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Liquidation of Partnerships

Liquidation of Partnerships. Table of Contents. I. The Case Problem II. The Handout III. The Solution for Part (a) IV. The Journal Entries for Part (a) V. The Solution for Part (b) VI. The Journal Entries for Part (b).

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Liquidation of Partnerships

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  1. Liquidation of Partnerships

  2. Table of Contents I. The Case Problem II. The Handout III. The Solution for Part (a) IV. The Journal Entries for Part (a) V. The Solution for Part (b) VI. The Journal Entries for Part (b) This presentation is a work in progress. Most of these Table of Content items have been completed; others may be completed in the future. Hopefully, you will be able to go to the portion you did not get to complete in class or the portion you would like to review. Happy clicking!

  3. The Case PrinterFriendlyVersion Oh, Are, and Ewe are partners who share profits and losses 2:1:2. A summary of the balances in the accounts in their general ledger at the time they decide to liquidate their partnership is as follows: Instructions: Make the entries necessary to liquidate their partnership (1) in terms of the accounting equation, and (2) as general journal entries assuming the non-cash assets are sold for (a) $70,600, and (b) $20,600, and the deficient partner subsequently pays $2,700 of his deficiency. Return to TOC

  4. The Handout • Two pages follow: • One for part (a) • Another for part (b) Return to TOC

  5. Principles of Financial and Managerial Accounting IILiquidation of Partnerships(a) Name ________________________________ PrinterFriendlyVersion Return to TOC

  6. Principles of Financial and Managerial Accounting IILiquidation of Partnerships(b) PrinterFriendlyVersion Return to TOC

  7. The Solution: Part (a) Return to TOC

  8. a) Assuming the non-cash assets were sold for $70,600.

  9. a) Assuming the non-cash assets were sold for $70,600.

  10. a) Assuming the non-cash assets were sold for $70,600.

  11. a) Assuming the non-cash assets were sold for $70,600. Bring down ALL the new balances.

  12. a) Assuming the non-cash assets were sold for $70,600. The steps in liquidation are (essentially) always the same.

  13. a) Assuming the non-cash assets were sold for $70,600.

  14. a) Assuming the non-cash assets were sold for $70,600.

  15. a) Assuming the non-cash assets were sold for $70,600. Bring down ALL the new balances.

  16. a) Assuming the non-cash assets were sold for $70,600. The steps in liquidation are (essentially always the same.

  17. a) Assuming the non-cash assets were sold for $70,600.

  18. a) Assuming the non-cash assets were sold for $70,600.

  19. a) Assuming the non-cash assets were sold for $70,600. Make appropriate general journal entries based on this analysis.

  20. a) Assuming the non-cash assets were sold for $70,600.

  21. a) Assuming the non-cash assets were sold for $70,600.

  22. a) Assuming the non-cash assets were sold for $70,600.

  23. The Solution: Part (b) Return to TOC

  24. b) Assuming the non-cash assets were sold for $20,600.

  25. b) Assuming the non-cash assets were sold for $20,600. The $20,600 cash for which the assets were sold increases cash.

  26. b) Assuming the non-cash assets were sold for $20,600. ??? Should non-cash assets be reduced by $20,600 (to keep the equation in balance… ??? Or should non-cash assets be reduced by $70,600 because all were sold?

  27. b) Assuming the non-cash assets were sold for $20,600. ALL of the non-cash assets were sold. Non-cash assets should be reduced by $70,600.

  28. b) Assuming the non-cash assets were sold for $20,600. So when $70,600 of assets were sold for $20,600, how did we do? Gain or loss?

  29. b) Assuming the non-cash assets were sold for $20,600. We incurred a $50,000 loss which must be allocated to the partners according to their AGREEMENT.

  30. b) Assuming the non-cash assets were sold for $20,600. Oh’s share of the loss is 2/5 of the $50,000 total.

  31. b) Assuming the non-cash assets were sold for $20,600. Are’s share of the loss is 1/5 of the $50,000 total.

  32. b) Assuming the non-cash assets were sold for $20,600. Ewe’s share of the loss is 2/5 of the $50,000 total.

  33. b) Assuming the non-cash assets were sold for $20,600. Then bring down all the new balances.

  34. b) Assuming the non-cash assets were sold for $20,600. This negative balance is called a “deficiency.” This partner did not have enough capital to absorb his share of the loss. The balances of the other two capital accounts are credit yet this balance is DEBIT.

  35. b) Assuming the non-cash assets were sold for $20,600. The creditors are paid what they want and deserve.

  36. b) Assuming the non-cash assets were sold for $20,600. Bring down all the new balances.

  37. b) Assuming the non-cash assets were sold for $20,600. This amount of cash is available to be distributed to the partners.

  38. b) Assuming the non-cash assets were sold for $20,600. But these two partners have claims greater than the amount of cash available.

  39. b) Assuming the non-cash assets were sold for $20,600. And this partner does not deserve to share in the distribution. His deficiency means he actually OWES the p/s rather than the p/s owing him.

  40. b) Assuming the non-cash assets were sold for $20,600. So how should the remainingcash be distributed?

  41. b) Assuming the non-cash assets were sold for $20,600. Two partners deserve some of the cash; one does not.

  42. b) Assuming the non-cash assets were sold for $20,600. Skip the transaction line and determine the desired balances instead.

  43. b) Assuming the non-cash assets were sold for $20,600. Three things could potentially happen to the deficiency. He could pay 1) all, 2) some, or 3) none of the deficiency. The desired balances are determined as if the worse thing happens: if the deficient partner pays NONE of his deficiency.

  44. b) Assuming the non-cash assets were sold for $20,600. The potential loss should be allocated to the partners in their profit and loss sharing agreement. The agreement was 2:1:2, but since the deficient partner is not participating, the ratio becomes 2:1.

  45. b) Assuming the non-cash assets were sold for $20,600. Two-thirds of the loss might be allocated to Oh if Ewe does not pay anything: $4,200 x 2/3 is $2,800.

  46. b) Assuming the non-cash assets were sold for $20,600. One-third of the loss might have be to allocated to Are if Ewe does not pay: $4,200 x 1/3 is $1,400.

  47. b) Assuming the non-cash assets were sold for $20,600. These are their DESIRED capital balances.

  48. b) Assuming the non-cash assets were sold for $20,600. The difference between their present balanceand their desired balance is the amount of cash they are entitled to receive.

  49. b) Assuming the non-cash assets were sold for $20,600. $3,300 - 2,800 = $500

  50. b) Assuming the non-cash assets were sold for $20,600. $3,300 - 2,800 = $500

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