Advanced Accounting Chapter 16 PPT

What causes dissolution in: 1) An at-will partnership? 2) A partnership with a definite term or specific undertaking? (3)

1) A partner's express notice to leave the partnership. 2) A) When after a partner's death or wrongful disassociation, at least half of the remaining partners decide to wind up the partnership business. B) When all of the partners agree to wind up the business. C) When the term or specific undertaking has expired or been completed.

Gains and losses incurred on the realization of noncash assets during liquidation are (2):

1) Allocated among the partners in the profit and loss- sharing ratio (such as 4:3:1). 2) Unless agreed to otherwise by the partners.

What two legal events cause the dissolution of a partnership?

1) An event that makes it unlawful to carry on a substantial part of the partnership business. 2) A judicial determination.

What is an installment liquidation? (3)

1) Assets are sold over time. 2) Cash is distributed throughout the liquidation process. 3) Takes place over an extended period in order to obtain the largest possible amount for the realization of the assets.

1) A partner having a capital account deficit may be able to eliminate the deficit by: 2) A deficit that cannot be eliminated is allocated to:

1) Capital contribution setoff (against loans to the partnership). 2) The remaining partners who have positive capital balances (using their P/L sharing ratio).

1) What do partners with deficits in their capital accounts have to do to remedy the deficit? 2) Which partners get a liquidating distribution of cash? 3) What happens if a partner fails to remedy their capital deficit?

1) Make a contribution to the partnership. 2) Those with capital credit balances. 3) All other partners must contribute, in the proportion to which these partners share partnership losses, the additional amount necessary to pay the partnership's obligations.

Three steps of a lump-sum liquidation:

1) Noncash assets converted to cash. 2) Creditors paid to the extent possible. 3) Single, lump-sum payment is made to the partners for their capital interests.

Sharing profits and losses in the ratio of capital balances (3)

1) One of the most important safeguards used in partnership agreements. 2) Results in no partner ever having a capital account deficit balance until the losses incurred in liquidation exceed the total partnership capital. 3) Thus, all partners go into a deficit position simultaneously.

When dissolving the partnership, the remaining cash is distributed in the following order (3):

1) Pay the firm's creditors. 2) Loans to/from partners are resolved. 3) Remainder is distributed to partners according to their rights to liquidating distributions under the partnership agreement.

The cash distribution plan 1) What is it? 2) When is it prepared?

1) Pro forma (what if) statement for installment liquidations. 2) Only prepared once at the beginning of the liquidation process.

The schedule of safe payments 1) What is it? 2) What does it portray? 3) How often must it be prepared?

1) Pro forma (what if) statement for installment liquidations. 2) Portrays what could happen in the future—on a worst-case basis. 3) Must prepare a new schedule each time cash becomes available for distribution to the partners.

What two items can be used to determine the amount to be distributed to each partner at any point in time?

1) Schedules of safe payments at each cash distribution date will have to be done several times. 2) A cash distribution plan at the beginning of the liquidation process need be done only once.

Two consequences of having the highest Loss Absorption Potential. Is this a good thing to have?

1) The first partner to receive cash. 2) The partner that could suffer the greatest inequity in relation to his or her capital balance. 3) No

1) How are loans to/from partners treated during liquidation? 2) Do these loans have any priority for repayment? 3) Are partners frequently required to subordinate their receivables from the partnership to creditors?

1) The same as third party creditors. 2) No 3) Yes

Statement of partnership realization and liquidation 1) What may this be prepared for? 2) What is it often called? 3) What does it present in worksheet form?

1) To guide and summarize the partnership liquidation process. 2) A statement of liquidation. 3) The effects of the liquidation on the partnership's balance sheet accounts.

1) When is a partnership insolvent? 2) Who is liable for the remaining unpaid partnership liabilities?

1) When existing cash and cash generated by the sale of the assets are not sufficient to pay the partnership's liabilities. 2) Individual partners are liable for the remaining unpaid partnership liabilities.

1) How long does the partnership continue operations after dissolution? 2) What transactions are included in winding up? 3) What accounting method do some partnerships change to during liquidation and why?

1) Winding up the business and completing work in process. 2) Transactions necessary to liquidate the partnership. 3) Liquidation basis; they no longer consider the business to be a going concern.

1) Does a partner that winds up absorbing some or all of another partner's capital deficit have legal recourse against that partner? 2) Why or why not?

1) Yes 2) That partner has broken the terms of the partnership agreement.

The Rule of Setoff

A deficit balance in a partner's capital account can be eliminated to the extent that such partner has a loan to the partnership.

Who has first claim to a partnerships assets?

Creditors

Which of the following statements is true about a lump-sum partnership liquidation? A) Lump-sum liquidations take place over an extended period of time. B) Lump-sum liquidations can only take place when the partnership has two partners. C) Lump-sum liquidations relate mainly to corporations. D) Lump-sum liquidations take place all at once or over a short period of time .

D) Lump-sum liquidations take place all at once or over a short period of time .

How is Loss Absorption Potential calculated?

Divide the partners capital account balance by their profit or loss sharing percentage.

In liquidation, cash distributions to partners are determined based on: A) Who has the highest capital balance. B) How profits and losses are shared. C) Partners' loans to the partnership having priority over partners' capital balances. D) The marshalling of assets principle. E) The rule of setoff. F) None of the above.

F) None of the above.

How do you know if you have allocated losses correctly?

If the remaining cash balances at the end are exactly enough to pay back the partners' capital balances.

When does the winding up process begin?

On dissolution

Order of payments upon liquidation:

Outside debt Inside debt Capital

How many sections in the UPA 1997 deal specifically with the dissolution and winding up of a partnership?

Seven

How are partner's loans from the partnership treated when calculating Loss Absorption Potential?

Subtracted

Disassociation What three events are included? Do all disassociation's result in a partnership liquidation?

The legal description of a partners withdrawal, including the following: 1) A partner's death. 2) A partner's voluntary withdrawal. 3) A judicial determination. No

Loss Absorption Potential

The maximum loss that the partnership can realize before the partner's capital account balance is extinguished.

Which partner gets the first cash distribution?

The partner with the highest Loss Absorption Potential

Dissolution

The termination of a partnership

How are any assets remaining after the creditors are satisfied handled?

They are distributed to the partners based on the balances in their capital accounts.

What is the effect of distributing cash to partners based on either (a) schedules of safe payments or (b) cash distribution plans?

To bring the capital balances into the profit and loss sharing ratio.

In determining a partner's Loss Absorption Potential, are that partner's loans to the partnership added in?

Yes

Which of the following is NOT true about the schedule of safe payments and cash distribution plans? A) Cash distribution plans are prepared multiple times during the liquidation as cash comes in. B) Cash distribution plans are prepared at the beginning of the liquidation. C) Schedules of safe payments are prepared multiple times during the liquidation as cash comes in. D) The allocation of assets to partners is the same under the cash distribution plan and schedule of safe payments.

A) Cash distribution plans are prepared multiple times during the liquidation as cash comes in.

The difference between disassociation and dissolution is: A) Dissolution relates to adding a powder to a liquid. B) Disassociation relates to the withdrawal of a partner and dissolution relates to the winding up of a partnership. C) Dissolution relates to the dissolving of a partner's personal assets. D) Dissolution relates to the withdrawal of a partner and disassociation relates to the winding-up of a partnership.

B) Disassociation relates to the withdrawal of a partner and dissolution relates to the winding up of a partnership.