Lecture Advanced accounting (6th Edition): Chapter 16 - Jeter, Chaney

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Lecture Advanced accounting (6th Edition): Chapter 16 - Jeter, Chaney. Chapter 16 - Partnership liquidation. In this chapter, we will discuss how partnerships are liquidated. While it might seem like a simple process to turn all of the partnership’s assets to cash, to pay liabilities, and to distribute any remaining cash, it’s not an easy task. It can sometimes take many months to finally liquidate the partnership.
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Lecture Advanced accounting (6th Edition): Chapter 16 - Jeter, Chaney. Chapter 16 - Partnership liquidation. In this chapter, we will discuss how partnerships are liquidated. While it might seem like a simple process to turn all of the partnership’s assets to cash, to pay liabilities, and to distribute any remaining cash, it’s not an easy task. It can sometimes take many months to finally liquidate the partnership..

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Advanced Accounting Jeter Chaney Partnerships Liquidation 1 Prepared by Sheila Ammons, Austin Community College Learning Objectives • Describe the steps used to distribute available partnership assets in liquidation under the Uniform Partnership Act (UPA). • List the order of priority for each class of creditors in partnership liquidation under the UPA. • Prepare a liquidation schedule to settle debts and allocate assets. • Prepare a “safe payment approach” liquidation schedule. • Describe the four steps in the preparation of an advance plan for the disCopyright © 2015. John Wiley & Sons, Inc. All rights reserved. tnership Steps in the Liquidation Process • First Step: Compute net income or loss up to the date of dissolution. – The closing process should be completed and – any net income or loss should be allocated to the partners in accordance with their profit and loss agreement. • Second Step: Assets not acceptable for distribution in their present form are converted into cash. • Last Step: Distribute available assets to creditors and partners. LO 1 Steps in the liquidation process. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved. Follow the provisions of Section 40(b) of the Steps in the Liquidation Process • Section 40(b) of the Uniform Partnership Act (UPA) –Liabilities rank in order of payment, as follows: I. Liabilities to creditors other than partners, II. Liabilities to partners other than for capital and profits (such as loans), III. Liabilities to IV. Liabilities to partners in partners in respect of capital, respect of profits. LO 1 Steps in the liquidation process. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved. Steps in the Liquidation Process Review Question The first step in the liquidation process is to a) Convert noncash assets into cash. b) Pay partnership creditors. c) Compute any net income (loss) up to the date of dissolution. d) Allocate any gains or losses to the partners. LO 1 Steps in the liquidation process. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved. Priorities of Partnership and Personal Creditors • UPA (Section 15) provides that partners are jointly liable for all contracts and other obligations of the partnership. • Order of Priority concerning availability of assets: a) Partnership assets 1) Partnership creditors. 2) Personal creditors that did not recover their claims in full from personal assets. b) Personal assets LO 2 Order of priority for each class of creditors. 1) Copyright © 2015. John Wiley & Sons, Inc. All rights reserved. Priorities of Partnership and Personal Creditors Review: True/False: Personal assets are first allocated to partnership creditors and then to personal creditors. False LO 2 Order of priority for each class of creditors. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved. Priorities of Partnership and Personal Creditors Review Question If a partner with a debit capital balance during liquidation is insolvent, the following results: a) The partner must borrow money to invest in the partnership. b) The partnership will give the partner cash to the extent of the partners’ debit balance. c) The partner’s debit balance will be allocated to the other partners. d) LO 2 Order of priority for each class of creditors. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved. Priorities of Partnership and Personal Creditors Review Question In accordance with the marshaling of assets provision of the Uniform Partnership Act, rank the following liabilities of a partnership in order of payment. 1) $20,000 loan from B. Barry who is a partner. 2) $30,000 of profits from the last year of operations. 3) $3,000 payable to a supplier. 4) $100,000 in capital balances of the partners. a. 2,3,4,1. b. 4,2,1,3. c. 3,1,4,2. LO 2 Order of priority for each class of creditors. dCopyright © 2015. John Wiley & Sons, Inc. All rights reserved. Simple Liquidation Illustrated Exercise 16­6: Pete, Tom, and Zack have operated a laundromat for 10 years. The partners, who share profits 4:3:3, respectively, decide to liquidate the partnership. The firm’s balance sheet just before the partners sell other assets for $30,000 is as follows: Assets Liabilities and Capital Cash Other assets $ 15,000 110,000 $ 125,000 Liabilities Pete, Capital Tom, Capital Zack, Capital $ 42,000 55,000 14,000 14,000 $ 125,000 Personal status of each partner just before liquidation is as follows: Assets Liabilities Pete $ 55,000 Tom 30,000 Zack 30,000 $ 80,000 10,000 50,000 LO 3 Preparing a liquidation schedule. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved. Simple Liquidation Illustrated Exercise 16­6: Determine the amount of cash each partner will receive in liquidation and how much cash each partner must invest in the firm, given their personal positions. Part A Balances Sale of assets and allocationofloss Allocate Zack's balance Investmentby Tom Payment to creditors Payment to Pete Cash 15,000 30,000 45,000 45,000 14,286 59,286 (42,000) 17,286 (17,286) ­ Noncash Assets 110,000 (110,000) ­ ­ ­ ­ ­ Liabilities (42,000) ­ (42,000) (42,000) (42,000) 42,000 ­ ­ Pete 40% (55,000) 32,000 (23,000)