Liquidation of Partnerships

Table of Contents

I.The Case ProblemII.The HandoutIII.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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The CaseOh, 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:

Cash 8,100

Non-Cash Assets 70,600

Liabilities 27,500

Oh, Capital 23,300

Are, Capital 12,100

Ewe, Capital 15,800

Totals 78,700 78,700

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.

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The Handout

• Two pages follow:– One for part (a)– Another for part (b)

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Principles of Financial and Managerial Accounting IILiquidation of Partnerships(a)

ASSETS = LIABILITIES + OWNERS’ EQUITY

Description Cash Non-Cash Liabilities Oh (2) Are (1) Ewe (2)

beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a

balances

b

balances

c

balances

Name ________________________________

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http://oruaccounting.com/acct/prin2/PSLiquidationHO-PartA.pdf



beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a

balances

b

balances

c

balances

d

balances

e

balances

Principles of Financial and Managerial Accounting IILiquidation of Partnerships(b)

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http://oruaccounting.com/acct/prin2/PSLiquidationHO-PartB.pdf

The Solution: Part (a)

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



beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization

balances

b

balances

c 23,300 -12,100 -15,800

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +70,600

balances

b

balances

c 23,300 -12,100 -15,800

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +70,600 -70,600

balances

b

balances

c 23,300 -12,100 -15,800

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800

b

balances

c 23,300 -12,100 -15,800

balances

Bring down ALL the new balances.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800

b

balances

c 23,300 -12,100 -15,800

balances

The steps in liquidation are (essentially) always the same.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800

b pay creditors

balances

c 23,300 -12,100 -15,800

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800

b pay creditors -27,500 -27,500

balances

c 23,300 -12,100 -15,800

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800


balances 51,200 0 0 23,300 12,100 15,800

c 23,300 -12,100 -15,800

balances

Bring down ALL the new balances.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800


balances 51,200 0 0 23,300 12,100 15,800

c 23,300 -12,100 -15,800

balances

The steps in liquidation are (essentially always the same.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800


balances 51,200 0 0 23,300 12,100 15,800

c pay partners -51,200 -23,300 -12,100 -15,800

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800


balances 51,200 0 0 23,300 12,100 15,800

c pay partners -51,200 -23,300 -12,100 -15,800

balances 0 0 0 0 0 0




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800


balances 51,200 0 0 23,300 12,100 15,800

c pay partners -51,200 -23,300 -12,100 -15,800

balances 0 0 0 0 0 0

Make appropriate general journal entries based on this analysis.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances

b

balances

c 23,300 -12,100 -15,800

balances

Date Account Titles Debit Credit

Cash 70,600

Non-Cash Assets 70,600




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800


balances

c 23,300 -12,100 -15,800

balancesDate Account Titles Debit Credit

Liabilities 27,500

Cash 27,500




beg bal 8,100 70,600 27,500 23,300 12,100 15,800


balances 78,700 0 27,500 23,300 12,100 15,800


balances 51,200 0 0 23,300 12,100 15,800

c pay partners -51,200 -23,300 -12,100 -15,800

balances

Date Account Titles Debit Credit

Oh, Capital 23,300

Are, Capital 12,100

Ewe, Capital 15,800

Cash 51,200

The Solution: Part (b)

Return to TOC

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



beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a

balances

b

balances

c

balances

d

balances

e

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances

b

balances

c

balances

d

balances

e

balances

The $20,600 cash for which the assets were sold increases cash.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600

balances 28,700 0 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

???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?




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 0 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

ALL of the non-cash assets were sold. Non-cash assets should be reduced by $70,600.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 0 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

So when $70,600 of assets were sold for $20,600, how did we do? Gain or loss?




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 0 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

We incurred a $50,000 loss which must be allocated to the partners according to their AGREEMENT.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

Oh’s share of the loss is 2/5 of the $50,000 total.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

Are’s share of the loss is 1/5 of the $50,000 total.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

Ewe’s share of the loss is 2/5 of the $50,000 total.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

Then bring down all the new balances.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>

b

balances

c

balances

d

balances

e

balances

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.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances

c

balances

d

balances

e

balances

The creditors are paid what they want and deserve.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

Bring down all the new balances.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

This amount of cash is available to be distributed to the partners.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

But these two partners have claims greater than the amount of cash available.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

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.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

So how should

the remainingcash be

distributed?




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

Two partners deserve some of the cash; one does not.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

Skip the transaction line and determine the desired balances instead.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

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.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

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.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances

d

balances

e

balances

Two-thirds of the loss might be allocated to Oh if Ewe does not pay anything: $4,200 x 2/3 is $2,800.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances 2,800

d

balances

e

balances

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.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c

balances 2,800 1,400

d

balances

e

balances

These are their DESIRED capital

balances.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200


d

balances

e

balances

The difference between their present balanceand their desired balance is the amount of cash they are entitled to receive.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>



d

balances

e

balances

$3,300 - 2,800 = $500




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 - 500


d

balances

e

balances

$3,300 - 2,800 = $500




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>



d

balances

e

balances

The difference between their present balanceand their desired balance is the amount of cash they are entitled to receive.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>



d

balances

e

balances

$2,100 - 1,400 = $700




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 -500 - 700


d

balances

e

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 - 500 -700

balances 0 0 0 2,800 1,400 <4,200>

d

balances

e

balances




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 - 500 -700

balances 0 0 0 2,800 1,400 <4,200>

d

balances

e

balances

Now these two partners should wait patiently hoping the deficient partner will pay all or some of his deficiency. But they are also prepared if he pays none.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 - 500 -700

balances 0 0 0 2,800 1,400 <4,200>

d

balances

e

balances

The problem says the deficient partner pays $2,700 of his deficiency.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 - 500 -700

balances 0 0 0 2,800 1,400 <4,200>

d received cash + 2,700 +2,700

balances

e

balances

Cash of $2,700 is received from the deficient partner.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 - 500 -700

balances 0 0 0 2,800 1,400 <4,200>


balances 2,700 0 0 2,800 1,400 <1,500>

e

balances

New balances are determined in each column.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 - 500 -700

balances 0 0 0 2,800 1,400 <4,200>


balances 2,700 0 0 2,800 1,400 <1,500>

e

balances

Again there is money to be distributed to the partners, and the process repeats.




beg bal 8,100 70,600 27,500 23,300 12,100 15,800

a realization +20,600 -70,600 -20,000 -10,000 -20,000

balances 28,700 0 27,500 3,300 2,100 <4,200>


balances 1,200 0 0 3,300 2,100 <4,200>

c pay partners - 1,200 - 500 -700

balances 0 0 0 2,800 1,400 <4,200>


balances 2,700 0 0 2,800 1,400 <1,500>

e pay partners - 2,700 - 1,800 -900

balances 0 0 0 1,000 500 <1,500>

Liquidation of Partnerships

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