Kế toán, kiểm toán - Chapter fifteen: Partnerships: termination and liquidation

Chapter FifteenPartnerships: Termination and Liquidation Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinReasons for TerminationTermination of business activities followed by liquidation of partnership property occurs for a variety of reasons: Personality disputes between partnersRetirementDeathChanged business environmentOther opportunitiesLow profitsBankruptcy (either the business or a partner)15-*Termination & Liquidation When the partners wish to terminate the business:Convert all assets to cash.Allocate all gains or losses to the partner capital balances.Pay all liabilities and expenses.Distribute remaining cash to partners.LO 115-*Termination & Liquidation -Example According to their agreement, Morgan & Houseman divide profits 6:4 respectively. On 6/1, the inventory is sold for $15,000. Note that the loss on the sale of inventory of $7,000 is assigned $4,200 ($7,000 x 60%) Morgan and $2,800 ($7,000 x 40%) to Houseman.LO 215-*Deficit Capital BalanceDeficit balances can be resolved two ways:The deficit partner can make a contribution to make up the deficit.The remaining partners can absorb the deficit.(The deficit partner may pay later or can be sued for the deficit amount.)LO 315-*Any payments by Holland will be split 2/3 to Dozier and 1/3 to Ross.Deficit Capital Balance --Contribution by Deficit PartnerContributions made by the deficit partner(s) are distributed to the non-deficit partners based on their relative profit sharing percentages.15-*Deficit Capital Balance - Remaining Partners Absorb DeficitCapital balances after distribution of Holland’s loss:15-*Preliminary Distribution of AssetsDebts owed to personal creditors.Debts owed to partnership creditors.Debts owed to the other partners.Under the Uniform Partnership Act, a priority ranking of creditors having claims against individual partners is recognized: LO 415-*Predistribution PlanUsed by accountants to guide the distribution of cash resulting from the liquidation process.Examine the Balance Sheet below. Assume the income sharing % is Rubens 50%, Smith 20%, and Trice 30%. LO 515-*Predistribution PlanFirst, determine the maximum loss that each partner can absorb. Divide each partner’s capital balance by their respective income sharing %.15-*Predistribution PlanSince Rubens can ONLY absorb a partnership loss of $60,000, new balances are computed assuming that the partnership has a $60,000 loss.15-*Predistribution PlanWith Rubens wiped out, continue calculating maximum absorbable losses using income sharing percentages of Smith, 20% (2/5) and Trice 30% (3/5).15-*Predistribution PlanAs earlier, compute the maximum absorbable loss by dividing the capital balances by the relative income sharing %.15-*Predistribution PlanTrice can only absorb a loss of $55,000.Now determine new capital balances for a loss of $55,000.15-*Predistribution PlanWith Rubens and Trice both wiped out, and Smith left as the only remaining partner, the predistribution plan can be prepared.15-*Predistribution PlanTo inform all parties of the pattern by which available cash will be disbursed, the predistribution plan should be formally prepared in a schedule format prior to beginning liquidation.15-*