2. 16 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Partnership Liquidation Chapter 16

3. 16 - 2 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 1 Understand legal aspects of partnership liquidation.

4. 16 - 3 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Liquidation Process – Converting noncash assets into cash – Recognizing gains and losses and liquidating expenses incurred during the liquidation period – Distributing cash to partners according to the final balances in their capital accounts – Settling all liabilities

5. 16 - 4 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Rank Order of Payments I – Amounts owed to creditors other than partners II – Amounts owed to partners other than for capital and profits III – Amounts due to partners with respect to their capital interests IV – Amounts to partners with respect to profits

6. 16 - 5 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 2 Apply simple partnership liquidation computations and accounting.

7. 16 - 6 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Simple Partnership Liquidation Holmes and Kaiser Balance Sheet December 31, 2003 Assets Liabilities and Equity Cash$ 10,000Accounts payable $ 40,000 A/R, net 30,000Loan from Holmes 10,000 Inventory 30,000Holmes, capital 25,000 Plant assets, net 40,000Kaiser, capital 35,000$110,000

8. 16 - 7 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Simple Partnership Liquidation Profits and losses are distributed as follows: 70% to Holmes and 30% to Kaiser They agreed to liquidate the partnership as soon as possible after January 1, 2004. Inventory items are sold for $25,000, plant assets are sold for $30,000, $22,000 is collected from accounts receivable.

9. 16 - 8 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Simple Partnership Liquidation Holmes and Kaiser Balance Sheet January 5, 2004 Assets Liabilities and Equity Cash$87,000Accounts payable $40,000 A/R, netLoan from Holmes 10,000 InventoryHolmes, capital 8,900 Plant assets, net Kaiser, capital 28,100$87,000

10. 16 - 9 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Simple Partnership Liquidation Order of Payment ITo creditors for accounts payable$40,000 IITo Holmes for his loan balance 10,000 IIITo Holmes for his capital balance 8,900 To Kaiser for his capital balance 28,100 Total distribution$87,000

11. 16 - 10 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Debit Capital Balances in a Solvent Partnership The partnership of Jay, Jim, and Joe is in the process of liquidation. Debit Credit Cash$25,000 Jay, capital (40%) 3,000 Jim, capital (40%)$16,000 Joe, capital (20%) 12,000 Total$28,000$28,000

12. 16 - 11 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Debit Capital Balances in a Solvent Partnership If Jay is unable to pay $3,000 to the partnership, his debit balance represents a loss to be charged to Jim and Joe. Jim’s share: 4/6 × $3,000 = $2,000 Joe’s share: 2/6 × $3,000 = $1,000

13. 16 - 12 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 3 Perform safe payment computations.

14. 16 - 13 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Safe Payments to Partners The calculation of safe payments is based on the following assumptions: All partners are personally insolvent.All noncash assets represent possible losses.

15. 16 - 14 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Application of Safe Payments Schedule (000) Debits Credits Cash$ 80Loan payable to Nancy $20 Loan due from Maxine 10Buzz, capital (50%) 50 Land 20Maxine, capital (30%) 70 Building, net 140Nancy, capital (20%) 110$250

16. 16 - 15 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Safe Payment Schedule Partners’ equities (capital ± loan balances Possible loss on noncash assets Book value of land and buildings Possible loss on contingencies Cash withheld for contingencies $160 10 $50 (80) (30) (5) (35) $60 (48) 12 (3) 9 $130 (32) 98 (2) 96 Possible Losses Buzz Equity (50%) Maxine Equity (30%) Nancy Equity (20%)(000)

17. 16 - 16 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Safe Payment Schedule Possible loss from Buzz Buzz’s debit balance allocated 60:40 to Maxine and Nancy Possible loss from Maxine Maxine’s debit balance assigned to Nancy 35 0 (21) (12) 12 0 (14) 82 (12) $ 70 Possible Losses Buzz Equity (50%) Maxine Equity (30%) Nancy Equity (20%)(000)

18. 16 - 17 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Safe Payment Schedule Loan payable to Nancy20,000 Nancy, Capital50,000 Cash70,000

19. 16 - 18 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Account Balances (000) Debits Credits Cash$ 10Buzz, capital (50%)$ 50 Loan due from Maxine 10Maxine, capital (30%) 70 Land 20Nancy, capital (20%) 60 Building, net 140$180

20. 16 - 19 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Advance Distribution Any distribution to partners before all gains and losses have been realized and recognized requires approval of all partners.