0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 16: Partnership Liquidation
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

1. Steps in Liquidation Process
Compute net income or loss up to the date of dissolution, allocate to partners
Convert assets into cash if necessary, record gain or loss and allocate to partners
Distribute assets to creditors and partners
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2. Order of Payment creditors other than partners loans from partners
capitals of partners
profits of partners
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3. Simple Liquidation Sequence of events
sale of all noncash assets and allocation of loss
based on partners’ profit and loss ratio
payment to creditors
offset partner’s loans against debit capital balance
allocate debit capital balance of insolvent partner
investment by partners
payment to partners
based on their capital balances
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4. Simple Liquidation Cash Noncash Assets Liab. A, Cap. .25 B, Cap. .5
C, Cap
Balance before cash
distribution
20,000
80,000
(40,000)
(10,000)
(60,000)
10,000
Sell assets and distribute loss
60,000
(80,000)
-0-
5,000
(5,000)
(50,000)
15,000
Pay creditors
40,000
Allocate debit capital
balance of C
(15,000)
Payment to B
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5. Installment Liquidation
noncash assets are sold over an extended period
partners receive cash in installments
problems:
distribution of cash to partners before total liquidation loss is known
potential wrongful distributions against the interest of creditors or individual partners
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6. Safe Payment Approach Assumptions:
a loan to or from a partner will be combined with the partner’s capital account
remaining noncash assets will not provide additional cash
a partner with a deficit capital account will be unable to make additional investment
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7. Installment Liquidation
Cash $ 50,000
Noncash assets ,000
$100,000
Liabilities $ 40,000
A, Capital (25%) ,000
B, Capital (50%) ,000
C, Capital (25%) (10,000) A
25% B
50% C
Capital and loan balances
Allocation of potential loss
20,000
(12,500)
7,500
50,000
(25000)
25,000
(10,000)
(22,500)
Allocation of C’s potential deficit
(7,500)
(15,000)
10,000
22.500
After the liabilities are paid, B would get the remaining $10,000 and A and B would get no cash
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8. Safe Payment Approach Procedure
a safe payment schedule is prepared each time cash is to be distributed
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9. Advance Cash Distribution Plan
A schedule that specifies
the order in which each partner will participate in cash distribution
the amount of cash each partner will receive as it becomes available for distribution
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10. Advance Cash Distribution Plan - Steps
net capital interest of each partner = capital account +/- loans to (from) partnership
order of participation = ranking by:
loss absorption potential (= net capital interest / profit and loss ratio)
amount of cash distributed to each partner = (difference in loss absorption potentials of partner and next ranking partner) x (profit and loss ratio)
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11. Incorporation of a Partnership
Advantages of incorporation
limited liability
continuity of existence
ability to raise resources
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12. Incorporation of a Partnership
Procedures
assets and liabilities are transferred to the corporation
partners receive capital stock in settlement of their interests
partnership accounts restated to fair values
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13. Incorporation of a Partnership
Accounting Steps
The partnership books may be retained for use by the corporation or
a new set of books may be established
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14. Retention of Partnership Books
Valuation JE
Inventory 2,000
Land ,000
Equipment ,000
Accounts receivable
Valuation adjustment 5,600
To adjust assets and liabilities to fair value.
The gains and losses are accumulated in the
valuation adjustment account.
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15. Retention of Partnership Books
Valuation-Closing JE
Valuation adjustment 5,600
Art, capital ,800
Beck, capital ,800
To close the valuation adjustment account to
the partners’ capital accounts by their
profit and loss ratio.
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16. Retention of Partnership Books
Capital-Closing JE
Art, capital ,800
Beck, capital ,800
Capital stock ,600
To close the capital account upon transfer of capital stock
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17. New Books Established All accounts in partnership books will be closed
the corporation records the assets received and liabilities assumed at fair value
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18. Advanced Accounting by Debra Jeter and Paul Chaney
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