Partnership Liquidation
Chapter 16
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 1
Learning Objective 1
Understand legal aspects of
partnership liquidation.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 2
The Liquidation Process
– Converting noncash assets into cash
– Recognizing gains and losses and liquidating
expenses incurred during the liquidation period
– Settling all liabilities
– Distributing cash to partners according to
the final balances in their capital accounts
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 3
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
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 4
Learning Objective 2
Apply simple partnership
liquidation computations
and accounting.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 5
Simple Partnership Liquidation
Holmes and Kaiser Balance Sheet
December 31, 2003
Assets
Liabilities and Equity
Cash
$ 10,000 Accounts payable
$ 40,000
A/R, net
30,000 Loan from Holmes
10,000
Inventory
30,000 Holmes, capital
25,000
Plant assets, net
40,000 Kaiser, capital
35,000
$110,000
$110,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 6
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.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 7
Simple Partnership Liquidation
Holmes and Kaiser Balance Sheet
January 5, 2004
Assets
Liabilities and Equity
Cash
$87,000 Accounts payable
$40,000
A/R, net
Loan from Holmes
10,000
Inventory
Holmes, capital
8,900
Plant assets, net
Kaiser, capital
28,100
$87,000
$87,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 8
Simple Partnership Liquidation
Order of Payment
I To creditors for accounts payable
II To Holmes for his loan balance
III To Holmes for his capital balance
To Kaiser for his capital balance
Total distribution
$40,000
10,000
8,900
28,100
$87,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
16 - 9
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
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 10
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
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 11
Learning Objective 3
Perform safe payment
computations.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 12
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.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 13
Application of Safe
Payments Schedule
(000)
Debits
Cash
$ 80
Loan due from Maxine 10
Land
20
Building, net
140
$250
Credits
Loan payable to Nancy
Buzz, capital (50%)
Maxine, capital (30%)
Nancy, capital (20%)
$20
50
70
110
$250
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Safe Payment Schedule
(000)
Buzz Maxine Nancy
Possible Equity Equity Equity
Losses (50%) (30%) (20%)
Partners’ equities
(capital ± loan balances
$60
$130
Possible loss on noncash assets
Book value of land and buildings $160 (80) (48)
(30) 12
(32)
98
Possible loss on contingencies
Cash withheld for contingencies
$50
10
(5) (3)
(35) 9
(2)
96
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Safe Payment Schedule
(000)
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
Buzz Maxine Nancy
Possible Equity Equity Equity
Losses (50%) (30%) (20%)
35
0
(21) (14)
(12) 82
12
0
(12)
$ 70
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 16
Safe Payment Schedule
Loan payable to Nancy
Nancy, Capital
Cash
20,000
50,000
70,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 17
Account Balances
(000)
Debits
Credits
Cash
$ 10 Buzz, capital (50%)
Loan due from Maxine 10 Maxine, capital (30%)
Land
20 Nancy, capital (20%)
Building, net
140
$180
$ 50
70
60
$180
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Advance Distribution
Any distribution to partners
before all gains and losses
have been realized and
recognized requires
approval of all partners.
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