ADVANCE ACCOUNTING Ch16

Slide 16-1

Partnerships Liquidation

Advanced Accounting, Fifth Edition

1616

Slide 16-2

1. Describe the steps used to distribute available partnership assets in liquidation under the Uniform Partnership Act (UPA).

2. List the order of priority for each class of creditors in partnership liquidation under the UPA.

3. Prepare a liquidation schedule to settle debts and allocate assets.

4. Prepare a “safe payment approach” liquidation schedule.5. Describe the four steps in the preparation of an advance plan

for the distribution of cash in a partnership liquidation.6. Prepare the journal entries to incorporate a partnership.

Learning ObjectivesLearning Objectives

Slide 16-3

First Step: Compute net income or loss up to the date of dissolution.

Second Step: Assets not acceptable for distribution in their present form are converted into cash.

Last Step: Distribute available assets to creditors and partners.

Steps in the Liquidation ProcessSteps in the Liquidation Process

LO 1 Steps in the liquidation process.LO 1 Steps in the liquidation process.

Slide 16-4

The first step in the liquidation process is toa. Convert noncash assets into cash.b. Pay partnership creditors.c. Compute any net income (loss) up to the date of

dissolution.d. Allocate any gains or losses to the partners.

Review QuestionReview Question



Slide 16-5

Liabilities rank in order of payment, as follows:

I. Liabilities to creditors other than partners,

II. Liabilities to partners other than for capital and profits (such as loans),

III. Liabilities to partners in respect of capital,

IV. Liabilities to partners in respect of profits.



Slide 16-6

UPA (Section 15) provides that partners are jointly liable for all contracts and other obligations of the partnership.

Priorities of Partnership and Personal Priorities of Partnership and Personal CreditorsCreditors

LO 2 Order of priority for each class of creditors.LO 2 Order of priority for each class of creditors.

Order of Priority concerning availability of assets:A. Partnership assets

1. Partnership creditors.2. Personal creditors that did not recover their claims in

full from personal assets.B. Personal assets

1. Personal creditors.2. Partnership creditors not satisfied from partnership

assets. 3. Claims of partnership against partner with deficit

equity.

Slide 16-7

True/False: Personal assets are first allocated to partnership creditors and then to personal creditors.

Review:Review:

FalseFalse



Slide 16-8

If a partner with a debit capital balance during liquidation is insolvent, the following results:

a. The partner must borrow money to invest in the partnership.

b. The partnership will give the partner cash to the extent of the partners’ debit balance.

c. The partner’s debit balance will be allocated to the other partners.

d. None of the above.




Slide 16-9

In accordance with the marshaling of assets provision of the Uniform Partnership Act, rank the following liabilities of a partnership in order of payment.

1) $20,000 loan from B. Barry who is a partner.2) $30,000 of profits from the last year of operations.3) $3,000 payable to a supplier.4) $100,000 in capital balances of the partners.

a. 2,3,4,1. c. 3,1,4,2.b. 4,2,1,3. d. 3,1,2,4.




Slide 16-10

Exercise 16-6: Pete, Tom, and Zack have operated a laundromat for 10 years. The partners, who share profits 4:3:3, respectively, decide to liquidate the partnership. The firm’s balance sheet just before the partners sell other assets for $30,000 is as follows:

LO 3 Preparing a liquidation schedule.LO 3 Preparing a liquidation schedule.

Simple Liquidation IllustratedSimple Liquidation Illustrated

Assets Liabilities and CapitalCash 15,000$ Liabilities 42,000$ Other assets 110,000 Pete, Capital 55,000

Tom, Capital 14,000 Zack, Capital 14,000

125,000$ 125,000$

Personal status of each partner just before liquidation is as follows:

Assets LiabilitiesPete 55,000$ 80,000$ Tom 30,000 10,000 Zack 30,000 50,000

Slide 16-11

Exercise 16-6: Determine the amount of cash each partner will receive in liquidation and how much cash each partner must invest in the firm, given their personal positions.



Capital BalancesPart A Noncash Pete Tom Zack

Cash Assets Liabilities 40% 30% 30% Balances 15,000 110,000 (42,000) (55,000) (14,000) (14,000)Sale of assets and allocation of loss 30,000 (110,000) - 32,000 24,000 24,000

45,000 - (42,000) (23,000) 10,000 10,000 Allocate Zack's balance 5,714 4,286 (10,000)

45,000 - (42,000) (17,286) 14,286 - Investment by Tom 14,286 (14,286)

59,286 - (42,000) (17,286) - - Payment to creditors (42,000) 42,000

17,286 - - (17,286) - - Payment to Pete (17,286)

17,286

- - - - - -

Slide 16-12

Exercise 16-6: Determine the amounts that the personal creditors will receive from personal assets and any distribution from the partnership.



Part B Distribution TotalPersonal Personal Excess from Payable to Assets Liabilities (Deficiency) Partnership Creditors

Pete $ 55,000 $ 80,000 $ (25,000) $ 17,286 $ 72,286

Tom 30,000 10,000 20,000 - 10,000

Zack 30,000 50,000 (20,000) - 30,000

Slide 16-13 LO 4 Safe payment approach.LO 4 Safe payment approach.

Installment LiquidationInstallment Liquidation

Partners receive cash in installments before

Total liquidation losses and Total cash available are known.

Many of the procedures followed are necessary to satisfy legal requirements and to protect the person in charge of the liquidation and the residual partners’ interests.



Based on three assumptions:1. Loan to or from an individual partner will be

combined with respective partner’s capital account.

2. Remaining noncash assets will not provide any additional cash.

3. Partner with a debit balance in capital account will be unable to pay amounts owed.

Safe Payment Approach

A safe payment schedule is prepared each time cash is to be distributed.



Exercise 16-5: Following is the balance sheet of the BDO Partnership:Cash $ 10,000 Liabilities $ 18,000Accounts Receivable 40,000 Brink, Capital 45,000Inventory 30,000 Davis, Capital 27,000Equipment 60,000 Olsen, Capital 50,000

$140,000 $140,000

The partners share income 40:40:20, respectively. Assume that 70% of the receivables are collected and that inventory with a book value of $15,000 is sold for $10,000. All cash available at this time is to be distributed.



Exercise 16-5: Determine the proper distribution of cash, using the safe payment approach.

Noncash Brink Davis Olsen Cash Assets Liabilities 40% 40% 20%

Account balances $ 10,000 $ 130,000 $ (18,000) $ (45,000) $ (27,000) $ (50,000)Sale of inventory, collect A/R, allocate loss 38,000 (43,000) 2,000 2,000 1,000

48,000 87,000 (18,000) (43,000) (25,000) (49,000)Payment to creditors (18,000) 18,000

30,000 87,000 - (43,000) (25,000) (49,000)Payment to partners (30,000) 1,667 28,333

$ - $ 87,000 $ - $ (41,333) $ (25,000) $ (20,667)

Capital balances before safe payment to partners (43,000) (25,000) (49,000) Allocation of potential loss 34,800 34,800 17,400

(8,200) 9,800 (31,600) Allocation of deficit 6,533 (9,800) 3,267 Safe payment $ (1,667) $ - $ (28,333)

Capital Balances

Slide 16-17 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.


Objective is to derive the order and the amount of cash that should be distributed to each partner such that no partner receiving a cash distribution will have to make an additional investment.

Advance Plan for the Distribution of Cash



Step 1 Determine net capital interest of each partner.Step 2 Provide an order of cash distribution in which the

ratio of partners’ capital interest will eventually be equal to their profit and loss ratio. (All partners will then have an equal ability to absorb their share of partnership losses.)

Step 3 Determine the amount of cash to distribute to bring the ratios of their capital interests into alignment with their profit and loss ratios.

Step 4 Prepare a cash distribution plan.

Advance Plan for the Distribution of Cash


Installment LiquidationInstallment LiquidationProblem 16-5: Baker, Strong, and Weak have called on you to assist them in winding up the affairs of their partnership. 1. The trial balance of the partnership at June 30, 2008, is:

Debit CreditCash $ 6,000Accounts Receivable 22,000Inventory 14,000Plant and Equipment (net) 99,000Baker, Advance 12,000Weak, Advance 7,500Accounts Payable $ 17,000Baker, Capital 67,000Strong, Capital 45,000Weak, Capital 31,500Total $160,500 $160,500



Problem 16-5:

2. The partners share profits and losses as follows: Baker, 40%; Strong, 40%; and Weak, 20%.

3. The partners are considering an offer of $100,000 for the accounts receivable, inventory, and plant and equipment as of June 30. The $100,000 would be paid to the partners in installments, the number and amounts of which are to be negotiated.

Required:Prepare an advance cash distribution plan as of June 30, 2008. Prepare a schedule to show how the potential cash ($106,000) would be distributed as it becomes available.



Problem 16-5: Step 1 Determine net capital interest of each partner.

Baker Strong Weak Capital balance $ 67,000 $ 45,000 $ 31,500 Advance balance 12,000 0 7,500 Net capital interest $ 55,000 $ 45,000 $ 24,000



Problem 16-5: Step 2 Provide an order of cash distribution in which the ratio of partners’ capital interest will eventually be equal to their profit and loss ratio.

Baker Strong Weak Capital and advance balances $ 55,000 $ 45,000 $ 24,000 Profit and loss ratio 40% 40% 20%Loss absorption potential $ 137,500 $ 112,500 $ 120,000 Order of cash distribution 1 3 2



Problem 16-5: Step 3 Determine the amount of cash to distribute to bring the ratios of their capital interests into alignment with their profit and loss ratios.

Baker Strong Weak Baker Strong Weak Profit and loss rates 40% 40% 20% 40% 40% 20%Loss absorption potential $ 137,500 $ 112,500 $ 120,000 Net capital interest $ 55,000 $ 45,000 $ 24,000 Reduce loss absorption potential of Baker 17,500 7,000

120,000 112,500 120,000 48,000 45,000 24,000 Reduce loss absorption potential of -Baker 7,500 3,000 -Weak 7,500 1,500

$ 112,500 $ 112,500 $ 112,500 $ 45,000 $ 45,000 $ 22,500 Remainder 40% 40% 20%

Loss Absorption Potential Cash Distribution



Problem 16-5: Step 4 Prepare a cash distribution plan.

Creditors Baker Strong Weak First $ 17,000 100%Next 7,000 100%Next 4,500 67% 33%Remainder 40% 40% 20%

Total Creditors Baker Strong WeakTo Creditors $ 17,000 $ 17,000 To Baker 7,000 $ 7,000 To Baker and Weak 4,500 3,000 $ 1,500 Remainder --Profit and Loss Ratio 77,500 31,000 $ 31,000 15,500

$ 106,000 $ 17,000 $ 41,000 $ 31,000 $ 17,000

Cash Distribution

Cash Distribution

Slide 16-25


LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.


In a partnership liquidation, the final cash distribution to the partners should be made in accordance with the:

a. partners' profit and loss sharing ratio.b. balances of the partners' capital accounts.c. ratio of the capital contributions by the partners.d. ratio of capital contributions less withdrawals by the partners.

Slide 16-26 LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.

Incorporation of a PartnershipIncorporation of a Partnership

Incorporation may be attractive because of:Limited liability.Continuity of existence.Ability to raise needed resources.

Slide 16-27 LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.


Steps to record the incorporation Assets and liabilities are transferred to corporation. Partners receive capital stock in settlement of their

interests. Partnership accounts restated to fair values.

Retention of Partnership Books by Corporation

Slide 16-28

Problem 16-7: Jan and Sue have engaged successfully as partners in their law firm for a number of years. The partners decide to organize a corporation to take over the business. The Dec. 31, 2008, after-closing trial balance is as follows:

Debit CreditCash $15,000Accounts Receivable 32,400Allowances for Uncollectibles $ 2,000Prepaid Insurance 800Office Equipment 30,200Accumulated Depreciation 12,600Jan, Loan (outstanding since 2000, at 5%) 6,400Jan, Capital (50%) 29,400Sue, Capital (50%) 28,000

$78,400 $78,400LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.


Slide 16-29

Problem 16-7: The partners have hired you as an accountant to adjust the recorded assets and liabilities to their market values and to close the partners’ capital accounts to the new corporate capital stock. The corporation is to retain the partnership’s books, and the assets of the partnership should be taken over by the corporation in the following amounts:

Cash $15,000Accounts receivable 32,400Allowance for uncollectibles 2,900Office equipment 16,000Prepaid insurance 800

Jan’s loan is to be transferred to her capital account in the amount of $6,600.

LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.


Slide 16-30

Problem 16-7: A. Prepare the necessary journal entries to express the agreement described.



Valuation Adjustment 2,700Accumulated Depreciation 12,600

Office Equipment 14,200Allowance for Uncollectibles 900Jan, Loan 200

Jan, Loan 6,600Jan, Capital 6,600

Jan, Capital 1,350Sue, Capital 1,350

Valuation Adjustment 2,700

Slide 16-31

Problem 16-7: B. Prepare the journal entries assuming the issuance of 400 shares (par value $100) of stock to Jan and Sue.



Jan, Capital ($29,400 + $6,600 - $1,350) 34,650Sue, Capital ($28,000 – $1,350) 26,650

Capital Stock (400 x $100) 40,000Additional Paid-in Capital 21,300

Proof Cash $15,000Accounts receivable 32,400Allowance for uncollectibles - 2,900Prepaid insurance 800Office equipment 16,000

Total stockholders' equity $61,300

Slide 16-32

If a partnership is undergoing a transformation to a corporation, which of the following is a result?

a. Assets and liabilities are adjusted to fair value.b. The net assets are distributed to the partners in

their profit and loss ratio.c. The partners receive stock in the new corporation.d. Both (a) and (c) are correct.




Slide 16-33

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ADVANCE ACCOUNTING Ch16