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Partnership Liquidation. Chapter 16. Installment Liquidation. An installment liquidation 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.
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Partnership Liquidation Chapter 16
Installment Liquidation An installment liquidation 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.
Installment LiquidationIllustration The partnership of Duro, Kemp, and Roth is to be liquidated as soon as possible after December 31, 2003. All cash on hand, except for $20,000 is to be distributed at the end of each month. Profit and losses are shared 50%, 30%, and 20% to Duro, Kemp, and Roth.
Installment LiquidationIllustration Duro, Kemp, and Roth Balance Sheet December 31, 2003 (000) AssetsLiabilities and Equity Cash $ 240 Accounts payable $ 300 A/R, net 280 Note payable 200 Loan to Roth 40 Loan from Kemp 20 Inventories 400 Duro, capital (50%) 340 Land 100 Kemp, capital (30%) 340 Equipment, net 300 Roth, capital (20%) 200 Goodwill 40 $1,400 $1,400
Installment LiquidationIllustration Statement of Partnership Liquidation for the Period 1/1/2004 to 2/1/2002 (000) Cash Non- cash Assets Priority Liabil- ities 50% Duro Capital Kemp Loan 30% Kemp Capital 20% Roth Capital Balances January 1 Offset Roth loan Write-off of goodwill Collection of receivables Sale of inventory items Predistribution balances January 31 January distribution Creditors Kemp Balances February 1 $240 200 200 $640 (500) (120) $ 20 $1,160 (40) (40) (200) (160) $ 720 $ 720 $500 $500 (500) $ 0 $340 (20) 20 $340 $340 $20 $20 (20) $ 0 $340 (12) 12 $340 (100) $240 $200 (40) (8) 8 $160 $160
Installment LiquidationIllustration First Installment – Schedule of Safe Payments January 31, 2004 (000) Possible Losses 50% Duro Capital 30% Kemp Capital and Loan 20% Roth Capital Partners’ equities January 31, 2004 Possible loss on noncash assets Possible loss on contingencies: cash withheld Possible loss from Duro: debit balance allocated 60:40 $720 20 $340 (360) $ (20) (10) $ (30) 30 — $360 (216) $144 (6) $138 (18) $120 $160 (144) $ 16 (4) $ 12 (12) —
February Liquidation Events Cash 60,000 Duro, Capital 10,000 Kemp, Capital 6,000 Roth, Capital 4,000 Equipment, net 80,000 To record sale of equipment at a $20,000 loss Cash 180,000 Duro, Capital 30,000 Kemp, Capital 18,000 Roth, Capital 12,000 Inventories 240,000 To record sale of remaining inventory items at a $60,000 loss
February Liquidation Events Duro, Capital 2,000 Kemp, Capital 1,200 Roth, Capital 800 Cash 4,000 To record payment of liquidation expenses Duro, Capital 4,000 Kemp, Capital 2,400 Roth, Capital 1,600 Accounts Payable 8,000 To record identification of an unrecorded liability
February Liquidation Events Accounts Payable 8,000 Cash 8,000 To record payment of accounts payable Duro, Capital 84,000 Kemp, Capital 86,400 Roth, Capital 57,600 Cash 228,000 To record distribution of cash to partners
Learning Objective 5 Learn about cash distribution plans for installment liquidations.
$$$ Cash Distribution Plans The development of a cash distribution plan for the liquidation of a partnership involves ranking the partners in terms of their vulnerability to possible losses.
Partner’s Equity Profit Sharing Ratio Loss Absorption Potential Vulnerability Ranking (1 most vulnerable) Duro $340 ÷ 0.5 = $ 680 1 Kemp 360 ÷ 0.3 = 1,200 3 Roth 160 ÷ 0.2 = 800 2 Vulnerability Ranking
Assumed Loss Absorption A schedule of assumed loss absorption is prepared as a second step in developing the cash distribution plan.
Assumed Loss Absorption Schedule of Assumed Loss Absorption (000) Duro (50%) Kemp (30%) Roth (20%) Total Preliquidation equities Assumed loss to absorb Duro’s equity (allocated 50:30:20) Balances Assumed loss to absorb Roth’s equity (allocated 60:40) Balances $340 (340) — $360 (204) $156 (36) $120 $160 (136) $ 24 (24) — $860 (680) $180 (60) $120
Priority Liabilities Kemp Loan Duro Kemp Roth First $500,000 100% Next $20,000 100% Next $100,000 100% Next $60,000 60 40% Remainder 50% 30 20 Cash Distribution Plan
Learning Objective 6 Comprehend liquidations when either the partnership or partners are insolvent.
Insolvent Partners and Partnerships Ranking for claims against the separate property of a bankrupt partner: I Those owing to separate creditors II Those owing to partnership creditors III Those owing to partners by way of contribution
Partnership Solvent – One or MorePartners Personally Insolvent In the liquidation of a solvent partnership, partnership creditors are entitled to recover the full amount of their claims from partnership property. West, York, and Zeff are partners sharing profits 30%, 30%, and 40%, respectively. West is personally insolvent with personal assets of $50,000 and personal liabilities of $100,000.
Case A Case B Case C Cash $60,000 — — West, capital (30%) 18,000 $18,000 $21,000 York, capital (30%) 18,000 27,000 9,000 Zeff, capital (40%) 24,000 9,000 12,000 Partnership Account Balances
Insolvent Partnership When a partnership is insolvent, the cash available is not enough to pay partnership creditors. Creditors will obtain partial recovery from partnership assets and will call upon individual partners to use their personal resources to satisfy remaining claims.
