are $500 Can we give the $140 to the partners, and if so, to whom? The safe payment schedule answers this. Assume the remaining noncash assets are losses and allow for an extra $20 loss,43,Safe Payment Schedule, Jan. 31,Kemp can receive safe payments up to

22、 $120. Duro and Ross must agree.,44,Updating the Liquidation Statement,45,January Distributions,The liquidation schedule shows that The creditors were paid their $500 Kemp was paid $20 on the loan and $100 of capital (Maximum safe payment) Cash of $20 remained in the partnership,46,47,Cash Distribution Plans,Partnership Liquidation,Cash Distribution Plan,