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22

PARTNERSHIPS: LIQUIDATIONS
REVIEW QUESTIONS

LEVEL OF
TIME
DIFFICULTY   (MINUTES)

EXERCISES
22­1  Lump­sum liquidation: Solvent partnership having partners’ loans
—All partners personally solvent..........................................................
22­2  Lump­sum liquidation: Insolvent partnership having loans to and 
from partners—All partners personally solvent.....................................
22­3  Lump­sum liquidation: Solvent partnership having loans to and 
from partners—Certain partners personally insolvent............................
22­4  Lump­sum liquidation: Insolvent partnership having loans from 
partners—Certain partners personally insolvent....................................
22­5 Insolvent partnership and insolvent partners: Theory............................
22­6  Installment liquidation: Solvent partnership having partner’s loan—
First cash distribution to partners...........................................................
22­7  Installment liquidation: Solvent partnership—First cash distribution 
to partners..............................................................................................
22­8  Installment liquidation: Solvent partnership with partnership’s and 
partner’s loans—First cash distribution to partners................................

Simple

10

Simple

10

Simple

10

Moderate
Simple

15
3

Simple

10

Simple

10

Moderate

10

Simple

15

Simple

15

Simple

15

Moderate

40

Moderate
Moderate
Moderate

60
50
30

Complex

70

PROBLEMS
22­1  Lump­sum liquidation: Solvent partnership having partner’s loan— 
All partners personally solvent..............................................................
22­2  Lump­sum liquidation: Solvent partnership having partners’ loans—
Certain partners personally insolvent.....................................................
22­3  Lump­sum liquidation: Insolvent partnership having partners’ loans—
Certain partners personally insolvent.....................................................
22­4  Installment liquidation: Schedule of safe payments—First cash 
distribution to partners...........................................................................
22­5  Installment liquidation: Schedule of safe payments and statement of 
realization and liquidation......................................................................
22­6 Installment liquidation: Schedule of cash distribution...........................
22­7 Installment liquidation: Schedule of cash distribution...........................
22­8  Installment liquidation: Schedule of cash distribution and statement  
of realization and liquidation.................................................................

22-2 •

ADVANCED ACCOUNTING: Concepts and Practice

THINKING CRITICALLY 
CASES
22­1
22­2
22­3
22­4

Manner of sharing realization losses during liquidation........................
Manner of sharing realization losses during liquidation........................
Procedures for distributing available cash to partners............................
Procedures for distributing available cash to partners............................

Simple
Simple
Simple
Simple

5
5
5
10

ASSIGNMENT MATERIAL
Review Questions
1. Partnership liquidations differ from corporate liquidations in that partnership creditors have recourse to the 
partners’ personal assets.
2. Maintaining partners’ capital accounts in the profit and loss sharing ratio minimizes the possibility of a 
partner having to absorb an insolvent partner’s deficit capital balance.
3. A partner’s deficit balance that cannot be eliminated through setoff or contribution must be allocated to the 
partners who have positive capital balances.
4. Realization gains and losses during liquidation should be shared in the profit and loss sharing ratio. No 
distinction should be made between liquidation losses and operating losses.
5. Under the rule of setoff, a deficit balance in a partner’s capital account can be set off against any balance in 
that partner’s loan account. Thus, no cash distributions would be made on a partner’s loan if such partner had
a deficit balance in his or her capital account in excess of the loan balance.
6. The statement of realization and liquidation provides information regarding (a) gains and losses on the 
realization of assets, including how such gains and losses have had an impact on the partners’ capital 
accounts; (b) payments that have been made to creditors and partners; and (c) the remaining noncash assets 
yet to be converted into cash.
7. The RUPA specifies that cash distributions should be made to creditors and partners during liquidation in the
following order: (a)  first  to creditors other than partners (if partnership loans are  subordinated  to creditor
liabilities­­otherwise to all creditors [includes partner loans to the partnership]) and  (b) second to partner's to
settle capital balances.
8. The order specified in question 7 is followed except to the extent that the rule of setoff is applied.
9. The  marshaling   of   assets  is  a  procedure   of  the   courts  whereby  a   partnership’s   creditors   are   given  first
priority as to partnership assets, and personal creditors of an insolvent partner are given first priority as to
the personal assets of such partner.  The RUPA does not use the marahalling of assets procedure.  Under
the RUPA, (1) partnership creditors have first priority as to partnership assets and (2) partnership creditors
share  on  a  pro  rata  basis  with  personal  creditors  of  an  insolvent  partner  in  that  partner's  estate.   Thus
personal creditors no longer have first priority as to an insolvent partner's personal assets.
10. Cash may be distributed to partners on the installment basis if adequate safeguards are taken to prevent the 
possibility of distributing cash to a partner who may be asked to contribute cash at a later date to eliminate a 
capital deficit created as a result of losses on the realization of assets.
11. Creditors may proceed against any partner to obtain full payment of their claims against the partnership. 
Such creditors, however, rank second in order behind a partner’s personal creditors.
12. When a partner personally pays partnership creditors, the payment is treated on the partnership books as a 
capital contribution by the partner and a cash payment to the creditors by the partnership.

Partnerships: Liquidations

• 22-3

E 22-1 (Estimated time: 10 minutes)

EXERCISES

Hall, Lane, and Tower
Statement of Realization and Liquidation
                                                                                                                                                  
 
 Partners’ Capital___ __
              Assets                    OutsidePartners’ LoansHall
Lane
Tower
Cash
Noncash
Liabilities
Hall
Tower
(1/2)
(1/3)
(1/6)
Preliquidation Balances............... $  2,000
$ 78,000
$20,000
$5,000
$10,000
$20,000
$ 15,000
$10,000
REALIZATION OF ASSETS AND 
 ALLOCATION OF LOSS..........    36,000         
 
  (78,000
 
 )         
 
 ______
 
          
 
 _____
 
          
 
 ______
 
         
 
  (21,000
 
 )       
     (14,000
 
 )      
     (7,000)
     SUBTOTAL............................. $38,000
$    ­0­
$20,000
$5,000
$10,000
$ (1,000)
$   1,000
$  3,000
Right of setoff exercised................  ______                      
 
          
 
 ______
 
          
 
 (1,000
 
 )         
 
 ______
 
         
 
     1,000
 
         
 
 _ _____
 
        
   ______
     SUBTOTAL.............................. $38,000
$    ­0­
$20,000
$4,000
$10,000
$   ­0­
$   1,000
$  3,000
CASH DISTRIBUTIONS:
    OUTSIDE CREDITORS............ (20,000)
(20,000)
    PARTNERS’ LOANS................ (14,000)
(4,000)
(10,000)
    Partners’ capital..........................    (4,000 )                     
 
          
 
 ______
 
          
 
 _____
 
          
 
 ______
 
                      
 
          
 
   (1,000
 
 )       
    (3,000)
POSTLIQUIDATION BALANCES
 $  ­0 ­   
          
   $   ­0
 
 ­              
 
 $ ­0
   ­    
           
 
 $ ­0
   ­   
             
 
 $  ­0
   ­   
           
 
 $   ­0
 
 ­          
 
 $   ­0
 
 ­   
     
  $  ­0­
 
     

E 22-2 (Estimated time: 10 minutes)

Bass, Singer, and Tennor
Statement of Realization and Liquidation
                                                                                                                                                                         
 
 Partners’ Capital
 
                     
              Assets                       OutsidePartners’ Loans
 Bass
Singer
 Tennor
 Cash
Noncash
Liabilities
Bass
Singer
(1/3)
(1/3)
(1/3)
PRELIQUIDATION BALANCES
$14,000
$131,000
$80,000
$4,000
$16,000
$ 15,000 $ 15,000 $ 15,000
WRITE­OFF TENNOR’S RECEIVABLE
(11,000)
(11,000)
Realization of assets and 
 allocation of loss...........................    54,000        
   (120,000
 
 )         
 
 ______
 
          
 
 _____
 
          
 
 ______
 
         
 
  (22,000
 
 )        
    (22,000
 
 )        (22,000)
 
    Subtotal...................................... $68,000
$   ­0­
$80,000
$4,000
$16,000
$ (7,000)
$ (7,000) $(18,000)
Right of setoff exercised................  ______                      
 
          
 
 ______
 
          
 
 (4,000
 
 )        
 
   (7,000
 
 )        
       4,000
 
         
 
     7,000
 
      
   _______
    SUBTOTAL............................... $68,000
$   ­0­
$80,000
$  ­0­  
 $  9,000
$ (3,000)
$  ­0­     $(18,000)
CASH CONTRIBUTION BY 
 Bass and Tennor............................  $21,000                 
 
               
 
 ______
 
                    
 
          
 
 ______
 
         
 
     3,000
 
                      
 
      
      18,000
    SUBTOTAL.............................. $89,000
$   ­0­
$80,000
$  ­0­
$ 9,000
$  ­0­    
$  ­0­
$   ­0­
Cash distributions:
    OUTSIDE CREDITORS............ (80,000)
(80,000)
    Partners’ loans............................    (9,000 )               
 
               
 
 ______
 
                    
 
           
 
 ( 9,000
 
 )                     
 
                      
 
                    
Postliquidation Balances..............  $  ­0 ­    
          
 
 $   ­0
 
 ­              
 
 $ ­0
   ­    
           
 
 $  ­0
   ­             
 
 $ ­0
   ­     
           
 
 $  ­0
   ­             
 
 $  ­0
   ­           
 
 $  ­0
   ­    

22-4 •

ADVANCED ACCOUNTING: Concepts and Practice

E 22-3 (Estimated time: 10 minutes)
Criss, Kross, and Zigge
Statement of Realization and Liquidation
                                                                                                                                        Partners’                 Partners’ Capital
 
                     
                                                                                            
 
 Assets              Outside
 Loans 
Criss
Kross
  Zigge
Cash
Noncash Liabilities
 Kross
(3/8)
(3/8)
   (2/8)
PRELIQUIDATION BALANCES...............
$  1,000
$84,000
$34,000
$15,000
$ 11,000
$ 10,000   $ 15,000
Write off of Zigge’s receivable.......................
(9,000)
(9,000)
Realization of assets and allocation of loss.....
   43,000         
 
 (75,000
 
 )                    
 
                      
 
          
 
 (12,000
 
 )       
   (12,000
 
 )        
   (8,000)
    SUBTOTAL...............................................
$44,000
$   ­0­
$34,000
$15,000
$ (1,000) $ (2,000) $ (2,000)
Write off of Zigge’s capital deficit..................
 
             
                     
 
                     
 
                     
 
              
 
 (1,000
 
 )       
     (1,000
 
 )      
       2,000
 
    
    SUBTOTAL...............................................
$44,000 
$  ­0­
$34,000
$15,000
$ (2,000)
$ (3,000)  $   ­0­
Right of setoff exercised..................................
(3,000)
    3,000
Cash contribution by Criss..............................
     2,000                     
 
                     
 
                      
 
         
 
     2,000
 
                     
 
                    
    SUBTOTAL...............................................
$46,000        $  ­0­
$34,000
$12,000        $     ­0­       $       ­0­
Cash distributions:
    Outside creditors.........................................
(34,000)
(34,000)
    Partners’ loans.............................................
  (12,000 )                    
 
                     
 
        
     (12,000
 
 )                     
 
                     
 
                    
Postliquidation Balances...............................      $    ­0
 
 ­            
 
 $  ­0
   ­           
 
 $­    0
 
 ­         
 
    
    $ ­0
   ­                
 
 $  ­0
   ­             
 
 $  ­0
   ­          
 
 $  ­0
   ­  

22-5 •

ADVANCED ACCOUNTING: Concepts and Practice

E 22-4 (Estimated time: 15 minutes)

Cattie, Deere, Fox, and O’Hare
Statement of Realization and Liquidation
Cash

Assets                          Outside                   Partners’ Loans
 
      
               
Noncash
Liabilities
Deere
Fox
O’Hare

Preliquidation Balances.............................................
$ 15,000
$235,000
$165,000
$7,000
$5,000
$3,000
Realization of assets and allocation of loss..................
 135,000
(235,000)
_______
_____
_____
_____
     SUBTOTAL...........................................................
$150,000
 $    ­0 ­    
$165,000
$7,000
$5,000
$3,000
Cash contribution by Cattie..........................................
      5,000
_______
_____
_____
_____
     Subtotal...................................................................
$155,000
$165,000
$7,000
$5,000
$3,000
WRITE OFF OF CATTIE’S CAPITAL DEFICIT.
_______
_______
_____
_____
_____
     Subtotal...................................................................
$155,000
$165,000
$7,000
$5,000
$3,000
Right of setoff exercised..............................................
_______
_______
(6,000)
(5,000)
(3,000)
     Subtotal...................................................................
$155,000
$165,000
$1,000     $ ­0­             $    ­0­
Cash contribution by Fox and O’Hare..........................
    11,000
    Subtotal....................................................................
$166,000
$165,000
$1,000
CASH DISTRIBUTIONS:
    Outside creditors......................................................
(165,000)
(165,000)
    Partners’ loans..........................................................
     (1,000)
_______
(1,000)
Postliquidation Balances............................................
 $      ­0 ­   
 $     ­0 ­              $     ­0
 
 ­
                                                                                                                                                                      
 
 Partners’ Capital
 
                      
Cattie
Deere
Fox
O’Hare
(50%)
(20%)
(20%)
(10%)
PRELIQUIDATION BALANCES.............................................................................
Realization of assets and allocations of loss..................................................................
    Subtotal.....................................................................................................................
CASH CONTRIBUTION BY CATTIE.....................................................................
     Subtotal....................................................................................................................
Write off of Cattie’s capital deficit................................................................................
     Subtotal....................................................................................................................
Right of setoff exercised................................................................................................
    Subtotal.....................................................................................................................
Cash contributions by Fox and O’Hare.........................................................................
     Subtotal....................................................................................................................

$ 40,000
  (50,000)
$(10,000)
     5,000
$  (5,000)
     5,000
 $   ­0 ­    

$16,000
(20,000)
$ (4,000)
______
$ (4,000)
   (2,000)
$ (6,000)
    6,000
 $   ­0 ­   

$ 10,000
  (20,000)
$(10,000)
_______
$(10,000)
    (2,000)
$(12,000)
    5,000
$  (7,000)
     7,000
 $    ­0 ­   

$ 4,000
(10,000)
$(6,000)
______
$(6,000)
  (1,000)
$(7,000)
   3,000
$(4,000)
   4,000
 $  ­0 ­        

22-6 •

ADVANCED ACCOUNTING: Concepts and Practice

E 22-5 (Estimated time: 3 minutes)
4. Have   first   claim   to   the   partnership   assets   before   any   partner’s   personal   creditors   have   rights   to   the
partnership assets.

E 22-6 (Estimated time: 10 minutes)
Deeds, Grant, and Trusty
Schedule of Safe Payment to Partners
                                                                                                                                        
 
 Partner
 
        
                
Deeds
Grant
Trusty
PRELIQUIDATION LOAN BALANCE.......................................
Preliquidation capital balances..........................................................
      Subtotal........................................................................................
Allocation of loss on first sale of assets ($20,000 shared 6:3:1)........
Combined capital and loan balances at time of first cash 
 distribution......................................................................................
First worst­case assumption—Assume full loss on remaining 
   noncash assets of $20,000...............................................................
CASH TO BE DISTRIBUTED TO EACH PARTNER................

$   ­0­
  30,000
$30,000
 (12,000)

$  ­0­
  15,000
$15,000
   (6,000)

$10,000
    5,000
$15,000
   (2,000)

$18,000

$ 9,000

$13,000

 (12,000)
$  6,000

 (6,000)
$ 3,000

  (2,000)
$11,000

Note: A second worst­case assumption was not needed because no partner had a deficit balance after the first
worst­case assumption.

E 22-7 (Estimated time: 10 minutes)
Springer, Sumner, and Winters
Schedule of Safe Payments to Partners
                                                                                                                                  
 
 Partner
 
                            
 
   
Springer
Sumner
Winters
Preliquidation capital balances....................................................... $  48,000
Allocation of loss on first sale of assets ($30,000 shared 5:3:2)........   (15,000)
Capital balances at time of first cash distribution.............................. $  33,000
First worst­case assumption—Assume full loss on remaining 
  noncash assets of $90,000................................................................   (45,000)
     Subtotal......................................................................................... $(12,000)
Second worst­case assumption—Assume Springer’s deficit 
  must be absorbed by Sumner and Winters (3:2)..............................    12,000
Cash to Be Distributed to Each Partner........................................   $       ­0
 
 ­

$72,000
  (9,000)
$63,000

$70,000
  (6,000)
$64,000

 (27,000)
$36,000

 (18,000)
$46,000

   (7,200)
$28,800

   (4,800)
$41,200

Partnerships: Liquidations   •

22-7

E 22-8 (Estimated time: 10 minutes)
Castle, King, and Queen
Schedule of Safe Payments to Partners
                                                                                                                                  
 
 Partner
 
                              
Castle
King
Queen
Preliquidation loan balance............................................................ $   ­0­
Preliquidation capital balances.......................................................
37,000
Preliquidation loan from partnership balance....................................  (10,000)
    Subtotal.......................................................................................... $27,000
Allocation of loss on first sale of noncash assets 
 ($40,000 shared 4:4:2)...................................................................... (16,000)
COMBINED CAPITAL AND LOAN BALANCES AT TIME OF FIRST 
______
 cash distribution................................................................................ $ 11,000
First worst­case assumption—Assume full loss on remaining 
 noncash assets of $80,000.................................................................   (32,000)
    Subtotal.......................................................................................... $(21,000)
Second worst­case assumption—Assume Castle’s and 
   King’s deficits must be absorbed by Queen....................................    21,000
Cash to Be Distributed to Queen....................................................  $    ­0 ­   

$ 30,000
15,000
_______
$ 45,000

$   ­0­
68,000
______
$68,000

(16,000)
_______

(8,000)
_______

$ 29,000

$60,000

 (32,000)
$ (3,000)

 (16,000)
$44,000

    3,000
 $   ­0 ­   

 (24,000)
$20,000

22-8 •   ADVANCED ACCOUNTING: Concepts and Practice
PROBLEMS
P 22-1 (Estimated time: 15 minutes)
Rockne and Stone Partnership
Statement of Realization and Liquidation

  Assets             
Cash
Noncash
Preliquidation Balances....................................
Recognize increase in value of equipment
 ($6,500 – $5,000)...............................................
Distribute equipment to Rockne..........................
Recognize decrease in value of office furniture 
 ($3,000 – $2,000)...............................................
Distribute office furniture to Stone......................
Realization of all other noncash assets and 
 allocation of $11,000 loss...................................
Payment of liquidation expenses.........................
       Subtotal.........................................................
Right of setoff exercised......................................
    Subtotal............................................................
Cash distributions:
    Outside creditors..............................................
    Partner’s loan...................................................
    Partners’ capital...............................................
Postliquidation Balances...................................

$ 6,000

25,000
   (1,000)
$30,000
______
$30,000
(27,000)
(2,400)
    (600)
 $  ­0 ­   

$44,000

     Partner’s
Outside          Loan               Partners’ Capital_____
Liabilities
Stone
Rockne (60%) Stone (40%)
$27,000

$6,000

$14,000

1,500
(6,500)

900
(6,500)

(1,000)
(2,000)

(600)

(36,000)
______
 $   ­0 ­

______
$27,000
______
$27,000
(27,000)
______
 $   ­0 ­   

_____
$6,000
(3,600)
$2,400

$ 3,000
600
(400)
(2,000)

(6,600)
(4,400)
    (600)
    (400)
$   600
$(3,600)
_____
   3,600
$   600             $  ­0
   ­    

(2,400)
_____
  (600)
 $ ­0 ­                  $    ­0
 
 ­

Partnerships: Liquidations  

• 22-9

P 22-2 (Estimated time: 15 minutes)
Duke, Lord, Noble, and Prince Partnership
Statement of Realization and Liquidation
                                                                                      
 
 Assets                       Outside
Cash
Noncash
Liabilities

Partners’ Loans
Duke
Lord

PRELIQUIDATION BALANCES..........
Realization of assets and allocation of loss.
    SUBTOTAL...........................................
Right of setoff exercised.............................
    Subtotal...................................................
Cash contribution by Lord..........................
    Subtotal...................................................
Write off of Duke’s capital deficit..............
    SUBTOTAL...........................................
Cash distributions:
  Outside creditors.......................................
  Partners’ capital........................................
Postliquidation Balances...........................

$4,000
$3,000
_____
_____
$4,000
$3,000
(4,000)
(3,000)
 $ ­0 ­           $    ­0
 
 ­

$ 10,000
   90,000
$100,000
_______
$100,000
      2,000
$102,000

$140,000
(140,000)
 $    ­0 ­    

$102,000
(78,000)
  (24,000)
 $    ­0 ­    

$78,000
______
$78,000
______
$78,000
______
$78,000
$78,000

(78,000)
______
                $      ­0
 
 ­

                                                                                                            
 
 Partners’ Capital
 
                                 
Duke (40%) Lord (30%)   Noble (20%)   Prince (10%)
Preliquidation Balances....................................
Realization of assets and allocation of loss..........
     Subtotal...........................................................
Right of setoff exercised......................................
     SUBTOTAL..................................................
Cash contribution by Lord...................................
     Subtotal...........................................................
Write off of Duke’s capital deficit.......................
     Subtotal...........................................................
Cash distributions:
    Outside creditors..............................................
    Partners’ capital...............................................
Postliquidation Balances...................................

$ 10,000
  (20,000)
$(10,000)
     4,000
$  (6,000)
_______
$  (6,000)
     6,000
 $   ­0 ­    

$10,000
 (15,000)
$ (5,000)
    3,000
$ (2,000)
    2,000
 $  ­0 ­    

$30,000
 (10,000)
$20,000
______
$20,000
______
$20,000
   (4,000)
$16,000

$15,000
  (5,000)
$10,000
______
$10,000
______
$10,000
  (2,000)
$  8,000

(16,000)
 $  ­0 ­   

(8,000)
 $  ­0 ­    

22-10 •

ADVANCED ACCOUNTING: Concepts and Practice

P 22-3 Estimated time: 15 minutes)
Oates, Ryley, and Wheatman Partnership
Statement of Realization and Liquidation
                                                                                                                                                                         
 
 Partners’ Capital
 
                     
                                                                       Assets              
Outside
 Partners’ Loans 
Oates
Ryley Wheatman
Cash
   Noncash Liabilities  Oates
   Ryley
(3/8)
(3/8)
(2/8) 
Preliquidation Balances............... $   5,000
Realization of assets and  
 allocation of loss...........................   29,000
     Subtotal..................................... $ 34,000
Right of setoff exercised................ _______
     Subtotal..................................... $ 34,000
Liquidation expenses......................
PAYMENT OF LIQUIDATION EXPENSES 
 by Ryley........................................ _______
     SUBTOTAL.............................. $ 34,000
Payment to creditors by Wheatman _______
     Subtotal..................................... $ 34,000
WRITE OFF OATES’S CAPITAL DEFICIT
..........................................     (600)
     SUBTOTAL............................. $ 34,000
Cash distributions:
_______
    Outside creditors........................ $(34,000)
    Personal payment from Ryley to 
     Wheatman................................. _______
Postliquidation Balances..............  $   ­0 ­    

$85,000

$ 48,000

$10,000

$3,000

$ 11,000

(85,000)
 $  ­0 ­

_______
$ 48,000
_______
$ 48,000
4,000

______
$10,000
(10,000)
 $  ­0 ­    

_____
$3,000
(3,000)
 $ ­0 ­   

  (21,000)   (21,000)
$(10,000) $(11,000)
   10,000
    3,000
$   ­0­
$  (8,000)
(1,500)
(1,500)

   (4,000)
$ 48,000
 (14,000)
$ 34,000
_______
$ 34,000
_______
$(34,000)
_______
 $  ­0 ­     

_______

$ 10,000

$ 8,000
(14,000)
$(6,000)
______
$ (6,000)
(1,000)

______
$ (1,500)
______
$ (1,500)

    4,000
______
$ (5,500)  $ (7,000)
______
  14,000
$ (5,500)  $  7,000
    1,500      (900)

 $   ­0 ­   

$ (6,400)

$  6,400

  6,400
(6,400)
 $  ­0 ­          $     ­0
 
 ­

Partnerships: Liquidations

• 22-11

P 22-4 (Estimated time: 40 minutes)
Allen, Brown, and Cox Partnership
Computation of Safe Installment Payment to Partners
January 31, 2006
                                                                                                                         
 
 Residual Equities
 
      
               
Total 
Allen 
Brown 
Cox
(100%) 
(30%)
(20%)
(10%)
Computation of January installment:
  Preliquidation balances —
    Capital........................................................................ $282,000 $118,000 $  90,000
$74,000
    Add (deduct) loans.....................................................   (10,000)   (30,000)    20,000               —
 
   
      SUBTOTAL............................................................. $272,000 $  88,000 $110,000
$74,000
Deduct January losses (Schedule 1)................................   (28,000)   (14,000)     (8,400)
   (5,600)
PREDISTRIBUTION BALANCES............................. $244,000 $  74,000 $101,600
$68,400
Deduct potential losses using first worst­case 
   assumption (Schedule 1)............................................. (199,000)   (99,500)   (59,700)
 (39,800)
      SUBTOTAL............................................................. $ 45,000 $(25,500) $ 41,900
$28,600
Deduct potential loss using second worst­case 
  assumption—Assume Allen’s deficit balance must be 
  absorbed by Brown 3/5; Cox 2/5................................... _______
  25,500
 (15,300)
 (10,200)
Safe Payments to Partners............................................ $ 45,000  $   ­0 ­    
$ 26,600
$18,400
Schedule 1
Computations of Actual and Potential Liquidation Losses
January 2006
Actual

Potential

   Losses

   Losses

Collection of accounts receivable ($66,000 – $51,000)............................................ $15,000
Sale of inventory ($52,000 – $38,000)...................................................................... 14,000
Liquidation expenses.................................................................................................
2,000
Gain resulting from January credit memorandum offset against 
   payments to creditors.............................................................................................
(3,000)
Machinery and equipment, net..................................................................................
Potential unrecorded liabilities and anticipated expenses.......................................... ______
    Totals.................................................................................................................... $28,000

$189,000
    10,000
$199,000

22-12  •

ADVANCED ACCOUNTING: Concepts and Practice

P 22-5 (Estimated time: 60 minutes)

Barley, Flax, and Rice
Statement of Realization and Liquidation
                                                                                                                                                        
 
 Partners’ Capital_____
                                                                    
 
 Assets
 
              
 
       Outside             Partners’ Loans 
 Barley
Flax
Cash
Noncash Liabilities
Barley
 Flax
 (60%)
(30%)

PRELIQUIDATION BAL., 6/30/06
Estimated liquidation 
 expenses (7/1/06)......................
Realization of assets and 
 allocation of gain, 7/5/06..........   36,000
      Subtotal............................... $46,000
Cash distribution, 7/31/06:
   Outside creditors..................... (43,000)
   Partner’s loan..........................   (1,000)*
      Subtotal............................... $  2,000
Realization of assets and 
 allocation of loss, 8/7/06...........   28,000
      Subtotal............................... $30,000
Cash distribution, 8/31/06:
   Outside creditors..................... (1,000)
   Partner’s loan.......................... (3,000)*
   Partner’s capital...................... (25,000)*
       Subtotal.............................. $ 1,000
Realization of assets and 
 allocation of loss, 9/9/06........... 44,000
Reverse excess liability for 
 liquidation expenses.................. ______
       Subtotal.............................. $45,000
RIGHT OF SETOFF EXERCISED
 Cash contributed by Flax..........     1,350
       SUBTOTAL....................... $46,350
Final Cash Distributions, 9/30/06:
    Outside creditors....................
(500)
    Partner’s capital..................... (45,850)
Postliquidation Balances.........  $  ­0 ­    
*See next page for calculation.

$10,000

$130,000

$42,000

$4,000

3,000

$1,000
(1,800)

$84,000
(900)

Rice
(10%)

$ 5,000 $4,000
(300)

  (30,000)
$100,000

______
$45,000

_____
$4,000

_____
$1,000

    3,600
$85,800

   1,800
$ 5,900

    600
$4,300

_______
$100,000

(43,000)
______
$  2,000

(1,000)*
$3,000

_____
$1,000

______
$85,800

______
$ 5,900

_____
$4,300

 (40,000)
$ 60,000

______
$  2,000

_____
$3,000

_____
$1,000

  (7,200)
$78,600

 (3,600)
$ 2,300

(1,200)
$3,100

(3,000)*
_____
 $ ­0 ­   

_____
$1,000

(25,000)*
$53,600

______
$ 2,300

_____
$3,100

(1,000)
_______
$  60,000

______
$  1,000

(60,000)
_______
 $   ­0 ­    

    (500)
$    500

          
$1,000

______
$    500

_____
 $ ­0 ­  

(500)
______
 $   ­0 ­    

(9,600)

(4,800)

(1,600)

       300
$44,300
(1,000)
______
$44,300

      150
$(2,350)

      50
$1,550
1,000
_____
$1,550

(44,300)
 $  ­0 ­      

  1,350
 $ ­0 ­   

(1,550)
 $  ­0 ­     

Partnerships: Liquidation

• 22-13

P 22-5 (continued)
Barley, Flax, and Rice
Schedule of Safe Payments to Partners
                                                                                                                                        
 
 Partner
 
        
               

Barley
(60%)

COMPUTATION FOR DETERMINING HOW AVAILABLE
 CASH SHOULD BE DISTRIBUTED ON 7/5/06:
  Capital and loan balances at time of cash distribution 
   (PER PRECEDING PAGE)......................................................... $89,800
  FIRST WORST­CASE ASSUMPTION—Assume full loss
   on noncash assets of $100,000a ......................................................  (60,000)
       Subtotal....................................................................................... $29,800
  SECOND WORST­CASE ASSUMPTION—Assume Flax’s
   and Rice’s deficits must be absorbed by Barley............................. (28,800)
       CASH TO BE DISTRIBUTED TO BARLEY....................... $  1,000

Flax
(30%)

Rice
(10%)

$   6,900

$ 4,300

  (30,000) (10,000)
$(23,100) $  (5,700)
   23,100    5,700
 $   ­0 ­          $ ­0
   ­    

COMPUTATION FOR DETERMINING HOW AVAILABLE
CASH SHOULD BE DISTRIBUTED ON 8/7/06:
  Capital and loan balances at time of cash distribution 
   (per preceding page)....................................................................... $81,600 $   3,300 $  3,100
  FIRST WORST­CASE ASSUMPTION—Assume full loss
   on noncash assets of $60,000a ........................................................ (36,000)   (18,000)   
  (6,000)
       Subtotal....................................................................................... $45,600 $(14,700) $(2,900)
  SECOND WORST­CASE ASSUMPTION—Assume Flax’s
   and Rice’s deficits must be absorbed by Barley............................. (17,600)   14,700
  2,900
       Cash to Be Distributed to Barley................................................ $28,000
 $  ­0 ­         $  ­0
   ­   
Because estimated liquidation expenses were recorded on 7/1/06, no need exists to add them to this
loss assumption.

a

P 22-6 (Estimated time: 50 minutes)
Requirement 1:
Brickley, Glass, Steele, and Woods
Schedule of Cash Distributions to Partners
                                                                                                                            
 
 Partner
 
       
               
 
             
Brickley
Glass
Steele
Woods
PRELIQUIDATION CAPITAL AND LOAN BALANCES
......................................................................$  10,000
Profit and loss sharing percentage................................         40%
   Loss absorption potentials...................................... $65,000
Ranking.......................................................................

4

$26,000
        35%
$90,000
3

$31,500

$  18,000

          15%           10%
$120,000
$100,000
1

2

22-14 •

ADVANCED ACCOUNTING: Concepts and Practice

P 22-6 (continued)
Requirement 1: (continued)
                                                                                                                           
 
 Partner
 
        
               
 
             
Brickley
Glass
Steele
Woods
Step 1: Cash to be distributed to Steele:
  Balances, per above....................................................
$18,000
$10,000
  Balances in profit and loss ratio of 3:2 using 
   Woods’s actual balance of $10,000 as the base....... 
 15,000
10,000
$ 3,000
Step 2: Cash to be distributed to Steele and Woods:
  Balances, per above....................................................
  Balances in profit and loss ratio of 7:3:2 using 
   Glass’s actual balance of $31,500 as the base..........
Step 3: Cash to be distributed to Glass, Steele, 
 and Woods:
  Balances, per above....................................................
  Balances in profit and loss ratio of 8:7:3:2 using 
   Brickley’s actual balance of $26,000 as the base.....

$31,500

$15,000

$10,000

31,500

 13,500
$ 1,500

   9,000
$ 1,000

$26,000

$31,500

$13,500

$ 9,000

26,000

 22,750
$ 8,750

   9,750
$ 3,750

  6,500
$2,500

Glass

Steele

Woods

$8,750
35%

$3,000
1,500
3,750
15%

$1,000
2,500
10%

All future cash distributions can be made in the profit and loss sharing ratio.
Summary of Cash Distribution Plan
Brickley
First $3,000..................................................................
Next $2,500..................................................................
Next $15,000................................................................
Any additional amounts...............................................

40%

Requirement 2:
Distribution of $12,700 Available Cash
                                                                                                                              
 
        Partner             
 
             
Glass
Steele
 Woods
Total available.............................................................. $12,700
  First $3,000................................................................
(3,000)
$3,000
  Next $2,500................................................................   (2,500)
1,500
$1,000
      Subtotal.................................................................. $  7,200
  Distribute in 35:15:10 ratio........................................   (7,200)
$4,200
  1,800
  1,200
      Total Distributable to Each Partner........................  $   ­0 ­   
$4,200
$6,300
$2,200

Partnerships: Liquidation  •

22-15

P 22-7 (Estimated time: 30 minutes)
Arbuckle, Beltmore, and Tanner
Schedule of Cash Distributions to Partners
                                                                                                              
 
 Partner
 
             
 
            
Arbuckle
Beltmore
Tanner 
Preliquidation capital and loan balances (net of loans from 
 THE PARTNERSHIP)................................................................... $  55,000
$  45,000 $  24,000
Profit and loss sharing percentage.....................................................           50%           30%           20%
Loss absorption potentials.............................................................. $110,000
$150,000 $120,000
Ranking............................................................................................

3

STEP 1: CASH TO BE DISTRIBUTED TO BELTMORE:
  Balances, per above.........................................................................
  Balances in the profit and loss ratio of 3:2 using Tanner’s  
   actual balance of $24,000 as the base.............................................
Step 2: Cash to be distributed to Beltmore and Tanner:
  Balances, per above......................................................................... $ 55,000
  Balances in the profit and loss ratio of 5:3:2 using Arbuckle’s 
   actual balance of $55,000 as the base.............................................
55,000

1

2

$ 45,000

$ 24,000

  36,000
$  9,000

24,000

$ 36,000

$ 24,000

   33,000
$   3,000

  22,000
$  2,000

All future cash distributions can be made in the profit and loss sharing ratio.
Summary of Cash Distribution Plan
Arbuckle
First $9,000........................................................................................
Next $5,000.......................................................................................
Any additional amounts.....................................................................

50%

Beltmore
$9,000
3,000
30%

Tanner 
$2,000
20%

22-16 •

ADVANCED ACCOUNTING: Concepts and Practice

P 22-8 (Estimated time: 70 minutes)
Arbuckle, Beltmore, and Tanner
Statement of Realization and Liquidation

 

                                
 
 Assets
 
            
Outside            
              Partners’ Capital_____  
Cash
Noncash
 Liabilities
Arbuckle
Beltmore Tanner

Preliquidation Balances.............................................
Write­off loans to partners...........................................
Realization of assets and allocation of loss—July........
Payment of liquidation expenses..................................
    SUBTOTAL............................................................

$   6,000
26,500
  (1,000)
$ 31,500

July Cash Distributions:
  OUTSIDE CREDITORS............................................
  Partner—Beltmore (see supporting schedule 
   on next page).............................................................
    Subtotal...................................................................
Payment of liquidation expenses..................................

  (6,500)
$  8,000
(1,500)

Realization of special equipment
  Recognition of gain ($10,000 – $4,000).....................
  Distribution to Tanner................................................
    Subtotal...................................................................

_____
$ 6,500

$154,500
(19,500)
(36,000)
______
$ 99,000

$67,000
(12,000)
(4,750)
     (500)
$49,750

$45,000
(2,850)
     (300)
$41,850

$31,500
(7,500)
(1,900)
     (200)
$21,900

______
$49,750
(750)

  (6,500)
$35,350
(450)

            
$21,900
(300)

6,000
 (10,000)
$ 95,000

3,000
______
$52,000

1,800
______
$36,700

1,200
(10,000)
$12,800

______
$ 95,000
75,000
______
 $   ­0 ­    

______
$52,000

  (4,000)
______
$32,700
$12,800
(10,000)
(6,000) (4,000)
     (300)
    (200)
$26,400
$ 8,600
(26,400)
(8,600)
 $   ­0 ­           $ ­ 0
   ­      

(17,000)

August Cash Distribution to Beltmore 
 (see supporting schedule on next page).......................
 (4,000)
    Subtotal...................................................................
$  2,500
REALIZATION OF ASSETS AND ALLOCATION OF LOSS
Payment of liquidation expenses..................................
  (1,000)
    Subtotal...................................................................
$76,500
Final cash distribution to partners................................
(76,500)
Postliquidation Balances............................................
 $   ­0 ­   

$17,000
______
$17,000
(17,000)

______
$ 99,000

_____
 $  ­0 ­   

(95,000)

     (500)
$41,500
(41,500)
 $   ­0 ­   

Partnerships: Liquidation  •

22-17

P 22-8 (continued)
Schedule of Safe Payments to Partners
(as of July 31, 2006)
                                                                                                                                       
 
 Partner
 
         
 
             
 
  
Arbuckle
Beltmore
Tanner 
(50%)
 (30%)
(20%)

Capital balances (per statement of realization and liquidation)
.............................................................................$21,900
FIRST WORST­CASE ASSUMPTION—Assume full loss
on remaining noncash assets of $99,000.................................... (49,500)
    SUBTOTAL.......................................................................... $     250
Assume $8,000 of cash to be retained at month­end is used for 
 liquidation expenses..................................................................   (4,000)
    Subtotal................................................................................. $ (3,750)
SECOND WORST­CASE ASSUMPTION—Assume 
 Arbuckle’s deficit must be absorbed by Beltmore and Tanner.    3,750
    Subtotal.................................................................................  $  ­0 ­    
REPEAT SECOND WORST­CASE ASSUMPTION—
 Assume Tanner’s  deficit must be absorbed by Beltmore .......
    Cash to Be Distributed to Beltmore...................................

$ 49,750

$41,850

(29,700)
$12,150

(19,800)
$  2,100

 (2,400)
$ 9,750

 (1,600)
$    500

 (2,250)
$ 7,500

 (1,500)
$(1,000)

 (1,000)
 1,000
$ 6,500         $   ­0
 
 ­    

Note: The preparation of this schedule of safe payments as of 7/31/06 is unnecessary if Problem 22­7
is assigned because the same answer can be obtained from the cash distribution plan called for
in that problem.
Schedule of Safe Payments to Partners
(as of August 31, 2006)

                                                                                                                
 
  Partner            
 
             
 
 _
Arbuckle
(50%)

Capital balances (per statement of realization and liquidation)
............................................................................$ 12,800
FIRST WORST­CASE ASSUMPTION—Assume full loss
 on remaining noncash assets of $95,000................................... (47,500)
    SUBTOTAL.......................................................................... $  4,500
SECOND WORST­CASE ASSUMPTION—Assume
Tanner’s deficit must be absorbed by Arbuckle and Beltmore..  (3,875)
    Subtotal................................................................................. $    625
Assume $2,500 of cash to be retained at month­end
 is used for liquidation expenses................................................  (1,563)
    SUBTOTAL.......................................................................... $   (938)
REPEAT SECOND WORST­CASE ASSUMPTION—
Assume Arbuckle’s deficit must be absorbed by Beltmore.......      938
   Cash to Be Distributed to Beltmore....................................  $  ­0 ­   

Beltmore
(30%)

Tanner 
(20%)

$ 52,000

$36,700 

(28,500)
$ 8,200

(19,000)
 $(6,200)

(2,325)
  6,200
$ 5,875         $  ­0
   ­   
    
   (937)
$ 4,938
    (938)
$ 4,000

Note:  The preparation of this schedule of safe payments as of 8/31/06 is necessary regardless of
whether Problem 22­7 was assigned because the distribution of the special equipment to Tanner
disrupted the original cash distribution plan called for in that problem. (Alternatively, a new
cash distribution plan could have been prepared.)

22-18  •

ADVANCED ACCOUNTING: Concepts and Practice

  CASES  
C 22-1 (Estimated time: 5 minutes)
The partnership agreement does not include the fundamental safeguard provision requiring capital balances to
be maintained in the profit and loss sharing ratio. As a result, Jennings may have to absorb more than 50% of
any losses if Nelson is unable to make good a deficit in his capital account. Whether this additional risk is
offset by the additional earnings that accrue to Jennings (as a result of the profit and loss sharing formula
having an interest on capital feature) is judgmental.

C 22-2 (Estimated time: 5 minutes)
The accountant cannot actually settle the dispute but can only point out the customary provision pertaining to
liquidation that is used in partnership agreements. The accountant should explain the rationale for using such
an approach and the reasons that other approaches are not widely used.
Specifically, Harper’s position is without merit because a partnership agreement should be complete in all
respects. Even if the partnership is successful, something could happen to one of the partners to disrupt the
continuity of the business.
McCord’s position of sharing realization losses in the ratio of capital balances has no theoretical support.
Sharing liquidation losses in the ratio of capital balances, so that losses are borne in relation to a partner’s
capacity to absorb such losses, is similar to sharing profits in relation to the partners’ individual needs.
Stringer’s position ignores the fact that losses incurred in liquidation are no different from operating losses
incurred before liquidation from an overall profitability perspective.

C 22-3 (Estimated time: 5 minutes)
Cash may be distributed to partners as it becomes available, provided that certain safeguards are used. Two
worst­case assumptions should be made as to realization of remaining noncash assets and the ability of a
partner to make good a potential deficit balance in his or her capital account resulting from making the first
worst­case assumption.

C 22-4 (Estimated time: 10 minutes)
Requirement 1:
Jurnell quotes the UPA properly but does not consider the rule of setoff, which essentially treats a partner’s
loan as a capital contribution in determining how cash should be distributed to partners.
Post’s position indirectly states that he is most able to bear losses and the cash should be distributed
considering this ability. This general approach is used in distributing cash to partners.
Ledgley’s position is without merit. The distribution of cash in liquidation is not related to the manner of
sharing profits and losses.

Partnerships: Liquidation  •

22-19

C 22-4 (continued)
Requirement 2:
The two worst­case assumptions are needed to determine who gets the cash. A schedule of safe payments
follows:
Schedule of Safe Payments to Partners
                                                                                                                              
 
 Partner
 
    
    
Jurnell
Ledgley
Preliquidation loan balance............................................................... $ 11,000
Preliquidation capital balances..........................................................
9,000
Preliquidation loan from partnership................................................. ______
    Subtotal.......................................................................................... $20,000
First worst­case assumption—Assume full loss on all noncash 
  assets ($36,000 divided equally)..................................................... (12,000)
    Subtotal.......................................................................................... $ 8,000
Second worst­case assumption—Assume Ledgley’s deficit 
  must be absorbed by Jurnell and Post .............................................
 (2,000)
     Cash to Be Distributed to Jurnell and Post.............................. $ 6,000

Post

$21,000
(13,000)
$ 8,000

$39,000
______
$39,000

(12,000)
$(4,000)

(12,000)
$27,000

  4,000
 $  ­0 ­   

  (2,000)
$25,000

Requirement 3 (Optional)
Schedule of Safe Payments to Partners—
Beginning Balances Are After the Above Cash Distribution of $31,000
and After the $21,000 Loss on the Sale of Noncash Assets for $6,000
                                                                                                                                   
 
 Partner
 
             
 
             
Jurnell
Ledgley
Post
Partner’s loan balance........................................................................ $   5,000
Partners’ capital balances..................................................................
2,000
Preliquidation loan from partnership.................................................              
    Subtotal..........................................................................................
$7,000
First worst­case assumption—Assume full loss on all noncash 
 assets ($9,000 divided equally)........................................................    (3,000)
     Subtotal......................................................................................... $  4,000
Second worst­case assumption—Assume Ledgley’s deficit must be 
 absorbed by Jurnell and Post ...........................................................     (1,000 )
     Cash to be Distributed to Jurnell and Post...............................  $    3,000

$14,000
(13,000)
$  1,000

$7,000
          
$7,000

 (3,000)
$ (2,000)

 (3,000)
$4,000

   2,000
 $   ­0 ­  

  (1,000)
$3,000