Chapter17: Partnership Liquidation
-converting noncash assets into cash
-recognizing gains and losses and expenses incurred during the liquidation period -settling all liabilities
-distributing cash to the partners according to the final balances in their capital accounts
Rank order of payment:
Amounts owed to creditors other than partners and amounts owed to partners other than for capital and profits 2.
Amounts due to partners liquidating their capital balance upon conclusion of the liquidation of partnership assets and liabilities Simple Partnership Liquidation
-conversion of all partnership assets into cash with a single distribution of cash to partners in final settlement of the partnership’s affairs Debit Capital Balances in a Solvent Partnership
-if the partners with debit balances are without personal resources, the partners with positive equity absorb losses equal to the debit balances.
-losses are shared in relative profit and loss sharing ratios of the partners with positive equity balances -if partner is personally solvent, he should pay money into the partnership to eliminate his debit capital balance. -Right of offset – amount owed to the partner offsets up to the debit capital amount If the partner is insolvent and the right of offset is not applied, the personal creditors of the partner with the debit balance would be paid the amount of their claims up to the amount of Loan payable (by the P) to the partner *recommended that the rule not be applied without agreement from the partners when a partner-creditor is personally insolvent. SAFE PAYMENTS TO PARTNERS
-some cash may be available for distribution to partners after all liabilities are paid but before all noncash assets are converted into cash -if partners decide to distribute available cash before all NCA are sold (and before all gains and losses are recognized) – how much cash can be safely distributed to the individual partners? Safe Payments – distributions that can be made to partners with assurance that the amounts distributed will not need to be returned to the partnership at some later date to cover known liabilities or realign partner capital Calculation of Safe Payments is based on the ff assumptions: 1.
All partners are personally insolvent (i.e. partners could not make any payments into the P) 2.
All NCA represent possible losses (i.e,. NCA should be considered losses for determining safe payments) *partnership may withhold specific amounts of cash on hand to cover liquidation expenses, unrecorded liabilities, and general contingencies The amounts of cash withheld are contingent losses to the partners and are considered losses for the purposes of determining safe payments.
Partners’ equities (capital+-loan balances)
Possible loss on NCA
BV of land &bldgs.
Possible loss on contingencies
Cash withheld for contingencies
Possible loss from Buz
Buz’s debit balance allocated
60:40 to Max and Nan
Possible loss from Max
Max’s debit balance assigned to
*Negative amounts must be allocated to the partners with positive equity balances using their relative P&L sharing ratios. -allocations are continued until none of the partners shows negative equity *Safe payments schedule is used only to determine the amount of advance distribution. It does not affect the account balances or the statement of partnership liquidation. Advance distribution requires partner approval
-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 General Principles of Installment Liquidation
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