Chapter 16 – PARTNERSHIPS: LIQUIDATION
CHAPTER 16
PARTNERSHIPS: LIQUIDATION
OVERVIEW OF CHAPTER 16
Chapter 16 completes the two-chapter sequence on partnership accounting and financial
reporting. The Uniform Partnership Act of 1997 (UPA) contains many of the basic liquidation
provisions that accountants must follow when providing professional services to partnerships
that are in the process of liquidating. The continuous example of the ABC Partnership begun in
Chapter 15 is carried through Chapter 16.
Two alternative liquidation processes are available: (1) lump-sum liquidation in which all
the assets are sold, the liabilities are paid, and the partners then receive one payment for their
remaining loans and capital balances, and (2) installment liquidation in which the partners
receive installment payments during the liquidation process.
A cash distribution plan is usually prepared before beginning an installment liquidation
so each partner may determine the amount of cash she/he will receive as cash becomes available.
The concept of loss absorption power is central to the preparation of the cash distribution plan.
A schedule of safe payments must be computed before any installment payments to
partners. The schedule of safe payments uses worst case scenarios to determine the appropriate
amount of payment. Worst case planning normally includes the following (1) an assumption that
all remaining noncash assets will be sold at a complete loss and (2) that any potential deficits
resulting from the assumptions in step (1) will not be remedied because each partner is
personally insolvent. Additional considerations section of the chapter discusses the incorporation
of a partnership.
Appendix 16A discusses and illustrates Partners’ Personal Financial Statements
consistent with the guidance provided in SOP 82-1. Partners personal financial statements are
typically prepared as part of any liquidation process.
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 16-1 Understand and explain terms associated with partnership liquidations.
LO 16-2 Make calculations related to lump-sum partnership liquidations.
LO 16-3 Make calculations related to installment partnership liquidations.
Chapter 16 – PARTNERSHIPS: LIQUIDATION
16-2
SYNOPSIS OF CHAPTER 16
Partnerships: Liquidations
The Demise of Laventhol & Horwarth
LO 16-1 Understand and explain terms associated with partnership liquidations.
Overview of Partnership Liquidations
Disassociation, Dissolution, Winding-Up and Liquidation of a Partnership
LO 16-2 Make calculations related to lump-sum partnership liquidations.
Lump-Sum Liquidations
Realization of Assets
Liquidation Expenses
Illustration of a Lump-Sum Liquidation
LO 16-3 Make calculations related to installment partnership liquidations.
Installment Liquidations
Illustration of Installment Liquidation
Cash Distribution Plan
Additional Considerations
Incorporation of a Partnership
Appendix 16A: Partners’ Personal Financial Statements
Illustration of Personal Financial Statements
Statement of Financial Condition
Statement of Changes in Net Worth
Footnote Disclosures
NOTES ON POWERPOINT SLIDES
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
Chapter 16 – PARTNERSHIPS: LIQUIDATION
16-3
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.
We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors
to use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of
each learning objective to show where the new material begins. Instructors may or may not want
to use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple-choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
LO 16-1 Understand and explain terms associated with partnership liquidations.
• Slides 3-10 introduce terms and concepts associated with partnership liquidations.
Instructors may want to select the slides related to terms they feel are most important
to emphasize.
LO 16-2 Make calculations related to lump-sum partnership liquidations.
• Slide 14 introduces the lump-sum liquidation process.
• Slides 15-23 present a very simple example of a lump-sum liquidation. We find that
rather than trying to explain the process in an abstract sort of way, it is easiest to walk
students slowly through an example and then go back and discuss the process and
important terms in the context of the example.
• Slides 24-29 discuss the sharing of profits and losses on the liquidation of partnership
assets. They also introduce procedures for dealing with situations in which partners
are personally insolvent.
• Slide 30 introduces the legal doctrine of setoff.
• Slide 31 explains that when the lump-sum liquidation is over, the cash left over
should be exactly equal to the remaining balances in the partners’ capital accounts.
• Slides 32-42 comprise a group exercise to allow students to work together in applying
the concepts and principles discussed so far about lump-sum liquidations.
• Slides 43-48 provide a case in which the partnership is insolvent and a deficit is
created in a partner’s capital account.
• Slides 49-61 provide a group exercise regarding lump sum liquidation in an insolvent
situation and ask students to prepare a statement of realization and liquidation.
Chapter 16 – PARTNERSHIPS: LIQUIDATION
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LO 16-3 Make calculations related to installment partnership liquidations.
• Slides 65-70 introduce important concepts related to installment liquidations. In
particular, they explain the differences between the schedule of safe payments and the
cash distribution plan.
• Slides 71-82 provide an illustration of installment liquidation for ABC partnership.
• Slides 83-84 introduce a basic group exercise. The first portion of the exercise is
simply a discussion to get students thinking about the various ideas partners may have
about how assets should be allocated equitably during the liquidation process.
• Slide 85 explains the schedule of safe payments.
• Slides 86-91 lead students through the first way the liquidation can be documented
(using the schedule of safe payments).
• Slides 92-99 continue the same problem with a second round of cash derived from the
sale of some of the partnership assets. The students again receive practice using the
schedule of safe payments.
• Slides 100-106 introduce concepts required for the use of the cash distribution plan.
• Slides 107-108 walk students through a group exercise in which they calculate Loss
Absorption Power (LAP) in order to begin the cash distribution plan.
• Slides 111-118 lead students through the preparation of the cash distribution plan and
shows them how to allocate the first and second rounds of available cash by following
the plan.
• Slides 119-128 provide a group exercise to allow students to practice the preparation
of a schedule of safe payments to allocation the available cash.
• Slides 129-136 give students an opportunity to work together in a group to solve the
same problem using a cash distribution plan.
Chapter 16 – PARTNERSHIPS: LIQUIDATION
16-5
TEACHING IDEAS
1. The instructor could invite a local attorney, or a business law course instructor to class to
speak about the difficulties of attempting to “exit” of a partnership once a person has
become a partner. Students can learn from first-hand “war stories” of an attorney who has
worked with partnerships that have failed and where individual partners had to enter legal
actions for remedy. The speaker could be queried on why most partnerships fail and what
occurs after they fail and explain the implications for the partners.
2. The instructor could require that students prepare a brief memo discussing the advantages
and disadvantages of a short-term, lump sum liquidation versus extending the time of the
liquidation process and using an installment liquidation. Students should consider not
only the economic factors of obtaining the best prices for the goods, but also the costs of
continuing to operate and the personal factors of the individual partners. The focus of this
assignment is to consider the types of factors that will affect the decision on the length of
time of the liquidation.
Chapter 16 – PARTNERSHIPS: LIQUIDATION
16-6
DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS
C16-1
LO 16-3
20 min.
E
Cash Distributions to Partners
Students must compare and contrast a lump-sum liquidation and an installment
liquidation and provide a response to two partners who have conflicting views on
liquidation.
C16-2
LO 16-1,
LO 16-2
35 min.
M
Cash Distributions to Partners
This case addresses the issues of the priority of claims in a partnership liquidation
with one partner demanding that her loan be paid prior to other cash distributions.
C16-3
LO 16-3
25 min.
E
Incorporation of a Partnership
This case presents students with the opportunity to compare and contrast the
partnership form of entity with the corporate form of entity, including differences
found in the income statements.
C16-4
LO 16-1
30 min.
E
Sharing Losses During Liquidation
This is a research case on alternative views of sharing losses in the event of
partnership liquidation. Students are also asked to obtain a copy of the UPA and
specify the requirements for sharing losses required by the UPA.
C16-5
LO 16-1
30 min.
E
Analysis of a Court Decision on a Partnership Liquidation
This case requires students to obtain a copy of and answer questions pertaining to
the Montana Supreme Court decision in the Mattfield v. Kramer Brothers case.
E16-1
LO 16-2,
LO 16-3
25 min.
E
Multiple-Choice Questions on Partnership Liquidations
Seven multiple-choice questions on both lump-sum and installment liquidations.
Students must compute items such as amounts to be paid in various situations and
the order and amount of payments to creditors.
E16-2
LO 16-3
20 min.
E
Multiple-Choice Questions on Partnership Liquidation [AICPA Adapted]
Six multiple-choice questions on both lump-sum and installment liquidations.
E16-3
LO 16-2
25 min.
M
Computing Alternative Cash Distributions to Partners
This exercise requires the student to determine the amount of a liquidating
distribution of equipment if it were sold for three different amounts.
Chapter 16 – PARTNERSHIPS: LIQUIDATION
16-7
E16-4
LO 16-2
35 min.
M
Lump-Sum Liquidation
Students must prepare a statement of partnership realization and liquidation in a
relatively straight-forward lump-sum liquidation. The partnership has a loan
payable to one of the partners. Journal entries are also required to record the
liquidation.
E16-5
LO 16-3
15 min.
E
Schedule of Safe Payments
A schedule of safe payments is required for this exercise that includes estimated
additional liquidation costs and the distribution of a potential deficit in a partner’s
capital account.
E16-6
LO 16-3
40 min.
M
Schedule of Safe Payments to Partners
Students must prepare a statement of partnership realization and liquidation for a
two-month installment liquidation. A schedule of safe payments is required at
the end of the first month.
E16-7
LO 16-2
40 min.
M
Alternative Profit and Loss-Sharing Ratios in a Partnership Liquidation
Students must determine the amount of cash each partner will receive from the
final distributions of the partnership under three different profit and loss sharing
ratios.
E16-8
LO 16-2
30 min.
E
Cash Distribution Plan
This exercise requires the computation of loss absorption power and the
preparation of a cash distribution plan for the beginning of an installment
liquidation. A partnership loan payable to a partner is included in the exercise.
E16-9
LO 16-3
40 min.
M
Confirmation of Cash Distribution Plan
Continuing the data from E16-8, students must complete the installment
liquidation and verify the cash distributions actually made with the plan prepared
in E16-8.
E16-10*
LO 16-3
30 min.
E
Incorporation of a Partnership
Journal entries are required on both the partnership’s books as assets are
transferred to a corporation and stock is received and distributed to partners, as
well as the entries that are made on the corporation’s books to record the receipt
of the net assets and the issuance of stock.
E16-11A
LO 16-3
20 min.
M
Multiple-Choice on Personal Financial Statements [AICPA Adapted]
Eleven multiple-choice questions requiring students to determine values to be
reported on personal financial statements.
E16-12A
LO 16-3
35 min.
M
Personal Financial Statements
Students are asked to prepare a statement of changes in net worth which includes
a separate farming business.
Chapter 16 – PARTNERSHIPS: LIQUIDATION
16-8
P16-13
LO 16-2
45 min.
M
Lump-Sum Liquidation
This problem requires the offset of a loan payable to partially remedy a capital
deficit, and a contribution from a partner to complete the remedy of a capital
deficit. Students should prepare a statement of realization and liquidation for the
partnership and a schedule of the net worth of each of the three partners after the
liquidation of the partnership is completed.
P16-14
LO 16-3
50 min.
M
Installment Liquidation [AICPA Adapted]
A comprehensive installment liquidation problem for a three-month period of
liquidation. The problem requires both the statement of partnership liquidation
and realization and the appropriate schedules of safe payments to partners.
P16-15
LO 16-3
35 min.
M
Cash Distribution Plan
This problem requires a cash distribution plan if the partners agree to accept an
offer of $100,000 for the sale of their partnership. The partnership has loans
receivable from two of the three partners.
P16-16
LO 16-3
60 min.
H
Installment Liquidation
Continuing the data in P16-15, students must prepare a statement of realization
and liquidation assuming the partners rejected the offer of $100,000 and decided
to liquidate their partnership using an installment liquidation. Supporting
schedules of safe payments to partners are also required.
P16-17
LO 16-3
60 min.
H
Installment Liquidation
This is a comprehensive, three-month installment liquidation problem requiring
the statement of realization and liquidation and schedules of safe payments.
P16-18
LO 16-3
35 min.
M
Cash Distribution Plan
Using the data from P16-17, students are asked to prepare the cash distribution
plan at the beginning of the liquidation process and then prepare schedules
showing how the available cash was actually distributed in accordance with the
plan.
P16-19
LO 16-1
through
LO 16-3
15 min.
E
Matching Terms
Ten terms are presented for which students must select the appropriate matching
description.
P16-20
LO 16-1
30 min.
M
Partnership Agreement Issues [AICPA Adapted]
This problem presents two different scenarios relating to the dissolution of
partnerships. For part A, students must evaluate the situation and determine the
correctness of five statements regarding a partnership that admits a new partner
upon the retirement of one of its “old” partners. For part B, students must
evaluate the situation and determine the correctness of five statements regarding
a partnership that admits a new partner and then fails.
Chapter 16 – PARTNERSHIPS: LIQUIDATION
16-9
OTHER RESOURCES
Chapter 16
Partnership: Liquidations
DISASSOCIATION is the legal description of the withdrawal of a partner including the
following:
1. A partner’s death
2. A partner’s voluntary withdrawal
3. A judicial determination, including:
a) the partner engaged in wrongful conduct
b) the partner willfully committed a material breach of the partnership agreement
c) the partner became a debtor in bankruptcy
d) an individual partner has become incapable of performing the partner’s duties under
the partnership agreement
DISSOLUTION is the dissolving of a partnership. Events that cause dissolution and winding up
of the partnership business include:
1. In a partnership at will, a partner’s express notice to leave the partnership.
2. In a partnership for a definite term or specific undertaking, dissolution takes place when
a) After a partner’s death or wrongful dissociation, at least half the remaining
partners decide to wind up the partnership business
b) If all of the partners agree to wind up the partnership business
c) The expiration of the term or specific undertaking
3. An event that makes it unlawful to carry on a substantial part of the partnership business
4. A judicial determination that
a) the economic purpose of the partnership is unlikely to be achieved
b) a partner engaged in conduct relating to the partnership business that makes it
impracticable to carry on the partnership business
c) it is not reasonably practicable to carry on the partnership business in conformity
with the partnership agreement