5. Liquidation of a Partnership

What happens when a partnership is liquidated?

Its business ends.

What is the first step that is required when a partnership is liquidated?

Record the sale of assets for cash, and any gain or loss is allocated to partners using their income-and-loss-sharing agreement.

What is the second step that is required when a partnership is liquidated?

Pay all partner liabilities.

What is the third step that is required when a partnership is liquidated?

Distribute any remaining cash to partners based on their capital balances.

What are the two cases partnership liquidation can fall into?

1. No capital deficiency.

2. Capital deficiency.

What does no capital deficiency mean?

All partners have a zero credit balance in their capital accounts for final distribution of cash.

What happens on the liquidation date?

The current period's income or loss is transferred to the partners' capital accounts according to their sharing agreement.

What is the first step for liquidation?

The partnership sell its assets, and any losses or gains are shared among partners according to their income-and-loss-sharing agreement.

What is the entry for a partnership to sell its assets? (Assume the asset is land)

• debit Cash for amount sold for

• credit Land for value of the asset

• credit Gain from Liquidation for amount sold for over the value of the asset (debit to Loss from Liquidation if it is a loss instead of credit)

What is the entry to allocate a gain from liquidation per the partners’ income-and-loss sharing agreement?

debit Gain from Liquidation, credit each partner’s capital account for their allowance according to the income-and-loss sharing agreement.

What is the second step for liquidation?

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.

What is the entry to record paying off a liability such as Accounts payable?

debit Accounts payable, credit cash (assuming no gains or loss occurred)

What is step 3 for liquidation?

Any remaining cash is divided among the partners according to their capital account balances.

What is the entry to record dividing the remaining cash among the partners to their capital account balances?

debit all partners’ Capital accounts for their respective amounts, credit Cash for total of all the capital accounts.

Review

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.

Review example under no capital deficiency.

Review statement of liquidation under no capital deficiency.

What is capital deficiency?

Capital deficiency means a partner has a debit balance in their capital account at the point of final cash distribution.

Where does a capital deficiency come from?

his comes from liquidation losses, large withdrawals before liquidation, or recurring losses in prior periods.

What must a partner with a capital deficiency do?

A partner with a capital deficiency must pay cash into the partnership.

What does the final distribution of cash depends on if there is a capital deficiency?

Depends on if the partner pays the deficiency or the partner cannot pay the deficiency.

If the partner that has a capital deficiency can pay the deficiency, what is the entry to record receipt of payment from that partner?

debit Cash, credit paying partner’s capital account.

What is the entry to record the final cash distribution to partners?

debit each partner's capital account for amount in capital account balance after allocating gain or loss from sale of assets (using income and loss sharing agreement) and paying all partner liabilities, credit Cash for all capital account amounts added together.

What happens if the partner cannot pay the deficiency?

The remaining partners with credit balances absorb any partner's unpaid deficiency according to their income-and-loss-sharing agreement.

What is the entry for if the other partners have to absorb a partner’s deficiency?

debit Capital accounts of the partners absorbing the deficiency for the amount based on their income-and-loss-sharing ratio, credit Capital account of partner who has capital deficiency.

Review example under Capital Deficiency

Review Need-To-Know 12-5