Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,PARTNERSHIP LIQUIDATION,Chapter 8,Dissolution,Due to a change in the legal relationship among partners,Typically due to,Admission of a new partner,Withdrawal of a partner,Death of a partner,Termination,Partnership ceases normal business operations,Liquidation,Occurs when the partnership sells its assets,pays its liabilities,and distributes remaining assets to partners,May occur due to,Partnership fulfilling its business purpose,Partners desire to not continue the business,Partnership is in financial difficulty,Liquidation(cont),May be,Voluntary the partners may choose to liquidate,Involuntary creditors force the partnership to liquidate,Accountants Liquidation Responsibilities,Manage liquidation to ensure the payment to creditors,Manage liquidation that will result in an appropriate distribution to partners,Marshalling of Assets,Keeping the partnership assets and liabilities separated from the partners personal assets and liabilities,Partnership creditors and individual partner creditors can each have claims against partnership and partner assets but the priority of claims differ depending on source of payment,Partnership Creditors Claims,Order of priority,By partnership creditors,By personal creditors if claim not fully paid from partner personal assets(limited to partners capital balance),Partners Personal Creditor Claims,Order of priority,By personal creditors,By partnership creditors if claim not fully paid from partnership assets(not limited to partners capital balance),By other partners if partner capital account has a deficit capital balance,Uniform Partnership Act Partnership Claims,Partnership liabilities shall rank in the following order,Creditors other than partners,Partners other than for capital and profits,Partners in respect of capital,Partners in respect of profits,Uniform Partnership Act Partnership Claims(cont),Partners three claims(i.e.,loans to from partners,partners capital contributions,partners undistributed partnership income)are often combined into a single category in practice(e.g.,right of offset),Partners capital contributions and undistributed income are often combined into one account,Uniform Partnership Act Partnership Claims(cont),Right of offset importance is to ensure that payment is not made on a partner loan when there is a capital account deficit,Right of offset requires an agreement in the Articles of Partnership because partnership loans have priority over partnership capital account balances in the distribution,Partnership Priority Claims,Creditor claims does not mean that partnership creditors must be fully paid before partners can receive any distribution,Creditor claims means that the accountant has the duty to ensure that sufficient funds will be available for creditors if partners receive any distribution,Liquidation Process,Close books and allocate profit or loss to capital accounts,Liquidate noncash assets,allocate gains and losses directly to capital accounts using residual profit and loss ratios,Pay liabilities and distribute assets to partners,Partnership Distributions to Partners,Lump-sum liquidation:all liabilities are paid and then a single(lump-sum)distribution is made to partners,Installment liquidation:partner distributions are made while liabilities are still outstanding or noncash assets are still owned,If distributions to partners are made and there are insufficient assets to pay creditors,the accountant may be liable to the creditors,Lump-Sum Liquidation,Noncash assets generally sold in a relatively short period of time,Liabilities are all paid,Remaining cash is distributed,Accountants duty is to search for unrecognized liabilities and to unsure that priority of creditor claims are followed,Statement of Realization and Liquidation,May be used as an alternative to journal entries to recognize liquidation events,Trial balance before liquidation(balance sheet accounts only)are presented as column headings,Loans to and from partners are collapsed into the respective partners capital account(right of offset),Statement of Realization and Liquidation(cont),Liquidation events(sale of assets,payment of expenses or liabilities)are posted directly to the columns with income statement items(e.g.,gains,losses,expenses)posted directly to capital accounts using the residual profit and loss ratios,Income statement accounts do not exist on the statement because they are only relevant to a going concern,Statement of Realization and Liquidation(cont),Deficit capital accounts created during liquidation may occur due to the partner with the deficit,Having a large profit and loss residual ratio,Having withdrawn a larger portion of his/her profits,Statement of Realization and Liquidation(cont),Removal of deficit partner balance,Additional contribution by partner with deficit capital account desired,If additional contribution is not made,deficit must be ab