Partnership Liquidation

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

Partnership Liquidation

Chapter 16


Installment Liquidation

An installment liquidation involvesthe distribution of cash to partnersas it becomes available during theliquidation period and before all

liquidation gains and losseshave been realized.


Installment LiquidationIllustration

The partnership of Duro, Kemp, and Rothis to be liquidated as soon as possible

after December 31, 2003.

All cash on hand, except for $20,000 is tobe distributed at the end of each month.

Profit and losses are shared 50%, 30%,and 20% to Duro, Kemp, and Roth.



Duro, Kemp, and Roth Balance SheetDecember 31, 2003 (000)

Assets Liabilities and EquityCash $ 240 Accounts payable $ 300A/R, net 280 Note payable 200Loan to Roth 40 Loan from Kemp 20Inventories 400 Duro, capital (50%) 340Land 100 Kemp, capital (30%) 340Equipment, net 300 Roth, capital (20%) 200Goodwill 40

$1,400 $1,400



Balances January 1Offset Roth loanWrite-off of goodwillCollection of receivablesSale of inventory itemsPredistribution balances

January 31January distribution

CreditorsKemp

Balances February 1

$240

200 200

$640

(500)(120)$ 20

$1,160 (40) (40) (200) (160)

$ 720

$ 720

$500

$500

(500)

$ 0

$340

(20)

20

$340

$340

Cash

Non-cash

Assets

PriorityLiabil-

ities

50%Duro

Capital

Statement of PartnershipLiquidation for the Period1/1/2004 to 2/1/2002 (000)

$20

$20

(20) $ 0

$340

(12)

12

$340

(100)$240

$200 (40) (8)

8

$160

$160

KempLoan

30%Kemp

Capital

20%Roth

Capital



Partners’ equities January 31, 2004Possible loss on noncash assets

Possible loss on contingencies:cash withheld

Possible loss from Duro: debitbalance allocated 60:40

$720

20

$340 (360) $ (20) (10) $ (30)

30 —

$360 (216) $144

(6) $138

(18) $120

$160 (144) $ 16

(4) $ 12

(12) —

PossibleLosses

50%Duro

Capital

30% KempCapital

and Loan

20%Roth

Capital

First Installment –Schedule of Safe Payments

January 31, 2004 (000)


February Liquidation Events

Cash 60,000Duro, Capital 10,000Kemp, Capital 6,000Roth, Capital 4,000

Equipment, net 80,000To record sale of equipment at a $20,000 lossCash 180,000Duro, Capital 30,000Kemp, Capital 18,000Roth, Capital 12,000

Inventories 240,000To record sale of remaining inventory items at a $60,000 loss



Duro, Capital 2,000Kemp, Capital 1,200Roth, Capital 800

Cash 4,000To record payment of liquidation expenses

Duro, Capital 4,000Kemp, Capital 2,400Roth, Capital 1,600

Accounts Payable 8,000To record identification of an unrecorded liability



Accounts Payable 8,000Cash 8,000

To record payment of accounts payable

Duro, Capital 84,000Kemp, Capital 86,400Roth, Capital 57,600

Cash 228,000To record distribution of cash to partners


Learning Objective 5

Learn about cash distribution

plans for installment

liquidations.


Cash Distribution Plans

The development of a cash distribution planfor the liquidation of a partnership involves

ranking the partners in terms of theirvulnerability to possible losses.

$$$


Vulnerability Ranking

Duro $340 ÷ 0.5 = $ 680 1Kemp 360 ÷ 0.3 = 1,200 3Roth 160 ÷ 0.2 = 800 2

Partner’sEquity

ProfitSharing

Ratio

LossAbsorptionPotential

VulnerabilityRanking (1 most

vulnerable)


Assumed Loss Absorption

A schedule of assumed lossabsorption is prepared as asecond step in developingthe cash distribution plan.


Assumed Loss Absorption

Preliquidation equitiesAssumed loss to absorb Duro’s

equity (allocated 50:30:20)BalancesAssumed loss to absorb Roth’s

equity (allocated 60:40) Balances

$340

(340) —

$360

(204)$156

(36)

$120

$160

(136)$ 24

(24)

—

$860

(680)$180

(60)

$120

Duro(50%)

Kemp(30%)

Roth(20%) Total

Schedule of AssumedLoss Absorption (000)


Cash Distribution Plan

First $500,000 100%Next $20,000 100%Next $100,000 100%Next $60,000 60 40%Remainder 50% 30 20

PriorityLiabilities

KempLoan Duro Kemp Roth


Learning Objective 6

Comprehend liquidations when

either the partnership or

partners are insolvent.


III Those owing to partners by way of contribution

Insolvent Partners and Partnerships

Ranking for claims against the separateproperty of a bankrupt partner:

II Those owing to partnership creditors

I Those owing to separate creditors


Partnership Solvent – One or MorePartners Personally Insolvent

In the liquidation of a solvent partnership,partnership creditors are entitled to recover

the full amount of their claimsfrom partnership property.

West, York, and Zeff are partners sharingprofits 30%, 30%, and 40%, respectively.

West is personally insolvent with personal assetsof $50,000 and personal liabilities of $100,000.


Partnership Account Balances

Cash $60,000 — —West, capital (30%) 18,000 $18,000 $21,000York, capital (30%) 18,000 27,000 9,000Zeff, capital (40%) 24,000 9,000 12,000

Case A Case B Case C


Insolvent Partnership

When a partnership is insolvent, the cash availableis not enough to pay partnership creditors.

Creditors will obtain partial recovery frompartnership assets and will call upon

individual partners to use their personalresources to satisfy remaining claims.


End of Chapter 16

Documents

Partnership Liquidation