Partnership Liquidations These are the steps required to account for a partnership liquidation Transfer the current period income or loss to the capital accounts of the partnership in accordance with their revenue sharing agreement ID: 648835
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Slide1
What steps are required to record the liquidation of a partnership?
Partnership LiquidationsSlide2
These are the steps required to account for a partnership liquidation
Transfer the current period income or loss to the capital accounts of the partnership in accordance with their revenue sharing agreement.
Record the sale of the
noncash assets.
T
he partnership will no longer need the assets. Any loss or gain is allocated to the partners based on the
income and loss sharing agreement.
Pay or settle all of the partnership liabilities
.
After these steps,
usually there is either
no
capital deficiency
or
a
capital deficiency on behalf of one or more of the
partners
Partner with deficiency pays the deficiency or
Other partners absorb the deficiency
Distribute
remaining cash to partners based on
their capital balances. Slide3
Liquidating the Partnership – No capital deficiency
The partners share income and losses equally. After updating the partners’ capital accounts for current income/loss, the balance sheet accounts remaining:
The next step is to sell the
non-cash assets
(land).
If there is a liquidation loss, the JE is:If there is a liquidation gain, the JE is Slide4
The loss or gain is then allocated using the income/loss sharing agreement.
In this example, the p
artners are
sharing income/loss equally according
to
their agreement.If there was a liquidation loss:If there was a liquidation gain:Slide5
Paying Liabilities and Updating Balances
Next, the
partnership
pays its
liabilities
And updates the cash account as well as the partners’ equity balances to ready the final distribution of cash according to the capital balancesSlide6
Division of the Remaining Cash
The final distribution of cash will be based on the ratios of the
partners’ capital balances.Slide7
What if there is a capital deficiency?Liquidating the Partnership – C
apital
deficiency
A capital deficiency means there is a debit balance in a partner’s capital account at the point of the final distribution journal entry. Can be the result of excessive withdrawals, recurring income statement losses, or liquidation losses.
In this instance,
Rotolo owes the partnership $3,000 and both Zachary and Plaisance have a legal claim against Rotolo’s personal assets. One or two things can happen
Rotolo can either pay the partnership the $3,000 Or Rotolo does not pay the deficiency. Slide8
Partner pays the deficiency
The journal entry for the payment would be
Now the Balance Sheet is:
Final distribution journal entry is:Slide9
Partner does not pay deficiency
Partners absorb the deficiency according to the
income/loss sharing agreement.
In this instance, the partners are sharing income and losses equally; therefore, the journal entry would be:
The new Balance Sheet
And the final distribution journal entry would be: