Chapter 3 Partnership Liquidation and Incorporation Joint Ventures

Chapter 3 Partnership Liquidation and Incorporation; Joint Ventures All examples are from textbook by Larsen ACCT 501

Objectives of the Chapter To learn the accounting procedures for liquidation of limited liability partnerships (LLPs). n To discuss accounting issues related to incorporation of a LLP. n To discuss accounting for corporate and unincorporated joint ventures. n Partnership Liquidation and Incorporation 2

Liquidation of a Partnership n n n The liquidation of a LLP means discontinuing its activities. The procedures usually include selling assets, paying liabilities, and distributing any remaining cash to the partners. The liquidation process often starts with the realization of noncash assets. Partnership Liquidation and Incorporation 3

Liquidation of a Partnership (contd. ) n n n Any gains or losses resulting from the assets realization are divided among partners based on the income sharing ratio. The capital balances after the allocation of gains/losses are the basis for settlement. No cash can be distributed to partners until all liabilities are paid off. Partnership Liquidation and Incorporation 4

Liquidation of a Partnership (contd. ) n If cash of LLP is insufficient to pay liabilities in full, an unpaid creditor may collect from the personal assets of any solvent partner whose actions caused the partnership's insolvency, regardless whether that partner has a credit or a debit capital account balance. Partnership Liquidation and Incorporation 5

Distribution of Cash or Other Assets to Partners § The Uniform Partnership Act lists the order for distribution of cash by a liquidating partnership as: 1. Payment of creditors in full, 2. Payment of loans from partners, and 3. Payment of partners' capital account credit balances. Partnership Liquidation and Incorporation 6

Distribution of Cash or Other Assets to Partners (contd. ) n n However, if a partner's capital account has a deficit, that partner's loan to the partnership must be offset against the deficit in his/her capital account (referred to as the right of offset). Thus, the cash received by a partner is the same as if loans to the partnership had been recorded in the partner's capital account. Partnership Liquidation and Incorporation 7

Distribution of Cash or Other Assets to Partners (contd. ) n n The existence of partner's loan account will not advance the time of payment of any partner during the liquidation. Consequently, the loan to the partnership is often treated as capital during the liquidation. Partnership Liquidation and Incorporation 8

Distribution of Cash or Other Assets to Partners (contd. ) n n It is possible that partners are willing to receive assets other than cash for settlement. Regardless whether assets other than cash are distributed to partners, the distribution rule must be followed. Partnership Liquidation and Incorporation 9

Payment to Partners of an LLP after All Noncash Assets Realized n Five situations are discussed: A. Equity of every partner is sufficient to absorb loss from realization. B. Equity of one partner is not sufficient to absorb that partner's share of loss from realization. C. Equity of two partners are not sufficient to absorb their shares of loss from realization. Partnership Liquidation and Incorporation 10

Payment to Partners of an LLP after All Noncash Assets Realized(contd. ) D. Partnership is insolventa but partners are solventb. E. General partnership is insolvent and partners are insolvent. a. The partnership is unable to pay all outside creditors and at least one partner has a deficit capital account. Partnership Liquidation and Incorporation 11

Payment to Partners of an LLP after All Noncash Assets Realized(contd. ) b. The partner has personal assets in excess of liabilities. Note: the partnership is solvent in situations A, B and C. Partnership Liquidation and Incorporation 12

A. Equity of Each Partner is Sufficient to Absorb Loss from Realization Assets realized n Assume that Abra and Barg, who share income/losses equally, decide to liquidate Abra & Barg LLP. A balance sheet on 6/3/99, just prior to liquidation follows: Partnership Liquidation and Incorporation 13

Payment to Partners after All Noncash A. Equity of Each Partner is Sufficient to Absorb Loss from Realization (contd. ) Assets realized ABRA & BARG LLP Balance Sheet June 30, 1999 Assets Cash Other assets Total Liabilities & Partners’ Capital $10, 000 Liabilities $20, 000 75, 000 Loan payable to 20, 000 Barg Abra, capital 40, 000 Barg, capital 5, 000 $85, 000 Total $85, 000 Partnership Liquidation and Incorporation 14

Assets realized A. Equity of Each Partner is Sufficient to Absorb Loss from Realization (contd. ) n n Additional information: The noncash assets with a carrying amount of $75, 000 realized cash of $35, 000. The loss of $40, 000 is divided equally by the partners. After the allocation of realization loss, Barg's capital has a deficit of $15, 000. Partnership Liquidation and Incorporation 15

statement of realization and liquidation for Abra & Barg LLP Assets Partner’ Capital Cash Balances before liquidation Realization of other assets at a loss of $40, 000 Balances Payment to creditors Balances Offset Barg’s capital deficit against Barg’s Other Liabiliti es Barg, loan Abra(50 %) Barg (50%) $10, 00 $75, 00 $20, 00 $40, 00 $ 5, 000 0 0 35, 000 (75, 00 0) $45, 00 0 (20, 00 0) $25, 00 0 (20, 000) ) $20, 00 $(15, 00 0 0) (20, 00 0) $20, 00 $(15, 00 0 0 0) (15, 000 0) Partnership Liquidation and Incorporation 16

Note to the statement of realization and liquidation for Abra & Barg LLP n n Partners Abra and Barg received $20, 000 and $5, 000, respectively, after partnership creditors had been paid in full. The checks to both partners should be delivered to the partners at the same time. Partnership Liquidation and Incorporation 17

Note to the statement of realization and liquidation for Abra & Barg LLP n n Thus, the legal priority of a partner's loan account has no significance in determining either the amount of cash paid to a partner or the timing of cash payments to partners during liquidation. In the above statement, Barg's loan account balance of $20, 000 and capital account balance of $5, 000 can be combined to obtain an equity of $25, 000 for Barg prior to allocation/distribution. Partnership Liquidation and Incorporation 18

Note to the statement of realization and liquidation for Abra & Barg LLP (contd. ) n In the following examples, a partner's loan account balance (if any) is combined with the partner's capital account balance in the statement of realization and liquidation. Partnership Liquidation and Incorporation 19

Payment to Partners after All Noncash Assets realized B. Equity of One Partner is Not Sufficient to Absorb That Partner's Share of Loss from realization n n In this case, the loss on realization of assets results in a deficit balance in the capital account of one of the partners. Assume the balance sheet below for Diel, Ebbs & Frey LLP just prior to liquidation: Partnership Liquidation and Incorporation 20

B. Equity of One Partner is Not Sufficient to Absorb That Partner's Share of Loss from realization (contd. ) Diel, Ebbs & Frey LLP Balance Sheet May 20, 1999 Assets Cash Other assets Total Liabilities & Partners’ Capital $20, 000 Liabilities $30, 000 80, 000 Diel, capital 40, 000 Ebbs, capital 21, 000 Frey, capital 9, 000 $100, 000 Total $100, 000 Partnership Liquidation and Incorporation 21

B. Equity of One Partner is Not Sufficient to Absorb That Partner's Share of Loss from realization (contd. ) n n The income sharing ratio is Diel, 20%; Ebbs; 40% and Grey, 40%. The other assets with a carrying amount of $80, 000 realized $50, 000 cash. After dividing the loss of $30, 000 among the partners, Frey has a deficit of $3, 000 in his capital account. Assuming Frey pays the $3, 000 to the partnership immediately, the statement of realization and liquidation is as follows: Partnership Liquidation and Incorporation 22

Statement of Realization and Liquidation for Deil, Ebbs & Frey LLP (5/21 through 5/31/99) Assets Cash Balances before liquidation Realization of other assets at a loss of $30, 000 Balances Other Liabiliti es Diel(20 %) Ebbs(40 %) Frey(40 %) $20, 00 $80, 00 $30, 00 $40, 00 $21, 000 $ 9, 000 0 0 50, 000 $70, 00 0 Payment to (30, 00 creditors 0) Balances $40, 00 0 Cash received 3, 000 from Frey Balances Partner’ Capital $43, 00 (80, 00 0) (6, 000) (12, 000) $30, 00 $34, 00 0 0 (30, 00 0) $34, 00 0 $9, 000 $(3, 000) 3, 000 $34, 00 $9, 000 Partnership Liquidation and Incorporation $ -023

B. Equity of One Partner is Not Sufficient to Absorb That Partner's Share of Loss from realization (contd. ) n Assuming Grey was not able to pay the $3, 000 deficit to the partnership immediately and the cash available after payment to creditors is to be distributed to Deil and Ebbs without a delay, the statement of realization and liquidation would be as follows: Partnership Liquidation and Incorporation 24

Statement of Realization and Liquidation for Deil, Ebbs & Frey LLP – Frey Cannot Pay $3, 000 immediately Assets Partner’ Capital Cash Balances before liquidation Realization of other assets at a loss of $30, 000 Balances Other Liabiliti es Diel(20 %) Ebbs(40 %) Frey(40 %) $20, 00 $80, 00 $30, 00 $40, 00 $21, 000 $ 9, 000 0 0 50, 000 $70, 00 0 Payment to (30, 00 creditors 0) Balances $40, 00 0 Payments (40, 00 (80, 00 0) (6, 000) (12, 000) $30, 00 $34, 00 $9, 000 $(3, 000) 0 0 (30, 00 0) $34, 00 $9, 000 $(3, 000) 0 Partnership Liquidation and Incorporation (33, 00 (7, 000) 25

Notes to the above Statement n n The possible additional loss if Frey is unable to pay $3, 000 is charged to Diel and Ebbs in the ratio of 1/3 ($1, 000) and 2/3 ($2, 000), respectively. Therefore, the cash available of $40, 000 to partners is divided between Diel and Ebbs in a manner that reduces Deil's capital and Ebb's capital to $1, 000 and $2, 000, respectively. Partnership Liquidation and Incorporation 26

Notes to the above Statement (contd. ) n n n Thus, if Frey is not able to pay $3, 000, the loss can be all absorbed by remaining partners based on their income sharing ratio. If the $3, 000 is later collected from Frey, this amount will be divided $1, 000 to Diel and $2, 000 to Ebbs. The forgoing statement then can be completed as follows: Partnership Liquidation and Incorporation 27

The Completion of the Statement of Realization and Liquidation When $3, 000 Collected from Frey Assets Cash Balances (from page 25) Cash received from Frey Payments to partners $3, 000 Partner’ Capital Diel Ebbs Frey (20%) (40%) $1, 000 $2, 000 $(3, 00 0) 3, 000 (3, 000) (1, 000) (2, 000) Liabiliti es Partnership Liquidation and Incorporation 28

The Completion of the Statement of Realization and Liquidation When $3, 000 is Uncollectible from Frey However, if the $3, 000 is uncollectible, the statement would be completed with the writeoff Frey's Capital as follows: Assets Cash Balances (from page 25) Additional loss from Frey’s uncollectible capital deficit Liabiliti es Partner’ Capital Diel Ebbs Frey (20%) (40%) $1, 000 $2, 000 $(3, 00 0) (1, 000) (2, 000) 3, 000 Partnership Liquidation and Incorporation 29

Assets realized C. Equity of Two Partners Are Not Sufficient to Absorb Their Shares of Loss from Realization n n It is apparent that the inability to collect deficit of a partner will result in additional loss to the other partners as in example B when $3, 000 is uncollectible. This additional loss could cause a second partner to have a deficit in the capital account, which may or may not be collectible. Partnership Liquidation and Incorporation 30

C. Equity of Two Partners Are Not Sufficient to Absorb Their Shares of Loss from Realization (contd. ) n n Example: Assume that Judd, Kamb. Long and Marx, partners of Judd, , Kamb. Long & Marx LLP, share income /losses 10%, 20%, 30% and 40%, respectively. Their capital account balances for the period 8/1 through 8/15, 1999, are as shown in the following statement of realization and liquidation (p 29), supported by the exhibit that follows (p 30). Partnership Liquidation and Incorporation 31

Statement of Realization and Liquidation for Judd, Kamb, Long& Marx LLP (8/1 through 8/15/1999) Assets Cash Other Balances before liquidation Realization of other assets at a loss of $80, 000 Balances Payment to creditors Balances Payments to partners Balances Partners’ Capital Liabiliti Judd Kamb Long Marx es (10%) (20%) (30%) (40%) $20, 000 $200, 00 $120, 00 $32, 00 $30, 00 $8, 000 0 0 120, 000 $140, 00 0 (120, 00 0) $20, 000 (20, 000) (200, 00 0) (8, 000) (16, 00 0) (24, 00 (32, 000) 0) $120, 00 $22, 00 $16, 00 $6, 000 0 (120, 00 0) $22, 00 $16, 00 $6, 000 0 0 (16, 00 (4, 000) 0) $6, 000 and $12, 00 Partnership Liquidation Incorporation$6, 000 0 $(24, 00 0) $(24, 00 32 0)

Exhibit: Computation of Cash Payments to Partners of Judd, Kamb, Long & Marx LLP – 8/15/1999 Capital account balances before distribution of cash to partners Additional loss to Judd, Kamb, and Long if Marx’s deficit is uncollectible (ratio of 10: 20: 30) Balances Additional Loss to Judd and Kamb if Long’s deficit is uncollectible (ratio of 10: 20) Partners’ Capital Judd(10 Kamb(20 Long(30 Marx(40 %) %) $22, 000 $16, 000 $(24, 000 ) (4, 000) (8, 000) (12, 000) $18, 000 (2, 000) $8, 000 (4, 000) $(6, 000) 6, 000 Partnership Liquidation and Incorporation 24, 000 33

Payment to Partners after All Noncash D. Partnership Is Insolvent but Partners Are Solvent Assets realized n n In the case of insolvency in a LLP, the total of the capital account debit balance will exceed the total of the credit balances. If the partner(s) with a deficit capital balance pay off the deficit to the partnership, the LLP will have sufficient cash to pay its liabilities in full. Partnership Liquidation and Incorporation 34

Payment to Partners after All Noncash D. Partnership Is Insolvent but Partners Are Solvent (contd. ) Assets realized n n The creditors of LLP may demand payment from any solvent partner whose actions caused the partnership's insolvency, regardless of whether the partner's capital had a debit or a credit balance. A partner who makes payments to partnership creditors receives a credit to his/her capital account. Partnership Liquidation and Incorporation 35

Payment to Partners after All Noncash D. Partnership Is Insolvent but Partners Are Solvent (contd. ) Assets realized Example: Assume that Nehr, Ordo & Page LLP, whose partners share net income/losses equally, had the following balance sheet prior to liquidation on 5/1/1999: n Assets Cash Other assets Total Liabilities & Partners’ Capital $15, 000 Liabilities $65, 000 85, 000 Nehr, capital 18, 000 Ordo, capital 10, 000 Page, capital 7, 000 $100, 000 Total $100, 000 Partnership Liquidation and Incorporation 36

Payment to Partners after All Noncash D. Partnership Is Insolvent but Partners Are Solvent Assets realized n n n On 5/12/99, the other assets with a carrying amount of $85, 000 realize $40, 000 cash. The loss of $45, 000 is to be divided equally among the partners. The total cash of $55, 000 is paid to the creditors, which leaves unpaid liabilities of $10, 000. The capital balances of partner Nehr, Ordo and Page are $3, 000, ($5, 000) and ($8, 000), respectively after absorbing the realization loss of noncash assets. Partnership Liquidation and Incorporation 37

Payment to Partners after All Noncash D. Partnership Is Insolvent but Partners Are Solvent Assets realized Assuming that on 5/30/99, Ordo and Page pay off their deficiencies, the LLP will use $10, 000 of the $13, 000 available cash to pay the remaining liabilities. n The LLP will then distribute $3, 000 to Nehr. n These events are summarized in the statement of Realization and Liquidation on the following page. n Partnership Liquidation and Incorporation 38

The Statement of Realization and Liquidation of Nehr, Ordo & Page LLP Assets Partner’ Capital Cash Other Liabiliti Nehr(1/ Ordo(1/3) Page(1/3) es 3) $85, 000 $65, 000 $18, 000 $10, 000 $ 7, 000 Balances $15, 000 before liquidation Realization of 40, 000 (85, 000) (15, 000) other assets at a loss of $45, 000 Balances $55, 000 $65, 000 $3, 000 Payment to (55, 000) creditors Balances $ -0$10, 000 $3, 000 Cash invested 13, 000 by Ordo and Page Balances Final Payment to (15, 000) $(5, 000) $(8, 000) $(5, 000) 5, 000 $(8, 000) 8, 000 $3, 000 (10, 000 Partnership Liquidation and Incorporation 39

Payment to Partners after All Noncash D. Partnership Is Insolvent but Partners Are Solvent (contd. ) Assets realized If the insolvency of the LLP is due to an adverse award of damages in a lawsuit, and the partner(s) responsible for the damages are solvent, they alone must pay the damages that the LLP is unable to pay. n However, if such partner(s) also are insolvent, both they and the LLP may have to file for liquidation under Chapter 7 of the U. S. Bankruptcy Code. n Partnership Liquidation and Incorporation 40

Payment to Partners after All Noncash E. General Partnership Is Insolvent and Partners Are Insolvent Assets realized n n n All the above cases applies to both LLP and general partnership. The case discussed here only applies to the general partnership and both the partnership and some partners are insolvent. The question raised here is the relative rights of creditors of the partnership and the partners. Partnership Liquidation and Incorporation 41

Payment to Partners after All Noncash E. General Partnership Is Insolvent and Partners Are Insolvent (contd. ) Assets realized n n The rule provided by the UPA is that assets of the partnership (including partners' capital deficits) are first available to creditors of the partnership. Assets of the partners are first available to their creditors. Partnership Liquidation and Incorporation 42

Payment to Partners after All Noncash E. General Partnership Is Insolvent and Partners Are Insolvent (contd. ) Assets realized n After the liabilities of the partnership have been paid in full, the creditors of an individual partner have a claim against the assets of the partnership to the extent of that partner's equity in the partnership. Partnership Liquidation and Incorporation 43

Payment to Partners after All Noncash E. General Partnership Is Insolvent and Partners Are Insolvent (contd. ) Assets realized n n n On the other hand, after the creditors of a partner have been paid in full, any remaining assets of that partner are available to partnership creditors. This principle applies regardless of whether that partner's capital balance has a credit or a debit balance. One condition of this principle is that these creditors are unable to obtain payment from the partnership. Partnership Liquidation and Incorporation 44

The Relative rights of Creditors of an Insolvent General Partnership and Personal Creditors- An Example Assume that the Rich, Sand & Toll Partnership, a general partnership whose partners share net income and losses equally, has the partner- ship balance sheet below prior to liquidation on 11/30/99: Assets Cash Other assets Total Liabilities & Partners’ Capital $10, 000 Liabilities $60, 000 100, 000 Rich, capital 5, 000 Sand, capital 15, 000 Toll, capital 30, 000 $110, 000 Total $100, 000 Partnership Liquidation and Incorporation 45

The Relative rights of Creditors of an Insolvent General Partnership and Personal Creditors- An Example (contd. ) Assume that on 11/30/99, the partners have the following assets and liabilities other than their equities in the partnership: Partner Rich Sand Toll Personal Assets Personal Liabilities $100, 000 $25, 000 50, 000 5, 000 60, 000 Partnership Liquidation and Incorporation 46

The Relative rights of Creditors of an Insolvent General Partnership and Personal Creditors- An Example (contd. ) n. Assume that the realization of other assets of the partnership results in a loss of $60, 000, as shown in the following statement of realization and liquidation for the period 12/1/ through 12/12/99: Partnership Liquidation and Incorporation 47

The Statement of Realization and Liquidation of Rich, Sand & Toll (12/1 through 12/12/99) Assets Cash Balances before liquidation Realization of other assets at a loss of $60, 000 Balances Partner’ Capital Other Liabiliti Rich(1/3) Sand(1/ Tall(1/3) es 3) $10, 00 $100, 00 $60, 00 0 40, 000 (100, 00 0) $50, 00 0 Payment to (50, 00 creditors 0) Balances $5, 000 $15, 00 $30, 00 0 0 (20, 000) (20, 000 0) ) $60, 00 $(15, 00 $(5, 00 $10, 00 0 0) 0) 0 (50, 00 0) $10, 00 $(15, 00 $(5, 00 $10, 00 0 0) 0) 0 Partnership Liquidation and Incorporation 48

Notes to the Statement n n There is still $10, 000 liabilities unpaid after exhausting all cash available in the partnership. The creditors of the partnership can onlya collect these liabilities in full from Rich (who is personally solvent) regardless whether Rich's capital balance has a debit or credit balance. Partnership Liquidation and Incorporation 49

The Statement of Realization and Liquidation of Rich, Sand & Toll (12/1 through 12/12/99)(contd. ) The Statement is continued below (on p 50 & 51) to show Rich's Payment of the final $10, 000 owed to partnership's creditors: Cash Balances (from above) Payment by Rich to partnership creditors Balances Cash invested by Rich Balances Partner’ Capital Liabiliti Rich(1/3 Sand(1 Toll(1/ es ) /3) 3) $10, 000 $(15, 00 $(5, 00 $10, 00 0) 0) 0 (10, 000 ) $5, 000 $(5, 000) $(5, 00 $10, 00 0) 0 5, 000 $5, 000 Partnership Liquidation and Incorporation $(5, 00 $10, 00 50

The Statement of Realization and Liquidation of Rich, Sand & Toll (12/1 through 12/12/99)(contd. ) Cash Balances (from Page 50) Write-off of Sand’s capital deficit as uncollectible Balances Cash invested by Rich Balances Payment to Toll (or Toll’s creditors) Partner’ Capital Rich Sand Toll (1/3) $(5, 00 $5, 000 0) $(2, 500) 5, 000 (2, 500) $2, 500 (2, 500) Partnership Liquidation and Incorporation $2, 500 (2, 500) 51

Notes to the Statement on p 50 1. Due to the abundant personal assets, Rich is able to paid $5, 000 needed to offset its capital deficit in the partnership. 2. This $5, 000 cash is paid to partner Toll (or Toll's creditors), the only partner with a credit balance of capital account. Partnership Liquidation and Incorporation 52

Notes to the Statement on p 51 1. The continued statement shows that Sand owes $5, 000 to the partnership. 2. Nevertheless, Sand's personal assets are just sufficient to cover his personal liabilities. 3. Therefore, Sand's deficit of $5, 000 in his capital is a loss to the partnership and will be absorbed by the other two partners equally. Partnership Liquidation and Incorporation 53

Notes to the Statement on p 51 (contd. ) 4. As a result, Rich and Toll have capital balances of deficit $2, 500 and credit $2, 500, respectively, after absorbing the $5, 000 loss from Sand's deficit in capital. 5. Since Rich is personally solvent, he will pay $2, 500 to the partnership to offset his deficit. 6. This $2, 500 cash will go to Toll (or Toll's creditors) since Toll is the one with credit balance in capital. Partnership Liquidation and Incorporation 54

Conclusions of this Liquidation § The final result of this liquidation is that the partnership creditors receives payment in full due to the financial status of Rich. § The personal creditors of Sand are paid in full. § The personal creditors of Toll are paid $12, 500 (Toll's personal assets of $5, 000 + $7, 500 from Rich's payment to the partnership to cover Rich's deficit). Partnership Liquidation and Incorporation 55

Installment Payments to Partners § In all previous case, cash payments to partners in liquidation are made only after all noncash assets being realized and realized losses being divided. § Due to the liquidation process can extent to several months, the partners may want to receive cash as it becomes available rather than waiting until all noncash assets have been realized. Partnership Liquidation and Incorporation 56

Installment Payments to Partners (contd. ) 1. Liquidation in installments is a process of realizing some assets, paying creditors, paying the remaining available cash to partners, realizing additional assets and making additional cash payments to partners. 2. Installment payments to partners are appropriate if necessary safeguards are used to ensure that all partnership creditors are paid in full. Partnership Liquidation and Incorporation 57

Installment Payments to Partners (contd. ) § Also no partners are paid more than the amount to which they would be entitled after all losses on realization of assets are known. § The danger to an installment liquidations is that the liquidator authorizes cash payment to partners before all losses in the liquidation are known. Partnership Liquidation and Incorporation 58

Installment Payments to Partners (contd. ) § If payments are made to partners and later losses cause deficits in the partner's capital accounts, the liquidator will be responsible for the recovery of these deficits. § Due to this danger, the safe policy for determining installment cash payments to partners is the following worst-case scenario: Partnership Liquidation and Incorporation 59

General Rules for Installment Payments to Partners 1. Assume a total loss on all remaining noncash assets, and provide for all possible losses, including potential liquidation costs and unrecorded liabilities. 2. Assume that partner(s) with potential capital deficits will be unable to pay anything to the partnership. Partnership Liquidation and Incorporation 60

General Rules for Installment Payments to Partners (contd. ) 1. Thus, the distribution of cash in installment payment as if no more cash will be forthcoming, either from realization of assets or from collection of capital deficits from partners. 2. Therefore, cash payment to a partner only if that partner has a capital (plus loan) account credit balance in excess of the amount required to absorb his/her share of maximum possible loss that may incur on liquidation. Partnership Liquidation and Incorporation 61

General Rules for Installment Payments to Partners (contd. ) 1. When these installment payment rules are followed, the effect is to bring the equities of the partner to the incomesharing ratio as quickly as possible. 2. The following example (from P 3 -4 of the textbook) illustrates an installment payment on liquidation following the aforementioned rules. Partnership Liquidation and Incorporation 62

Installment Payments to Partners- an Example § Carson and Worden decided to dissolve and liquidate Carson& Worden LLP on 9/23/99. On that date, the balance sheet of the partnership was as follows: Partnership Liquidation and Incorporation 63

Installment Payments to Partners- an Example (contd. ) Carson &Worden LLP Balance Sheet Sep. 23, 1999 Assets Cash Other assets Total Liabilities & Partners’ Capital $5, 000 Liabilities $15, 000 100, 000 Loan payable to 10, 000 Worden Carson, capital 60, 000 Worden, capital 20, 000 $105, 000 Total $100, 000 Partnership Liquidation and Incorporation 64

Installment Payments to Partners- an Example (contd. ) 1. On Sep. 23, 1999, noncash assets with a carrying amount of $70, 00 realized $60, 000 and $64, 000 was paid to creditors and partner. 2. $1, 000 is retained to cover possible liquidation cots. 3. On 10/1/1999, the remaining noncash assets realized $18, 000 (net of liquidation costs), and all available cash was distributed to partner. Partnership Liquidation and Incorporation 65

Installment Payments to Partners- an Example (contd. ) 1. Carson and Worden share net income and losses 40% and 60%, respectively. 2. Required: 1)Prepare a cash distribution program for Carson &Worden LLP on 9/23/99. 2)Determine the appropriate distribution of cash to partners as it becomes available. 3)Prepare journal entries for the LLP on 9/23 and 10/1 to record the realization of assets and distribution of cash to Partnership Liquidation and Incorporation 66

Cash Distribution Program for Carson &Worden LLP Carson & Worden LLP Cash Distribution Program September 23, 1999 Creditor Carso Worde s n n First $15, 000 100% Next 40, 000 100% All over $55, 000 40% 60% Partnership Liquidation and Incorporation 67

Distribution of Cash to Partners Carson & Worden LLP Working Paper for Cash Distribution to Partners during Liquidations September 23, 1999 Capital account balances before $60, 00 $30, 00 liquidation (including $10, 000 loan 0 0 payable to Warden) Income-sharing ratio 2 3 Capital per unit of income (loss) $30, 00 $10, 00 sharing 0 0 Reduce Carson’s balance to Worden’s balance; Carson receives $40, 000 (20, 00 ($20, 000 X 2) 0) Capital per unit of income $10, 00 Partnership(loss) Liquidation and Incorporation 68

Journal Entries to Record the Realization of Assets and Distribution of Cash to Creditors and Partners. Carson & Worden LLP Journal Entries 199 9 Sep 23 Cash t Carson, Capital ($10, 000 X 0. 40) Worden, Capital ($10, 000 X 0. 60) Other Assets 60, 00 0 4, 000 6, 000 70, 00 0 To record realization of assets at a loss of $10, 000, divided between Carson and Worden in 2: 3 ratio. 23 Trade Accounts Payable 15, 00 0 Partnership Liquidation and Incorporation Loan Payable to Worden 5, 400 69

Journal Entries (contd. ) 199 9 Oct 1 Loan Payable to Worden ($10, 000$5, 400) Carson, Capital (balance of capital account) Worden, Capital (balance of capital account) Cash 4, 600 7, 600 6, 800 19, 00 0 To record distribution of cash to partners. Partnership Liquidation and Incorporation 70

Withholding of Cash for Liabilities and Liquidation Costs 1. Costs of liquidation are treated as part of the total loss from liquidation and are deducted from partner's capital accounts. 2. It is reasonable to withhold cash for the payments of recorded liability or costs when these liabilities or costs were not paid prior to the payments to partners. Partnership Liquidation and Incorporation 71

Liquidation of Limited Partnerships 1. Most of the prior discussion of the liquidation of LLP and general partnerships applies to the liquidation of limited partnerships except the following: 2. The ULP Act provides that after outside creditors of a limited partnership have been paid, the equities of the limited partners must be paid before the general partner(s) may receive any cash. Partnership Liquidation and Incorporation 72

Liquidation of Limited Partnerships § Also, the limited partners may agree that one or more of them may have priority over the others regarding payments in liquidation. Partnership Liquidation and Incorporation 73