Advanced Accounting Chapter 17：Partnership Liquidation

1、Advanced Accounting Chapter 17：Partnership LiquidationAdvanced Accounting by Debra Jeter and Paul ChaneyChapter 17: Partnership LiquidationSlides Authored by Hannah Wong, Ph.D.Rutgers UniversitySteps in Liquidation ProcessCompute net income or loss up to the date of dissolution, allocate to partners

2、Convert assets into cash if necessary, record gain or loss and allocate to partnersDistribute assets to creditors and partnersOrder of Paymentcreditors other than partnersloans from partners capitals of partnersprofits of partnersJoint and Several Liabilitylegal action may be brought against all par

3、tners together or against any one or more of the partners in separate suitsMarshaling of Assetsrecognition of the rights of partnership and personal creditors and the classification of assets into partnership and personal categoriesRight of OffsetA partner with an outstanding loan to the partnership

4、 can offset the loan against his debit capital balancePriorities of Claims against Partnership Assetspartnership creditorspersonal creditors that did not recover their claims in full from personal assetslimited to the partners capital interest in the partnershipPriorities of Claims against Personal

5、Assetspersonal creditorspartnership creditors that did not recover their claims in full from partnership assetsregardless of the partners capital interest in the partnershipclaims of partnership against the partneri.e., a deficit equity interestSimple LiquidationSequence of eventssale of all noncash

6、 assets and allocation of lossbased on their profit and loss ratiopayment to creditorsoffset loan against debit capital balanceallocate debit capital balance of insolvent partnerinvestment by partnerspayment to partnersbased on their capital balancesInstallment Liquidationnoncash assets are sold ove

7、r an extended periodpartners receive cash in installmentsproblems:distribution of cash to partners before total liquidation loss is known potential wrongful distributions against the interest of creditors or individual partnersSafe Payment ApproachAssumptions:a loan to or from a partner will be comb

8、ined with the partners capital accountremaining noncash assets will not provide additional casha partner with a deficit capital account will be unable to make additional investmentSafe Payment ApproachProcedurea safe payment schedule is prepared each time cash is to be distributedAdvance Cash Distri

9、bution PlanA 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 distributionAdvance Cash Distribution Plan - Stepsnet capital interest of each partner = capital account +/- loans to (f

10、rom) partnershiporder 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)Incorporation of a Partner

11、shipAdvantages of incorporationlimited liabilitycontinuity of existenceability to raise resourcesIncorporation of a PartnershipProceduresassets and liabilities are transferred to the corporationpartners receive capital stock in settlement of their interestspartnership accounts restated to fair value

12、sIncorporation of a PartnershipAccounting StepsThe partnership books may be retained for use by the corporation ora new set of books may be establishedRetention of Partnership BooksInventory2,000Land5,000Equipment1,000Accounts receivable 400Valuation adjustment5,600Valuation JETo adjust assets and l

13、iabilities to fair value. The gains and losses are accumulated in the valuation adjustment account.Retention of Partnership BooksValuation adjustment5,600Art, capital2,800Beck, capital2,800Valuation-Closing JETo close the valuation adjustment account to the partners capital accounts by their profit and loss ratio.Retention of Partnership BooksArt, capital10,800Beck, capital 7,800Capital stock 18,600Capital-Closing JETo