Create an account
What must the accountant record in the termination of a partnership?
(1) Conversion of assets to cash; (2) Allocation of the resulting gains/losses; (3) Payment of liabilities and expenses; (4) Any remaining unpaid debts to be settled; (5) Distribution of remaining assets to partners based on their final capital balances
What is a schedule of liquidation?
A periodic report summarizing liquidation transactions as they occur. Some frequently disclosed events include: transactions to date, property still held, liabilities awaiting payment, current cash and capital balances. It is constructed by listing the assets and liabilities horizontally and changes vertically
What happens when a partner has a deficit at the end of liquidation?
They are required to convey funds to the partnership to zero out their balance. Partnership records may then be closed out.
What assumptions are made prior to making a cash distribution to the partners?
(1) All noncash assets will be complete losses; (2) All liabilities will be paid; (3) All deficit partners will be written off. These assumptions allow the computation of "safe" balances.
Steps in calculating the allocation of potential loss?
(1) Find the P/L ratio between existing partners; (2) Multiply maximum possible loss by each partners individual ratio; (3) Subtract allocated loss amount from their capital balance. The remaining amount is a "safe" balance
What is Marshaling of Assets?
Under the Uniform Partnership Act, it is the priority ranking of creditors having claims against partners. (1) Debts owed to separate creditors; (2) Debts owed to partnership creditors; (3) Debts owed to other partners. Other partners can sue, but they are last in line.
When can personal creditors claim partnership balances?
When: (1) Payment of all partnership debts is assured; AND (2) The insolvent partner has a positive capital balance. However, even in this circumstance, personal creditors cannot receive more than the total of that partner's capital balance.
How do you show the absorption of the deficit of an insolvent partner?
Zero out the deficit balance of the insolvent partner, and share the loss among the remaining partners according to their P/L ratio.
What is a predistribution plan?
A plan used to guide the distribution of cash resulting from the liquidation process.
What are the steps involved in creating a predistribution plan?
(1) Calculate maximum loss on any assets and allocate losses and expenses among partners; (2) Determine maximum loss absorption: Capital Balance / P/L interest; (3) Identify partner with minimum loss absorption; (4) Zero out their capital and allocate loss among other partners according to their P/L interest; (5) Repeat steps using new P/L ratio between existing partners until only one remains;
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