partnership liquidation 1
DESCRIPTION
Partnership and CorporationTRANSCRIPT
• PARTNERSHIP LIQUIDATION
• A PARTNERSHIP IS LIQUIDATED WHEN BUSINESS OPERATIONS ARE COMPLETELY TERMINATED OR ENDED. – Assets are sold– Creditors are paid– Remaining assets are distributed to the partners
CAUSES OF LIQUIDATION
• Accomplishment of the purpose for which the partnership was organized
• Termination of the term period covered by the partnership contract
• Bankruptcy of the firm• Mutual agreement among the partners
ACCOUNTING PROBLEMS
• Determination of profit or loss from the beginning of the accounting period to the date of liquidation and he distribution of the profit and loss
• Closing of the partnership books• Correction of prior period error
Overstatement/understatement of inventories
ACCOUNTING PROBLEMS
Excessive depreciation chargesInadequate provision for unollectible
accounts•Liquidation of the business
MARSHALING OF ASSETS
• EXTERNAL CREDITORS• INTERNAL CREDITORS• PARTNERS BASED ON THE CREDIT BALANCES
OF THEIR CAPITAL ACCOUNTS
LIQUIDATION PROCEDURES
1. Realization of assets – converting all assets into cashWhen assets are sold at less than book value, a loss is incurred.
Cash xxx Loss on realization xxx
Assets xxx
When assets are sold at more than book value, a gain is realized.
Cash xxx Gain on realization xxx
Assets xxx
• The gains or the losses are distributed among the partners according to profit and loss ratio.A, capital xxx
• B, capital xxx– Loss on realization xxx
Gain on realization xxxA, capital xxxB, capital xxx
• If the distribution of losses result to a partner’s debit capital balance, he is called a deficientdeficient partner .
• A deficient partner must cover his deficiency out of his personal assets.
• If a deficient partner cannot cover his deficiency out of his personal assets, he is considered an insolvent partner
• Insolvency = Assets<Liabilities• Solvency = Assets>Liabilities• When a partner is insolvent, the other
partners will have to absorb the insolvency
2. Payment to external creditorsLiabilities xxx
Cash xxx3. Distribution of remaining cash to partners A, capital xxx
B, capital xxxCash xxx
OTHER AMANDA ARIEL ARIANNECASH ASSETS LIABILITIES CAPITAL CAPITAL CAPITAL
25,000 180,000 52,000 40,000 65,000 48,000 Realization of assets 250,000 (180,000) 28,000 28,000 14,000
275,000 - 52,000 68,000 93,000 62,000
OTHER AMANDA ARIEL ARIANNECASH ASSETS LIABILITIES CAPITAL CAPITAL CAPITAL
25,000 180,000 52,000 40,000 65,000 48,000 Realization of assets 250,000 (180,000) 28,000 28,000 14,000
275,000 - 52,000 68,000 93,000 62,000 Payment to creditors (52,000) (52,000)
223,000 - - 68,000 93,000 62,000
OTHER AMANDA ARIEL ARIANNECASH ASSETS LIABILITIES CAPITAL CAPITAL CAPITAL
25,000 180,000 52,000 40,000 65,000 48,000 Realization of assets 250,000 (180,000) 28,000 28,000 14,000
275,000 - 52,000 68,000 93,000 62,000 Payment to creditors (52,000) (52,000)
223,000 - - 68,000 93,000 62,000 Distribution of remaining (223,000) (68,000) (93,000) (62,000) cash - - - - - -
CASH OTHER ASSETS LIABILITIES
DARRYLCAPITAL
EVELYNCAPITAL
FREDRICKCAPITAL
Balances prior to realization
87,500 675000 325,000 212,500 137,500 87,500
Sale of non cash assets
247,500 (675,000) (213,750) (128,250) (85,500)
335,000 - 325,000 (1,250) 9,250 2,000
Absorption of deficiency
1,250 (750) (500)
335,000 325,000 - 8,500 1,500
Payment of liabilities
(325,000) (325,000)
Balances after payment of liaBilities
10,000 8,500 1,500
DRICK DONNACASH LAND CAPITAL CAPITAL
Balances before realization 50,000 175,000 25,000 75,000 Realization of assets 125,000 (175,000) (15,000) (15,000)
175,000 - 10,000 60,000 Payment to creditors
175,000 - 10,000 60,000 Distribution of remaining (175,000) (10,000) (60,000) cash - - - -
DRICK DONNA DAISY CASH LAND CAPITAL CAPITAL CAPITAL
Balances before realization 50,000 175,000 25,000 75,000 125,000 Realization of assets 125,000 (175,000) (15,000) (15,000) (20,000)
175,000 - 10,000 60,000 105,000 Payment to creditors
175,000 - 10,000 60,000 105,000 Distribution of remainingcash (175,000) (10,000) (60,000) (105,000)
- - - - -
RECEIVABLE- OTHER ACCOUNTS LOAN NOEL, ADRIAN MJCASH NOEL ASSETS PAYABLE PAYABLE - MJCAPITAL CAPITAL CAPITAL
45,000 15,000 410,000 105,000 20,000 150,000 100,000 95000Realization of assets435,000 (410,000) 10,000 7,500 7500
480,000 15,000 - 105,000 20,000 160,000 107,500 102,500 Payment to creditors(105,000) (105,000)
375,000 15,000 - - 20,000 160,000 107,500 102,500 Distribution of remaining(375,000) (15,000) (20,000) (160,000) (107,500) (102,500) cash - - - - - - - -
Noel will receive P145,000 computed as follows:Noel, capital 160,000 Receivable-Noel (15,000) Due to Noel 145,000