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Course: Advanced Accounting

Chapter 2: Partnership liquidation and incorporation


 The LIQUIDATION of a limited liability partnership means winding up its activities,
usually by selling assets, paying liabilities, and distributing any remaining cash to the
partners.
Liquidation of Partnership
 The partnership net assets may be sold as a unit or in installments.
 The cash received must be used to pay partnership creditors.
 The accounting records of the partnership should be adjusted and closed and net income
of loss for the final period of operations entered in the capital accounts.
Meaning of Liquidation
 The liquidation usually starts with “Realization” of non-cash assets.
 Before any payments to partners, all outside creditors must be paid in full.
 An unpaid creditor may enforce collection from the personal assets of any solvent partner
whose actions caused the partnership’s insolvency.
 Partnership is treated as an entity for many purposes however, it may not use the shield of
a separate entity to protect culpable partners’ personal assets against the claims of unpaid
creditors.

Division of Loss and Gains


 Always first divide the loss / gain from the realization of non-cash assets before
distributing cash.
 As assets are realized, allocate any gains or loss to partners’ capital accounts in the
income-sharing ratio.
 All creditors must have been paid before distribution of cash.
 The final credit balances of the partners’ capital & loan ledger accounts should be equal
to the cash available for distribution.
 Payments are then made in the amounts of the partners’ respective equities in the
partnership.

Payments to Partners After All Non-cash Assets Realized


 Equity of Each Partners is Sufficient to Absorb Loss from Realization.
 Equity of One Partner is not Sufficient to Absorb that Partner’s Share of Loss from
Realization.
 Equities of Two Partners are not Sufficient to Absorb Their Shares of Loss from
Realization.
 Partnership is Insolvent but Partners are Solvent.
 General Partnership is Insolvent and Partners are Insolvent.

Lecturer: Qasim Jama (July 5, 2018 )


Example 1: Equity of each partner is sufficient to absorb loss from realization
Assume that Abra and Barg, who share net income and not losses equally decide to,
liquidate Abra & Barg LLP. A balance sheet on June 30, 2013 , just prior to liquidation is
as follows.

ABRA & BARG LLP


Balance Sheet
30-Jun-13
Liabilities and Partners'
Assets Capital
Cash $10,000 Liabilities $20,000
Other
Assets 75,000 Loan Payable to Barg 20,000
Abra Capital 40,000
Barg Capital 5,000
Total $85,000 Total 85,000

The noncash assets realized cash of $35,000, with a resultant loss of $40,000 absorbed
equally by Abra and Barg. The liquidation process will take 15 days.

Required
As the partnership’s accountant prepare statement of realization and liquidation

Example 2: equity of one partner is not sufficient to absorb partner’s loss from
realization.
Assume the balance sheet below for Diel, Ebbs & Frey LLP
DIEL, EBBS & FREY LLP
Balance Sheet
30-Jun-13
Liabilities and Partners'
Assets Capital
Cash $20,000 Liabilities 30,000
Other
Assets 80,000 Diel Capital 40,000
Ebbs Capital 21,000
Frey Capital 9,000
Total $100,000 Total 100,000

The income-sharing ratio is Diel, 20%, Ebbs, 40%; and Frey 40%. The other assets with
a carrying amount of $80,000 realized $50,000 cash. Frey pays $3,000 to the
partnership.
Required
As the partnership’s accountant prepare statement of realization and liquidation

Lecturer: Qasim Jama (July 5, 2018 )


Example 3: Equities of two partners are not sufficient to absorb their shares of
loss from realization.
Judd, Kamb, Long and Marx , partners of JKLM LLP share net income and loss 10%,
20%, 30%, and 40% respectively. Noncash asset were realized at $120,000.
JKLM LLP
Balance Sheet
30-Jun-13
Liabilities and Partners'
Assets Capital
Cash $20,000 Liabilities $120,000
Other
Assets 200,000 Judd Capital 30,000
Kamb Capital 32,000
Long Capital 30,000
Marx 8,000
Total $220,000 Total 220,000

Required
As the partnership’s accountant prepare statement of realization and liquidation

Example 4: Partnership is Insolvent but Partners are Solvent


Nehr, Ordo and page LLP whose partners share net income and losses equally had the
following balance sheet prior to liquidation on March 2014.
JKLM LLP
Balance Sheet
31-March-13
Liabilities and Partners'
Assets Capital
Cash $15,000 Liabilities $65,000
Other
Assets 85,000 Nehr, Capital 18,000
Ordo, Capital 10,000
Page, Capital 7,000
Total $100,000 Total 100,000
On April 10, 2014, the other assets with a carrying amount of $85,000 realize $40,000.
On May 31, 2014 Ordo and page pay in the amounts of their deficiencies.

Required
As the partnership’s last accountant prepare statement of realization and liquidation

Lecturer: Qasim Jama (July 5, 2018 )


Example 5: General partnership is insolvent and partners are insolvent
Rich, Sand & Toll LLP whose partners share net income and losses equally, has the
partnership balance sheet prior to liquidation on November 30, 2013.

JKLM LLP
Balance Sheet
30-Nov-13
Liabilities and Partners'
Assets Capital
Cash $10,000 Liabilities $60,000
Other
Assets 100,000 Rich, Capital 5,000
Sand, Capital 15,000
Toll, Capital 30,000
Total $110,000 Total 110,000

Assume also that on November 30, 2013, the partners’ have the following assets and
liabilities other than their equities in the partnership.
Partners Personal Assets Personal Liabilities
Rich $100,000 $25,000
Sand $50,000 $50,000
Toll $5,000 $60,000

The realization of other assets of the partnership results in a loss of $60,000


Required
As the partnership’s last accountant prepare statement of realization and liquidation

Lecturer: Qasim Jama (July 5, 2018 )

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