LIQUIDATION OF A PARTNERSHIP P5 Prepare entries for partnership liquidation. When a partnership is liquidated, its business ends and three steps are required. 1. Record the sale of assets for cash, and any gain or loss is allocated to partners using their income-and-loss- sharing agreement. 2. Pay all partner liabilities. 3. Distribute any remaining cash to partners based on their capital balances. Partnership liquidation usually falls into one of two cases, as described in this section. No Capital Deficiency No capital deficiency means that all partners have a zero or credit balance in their capital accounts for final distribution of cash. Assume that Zayn, Perez, and Rasheed operate their partnership in BOARDS for several years, sharing income and loss equally. The partners then decide to liquidate. On the liquidation date, the loss is transferred to the partners' capital accounts according to the sharing agreement. After that transfer, assume the partners' recorded account balances (immediately prior to liquidation) are: Cash Land $178,000 40,000 Accounts Payable $20,000 K. Zayn, Capital 70,000 H. Perez, Capital $66,000 T. Rasheed, Capital 62,000 We apply three steps for liquidation. The partnership sells its assets, and any losses or gains are shared We apply three steps for liquidation. The partnership sells its assets, and any losses or gains are shared among partners according to their income-and-loss-sharing agreement (equal for these partners). Assume that BOARDS sells its assets consisting of $40,000 in land for $46,000 cash, creating a net gain of $6,000. In a liquidation, gains or losses resulting from the sale of noncash assets are called losses and gains Page 447 from liquidation. The entry to sell its assets for $46,000 follows. 46,000 40,000 Jan. 15 Cash Land Gain from Liquidation Sold noncash assets at a gain. 6,000 Assets -40,000 +46,000 = Liabilities + Equity +6,000 Allocation of the gain from liquidation per the partners' income-and-loss-sharing agreement follows. 6,000 Jan. 15 Gain from Liquidation K. Zayn, Capital H. Perez, Capital T. Rasheed, Capital Allocate liquidation gain to partners. 2,000 2,000 2,000 Assets = Liabilities + Equity -6,000 +2,000 +2,000 +2,000 The partnership pays its liabilities, and any losses or gains from liquidation of liabilities are shared among partners according to their income-and-loss-sharing agreement. BOARDS's only liability is $20,000 in accounts payable, and no gain or loss occurred. The partnership pays its liabilities, and any losses or gains from liquidation of liabilities are shared among partners according to their income-and-loss-sharing agreement. BOARDS's only liability is $20,000 in accounts payable, and no gain or loss occurred. 20,000 Jan. 15 Accounts Payable Cash Pay claims of creditors. 20,000 Assets -20.000 = Liabilities + Equity -20,000 After step 2, we have the following capital balances along with the remaining cash balance. K. Zayn, Capital Bal. 70,000 2,000 (b) Bal. 72,000 H. Perez, Capital Bal. (6) 66,000 2,000 68,000 Bal. T. Rasheed, Capital Bal. 62,000 2000 K. Zayn, Capital Bal. (b) Bal. 70,000 2,000 72,000 H. Perez, Capital Bal. (b) 66,000 2,000 68,000 Bal. T. Rasheed, Capital Bal. (b) Bal. 62,000 2,000 64,000 Cash Bal 178,000 20,000 (a) 46,000 Bal. 204,000 3 Any remaining cash is divided among the partners according to their capital account balances. The entry to record the final distribution of cash to partners follows. * Any remaining cash is divided among the partners according to their capital account balances. The entry to record the final distribution of cash to partners follows. Jan. 15 K. Zayn, Capital 72,000 H. Perez, Capital 68,000 T. Rasheed, Capital 64,000 Cash Distribute remaining cash to partners. 204,000 Assets -204,000 = Liabilities + Equity -72,000 -68,000 -64,000 It is important to remember that the final cash payment is distributed to partners according to their capital account balances, whereas gains and losses from liquidation are allocated according to the income-and-loss- sharing ratio. The following statement of liquidation summarizes the three steps in this section. Noncash Assets K. Zayn, Capital H. Perez, Capital T. Rasheed, Capital Statement of Liquidation Cash + = Liabilities + + + $ 20,000 $40,000 (40,000) Balances prior to liquidation $ 178,000 Sale of noncash assets 46,000 Payment of liabilities (20,000) Balances for distribution 204,000 Distribution of cash to partners (204,000) 0 (20,000) $ 0 $ 70,000 2,000 0 72,000 (72,000) $ $ 66,000 2,000 0 68,000 (68,000) $ $ 62,000 2,000 0 64,000 (64,000) $ 0 $ 0 QS 12-9 Liquidation of partnership P5 The Field, Brown & Snow partnership was begun with investments by the partners as follows: Field, $131,250; Brown, $165,000; and Snow, $153,750. The partners decide to liquidate, sharing all losses equally. On May 31, after all assets were sold and all creditors were paid, only $45,000 in partnership cash remained. 1. Compute the capital account balance of each partner after the liquidation of assets and payment of creditors. Check (1) Field, $(3,750) 2. Assume that the partner with a deficit pays cash to cover the deficit. Prepare the journal entries on May 31 to record (a) the cash received to cover the deficit and (b) the final disbursement of cash to the partners. 3. Assume that the partner with a deficit does not reimburse the partnership. Prepare journal entries (a) to transfer the deficit to the other partners and (b) to record the final disbursement of cash to the partners