Advanced Accounting

by Debra Jeter and Paul Chaney

Chapter 17: Partnership

Liquidation

Slides Authored by Hannah Wong, Ph.D.

Rutgers University
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 Steps in Liquidation Process

 Compute net income or loss up to the date

of dissolution, allocate to partners
 Convert assets into cash if necessary,
record gain or loss and allocate to partners
 Distribute assets to creditors and partners

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 Order of Payment

 creditors other than partners

 loans from partners
 capitals of partners
 profits of partners

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 Joint and Several Liability

 legal action may be brought against all

partners together or against any one or
more of the partners in separate suits

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 Marshaling of Assets

 recognition of the rights of partnership

and personal creditors and the
classification of assets into partnership
and personal categories

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 Right of Offset

 A partner with an outstanding loan to the

partnership can offset the loan against his
debit capital balance

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 Priorities of Claims against
Partnership Assets

 partnership creditors
 personal creditors that did not recover
their claims in full from personal assets
 limited to the partner’s
capital interest in the
partnership

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 Priorities of Claims against
Personal Assets

 personal creditors
 partnership creditors that did not recover
their claims in full from partnership assets
 regardless of the partner’s capital interest
in the partnership
 claims of partnership against the partner
 i.e., a deficit equity interest

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 Simple Liquidation

 Sequence of events
 sale of all noncash assets and allocation of loss
based on their profit and loss ratio
 payment to creditors
 offset loan against debit capital balance
 allocate debit capital balance of insolvent partner
 investment by partners
 payment to partners
based on their capital balances

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 Installment Liquidation

 noncash assets are sold over an extended

period
 partners receive cash in installments
 problems:
 distribution of cash to partners before total
liquidation loss is known
 potential wrongful distributions against the
interest of creditors or individual partners

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 Safe Payment Approach

Assumptions:
 a loan to or from a partner will be combined
with the partner’s capital account
 remaining noncash assets will not provide
additional cash
 a partner with a deficit capital account will
be unable to make additional investment

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 Safe Payment Approach

Procedure
 a safe payment schedule is prepared each
time cash is to be distributed

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 Advance Cash Distribution Plan

 A schedule that specifies

 the order in which each partner will
participate in cash distribution
 the amount of cash each
partner will receive as it
becomes available for
distribution

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 Advance Cash Distribution Plan - Steps

 net capital interest of each partner

= capital account +/- loans to (from) partnership
 order of participation = ranking by:
loss absorption potential (= net capital interest /
profit and loss ratio)
 amount of cash distributed to each partner
= (difference in loss absorption potentials of
partner and next ranking partner) x (profit and loss
ratio)
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 Incorporation of a Partnership

Advantages of incorporation
 limited liability
 continuity of existence
 ability to raise resources

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 Incorporation of a Partnership

Procedures
 assets and liabilities are transferred to the
corporation
 partners receive capital stock in settlement
of their interests
 partnership accounts restated to fair
values

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 Incorporation of a Partnership

Accounting Steps
 The partnership books may be retained for
use by the corporation or
 a new set of books may be established

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 Retention of Partnership Books

Valuation JE
Inventory 2,000
Land 5,000
Equipment 1,000
Accounts receivable 400
Valuation adjustment 5,600

To adjust assets and liabilities to fair value.

The gains and losses are accumulated in the
valuation adjustment account.

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 Retention of Partnership Books

Valuation-Closing JE
Valuation adjustment 5,600
Art, capital 2,800
Beck, capital 2,800

To close the valuation adjustment account to

the partners’ capital accounts by their
profit and loss ratio.

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 Retention of Partnership Books

Capital-Closing JE
Art, capital 10,800
Beck, capital 7,800
Capital stock 18,600

To close the capital account upon transfer of capital stock

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 New Books Established

 All accounts in partnership books will be

closed
 the corporation records the assets received
and liabilities assumed at fair value

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 Advanced Accounting
by
Debra Jeter and Paul Chaney

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