advance accounting ch16
TRANSCRIPT
Slide 16-1
Partnerships Liquidation
Advanced Accounting, Fifth Edition
1616
Slide 16-2
1. Describe the steps used to distribute available partnership assets in liquidation under the Uniform Partnership Act (UPA).
2. List the order of priority for each class of creditors in partnership liquidation under the UPA.
3. Prepare a liquidation schedule to settle debts and allocate assets.
4. Prepare a “safe payment approach” liquidation schedule.5. Describe the four steps in the preparation of an advance plan
for the distribution of cash in a partnership liquidation.6. Prepare the journal entries to incorporate a partnership.
Learning ObjectivesLearning Objectives
Slide 16-3
First Step: Compute net income or loss up to the date of dissolution.
Second Step: Assets not acceptable for distribution in their present form are converted into cash.
Last Step: Distribute available assets to creditors and partners.
Steps in the Liquidation ProcessSteps in the Liquidation Process
LO 1 Steps in the liquidation process.LO 1 Steps in the liquidation process.
Slide 16-4
The first step in the liquidation process is toa. Convert noncash assets into cash.b. Pay partnership creditors.c. Compute any net income (loss) up to the date of
dissolution.d. Allocate any gains or losses to the partners.
Review QuestionReview Question
Steps in the Liquidation ProcessSteps in the Liquidation Process
LO 1 Steps in the liquidation process.LO 1 Steps in the liquidation process.
Slide 16-5
Liabilities rank in order of payment, as follows:
I. Liabilities to creditors other than partners,
II. Liabilities to partners other than for capital and profits (such as loans),
III. Liabilities to partners in respect of capital,
IV. Liabilities to partners in respect of profits.
Steps in the Liquidation ProcessSteps in the Liquidation Process
LO 1 Steps in the liquidation process.LO 1 Steps in the liquidation process.
Slide 16-6
UPA (Section 15) provides that partners are jointly liable for all contracts and other obligations of the partnership.
Priorities of Partnership and Personal Priorities of Partnership and Personal CreditorsCreditors
LO 2 Order of priority for each class of creditors.LO 2 Order of priority for each class of creditors.
Order of Priority concerning availability of assets:A. Partnership assets
1. Partnership creditors.2. Personal creditors that did not recover their claims in
full from personal assets.B. Personal assets
1. Personal creditors.2. Partnership creditors not satisfied from partnership
assets. 3. Claims of partnership against partner with deficit
equity.
Slide 16-7
True/False: Personal assets are first allocated to partnership creditors and then to personal creditors.
Review:Review:
FalseFalse
Priorities of Partnership and Personal Priorities of Partnership and Personal CreditorsCreditors
LO 2 Order of priority for each class of creditors.LO 2 Order of priority for each class of creditors.
Slide 16-8
If a partner with a debit capital balance during liquidation is insolvent, the following results:
a. The partner must borrow money to invest in the partnership.
b. The partnership will give the partner cash to the extent of the partners’ debit balance.
c. The partner’s debit balance will be allocated to the other partners.
d. None of the above.
Review QuestionReview Question
Priorities of Partnership and Personal Priorities of Partnership and Personal CreditorsCreditors
LO 2 Order of priority for each class of creditors.LO 2 Order of priority for each class of creditors.
Slide 16-9
In accordance with the marshaling of assets provision of the Uniform Partnership Act, rank the following liabilities of a partnership in order of payment.
1) $20,000 loan from B. Barry who is a partner.2) $30,000 of profits from the last year of operations.3) $3,000 payable to a supplier.4) $100,000 in capital balances of the partners.
a. 2,3,4,1. c. 3,1,4,2.b. 4,2,1,3. d. 3,1,2,4.
Review QuestionReview Question
Priorities of Partnership and Personal Priorities of Partnership and Personal CreditorsCreditors
LO 2 Order of priority for each class of creditors.LO 2 Order of priority for each class of creditors.
Slide 16-10
Exercise 16-6: Pete, Tom, and Zack have operated a laundromat for 10 years. The partners, who share profits 4:3:3, respectively, decide to liquidate the partnership. The firm’s balance sheet just before the partners sell other assets for $30,000 is as follows:
LO 3 Preparing a liquidation schedule.LO 3 Preparing a liquidation schedule.
Simple Liquidation IllustratedSimple Liquidation Illustrated
Assets Liabilities and CapitalCash 15,000$ Liabilities 42,000$ Other assets 110,000 Pete, Capital 55,000
Tom, Capital 14,000 Zack, Capital 14,000
125,000$ 125,000$
Personal status of each partner just before liquidation is as follows:
Assets LiabilitiesPete 55,000$ 80,000$ Tom 30,000 10,000 Zack 30,000 50,000
Slide 16-11
Exercise 16-6: Determine the amount of cash each partner will receive in liquidation and how much cash each partner must invest in the firm, given their personal positions.
LO 3 Preparing a liquidation schedule.LO 3 Preparing a liquidation schedule.
Simple Liquidation IllustratedSimple Liquidation Illustrated
Capital BalancesPart A Noncash Pete Tom Zack
Cash Assets Liabilities 40% 30% 30% Balances 15,000 110,000 (42,000) (55,000) (14,000) (14,000)Sale of assets and allocation of loss 30,000 (110,000) - 32,000 24,000 24,000
45,000 - (42,000) (23,000) 10,000 10,000 Allocate Zack's balance 5,714 4,286 (10,000)
45,000 - (42,000) (17,286) 14,286 - Investment by Tom 14,286 (14,286)
59,286 - (42,000) (17,286) - - Payment to creditors (42,000) 42,000
17,286 - - (17,286) - - Payment to Pete (17,286)
17,286
- - - - - -
Slide 16-12
Exercise 16-6: Determine the amounts that the personal creditors will receive from personal assets and any distribution from the partnership.
LO 3 Preparing a liquidation schedule.LO 3 Preparing a liquidation schedule.
Simple Liquidation IllustratedSimple Liquidation Illustrated
Part B Distribution TotalPersonal Personal Excess from Payable to Assets Liabilities (Deficiency) Partnership Creditors
Pete $ 55,000 $ 80,000 $ (25,000) $ 17,286 $ 72,286
Tom 30,000 10,000 20,000 - 10,000
Zack 30,000 50,000 (20,000) - 30,000
Slide 16-13 LO 4 Safe payment approach.LO 4 Safe payment approach.
Installment LiquidationInstallment Liquidation
Partners receive cash in installments before
Total liquidation losses and Total cash available are known.
Many of the procedures followed are necessary to satisfy legal requirements and to protect the person in charge of the liquidation and the residual partners’ interests.
Slide 16-14 LO 4 Safe payment approach.LO 4 Safe payment approach.
Installment LiquidationInstallment Liquidation
Based on three assumptions:1. Loan to or from an individual partner will be
combined with respective partner’s capital account.
2. Remaining noncash assets will not provide any additional cash.
3. Partner with a debit balance in capital account will be unable to pay amounts owed.
Safe Payment Approach
A safe payment schedule is prepared each time cash is to be distributed.
Slide 16-15 LO 4 Safe payment approach.LO 4 Safe payment approach.
Installment LiquidationInstallment Liquidation
Exercise 16-5: Following is the balance sheet of the BDO Partnership:Cash $ 10,000 Liabilities $ 18,000Accounts Receivable 40,000 Brink, Capital 45,000Inventory 30,000 Davis, Capital 27,000Equipment 60,000 Olsen, Capital 50,000
$140,000 $140,000
The partners share income 40:40:20, respectively. Assume that 70% of the receivables are collected and that inventory with a book value of $15,000 is sold for $10,000. All cash available at this time is to be distributed.
Slide 16-16 LO 4 Safe payment approach.LO 4 Safe payment approach.
Installment LiquidationInstallment Liquidation
Exercise 16-5: Determine the proper distribution of cash, using the safe payment approach.
Noncash Brink Davis Olsen Cash Assets Liabilities 40% 40% 20%
Account balances $ 10,000 $ 130,000 $ (18,000) $ (45,000) $ (27,000) $ (50,000)Sale of inventory, collect A/R, allocate loss 38,000 (43,000) 2,000 2,000 1,000
48,000 87,000 (18,000) (43,000) (25,000) (49,000)Payment to creditors (18,000) 18,000
30,000 87,000 - (43,000) (25,000) (49,000)Payment to partners (30,000) 1,667 28,333
$ - $ 87,000 $ - $ (41,333) $ (25,000) $ (20,667)
Capital balances before safe payment to partners (43,000) (25,000) (49,000) Allocation of potential loss 34,800 34,800 17,400
(8,200) 9,800 (31,600) Allocation of deficit 6,533 (9,800) 3,267 Safe payment $ (1,667) $ - $ (28,333)
Capital Balances
Slide 16-17 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment Liquidation
Objective is to derive the order and the amount of cash that should be distributed to each partner such that no partner receiving a cash distribution will have to make an additional investment.
Advance Plan for the Distribution of Cash
Slide 16-18 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment Liquidation
Step 1 Determine net capital interest of each partner.Step 2 Provide an order of cash distribution in which the
ratio of partners’ capital interest will eventually be equal to their profit and loss ratio. (All partners will then have an equal ability to absorb their share of partnership losses.)
Step 3 Determine the amount of cash to distribute to bring the ratios of their capital interests into alignment with their profit and loss ratios.
Step 4 Prepare a cash distribution plan.
Advance Plan for the Distribution of Cash
Slide 16-19 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment LiquidationProblem 16-5: Baker, Strong, and Weak have called on you to assist them in winding up the affairs of their partnership. 1. The trial balance of the partnership at June 30, 2008, is:
Debit CreditCash $ 6,000Accounts Receivable 22,000Inventory 14,000Plant and Equipment (net) 99,000Baker, Advance 12,000Weak, Advance 7,500Accounts Payable $ 17,000Baker, Capital 67,000Strong, Capital 45,000Weak, Capital 31,500Total $160,500 $160,500
Slide 16-20 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment Liquidation
Problem 16-5:
2. The partners share profits and losses as follows: Baker, 40%; Strong, 40%; and Weak, 20%.
3. The partners are considering an offer of $100,000 for the accounts receivable, inventory, and plant and equipment as of June 30. The $100,000 would be paid to the partners in installments, the number and amounts of which are to be negotiated.
Required:Prepare an advance cash distribution plan as of June 30, 2008. Prepare a schedule to show how the potential cash ($106,000) would be distributed as it becomes available.
Slide 16-21 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment Liquidation
Problem 16-5: Step 1 Determine net capital interest of each partner.
Baker Strong Weak Capital balance $ 67,000 $ 45,000 $ 31,500 Advance balance 12,000 0 7,500 Net capital interest $ 55,000 $ 45,000 $ 24,000
Slide 16-22 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment Liquidation
Problem 16-5: Step 2 Provide an order of cash distribution in which the ratio of partners’ capital interest will eventually be equal to their profit and loss ratio.
Baker Strong Weak Capital and advance balances $ 55,000 $ 45,000 $ 24,000 Profit and loss ratio 40% 40% 20%Loss absorption potential $ 137,500 $ 112,500 $ 120,000 Order of cash distribution 1 3 2
Slide 16-23 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment Liquidation
Problem 16-5: Step 3 Determine the amount of cash to distribute to bring the ratios of their capital interests into alignment with their profit and loss ratios.
Baker Strong Weak Baker Strong Weak Profit and loss rates 40% 40% 20% 40% 40% 20%Loss absorption potential $ 137,500 $ 112,500 $ 120,000 Net capital interest $ 55,000 $ 45,000 $ 24,000 Reduce loss absorption potential of Baker 17,500 7,000
120,000 112,500 120,000 48,000 45,000 24,000 Reduce loss absorption potential of -Baker 7,500 3,000 -Weak 7,500 1,500
$ 112,500 $ 112,500 $ 112,500 $ 45,000 $ 45,000 $ 22,500 Remainder 40% 40% 20%
Loss Absorption Potential Cash Distribution
Slide 16-24 LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment Liquidation
Problem 16-5: Step 4 Prepare a cash distribution plan.
Creditors Baker Strong Weak First $ 17,000 100%Next 7,000 100%Next 4,500 67% 33%Remainder 40% 40% 20%
Total Creditors Baker Strong WeakTo Creditors $ 17,000 $ 17,000 To Baker 7,000 $ 7,000 To Baker and Weak 4,500 3,000 $ 1,500 Remainder --Profit and Loss Ratio 77,500 31,000 $ 31,000 15,500
$ 106,000 $ 17,000 $ 41,000 $ 31,000 $ 17,000
Cash Distribution
Cash Distribution
Slide 16-25
Review QuestionReview Question
LO 5 Four steps in an advance plan.LO 5 Four steps in an advance plan.
Installment LiquidationInstallment Liquidation
In a partnership liquidation, the final cash distribution to the partners should be made in accordance with the:
a. partners' profit and loss sharing ratio.b. balances of the partners' capital accounts.c. ratio of the capital contributions by the partners.d. ratio of capital contributions less withdrawals by the partners.
Slide 16-26 LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.
Incorporation of a PartnershipIncorporation of a Partnership
Incorporation may be attractive because of:Limited liability.Continuity of existence.Ability to raise needed resources.
Slide 16-27 LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.
Incorporation of a PartnershipIncorporation of a Partnership
Steps to record the incorporation Assets and liabilities are transferred to corporation. Partners receive capital stock in settlement of their
interests. Partnership accounts restated to fair values.
Retention of Partnership Books by Corporation
Slide 16-28
Problem 16-7: Jan and Sue have engaged successfully as partners in their law firm for a number of years. The partners decide to organize a corporation to take over the business. The Dec. 31, 2008, after-closing trial balance is as follows:
Debit CreditCash $15,000Accounts Receivable 32,400Allowances for Uncollectibles $ 2,000Prepaid Insurance 800Office Equipment 30,200Accumulated Depreciation 12,600Jan, Loan (outstanding since 2000, at 5%) 6,400Jan, Capital (50%) 29,400Sue, Capital (50%) 28,000
$78,400 $78,400LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.
Incorporation of a PartnershipIncorporation of a Partnership
Slide 16-29
Problem 16-7: The partners have hired you as an accountant to adjust the recorded assets and liabilities to their market values and to close the partners’ capital accounts to the new corporate capital stock. The corporation is to retain the partnership’s books, and the assets of the partnership should be taken over by the corporation in the following amounts:
Cash $15,000Accounts receivable 32,400Allowance for uncollectibles 2,900Office equipment 16,000Prepaid insurance 800
Jan’s loan is to be transferred to her capital account in the amount of $6,600.
LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.
Incorporation of a PartnershipIncorporation of a Partnership
Slide 16-30
Problem 16-7: A. Prepare the necessary journal entries to express the agreement described.
LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.
Incorporation of a PartnershipIncorporation of a Partnership
Valuation Adjustment 2,700Accumulated Depreciation 12,600
Office Equipment 14,200Allowance for Uncollectibles 900Jan, Loan 200
Jan, Loan 6,600Jan, Capital 6,600
Jan, Capital 1,350Sue, Capital 1,350
Valuation Adjustment 2,700
Slide 16-31
Problem 16-7: B. Prepare the journal entries assuming the issuance of 400 shares (par value $100) of stock to Jan and Sue.
LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.
Incorporation of a PartnershipIncorporation of a Partnership
Jan, Capital ($29,400 + $6,600 - $1,350) 34,650Sue, Capital ($28,000 – $1,350) 26,650
Capital Stock (400 x $100) 40,000Additional Paid-in Capital 21,300
Proof Cash $15,000Accounts receivable 32,400Allowance for uncollectibles - 2,900Prepaid insurance 800Office equipment 16,000
Total stockholders' equity $61,300
Slide 16-32
If a partnership is undergoing a transformation to a corporation, which of the following is a result?
a. Assets and liabilities are adjusted to fair value.b. The net assets are distributed to the partners in
their profit and loss ratio.c. The partners receive stock in the new corporation.d. Both (a) and (c) are correct.
Review QuestionReview Question
LO 6 Incorporation of a partnership.LO 6 Incorporation of a partnership.
Incorporation of a PartnershipIncorporation of a Partnership
Slide 16-33
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