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All examples are from textbook by Larsen ACCT 501 Chapter 3 Partnership Liquidation and Incorporation; Joint Ventures.

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Presentation on theme: "All examples are from textbook by Larsen ACCT 501 Chapter 3 Partnership Liquidation and Incorporation; Joint Ventures."— Presentation transcript:

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2 All examples are from textbook by Larsen ACCT 501 Chapter 3 Partnership Liquidation and Incorporation; Joint Ventures

3 Partnership Liquidation and Incorporation 2 Objectives of the Chapter n To learn the accounting procedures for liquidation of limited liability partnerships (LLPs). n To discuss accounting issues related to incorporation of a LLP. n To discuss accounting for corporate and unincorporated joint ventures.

4 Partnership Liquidation and Incorporation 3 Liquidation of a Partnership n The liquidation of a LLP means discontinuing its activities. n The procedures usually include selling assets, paying liabilities, and distributing any remaining cash to the partners. n The liquidation process often starts with the realization of noncash assets.

5 Partnership Liquidation and Incorporation 4 Liquidation of a Partnership (contd.) n Any gains or losses resulting from the assets realization are divided among partners based on the income sharing ratio. n The capital balances after the allocation of gains/losses are the basis for settlement. n No cash can be distributed to partners until all liabilities are paid off.

6 Partnership Liquidation and Incorporation 5 Liquidation of a Partnership (contd.) n If cash of LLP is insufficient to pay liabilities in full, an unpaid creditor may collect from the personal assets of any solvent partner whose actions caused the partnership's insolvency, regardless whether that partner has a credit or a debit capital account balance.

7 Partnership Liquidation and Incorporation 6 Distribution of Cash or Other Assets to Partners  The Uniform Partnership Act lists the order for distribution of cash by a liquidating partnership as: 1.Payment of creditors in full, 2.Payment of loans from partners, and 3.Payment of partners' capital account credit balances.

8 Partnership Liquidation and Incorporation 7 Distribution of Cash or Other Assets to Partners (contd.) n However, if a partner's capital account has a deficit, that partner's loan to the partnership must be offset against the deficit in his/her capital account (referred to as the right of offset). n Thus, the cash received by a partner is the same as if loans to the partnership had been recorded in the partner's capital account.

9 Partnership Liquidation and Incorporation 8 Distribution of Cash or Other Assets to Partners (contd.) n The existence of partner's loan account will not advance the time of payment of any partner during the liquidation. n Consequently,the loan to the partnership is often treated as capital during the liquidation.

10 Partnership Liquidation and Incorporation 9 Distribution of Cash or Other Assets to Partners (contd.) n It is possible that partners are willing to receive assets other than cash for settlement. n Regardless whether assets other than cash are distributed to partners, the distribution rule must be followed.

11 Partnership Liquidation and Incorporation 10 Payment to Partners of an LLP after All Noncash Assets Realized n Five situations are discussed: A.Equity of every partner is sufficient to absorb loss from realization. B.Equity of one partner is not sufficient to absorb that partner's share of loss from realization. C.Equity of two partners are not sufficient to absorb their shares of loss from realization.

12 Partnership Liquidation and Incorporation 11 Payment to Partners of an LLP after All Noncash Assets Realized(contd.) D.Partnership is insolvent a but partners are solvent b. E.General partnership is insolvent and partners are insolvent. a.The partnership is unable to pay all outside creditors and at least one partner has a deficit capital account.

13 Partnership Liquidation and Incorporation 12 Payment to Partners of an LLP after All Noncash Assets Realized(contd.) b.The partner has personal assets in excess of liabilities. Note: the partnership is solvent in situations A, B and C.

14 Partnership Liquidation and Incorporation 13 Payment to Partners after All Noncash Assets realized A. Equity of Each Partner is Sufficient to Absorb Loss from Realization n Assume that Abra and Barg, who share income/losses equally, decide to liquidate Abra & Barg LLP. A balance sheet on 6/3/99, just prior to liquidation follows:

15 Partnership Liquidation and Incorporation 14 Payment to Partners after All Noncash Assets realized A. Equity of Each Partner is Sufficient to Absorb Loss from Realization (contd.) Assets Liabilities & Partners’ Capital Cash$10,000Liabilities$20,000 Other assets75,000Loan payable to Barg 20,000 Abra, capital40,000 Barg, capital5,000 Total$85,000Total$85,000 ABRA & BARG LLP Balance Sheet June 30, 1999

16 Partnership Liquidation and Incorporation 15 Payment to Partners after All Noncash Assets realized A. E quity of Each Partner is Sufficient to Absorb Loss from Realization (contd.) n Additional information: n The noncash assets with a carrying amount of $75,000 realized cash of $35,000. n The loss of $40,000 is divided equally by the partners. n After the allocation of realization loss, Barg's capital has a deficit of $15,000.

17 Partnership Liquidation and Incorporation 16 statement of realization and liquidation for Abra & Barg LLP AssetsPartner’ Capital CashOtherLiabilities Barg, loan Abra(50%)Barg (50%) Balances before liquidation $10,000$75,000$20,000 $40,000$ 5,000 Realization of other assets at a loss of $40,000 35,000(75,000)(20,000) Balances $45,000$20,000 $(15,000) Payment to creditors (20,000) Balances $25,000$20,000 $(15,000) Offset Barg’s capital deficit against Barg’s loan (15,000)15,000 Balances $25,000$5,000$20,000$ -0- Payments to partners (25,000)(5,000)(20,000)$ -0-

18 Partnership Liquidation and Incorporation 17 Note to the statement of realization and liquidation for Abra & Barg LLP n Partners Abra and Barg received $20,000 and $5,000, respectively, after partnership creditors had been paid in full. n The checks to both partners should be delivered to the partners at the same time.

19 Partnership Liquidation and Incorporation 18 Note to the statement of realization and liquidation for Abra & Barg LLP n Thus, the legal priority of a partner's loan account has no significance in determining either the amount of cash paid to a partner or the timing of cash payments to partners during liquidation. n In the above statement, Barg's loan account balance of $20,000 and capital account balance of $5,000 can be combined to obtain an equity of $25,000 for Barg prior to allocation/distribution.

20 Partnership Liquidation and Incorporation 19 Note to the statement of realization and liquidation for Abra & Barg LLP (contd.) n In the following examples, a partner's loan account balance (if any) is combined with the partner's capital account balance in the statement of realization and liquidation.

21 Partnership Liquidation and Incorporation 20 Payment to Partners after All Noncash Assets realized B. Equity of One Partner is Not Sufficient to Absorb That Partner's Share of Loss from realization n In this case, the loss on realization of assets results in a deficit balance in the capital account of one of the partners. n Assume the balance sheet below for Diel, Ebbs & Frey LLP just prior to liquidation:

22 Partnership Liquidation and Incorporation 21 B. Equity of One Partner is Not Sufficient to Absorb That Partner's Share of Loss from realization (contd.) AssetsLiabilities & Partners’ Capital Cash$20,000Liabilities$30,000 Other assets80,000Diel, capital40,000 Ebbs, capital21,000 Frey, capital9,000 Total$100,000Total$100,000 Diel, Ebbs & Frey LLP Balance Sheet May 20, 1999

23 Partnership Liquidation and Incorporation 22 B. Equity of One Partner is Not Sufficient to Absorb That Partner's Share of Loss from realization (contd.) n The income sharing ratio is Diel, 20%; Ebbs; 40% and Grey, 40%. n The other assets with a carrying amount of $80,000 realized $50,000 cash. n After dividing the loss of $30,000 among the partners, Frey has a deficit of $3,000 in his capital account. n Assuming Frey pays the $3,000 to the partnership immediately, the statement of realization and liquidation is as follows:

24 Partnership Liquidation and Incorporation 23 Statement of Realization and Liquidation for Deil, Ebbs & Frey LLP (5/21 through 5/31/99) AssetsPartner’ Capital CashOtherLiabilitiesDiel(20%)Ebbs(40%)Frey(40%) Balances before liquidation $20,000$80,000$30,000$40,000$21,000$ 9,000 Realization of other assets at a loss of $30,000 50,000(80,000)(6,000)(12,000) Balances $70,000$30,000$34,000$9,000$(3,000) Payment to creditors (30,000) Balances $40,000$34,000$9,000$(3,000) Cash received from Frey 3,000 Balances $43,000$34,000$9,000$ -0- Payments to partners (43,000)(34,000)(9,000)$ -0-

25 Partnership Liquidation and Incorporation 24 B. Equity of One Partner is Not Sufficient to Absorb That Partner's Share of Loss from realization (contd.) n Assuming Grey was not able to pay the $3,000 deficit to the partnership immediately and the cash available after payment to creditors is to be distributed to Deil and Ebbs without a delay, the statement of realization and liquidation would be as follows:

26 Partnership Liquidation and Incorporation 25 Statement of Realization and Liquidation for Deil, Ebbs & Frey LLP – Frey Cannot Pay $3,000 immediately AssetsPartner’ Capital CashOtherLiabilitiesDiel(20%)Ebbs(40%)Frey(40%) Balances before liquidation $20,000$80,000$30,000$40,000$21,000$ 9,000 Realization of other assets at a loss of $30,000 50,000(80,000)(6,000)(12,000) Balances$70,000$30,000$34,000$9,000$(3,000) Payment to creditors (30,000) Balances$40,000$34,000$9,000$(3,000) Payments to partners (40,000)(33,000)(7,000) Balances$1,000$2,000$ (3,000)

27 Partnership Liquidation and Incorporation 26 Notes to the above Statement n The possible additional loss if Frey is unable to pay $3,000 is charged to Diel and Ebbs in the ratio of 1/3 ($1,000) and 2/3 ($2,000), respectively. n Therefore, the cash available of $40,000 to partners is divided between Diel and Ebbs in a manner that reduces Deil's capital and Ebb's capital to $1,000 and $2,000, respectively.

28 Partnership Liquidation and Incorporation 27 Notes to the above Statement (contd.) n Thus, if Frey is not able to pay $3,000, the loss can be all absorbed by remaining partners based on their income sharing ratio. n If the $3,000 is later collected from Frey, this amount will be divided $1,000 to Diel and $2,000 to Ebbs. n The forgoing statement then can be completed as follows:

29 Partnership Liquidation and Incorporation 28 The Completion of the Statement of Realization and Liquidation When $3,000 Collected from Frey AssetsPartner’ Capital CashLiabilities Diel (20%) Ebbs (40%) Frey (40%) Balances (from page 25) $1,000$2,000$(3,000) Cash received from Frey $3,0003,000 Payments to partners(3,000)(1,000)(2,000)

30 Partnership Liquidation and Incorporation 29 The Completion of the Statement of Realization and Liquidation When $3,000 is Uncollectible from Frey AssetsPartner’ Capital CashLiabilities Diel (20%) Ebbs (40%) Frey (40%) Balances (from page 25) $1,000$2,000$(3,000) Additional loss from Frey’s uncollectible capital deficit (1,000)(2,000)3,000 However, if the $3,000 is uncollectible, the statement would be completed with the write- off Frey's Capital as follows:

31 Partnership Liquidation and Incorporation 30 Payment to Partners after All Noncash Assets realized C. Equity of Two Partners Are Not Sufficient to Absorb Their Shares of Loss from Realization n It is apparent that the inability to collect deficit of a partner will result in additional loss to the other partners as in example B when $3,000 is uncollectible. n This additional loss could cause a second partner to have a deficit in the capital account, which may or may not be collectible.

32 Partnership Liquidation and Incorporation 31 C. Equity of Two Partners Are Not Sufficient to Absorb Their Shares of Loss from Realization (contd.) n Example: Assume that Judd, Kamb. Long and Marx, partners of Judd,, Kamb. Long & Marx LLP, share income /losses 10%, 20%, 30% and 40%, respectively. n Their capital account balances for the period 8/1 through 8/15, 1999, are as shown in the following statement of realization and liquidation (p29), supported by the exhibit that follows (p30).

33 Partnership Liquidation and Incorporation 32 Statement of Realization and Liquidation for Judd, Kamb, Long& Marx LLP (8/1 through 8/15/1999) AssetsPartners’ Capital CashOtherLiabilities Judd (10%) Kamb (20%) Long (30%) Marx (40%) Balances before liquidation $20,000$200,000$120,000$30,000$32,000$30,000$8,000 Realization of other assets at a loss of $80, ,000(200,000)(8,000)(16,000)(24,000)(32,000) Balances$140,000$120,000$22,000$16,000$6,000$(24,000) Payment to creditors (120,000) Balances$20,000$22,000$16,000$6,000$(24,000) Payments to partners (20,000)(16,000)(4,000) Balances$6,000$12,000$6,000$(24,000)

34 Partnership Liquidation and Incorporation 33 Exhibit: Computation of Cash Payments to Partners of Judd, Kamb, Long & Marx LLP – 8/15/1999 Partners’ Capital Judd(10%)Kamb(20%)Long(30%)Marx(40%) Capital account balances before distribution of cash to partners $22,000$16,000$6,000$(24,000) Additional loss to Judd, Kamb, and Long if Marx’s deficit is uncollectible (ratio of 10:20:30) (4,000)(8,000)(12,000)24,000 Balances$18,000$8,000$(6,000) Additional Loss to Judd and Kamb if Long’s deficit is uncollectible (ratio of 10:20) (2,000)(4,000)6,000 Amounts that may be paid to partners $16,000$4,000

35 Partnership Liquidation and Incorporation 34 Payment to Partners after All Noncash Assets realized D. Partnership Is Insolvent but Partners Are Solvent n In the case of insolvency in a LLP, the total of the capital account debit balance will exceed the total of the credit balances. n If the partner(s) with a deficit capital balance pay off the deficit to the partnership, the LLP will have sufficient cash to pay its liabilities in full.

36 Partnership Liquidation and Incorporation 35 Payment to Partners after All Noncash Assets realized D. Partnership Is Insolvent but Partners Are Solvent (contd.) n The creditors of LLP may demand payment from any solvent partner whose actions caused the partnership's insolvency, regardless of whether the partner's capital had a debit or a credit balance. n A partner who makes payments to partnership creditors receives a credit to his/her capital account.

37 Partnership Liquidation and Incorporation 36 Payment to Partners after All Noncash Assets realized D. Partnership Is Insolvent but Partners Are Solvent (contd.) Assets Liabilities & Partners’ Capital Cash$15,000Liabilities$65,000 Other assets85,000Nehr, capital18,000 Ordo, capital10,000 Page, capital7,000 Total$100,000Total$100,000 n Example: Assume that Nehr, Ordo & Page LLP, whose partners share net income/losses equally,had the following balance sheet prior to liquidation on 5/1/1999:

38 Partnership Liquidation and Incorporation 37 Payment to Partners after All Noncash Assets realized D. Partnership Is Insolvent but Partners Are Solvent n On 5/12/99, the other assets with a carrying amount of $85,000 realize $40,000 cash. The loss of $45,000 is to be divided equally among the partners. n The total cash of $55,000 is paid to the creditors, which leaves unpaid liabilities of $10,000. n The capital balances of partner Nehr, Ordo and Page are $3,000, ($5,000) and ($8,000), respectively after absorbing the realization loss of noncash assets.

39 Partnership Liquidation and Incorporation 38 Payment to Partners after All Noncash Assets realized D. Partnership Is Insolvent but Partners Are Solvent n Assuming that on 5/30/99, Ordo and Page pay off their deficiencies, the LLP will use $10,000 of the $13,000 available cash to pay the remaining liabilities. n The LLP will then distribute $3,000 to Nehr. n These events are summarized in the statement of Realization and Liquidation on the following page.

40 Partnership Liquidation and Incorporation 39 The Statement of Realization and Liquidation of Nehr, Ordo & Page LLP AssetsPartner’ Capital CashOtherLiabilitiesNehr(1/3)Ordo(1/3)Page(1/3) Balances before liquidation $15,000$85,000$65,000$18,000$10,000$ 7,000 Realization of other assets at a loss of $45,000 40,000(85,000)(15,000) Balances$55,000$65,000$3,000$(5,000)$(8,000) Payment to creditors (55,000) Balances$ -0-$10,000$3,000$(5,000)$(8,000) Cash invested by Ordo and Page 13,0005,0008,000 Balances Final Payment to Creditors Balances Payment to Nehr (10,000) 3,000 (3,000) (10,000) $3,000 3,000 (3,000)

41 Partnership Liquidation and Incorporation 40 Payment to Partners after All Noncash Assets realized D. Partnership Is Insolvent but Partners Are Solvent (contd.) n If the insolvency of the LLP is due to an adverse award of damages in a lawsuit, and the partner(s) responsible for the damages are solvent, they alone must pay the damages that the LLP is unable to pay. n However, if such partner(s) also are insolvent, both they and the LLP may have to file for liquidation under Chapter 7 of the U.S. Bankruptcy Code.

42 Partnership Liquidation and Incorporation 41 Payment to Partners after All Noncash Assets realized E. General Partnership Is Insolvent and Partners Are Insolvent n All the above cases applies to both LLP and general partnership. n The case discussed here only applies to the general partnership and both the partnership and some partners are insolvent. n The question raised here is the relative rights of creditors of the partnership and the partners.

43 Partnership Liquidation and Incorporation 42 Payment to Partners after All Noncash Assets realized E. General Partnership Is Insolvent and Partners Are Insolvent (contd.) n The rule provided by the UPA is that assets of the partnership (including partners' capital deficits) are first available to creditors of the partnership. n Assets of the partners are first available to their creditors.

44 Partnership Liquidation and Incorporation 43 Payment to Partners after All Noncash Assets realized E. General Partnership Is Insolvent and Partners Are Insolvent (contd.) n After the liabilities of the partnership have been paid in full, the creditors of an individual partner have a claim against the assets of the partnership to the extent of that partner's equity in the partnership.

45 Partnership Liquidation and Incorporation 44 Payment to Partners after All Noncash Assets realized E. General Partnership Is Insolvent and Partners Are Insolvent (contd.) n On the other hand, after the creditors of a partner have been paid in full, any remaining assets of that partner are available to partnership creditors. n This principle applies regardless of whether that partner's capital balance has a credit or a debit balance. n One condition of this principle is that these creditors are unable to obtain payment from the partnership.

46 Partnership Liquidation and Incorporation 45 The Relative rights of Creditors of an Insolvent General Partnership and Personal Creditors- An Example Assets Liabilities & Partners’ Capital Cash$10,000Liabilities$60,000 Other assets100,000Rich, capital5,000 Sand, capital15,000 Toll, capital30,000 Total$110,000Total$100,000 Assume that the Rich,Sand & Toll Partnership, a general partnership whose partners share net income and losses equally,has the partner- ship balance sheet below prior to liquidation on 11/30/99:

47 Partnership Liquidation and Incorporation 46 The Relative rights of Creditors of an Insolvent General Partnership and Personal Creditors- An Example (contd.) PartnerPersonal AssetsPersonal Liabilities Rich$100,000$25,000 Sand50,000 Toll5,00060,000 Assume that on 11/30/99, the partners have the following assets and liabilities other than their equities in the partnership:

48 Partnership Liquidation and Incorporation 47 The Relative rights of Creditors of an Insolvent General Partnership and Personal Creditors- An Example (contd.) n Assume that the realization of other assets of the partnership results in a loss of $60,000, as shown in the following statement of realization and liquidation for the period 12/1/ through 12/12/99:

49 Partnership Liquidation and Incorporation 48 The Statement of Realization and Liquidation of Rich, Sand & Toll (12/1 through 12/12/99) AssetsPartner’ Capital CashOtherLiabilitiesRich(1/3)Sand(1/3)Tall(1/3) Balances before liquidation $10,000$100,000$60,000$5,000$15,000$30,000 Realization of other assets at a loss of $60,000 40,000(100,000)(20,000) Balances$50,000$60,000$(15,000)$(5,000)$10,000 Payment to creditors (50,000) Balances$10,000$(15,000)$(5,000)$10,000

50 Partnership Liquidation and Incorporation 49 Notes to the Statement n There is still $10,000 liabilities unpaid after exhausting all cash available in the partnership. n The creditors of the partnership can only a collect these liabilities in full from Rich (who is personally solvent) regardless whether Rich's capital balance has a debit or credit balance.

51 Partnership Liquidation and Incorporation 50 The Statement of Realization and Liquidation of Rich, Sand & Toll (12/1 through 12/12/99)(contd.) Partner’ Capital Cash Liabilities Rich (1/3) Sand (1/3) Toll (1/3) Balances (from above)$10,000$(15,000)$(5,000)$10,000 Payment by Rich to partnership creditors (10,000)10,000 Balances$(5,000) $10,000 Cash invested by Rich$5,0005,000 Balances$5,000$(5,000)$10,000 Payment to Toll (or Toll’s creditors) (5,000) Balances$(5,000)$5,000 The Statement is continued below (on p50 & 51) to show Rich's Payment of the final $10,000 owed to partnership's creditors:

52 Partnership Liquidation and Incorporation 51 The Statement of Realization and Liquidation of Rich, Sand & Toll (12/1 through 12/12/99)(contd.) Partner’ Capital Cash Rich (1/3) Sand (1/3) Toll (1/3) Balances (from Page 50)$(5,000)$5,000 Write-off of Sand’s capital deficit as uncollectible $(2,500)5,000(2,500) Balances$(2,500)$2,500 Cash invested by Rich$2,5002,500 Balances$2,500 Payment to Toll (or Toll’s creditors) (2,500)

53 Partnership Liquidation and Incorporation 52 Notes to the Statement on p50 1.Due to the abundant personal assets, Rich is able to paid $5,000 needed to offset its capital deficit in the partnership. 2.This $5,000 cash is paid to partner Toll (or Toll's creditors), the only partner with a credit balance of capital account.

54 Partnership Liquidation and Incorporation 53 Notes to the Statement on p51 1.The continued statement shows that Sand owes $5,000 to the partnership. 2.Nevertheless, Sand's personal assets are just sufficient to cover his personal liabilities. 3.Therefore, Sand's deficit of $5,000 in his capital is a loss to the partnership and will be absorbed by the other two partners equally.

55 Partnership Liquidation and Incorporation 54 Notes to the Statement on p51 (contd.) 4.As a result, Rich and Toll have capital balances of deficit $2,500 and credit $2,500, respectively, after absorbing the $5,000 loss from Sand's deficit in capital. 5.Since Rich is personally solvent, he will pay $2,500 to the partnership to offset his deficit. 6.This $2,500 cash will go to Toll (or Toll's creditors) since Toll is the one with credit balance in capital.

56 Partnership Liquidation and Incorporation 55 Conclusions of this Liquidation  The final result of this liquidation is that the partnership creditors receives payment in full due to the financial status of Rich.  The personal creditors of Sand are paid in full.  The personal creditors of Toll are paid $12,500 (Toll's personal assets of $5,000 + $7,500 from Rich's payment to the partnership to cover Rich's deficit).

57 Partnership Liquidation and Incorporation 56 Installment Payments to Partners  In all previous case, cash payments to partners in liquidation are made only after all noncash assets being realized and realized losses being divided.  Due to the liquidation process can extent to several months, the partners may want to receive cash as it becomes available rather than waiting until all noncash assets have been realized.

58 Partnership Liquidation and Incorporation 57 Installment Payments to Partners (contd.)  Liquidation in installments is a process of realizing some assets, paying creditors, paying the remaining available cash to partners, realizing additional assets and making additional cash payments to partners.  Installment payments to partners are appropriate if necessary safeguards are used to ensure that all partnership creditors are paid in full.

59 Partnership Liquidation and Incorporation 58 Installment Payments to Partners (contd.)  Also no partners are paid more than the amount to which they would be entitled after all losses on realization of assets are known.  The danger to an installment liquidations is that the liquidator authorizes cash payment to partners before all losses in the liquidation are known.

60 Partnership Liquidation and Incorporation 59 Installment Payments to Partners (contd.)  If payments are made to partners and later losses cause deficits in the partner's capital accounts, the liquidator will be responsible for the recovery of these deficits.  Due to this danger, the safe policy for determining installment cash payments to partners is the following worst-case scenario:

61 Partnership Liquidation and Incorporation 60 General Rules for Installment Payments to Partners 1.Assume a total loss on all remaining noncash assets, and provide for all possible losses, including potential liquidation costs and unrecorded liabilities. 2.Assume that partner(s) with potential capital deficits will be unable to pay anything to the partnership.

62 Partnership Liquidation and Incorporation 61 General Rules for Installment Payments to Partners (contd.)  Thus, the distribution of cash in installment payment as if no more cash will be forthcoming, either from realization of assets or from collection of capital deficits from partners.  Therefore, cash payment to a partner only if that partner has a capital (plus loan) account credit balance in excess of the amount required to absorb his/her share of maximum possible loss that may incur on liquidation.

63 Partnership Liquidation and Incorporation 62 General Rules for Installment Payments to Partners (contd.)  When these installment payment rules are followed, the effect is to bring the equities of the partner to the income- sharing ratio as quickly as possible.  The following example (from P3-4 of the textbook) illustrates an installment payment on liquidation following the aforementioned rules.

64 Partnership Liquidation and Incorporation 63 Installment Payments to Partners- an Example  Carson and Worden decided to dissolve and liquidate Carson& Worden LLP on 9/23/99. On that date, the balance sheet of the partnership was as follows:

65 Partnership Liquidation and Incorporation 64 Installment Payments to Partners- an Example (contd.) AssetsLiabilities & Partners’ Capital Cash$5,000Liabilities$15,000 Other assets100,000 Loan payable to Worden 10,000 Carson, capital60,000 Worden,capital20,000 Total$105,000Total$100,000 Carson &Worden LLP Balance Sheet Sep. 23, 1999

66 Partnership Liquidation and Incorporation 65 Installment Payments to Partners- an Example (contd.)  On Sep. 23, 1999, noncash assets with a carrying amount of $70,00 realized $60,000 and $64,000 was paid to creditors and partner.  $1,000 is retained to cover possible liquidation cots.  On 10/1/1999, the remaining noncash assets realized $18,000 (net of liquidation costs), and all available cash was distributed to partner.

67 Partnership Liquidation and Incorporation 66 Installment Payments to Partners- an Example (contd.)  Carson and Worden share net income and losses 40% and 60%, respectively.  Required: 1)Prepare a cash distribution program for Carson &Worden LLP on 9/23/99. 2)Determine the appropriate distribution of cash to partners as it becomes available. 3)Prepare journal entries for the LLP on 9/23 and 10/1 to record the realization of assets and distribution of cash to creditors and partners.

68 Partnership Liquidation and Incorporation 67 Cash Distribution Program for Carson &Worden LLP Carson & Worden LLP Cash Distribution Program September 23, 1999 CreditorsCarsonWorden First $15,000100% Next 40,000100% All over $55,00040%60%

69 Partnership Liquidation and Incorporation 68 Distribution of Cash to Partners Carson & Worden LLP Working Paper for Cash Distribution to Partners during Liquidations September 23, 1999 Capital account balances before liquidation (including $10,000 loan payable to Warden) $60,000$30,000 Income-sharing ratio23 Capital per unit of income (loss) sharing$30,000$10,000 Reduce Carson’s balance to Worden’s balance; Carson receives $40,000 ($20,000X2)(20,000) Capital per unit of income (loss) sharing$10,000

70 Partnership Liquidation and Incorporation 69 Journal Entries to Record the Realization of Assets and Distribution of Cash to Creditors and Partners. Carson & Worden LLP Journal Entries 1999 Sept23Cash60,000 Carson,Capital ($10,000X0.40)4,000 Worden, Capital ($10,000X0.60)6,000 Other Assets70,000 To record realization of assets at a loss of $10,000, divided between Carson and Worden in 2:3 ratio. 23Trade Accounts Payable15,000 Loan Payable to Worden5,400 Carson, Capital43,600 Cash64,000

71 Partnership Liquidation and Incorporation 70 Journal Entries (contd.) 1999 Oct1Loan Payable to Worden ($10,000-$5,400)4,600 Carson, Capital (balance of capital account)7,600 Worden, Capital (balance of capital account)6,800 Cash19,000 To record distribution of cash to partners.

72 Partnership Liquidation and Incorporation 71 Withholding of Cash for Liabilities and Liquidation Costs  Costs of liquidation are treated as part of the total loss from liquidation and are deducted from partner's capital accounts.  It is reasonable to withhold cash for the payments of recorded liability or costs when these liabilities or costs were not paid prior to the payments to partners.

73 Partnership Liquidation and Incorporation 72 Liquidation of Limited Partnerships  Most of the prior discussion of the liquidation of LLP and general partnerships applies to the liquidation of limited partnerships except the following:  The ULP Act provides that after outside creditors of a limited partnership have been paid, the equities of the limited partners must be paid before the general partner(s) may receive any cash.

74 Partnership Liquidation and Incorporation 73 Liquidation of Limited Partnerships  Also, the limited partners may agree that one or more of them may have priority over the others regarding payments in liquidation.


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