Partnership Liquidation

Chapter 16

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 1

 Installment Liquidation

An installment liquidation involves

the distribution of cash to partners
as it becomes available during the
liquidation period and before all
liquidation gains and losses
have been realized.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 2

 Installment Liquidation
Illustration

The partnership of Duro, Kemp, and Roth

is to be liquidated as soon as possible
after December 31, 2003.
All cash on hand, except for $20,000 is to
be distributed at the end of each month.
Profit and losses are shared 50%, 30%,
and 20% to Duro, Kemp, and Roth.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 3

 Installment Liquidation
Illustration
Duro, Kemp, and Roth Balance Sheet
December 31, 2003 (000)
Assets Liabilities and Equity
Cash $ 240 Accounts payable $ 300
A/R, net 280 Note payable 200
Loan to Roth 40 Loan from Kemp 20
Inventories 400 Duro, capital (50%) 340
Land 100 Kemp, capital (30%) 340
Equipment, net 300 Roth, capital (20%) 200
Goodwill 40
$1,400 $1,400

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 4

 Installment Liquidation
Illustration
Statement of Partnership Non- Priority 50% 30% 20%
Liquidation for the Period cash Liabil- Duro Kemp Kemp Roth
1/1/2004 to 2/1/2002 (000) Cash Assets ities Capital Loan Capital Capital
Balances January 1 $240 $1,160 $500 $340 $20 $340 $200
Offset Roth loan (40) (40)
Write-off of goodwill (40) (20) (12) (8)
Collection of receivables 200 (200)
Sale of inventory items 200 (160) 20 12 8
Predistribution balances
January 31 $640 $ 720 $500 $340 $20 $340 $160
January distribution
Creditors (500) (500)
Kemp (120) (20) (100)
Balances February 1 $ 20 $ 720 $ 0 $340 $ 0 $240 $160

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 5

 Installment Liquidation
Illustration
First Installment – 50% 30% Kemp 20%
Schedule of Safe Payments Possible Duro Capital Roth
January 31, 2004 (000) Losses Capital and Loan Capital
Partners’ equities January 31, 2004 $340 $360 $160
Possible loss on noncash assets $720 (360) (216) (144)
$ (20) $144 $ 16
Possible loss on contingencies:
cash withheld 20 (10) (6) (4)
$ (30) $138 $ 12
Possible loss from Duro: debit
balance allocated 60:40 30 (18) (12)
— $120 —

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 6

 February Liquidation Events
Cash 60,000
Duro, Capital 10,000
Kemp, Capital 6,000
Roth, Capital 4,000
Equipment, net 80,000
To record sale of equipment at a $20,000 loss
Cash 180,000
Duro, Capital 30,000
Kemp, Capital 18,000
Roth, Capital 12,000
Inventories 240,000
To record sale of remaining inventory items at a $60,000 loss
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 7
 February Liquidation Events

Duro, Capital 2,000

Kemp, Capital 1,200
Roth, Capital 800
Cash 4,000
To record payment of liquidation expenses
Duro, Capital 4,000
Kemp, Capital 2,400
Roth, Capital 1,600
Accounts Payable 8,000
To record identification of an unrecorded liability
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 8
 February Liquidation Events

Accounts Payable 8,000

Cash 8,000
To record payment of accounts payable
Duro, Capital 84,000
Kemp, Capital 86,400
Roth, Capital 57,600
Cash 228,000
To record distribution of cash to partners

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 9

 Learning Objective 5

Learn about cash distribution

plans for installment
liquidations.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 10

 Cash Distribution Plans

The development of a cash distribution plan

for the liquidation of a partnership involves
ranking the partners in terms of their
vulnerability to possible losses.

$$$

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 11

 Vulnerability Ranking

Profit Loss Vulnerability

Partner’s Sharing Absorption Ranking (1 most
Equity Ratio Potential vulnerable)

Duro $340 ÷ 0.5 = $ 680 1

Kemp 360 ÷ 0.3 = 1,200 3
Roth 160 ÷ 0.2 = 800 2

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 12

 Assumed Loss Absorption

A schedule of assumed loss

absorption is prepared as a
second step in developing
the cash distribution plan.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 13

 Assumed Loss Absorption

Schedule of Assumed Duro Kemp Roth

Loss Absorption (000) (50%) (30%) (20%) Total
Preliquidation equities $340 $360 $160 $860
Assumed loss to absorb Duro’s
equity (allocated 50:30:20) (340) (204) (136) (680)
Balances — $156 $ 24 $180
Assumed loss to absorb Roth’s
equity (allocated 60:40) (36) (24) (60)

Balances $120 — $120

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 14
 Cash Distribution Plan

Priority Kemp
Liabilities Loan Duro Kemp Roth

First $500,000 100%

Next $20,000 100%
Next $100,000 100%
Next $60,000 60 40%
Remainder 50% 30 20

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 15

 Learning Objective 6

Comprehend liquidations when

either the partnership or
partners are insolvent.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 16

 Insolvent Partners and Partnerships

Ranking for claims against the separate

property of a bankrupt partner:

I Those owing to separate creditors

II Those owing to partnership creditors
III Those owing to partners by way of contribution

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 17

 Partnership Solvent – One or More
Partners Personally Insolvent
In the liquidation of a solvent partnership,
partnership creditors are entitled to recover
the full amount of their claims
from partnership property.
West, York, and Zeff are partners sharing
profits 30%, 30%, and 40%, respectively.
West is personally insolvent with personal assets
of $50,000 and personal liabilities of $100,000.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 18
 Partnership Account Balances

Case A Case B Case C

Cash $60,000 — —
West, capital (30%) 18,000 $18,000 $21,000
York, capital (30%) 18,000 27,000 9,000
Zeff, capital (40%) 24,000 9,000 12,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 19

 Insolvent Partnership

When a partnership is insolvent, the cash available

is not enough to pay partnership creditors.

Creditors will obtain partial recovery from

partnership assets and will call upon
individual partners to use their personal
resources to satisfy remaining claims.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 20

 End of Chapter 16

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 16 - 21