17 - 0 advanced accounting by debra jeter and paul chaney chapter 17: partnership liquidation slides...
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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
Inventory 2,000
Land 5,000
Equipment 1,000
Accounts receivable 400
Valuation adjustment 5,600
Valuation JE
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 adjustment 5,600
Art, capital 2,800
Beck, capital 2,800
Valuation-Closing JE
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
Art, capital 10,800
Beck, capital 7,800
Capital stock 18,600
Capital-Closing JE
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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