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Chapter Fifteen

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Chapter Fifteen

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    1. Chapter Fifteen

    2. Reasons for Termination Personality disputes between partners Retirement Death Changed business environment Other opportunities Low profits Bankruptcy (either of the business or an individual partner)

    3. Termination & Liquidation When the partners wish to terminate the business: Convert all assets to cash. Allocate all gains or losses to the partner capital balances. Pay all liabilities. Distribute remaining cash to partners.

    4. Smith & Jones want to liquidate their partnership. Balances at 3/31/06 are: Termination & Liquidation Example

    5. Termination & Liquidation Example According to their partnership agreement, Smith and Jones divide profits 60:40 respectively. On 4/1, the inventory is sold for $35,000.

    6. Termination & Liquidation Example

    7. The balances after selling the inventory were: Termination & Liquidation Example

    8. Termination & Liquidation Example Assume that 70% of the Accounts Receivable are collected. The remaining accounts receivables are written off.

    9. Termination & Liquidation Example Smith and Jones collects $24,500 of the A/R. The loss is $10,500. Allocate 60% of the loss to Smith and 40% of the loss to Jones.

    10. Termination & Liquidation Example Smith and Jones sell the fixed assets for $175,000.

    11. Termination & Liquidation Example

    12. Termination & Liquidation Example

    13. Termination & Liquidation Example

    14. The pre-distribution balances are: Termination & Liquidation Example

    15. Once the remaining cash is distributed, the partnership is considered terminated. Termination & Liquidation Example

    16. Schedule of Liquidation The process of liquidation can take time. Partners may experience deficit balances during the liquidation period. Partners may want cash distributions prior to the completion of the liquidation.

    17. Schedule of Liquidation

    18. Schedule of Liquidation Interim Cash Distributions

    19. Deficit balances can be resolved two ways: The deficit partner can make a contribution to make up the deficit. The remaining partners can absorb the deficit. The deficit partner may pay later or can be sued for the deficit amount. Deficit Capital Balance

    20. Contributions made by the deficit partner(s) are distributed to the non-deficit partners based on their relative profit sharing %. Deficit Capital Balance Loss to Remaining Partners

    21. Contributions made by the deficit partner(s) are distributed to the non-deficit partners based on their relative profit sharing %. Deficit Capital Balance Loss to Remaining Partners

    22. Finn, Scales, and Gill have the following balances just prior to liquidation. Deficit Capital Balance Example

    23. Finn, Scales, and Gill share profits 35:25:40. On 7/5/06, the inventory is sold for $25,000, a $50,000 loss. Prepare the entry. Deficit Capital Balance Example

    24. Finn, Scales, and Gill share profits 35:25:40. On 7/5/06, the inventory is sold for $25,000, a $50,000 loss. Prepare the entry. Deficit Capital Balance Example

    25. With a 40% share of the $50,000 loss, Gill’s capital account moves to a deficit balance of $(15,000). Deficit Capital Balance Example

    26. Deficit Capital Balance Example

    27. Deficit Capital Balance Example

    28. Deficit Capital Balance Example

    29. Marshaling of Assets

    30. Individual partner’s creditors can make a claim against the assets of the partnership. All partnership creditors must be satisfied first. The creditors can only assert claims to the extent of the specific partner’s positive capital balance. Claims Against the Partnership

    31. Predistribution Plan

    32. Predistribution Plan

    33. Predistribution Plan

    34. Predistribution Plan

    35. Predistribution Plan

    36. Predistribution Plan

    37. Predistribution Plan

    38. Predistribution Plan

    39. Summary Partnerships may be terminated for a variety of reasons When terminated, partnership assets must be systematically liquidated Actual liquidation can require an extended period to accomplish. This promotes the use of proposed schedules of liquidation Marshaling of assets may be necessary when one or more partners have negative capital balances

    40. Possible Criticisms Development of predistribution plans and schedules of liquidation may involve speculation. Some critics feel that this violates the traditionally conservative role of accountants WHAT DO YOU THINK???

    41. End of chapter 15

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