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Chapter Fifteen

Partnerships:
Termination
and
Liquidation

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Termination and Liquidation

Why Terminate/Liquidate?
Retirement
Death
Personality disputes between
partners
Changed business environment
Other opportunities
Low profits
Bankruptcy (either the business or a
partner)

Required Steps
1. Sell non-cash assets
2. Allocate related gains/losses to the
capital accounts
Based on profit and loss ratio

3. Pay liabilities and expenses


4. Distribute remaining cash
Based on respective capital balances

JKL Partnership - Balance Sheet

Example:

Cash

$12,0
00

Other Assets

48,00
0

Liabilities

$17,0
00

J, Capital

21,00
0

K, Capital

6,000

16,00
a 2:1:1 ratio.
L, Capital
The partners share income in
If the others assets are sold0for
$64,000, record the sale, and$60,0
the payment
of creditors
and
Total
Liabilities
& partners.
$60,0
Total Assets
00
Capital
Journal Entry: Sell Other Assets
(1&2) and Allocate Gain on Sale.

00

JKL Partnership - Balance Sheet


Cash
Example:

$76,0
00

Liabilities

$17,0
00

J, Capital

29,00
0

K, Capital

10,00
0

20,00
The partners share income in a 2:1:1 ratio.
If
the
others
assets
are
sold
L, Capital
0 for
$64,000, record the sale, and the payment of creditors and partners.
$76,0
Total Liabilities &
$76,0
Total
Assets Entry:00Pay Creditors
Capital
00
(3&4 Journal
) and Partners:

Once the remaining cash is distributed, the partnership is terminated.

Reports

Beginning balance
Sold other assets
Updated balances
Paid Liabilities
Updated balances
Distributed
remaining cash
Closing Balance

JKL Partnership
Statement of Partnership Liquidation
Other
Liabilitie
J,
Cash
Assets
s
Capital
12,000
48,000
17,000
21,000
64,000
(48,000)

8,000
76,000
0
17,000
29,000
(17,000)

(17,000)

59,000
0
0
29,000

K,
Capital
6,000
4,000
10,000

10,000

L,
Capital
16,000
4,000
20,000

20,000

(59,000)
0

(10,000)
0

(20,000)
0

(29,000)
0

TIP: Dont forget the basics!


Assets =

Liabilities + Equity

Lets Complicate Things


Example Partner Receivables/Payables and Deficit Capital
Balance with the Remaining Partners Absorbing the Deficit:
XYZ Partnership - Balance Sheet
Cash
Loan Receivable
-Z
Other
Assets

$10,000

Liabiliti
es

$20,00
0

8,000

Loan Payable - X

6,000

100,000

Loan Payable - Y

4,000

X,
Capital

41,000

Y,
Capitalfrom/to the partners
10,000
Because receivables and payables
exist, Step 1 is to combine the
Z, receivables and payables
with the partners Capital
capital accounts:
37,000
Total
Assets

$118,00
0

Total Liabilities &


Capital

$118,
000

Step 1 is to combine the receivables and payables with the


partners capital accounts:
Z, Capital

8,000
8,00
0

Loan Receivable - Z

Loan Payable - X
X, Capital

Loan PayableCash
-Y
Beg. Bal.
10,000
Combine Rec/Pay
Y, Capital

Updated Bal

6,000
6,00
0
XYZ Partnership
Statement of Partnership Liquidation
Loan
Other
Loan
Loan
Rec Z Assets Liabilities4,000
Pay - X Pay - Y
8,000
6,000
4,000
100,000
20,000

4,00
0

X,
Capital
41,000

Y,
Capital
10,000

Z,
Capital
37,000

Ratio

Beg. Bal.
Combine
Rec/Pay
Updated Bal

Cash
10,000

XYZ Partnership
Statement of Partnership Liquidation

Loan
Other
Loan
Loan
Rec Z
Assets
Liab
Pay - X
Pay - Y
8,000
6,000
4,000
100,000
20,000

5
X,
Capital
41,000

3
Y,
Capital
10,000

2
Z,
Capital
37,000

The partners share income in a 5:3:2 ratio. If the others assets are sold for
$30,000 what is the journal entry?

XYZ Partnership
Statement of Partnership Liquidation
Ratio

Beg. Bal.
Combine
Rec/Pay
Updated Bal

Cash
10,000

Loan
Rec Z
8,000

Other
Assets
100,000

Liab
20,000

Loan
Pay - X
6,000

Loan
Pay - Y
4,000

5
X,
Capital
41,000

3
Y,
Capital
10,000

Sold other
assets
Updated Bal

2
Z,
Capital
37,000

What do you do when a partners capital balance is


negative (deficit)?
1. Obtain contribution from the partner, or
2. Other partners absorb deficit

XYZ Partnership
Statement of Partnership Liquidation
Ratio

Beg. Bal.
Combine
Rec/Pay
Updated Bal

Cash
10,000

Loan
Rec Z
8,000

Other
Assets
100,000

Liab
20,000

Loan
Pay - X
6,000

Loan
Pay - Y
4,000

5
X,
Capital
41,000

Sold other
assets
Updated Bal

Suppose Y is personally insolvent, what is


the journal entry?

3
Y,
Capital
10,000

2
Z,
Capital
37,000

Ratio

Beg. Bal.
Combine Rec/Pay

Cash
10,000

XYZ Partnership
Statement of Partnership Liquidation

Loan
Other
Loan
Loan
Rec Z
Assets
Liab
Pay - X
Pay - Y
8,000
100,000
20,000
6,000
4,000

5
X,
Capital
41,000

Updated Bal
Sold other assets
Updated Bal
Insolvent Partner
Updated
balances

What is the journal entry for paying the


partnership liabilities and distributing
cash to X & Z:

All cash is distributed, the partnership is terminated.

3
Y,
Capital
10,000

2
Z,
Capital
37,000

Claims Against the Partnership


Under the Uniform Partnership Act, a
priority ranking of creditors having
claims against individual partners is
recognized:
Debts owed to

1st:

nd

rd

partnership creditors

Debts owed to the other


partners
Debts owed to personal
creditors.

Claims Against the Partnership


1st:

Debts owed to partnership creditors


Each partner is liability for ALL the debts of the
partnership

2nd

Debts owed to the other partners


Creditors can only assert claims to the extent of
the specific partners positive capital balance.

3rd

Debts owed to personal creditors.


Partners are NEVER liable for the personal debts
of the other partners.

Installment Liquidations
Preliminary Distributions
Predistribution Plan

Interim Distributions
The process of liquidation can last over
months, even years.
Partners may experience deficit balances
during the liquidation period.
Partners may want cash distributions
prior to the completion of the liquidation.
Accountants distribute statements at each
important juncture of the process.

Interim Distributions Considerations

Must ensure partnership maintains


enough capital to absorb all future
losses.
Compute safe distributions by
assuming:
All noncash assets will be complete loss.
All liabilities and expenses will be paid.
All deficit partners will be written off.

Example
ABC Partnership
Cash
Receivables
Inventory

$
3,000

Liabilities

$
30,000

30,000

A, Capital
4:

116,000

47,000

B, Capital
4:

120,000

Net Property, Plant, &


237,00
C, Capital
The
partners P/L ratio is 4:4:2. Suppose
Equipment
0
2the inventory51,000
is sold for $35,000. What is the journal entry?
$317,0
$317,00
Total Assets
00
0

ABC Partnership (after sale of inventory)


$
Liabiliti
$
Cash
38,000 es
30,000
A,
112,20
Receivables
30,000 Capital 4:
0
Net Property, Plant, &
237,00 B,
114,20
Equipment
0 Capital 4:
0
C,
Compute Safe Distribution with maximum
costs
Capitalliquidation
2:
48,600
estimated at $4,000:
$305,0
ABC Safe Cash$305,0
Distribution Schedule
Total Assets
00
00
NonCash
4
4

Loss on non-cash assets


(4:4:2)
Current
balance
Max.
liquidation
expenses (4:4:2)
Pay creditors
Potential balance
C becomes insolvent
(4:4)
Safe balances

Cash

Assets

38,000

267,00
0

Liabilit
A,
B,
C,
ies
Capital Capital Capital
30,000

112,20
0

114,20
0

The creditors can be paid and a distribution of $4,000 cash may be made to
A & B without placing the partnership in jeopardy.

48,600

After safe payment, what is the balance in Bs Capital account?

In-Class 01

Predistribution Plan
Continual production of proposed
schedules of liquidation could become
burdensome.
Create a plan at beginning showing how
future payments will be allocated.
Develop by simulating a series of losses,
each of which is just large enough to
eliminate, one at a time, all of the
partners claims to partnership property.

Example: Predistribution Plan


The following partnership is being liquidated:
Cash
Noncash assets

$17,000

Liabilities

$30,000

300,000

A, capital
(40%)

117,000

B, capital
(40%)

119,000

C, capital
Liquidation expenses are estimated to be $4,000. Prepare a predistribution schedule to
(20%)
51,000
guide the distribution of cash.

Example: Predistribution Plan


1st Step: Determine the maximum loss that each partner can absorb (divide each
partners capital balance by their respective P/L ratio), select smallest loss.
Maximum Loss
that

Capital
Partner

Balanc
e

P/L
Ratio

Can be
Absorbed

A
Since ___ can onlyB
absorb a loss of $_______, new capital balances are computed
assuming that the partnership has a $________ loss.
C
ABC - Step 1 Allocations

Balance

A,
Capital

B,
Capital

C,
Capital

117,00
0

119,00
0

51,000

2nd Step Determine the maximum loss that each remaining partner can
absorb, select smallest loss.
Maximum Loss
that

Capital
Partner

Balanc
e

P/L
Ratio

Can be
Absorbed

Since ___ can only absorb a loss of $_______. Net balances are computed
B that the partnership has a $_______ loss.
assuming
ABC - Step 2 Allocations

step 1 balances
assumed $30,000 loss

A,
Capital

B,
Capital

C,
Capital

Therefore, we have our predistribution plan:


1st is the total of all liabilities and liquidation expenses,
then using the above to determine each additional layer
ABC Predistribution Plan
Available Cash

Recipient

1st

34,000

creditors and liquidation


expenses

Next

$ ______

_____ (who and at what ratio)

Next

$_______

_____ (who and at what ratio)

All further cash balances

_____ (who and at what ratio)

In-Class 02