Chapter 16 – Partnerships: Liquidation
16–21
E16-8 (continued):
Based on practical approach:
APB Partnership
Cash Distribution Plan
Loss Absorption Potential
Capital Accounts
Adams
Peters
Blake
Adams
Peters
Blake
Profit and loss
percentages
20%
30%
50%
Preliquidation capital
balances
55,000
75,000
70,000
Loan to Adams
(10,000)
Total
45,000
75,000
70,000
Loss absorption
potential
(Capital balances /
Loss percentage)
225,000
250,000
140,000
Decrease highest LAP
to next highest:
Adams
($25,000 x 0.30)
(25,000)
(7,500)
225,000
225,000
140,000
45,000
67,500
70,000
Decrease LAPs
to next highest:
Adams
($85,000 x 0.20)
(85,000)
(17,000)
Peters
($85,000 x 0.30)
(85,000)
(25,500)
140,000
140,000
140,000
28,000
42,000
70,000
Summary of Cash Distribution Plan
Adams
Peters
Blake
First $50,000 to creditors
Next $7,500
100%
Next $42,500
40%
60%
Any additional
20%
30%
50%
Chapter 16 – Partnerships: Liquidation
16–22
16-9 Confirmation of Cash Distribution Plan
Based on strict observance of UPA 1997:
APB Partnership
Statement of Partnership Realization and Liquidation
Installment Liquidation
Capital
Adams,
Noncash
Adams,
Peters,
Blake,
Cash+
Loan +
Assets =
Liabilities+
20% +
30% +
50%
Balances
40,000
10,000
200,000
50,000
55,000
75,000
70,000
Sale of assets
65,000
(85,000)
(4,000)
(6,000)
(10,000)
Payment to
creditors
(21,000)
(21,000)
84,000
10,000
115,000
29,000
51,000
69,000
60,000
Payment to
partners
(Sch. 1)
(55,000)
(25,000)
(30,000)
-0-
29,000
10,000
115,000
29,000
26,000
39,000
60,000
Sale of assets
79,000
(115,000)
(7,200)
(10,800)
(18,000)
Collection of
Adams’ loan
10,000
(10,000)
Payment to
creditors
(29,000)
(29,000)
89,000
-0-
-0-
-0-
18,800
28,200
42,000
Payment to
partners
(89,000)
(18,800)
(28,200)
(42,000)
Balances
-0-
-0–
-0-
-0-
-0-
-0-
-0-
Chapter 16 – Partnerships: Liquidation
16–23
E16-9 (continued)
Schedule 1:
APB Partnership
Schedule of Safe Payments to Partners
Adams
Peters
Blake
20%__
30% __
50%__
Capital balances, end of first month
51,000
69,000
60,000
Possible loss of $125,000 on noncash
assets ($10,000 loan and $115,000 other)
(25,000)
(37,500)
(62,500)
26,000
31,500
(2,500)
Allocate Blake’s potential deficit:
2,500
20/50 x $2,500
(1,000)
30/50 x $2,500
_______
__(1,500)
___ __
Safe payment to partners
(25,000)
(30,000)
-0-
Chapter 16 – Partnerships: Liquidation
16–24
E16-9 (continued)
Based on practical approach:
APB Partnership
Statement of Partnership Realization and Liquidation
Installment Liquidation
Capital
Adams,
Noncash
Adams,
Peters,
Blake,
Cash +
Loan +
Assets=
Liabilities+
20% +
30% +
50%
Balances
40,000
10,000
200,000
50,000
55,000
75,000
70,000
Adam’s loan write-off
(10,000)
(10,000)
Sale of assets
65,000
(85,000)
(4,000)
(6,000)
(10,000)
Payment to
creditors
(21,000)
(21,000)
84,000
-0-
115,000
29,000
41,000
69,000
60,000
Payment to
partners
(Sch. 1)
(55,000)
18,000
34,500
2,500
29,000
-0-
115,000
29,000
23,000
34,500
57,500
Sale of assets
79,000
(115,000)
(7,200)
(10,800)
(18,000)
Payment to creditors
(29,000)
(29,000)
79,000
-0-
-0-
-0-
15,800
23,700
39,500
Payment to
partners
(79,000)
(15,800)
(23,700)
(39,500)
Balances
-0-
-0–
-0-
-0-
-0-
-0-
-0-
Chapter 16 – Partnerships: Liquidation
16–25
E16-9 (continued)
Schedule 1:
APB Partnership
Schedule of Safe Payments to Partners
Adams
Peters
Blake
20%__
30% __
50%__
Capital balances, end of first month
41,000
69,000
60,000
Possible loss of $115,000 on assets
(23,000)
(34,500)
(57,500)
18,000
34,500
2,500
Safe payment to partners
(18,000)
(34,500)
(2,500)
Chapter 16 – Partnerships: Liquidation
16–26
E16-10* Incorporation of a Partnership
a.
Partnership’s Books
(1)
Alice, Capital ($11,200 x 0.60)
6,720
Betty, Capital ($11,200 x 0.40)
4,480
Accounts Receivable
800
Inventory
3,200
Equipment
7,200
To record revaluation of assets.
(2)
Investment in A & B Corporation Stock
85,200
Accounts Payable
17,200
Cash
8,000
Accounts Receivable
21,600
Inventory
32,800
Equipment
40,000
To record transfer of net assets to A & B corporation.
(3)
Alice, Capital ($62,400 – $6,720)
55,680
Betty, Capital ($34,000 – $4,480)
29,520
Investment in A & B Corporation Stock
85,200
To record distribution of stock to prior partners.
b.
A & B Corporation‘s Books
Cash
8,000
Accounts Receivable
21,600
Inventory
32,800
Equipment
40,000
Accounts Payable
17,200
Common Stock
71,000
Additional Paid-In Capital
14,200
To record receipt of net assets from partnership.
Chapter 16 – Partnerships: Liquidation
16–27
E16-11A Multiple-Choice Questions on Personal Financial Statements [AICPA
Adapted]
1. b
2. a
3. a –
10,000 shares x ($25 – $10)
=
$150,000 options fair value
x 0.65 net-of-tax rate
$ 97,500 value, net-of–tax
+400,000 pre-option net worth
$497,500 net worth
4. d
5. a
6. c
7. b
8. c
9. d – 95,500 + 3,400 = 98,900
10. b
11. d – 125,000 – 50,000 = 75,000
Chapter 16 – Partnerships: Liquidation
16–28
E16-12A Personal Financial Statements
Leonard and Michelle
Statement of Changes in Net Worth
For the Year Ended August 31, 20X3
Realized increases in net worth:
Salaries
$ 44,300
Farm income
6,700
Dividends and interest income
1,400
$ 52,400
Realized decreases in net worth:
Income taxes
$ 11,400
Personal expenditures
43,500
Loss on sale of marketable securities
300
(1)
Interest expense
4,600
(2)
$(59,800)
Net realized decrease in net worth
$ (7,400)
Unrealized increases in net worth:
Residence
$ 7,300
Investment in Farm
9,300
(3)
$ 16,600
Unrealized decreases in net worth:
Marketable securities
$ 400
(1)
Increase in estimated income taxes
on the difference between the
estimated current values of assets
and liabilities and their tax bases
3,200
$ 3,600
Net unrealized increase in net worth
$ 13,000
Net increase in net worth:
Realized and unrealized changes in net worth
$ 5,600
Net worth at beginning of period
60,800
Net worth at end of period
$ 66,400
(1) Realized loss: $11,000 – $10,700 = $300
Unrealized loss on remaining securities:
($16,300 – $11,000) – $4,900 = $400
(2) Mortgage payable: $76,000 – $71,000 = $5,000 principal payment
$9,000 paid – $5,000 = $4,000 interest payment
Life insurance loan: $4,000 x 0.15 = $600 interest payment
(3) Unrealized holding gain on farm land
$9,900
Unrealized holding loss on net farm equipment
($22,400 – $9,000) – $14,000
(600)
$9,300
Chapter 16 – Partnerships: Liquidation
16–29
P16-13 Lump-Sum Liquidation
a.
CDG Partnership
Statement of Realization and Liquidation
Lump-sum Liquidation on December 10, 20X6
Capital Balances
Noncash
Carlos
Dan
Gail
Cash +
Assets =
Liabilities+
20% +
40% +
40%
Preliquidation balances
25,000
475,000
270,000
120,000
50,000
60,000
Sale of assets and distribution
of $215,000 loss
260,000
(475,000)
(43,000)
(86,000)
(86,000)
285,000
-0-
270,000
77,000
(36,000)
(26,000)
Cash contributed by Gail to
extent of positive net worth
25,000
25,000
310,000
-0-
270,000
77,000
(36,000)
(1,000)
Distribution of deficit of
insolvent partner:
1,000
20/60($1,000)
(333)
40/60($1,000)
(667)
310,000
-0-
270,000
76,667
(36,667)
-0-
Contribution by Dan to remedy deficit
36,667
36,667
346,667
-0-
270,000
76,667
-0-
-0-
Payment to creditors
(270,000)
(270,000)
76,667
-0-
-0-
76,667
-0-
-0-
Payment to partner
(76,667)
(76,667)
Postliquidation balances
-0-
-0-
-0-
-0-
-0-
-0-
Chapter 16 – Partnerships: Liquidation
16–30
P16-13 (continued)
b.
CDG Partnership
Net Worth of Partners
December 10, 20X6
Carlos
Dan
Gail
Personal assets, excluding
partnership capital interests
250,000
300,000
350,000
Personal liabilities
(230,000)
(240,000)
(325,000)
Personal net worth, excluding
partnership capital interests, Dec. 1, 20X6
20,000
60,000
25,000
Contribution to partnership
(36,667)
(25,000)
Liquidating distribution from partnership
76,667
-0-
-0-
Net worth, December 10, 20X6
96,667
23,333
-0-
This computation assumes that no other events occurred in the 10-day period that changed any of the partners’ personal
assets and personal liabilities. In practice, the accountant must be sure that a computation of net worth is current and timely.
The table shows the effects of the transactions between the partnership and each partner. A presumption of this table is
that the personal creditors of Dan or Gail would not seek court action to block the settlement transactions with the
partnership. Upon winding up and liquidation, the partnership does not have any priority to the partner’s personal assets.
Thus, the personal creditors may seek to block the transactions with the partnership in order to provide more resources from
which they can be paid. A partner who fails to remedy his or her deficit can be sued by the other partners who had to make
additional contributions or even by a partnership creditor if the failed partner is liable to the partnership creditor. But those
claims are not superior to the other claims to the partner’s individual assets.
When accountants provide professional services to partnerships and to its partners, the accountant should expect, at
some time, legal suits involving the partnership and/or individual partners. A strong and thorough understanding of the legal
and accounting foundations of partnerships will be very important to that accountant.