Presentation on theme: "Partnership Liquidation And Incorporation; Joint Ventures"— Presentation transcript:
1Partnership Liquidation And Incorporation; Joint Ventures Chapter 3Partnership Liquidation And Incorporation; Joint Ventures
2Chapter 3: Scope of Chapter Liquidation of LLPs & LPsMeaning of LiquidationDivision of Losses & GainsDistribution of Cash or Other AssetsCase StudiesPayments to Partners in Different ScenariosPreparation of Cash Distribution PlanIncorporation of LLPJoint VenturesAccounting Methods & Accounting IssuesAccounting for Incorporated & Unincorporated Joint VenturesSEC Enforcement Actions for Wrongful Application of Accounting Standard
3Liquidation of Partnership Meaning of LiquidationDivision of Losses & GainsDistribution of Cash or Other AssetsPayments to Partners of an LLPExplanation of different case scenariosIllustrations & Case StudiesPreparation of Cash Distribution ProgramInstallment Payments to PartnersGeneral Principles Guiding Installment Payments
4Incorporation of a Limited Liability Partnership Advantages of incorporating LLPAccounting Concerns during IncorporationIllustrations
5Joint Ventures Definition Present-Day Joint Ventures Accounting for Corporate or LLC Joint VenturesAccounting for Unincorporated Joint VenturesBrief description of Equity Method of Accounting for Investment in Common StockSEC Enforcement Actions Dealing with Wrongful Application of Accounting StandardsIllustrations & Case StudiesReview Questions, Problems & Exercises
6The Meaning of Liquidation The LIQUIDATION of a limited liability partnership means winding up its activities, usually by selling assets, paying liabilities, and distributing any remaining cash to the partners.
7Liquidation of Partnership The partnership net assets may be sold as a unit or in installments.The cash received must be used to pay partnership creditors.The accounting records of the partnership should be adjusted and closed and net income of loss for the final period of operations entered in the capital accounts.
8Meaning of Liquidation The liquidation usually starts with “Realization” of non-cash assets.Before any payments to partners, all outside creditors must be paid in full.An unpaid creditor may enforce collection from the personal assets of any solvent partner whose actions caused the partnership’s insolvency.Partnership is treated as an entity for many purposes however, it may not use the shield of a separate entity to protect culpable partners’ personal assets against the claims of unpaid creditors.
9Division of Loss and Gains Always first divide the loss / gain from the realization of non-cash assets before distributing cash.As assets are realized, allocate any gains or loss to partners’ capital accounts in the income-sharing ratio.All creditors must have been paid before distribution of cash.The final credit balances of the partners’ capital & loan ledger accounts should be equal to the cash available for distribution.Payments are then made in the amounts of the partners’ respective equities in the partnership.
10Distribution of Cash or Other Assets Payment of Creditors in full.Payment of Loans from partners.Payment of partners’ Capital Account Credit Balances.If a partner’s capital account has a debit balance or potential debit balance after possible future realization of losses, then any credit balance in partner’s loan account must be offset against the deficit in the capital account. This is “Right of Offset”.
11Payments to Partners After All Non-cash Assets Realized Equity of Each Partners is Sufficient to Absorb Loss from Realization.Equity of One Partner is not Sufficient to Absorb that Partner’s Share of Loss from Realization.Equities of Two Partners are not Sufficient to Absorb Their Shares of Loss from Realization.Partnership is Insolvent but Partners are Solvent.General Partnership is Insolvent and Partners are Insolvent.
12Case 1: Equity of One Partner Is Not Sufficient to Absorb That Partner’s Share of Loss From RealizationThe loss on realization of assets, when distributed in the income-sharing ration, results in a debit balance in the capital (or capital & loan combined) account of one of the partners.That partner must pay the deficit to the partnership.If the partner is unable to do so, the deficit must be absorbed by other partners as an additional loss to be shared in the same proportion as they have previously shared net income or losses.
13Case 1: Balance Sheet of DE&F LLP (Prior to Liquidation) ASSETSCash $ 20,000Other Assets $ 80,000Total $ 100,000LIABILITIESLiabilities $ 30,000D, Capital $ 40,000E, Capital $ 21,000F, Capital $ 9,000Total $ 100,000
14Case 1: Assumptions for the Illustration: Income Sharing Ratio is D – 20%; E – 40%; and F – 40%The other assets of $ 80,000 realized $ 50,000 cashResulting loss of $ 30,000 from RealizationPartner F is charged with 40% of this loss ($ 12,000)Resulting deficit of $ 3,000 in F’s capital a/c
16Case 2: Equities of Two Partners Are Not Sufficient To Absorb Their Shares of Loss From Realization Inability of a partner to pay the partnership for a capital deficit may cause additional loss to the other partners.A partner may have sufficient capital (or combination of capital & loan accounts) to absorb any direct share of loss on the realization of non-cash assets, but not sufficient to absorb additional actual or potential losses caused by inability of the partnership to collect the deficit in another partner’s capital account.
17Case 2: Assumptions for Illustration JKL&M LLP is the partnership firmThe partners J, K, L & M share net income and losses 10%, 20%, 30% and 40% respectivelyTheir capital account balances are as shown in statement of realization and liquidation on next slide
19Partnership Is Insolvent but Partners Are Solvent If a limited liability partnership is insolvent, it is unable to pay all outside creditors, and at least one and perhaps all of the partners will have debit balances in their capital accounts.The partnership creditors may demand payment from any solvent partner whose actions caused the partnership’s insolvency, regardless of whether the partner’s capital account has a debit balance or a credit balance.
20Installment Payments to Partners Liquidation in installments means to realize some assets, paying creditors, paying the remaining available cash to partners, realizing additional assets and making additional cash payments to partners. The liquidation continues until all non-cash assets are realized and all cash has been distributed to creditors and partners.
21General Principles Guiding Installment Payments Assume a total loss on all remaining non-cash assets and provide for tall possible losses, including potential liquidation costs and unrecorded liabilities.Assume that any partner with a potential capital deficit will be unable to pay any thing to the partnership.Distribute each installment of cash as if no more cash will be forthcoming.
22General Principles Guiding Installment Payments The liquidator should authorize a cash payment to a partner only if that partner has a capital account ( or capital & loan combined account) credit balance enough to absorb a portion of maximum possible loss that may incur on realization.
23Cash Distribution Program Why to have a Cash Distribution Program?It’s more efficient to have in advance a complete “Cash Distribution Program”Ease, efficiency and accuracy of distributing cash as soon as it’s available
24Cash Distribution Program Procedure to develop Cash Distribution Program.Determine the equity of each partner before liquidation.Determine the capital per unit of income (loss) sharing for each partner, by dividing capital account balance by each partner’s income-sharing ratio.If for some reason, original relationship among the partners’ capital account balance has been disrupted, a “Revised Cash Distribution Program” must be prepared.
25Liquidation of Limited Partnerships Most of the procedures & rulings of the liquidation of LLPs and General Partnerships apply to the liquidation of Limited Partnerships.The Uniform Limited Partnership Act provides that after outside creditors have been paid, the equities of the limited partners must be paid before the general partner(s) may receive any cash.Limited partners may agree that one or more of them may have priority over the others regarding payments in liquidation of the limited partnership.
26Incorporation of Limited Liability Partnership Why to incorporate the Limited Liability Partnership?Limited Liability of stockholders.Ease of attracting additional Capital.Possible income tax advantages.
27Incorporation of Limited Liability Partnership Each partner receives an equitable portion of the capital stock issued by the new corporation.The assets of the partnership must be adjusted to current fair value before being transferred to the corporation.Identify any intangible asset or goodwill developed by the partnership should be included in the assets transferred to Corporation.
28Joint VenturesA Joint Venture is different from partnership in a way that it’s limited in carrying out a single project.When the capital required is larger than an individual can provide and risks are too high to be bourn alone – the Joint Ventures came into existence.The individuals (Venturers) would come together to undertake a venture of this type.
29Present-day Joint Ventures Today, JVs are less common but still employed for many projects such as –The acquisition, development and sale of real propertyExploration for Oil & GasConstruction of Bridges, Buildings and DamsCorporate Joint Ventures