ACC 618 CH 15

UPA requirement for replenishing a negative capital account

UPA states that the partner who has the deficit must contribute an amount to replenish the negative account

If liquidation occurs over an extended period of time, accountants might prepare:

a cash predistribution plan

to determine safe payments to be made to partners at any time, the accountant assumes:

all following events will result inn maximum losses

a negative (deficit) capital balance can arise when?

at the beginning of the liquidation process or can arise during the liquidation process

predistribution plan

at the start of a liquidation, accountants produce a predistribution plan as a guide for future payments

any capital in excess if the maximum requirement:

is a safe balance, an amount that can be immediately conveyed to the partner

instances that could cause a partnership to be insolvent

losses, partner drawings, or litigation depletes the working capital

what can be done to avoid legal actions when a partner has a negative capital balance?

negotiate a settlement

step one of the liquidation of a partnership:

noncash assets sold for cash and gains and losses on the sales are allocated to the capital accounts of partners based on P/L ratios

number of transactions required in partnership liquidations

numerous transactions over months and possibly even years

a negative capital balance arising during the liquidation can occur as:

partners' capital balances absorb losses from noncash asset sales and liquidation expenses

step two of the liquidation of a partnership:

partnership liabilities and expenses incurred during the liquidation are paid out of the partnerships available cash

Assume the partnership of Holland, Dozier, and Ross was terminated at the beginning of the current year. Business activities ceased and all noncash assets were subsequently converted into cash. During the liquidation process, the partnership incurred a number of large losses that have been allocated to the partners' capital accounts on a 4:4:2 basis, respectively. A portion of the resulting cash is then used to pay all partnership liabilities and liquidation expenses. Assume that the following four account balances remain open: Cash 20,000 Holland CA (6,000) Dozier CA 15,000 Ross CA 11,000 Total capital 20,000 safe payment made to Dozier:

safe payment made to Dozier for 11,000 reduces his capital account from 15,000 to the minimum $4,000 level

preliminary distribution ensures:

that a partnership maintains enough capital to absorb future losses

purpose of 11,000 safe payment to Dozier and 9,000 safe payment to Ross

the 11,000 and 9,000 are payments that can be distributed to the partners without fear of creating new deficits in the future

preliminary distribution

the accountant can determine a preliminary distribution of partnership assets at the beginning of the liquidation process

deficits are most likely to occur when:

the partnership is insolvent at the start of the liquidation or the disposal of noncash assets results in a material loss

why might an accountant prepare a predistribution plan in advance of the sale of noncash assets?

to guide the distribution of safe payments during the liquidation

when a partnership is terminated, gains and losses are recorded:

directly to the partners' capital accounts

a primary concern for parties involved in liquidation:

keeping track of the continuing changes in each partner's capital balance

if each partner has a capital balance large enough to absorb all liquidation losses, accountants should experience:

little difficulty in terminating assets

first option in eliminating a partner's negative capital balance

partner with deficit balance has sufficient person assets to be able to make a contribution to the partnership to eliminate the deficit

allocation of loss to other partners besides the one with the deficit is based on:

relative profit and loss ratios

What does a negative capital account mean?

the assigned share of partnership losses exceeds the partner's capital balance at the date the partnership terminated

accountants should produce frequent reports summarizing:

transactions as they occur

at the end of liquidation, the partnership could be:

unable to generate enough cash to satisfy creditor claims

Since Rubens can ONLY absorb a partnership loss of $60,000, new balances are computed assuming that the partnership has a $60,000 loss.

With Rubens wiped out, continue calculating maximum absorbable losses using income sharing percentages of Smith, 20% (2/5), and Trice 30% (3/5).

partnerships sufficient cash balances

partnerships often have sufficient cash balances at the date of termination that some cash can be paid out to individual partners before noncash assets are sold

If liquidation occurs over an extended period of time, accountants can facilitate distribution of cash in installments by calculating:

safe payments

after all obligations are paid, what is prepared?

schedule is prepared to determine the partners' ending capital account balances and the appropriate distribution of the final cash balance

at the end of liquidation, one or more partners could have:

a negative capital account

second option in eliminating a partner's negative capital balance

a partner is personally insolvent and the other partners absorb the deficit through reductions in their capital accounts

the PD plan stimulates:

a series of losses each of which is large enough to eliminate partners claims to property

accountant's job in termination/liquidation process

summarizes and keeps track of the process in a statement of partnership liquidation

After partnership assets are liquidated and obligations are paid, what is done with the rest of the cash?

$63,000 cash is distributed to Morgan and Houseman on the basis of their capital balances

step 3 of the liquidation of a partnership:

any cash remaining is distributed to the individual partners on the basis of their capital accounts

Any positive capital balance that remains even after the inclusion of all potential losses can be:

paid to the partner without delay

if a liquidation takes place over an extended period of time, the partners are likely to request:

that cash be distributed to them as it becomes available through the liquidation of partnership assets

after safe payments, each partner is assumed to be:

insolvent and no cash will be received in liquidating remaining noncash assets

whenever cash becomes available, the PD plan indicates:

the appropriate recipients without drawing up new plans

the 4,000 allocation of loss for Dozier and the 2,000 for Ross must remain:

in the respective capital accounts until the issue is resolved

assume that Morgan and Houseman have been operating an art gallery as a partnership for a number of years. Morgan and Houseman allocate all profits and losses on a 6:4 basis, respectively. On May 1, 2017, the partners decide to terminate business activities, liquidate all noncash assets, and dissolve their partnership. Although they give no specific explanation for this action, any number of reasons could exist:

The partners could have come to a disagreement or business profits could have become inadequate

Assume the partnership of Holland, Dozier, and Ross was terminated at the beginning of the current year. Business activities ceased and all noncash assets were subsequently converted into cash. During the liquidation process, the partnership incurred a number of large losses that have been allocated to the partners' capital accounts on a 4:4:2 basis, respectively. A portion of the resulting cash is then used to pay all partnership liabilities and liquidation expenses. Assume that the following four account balances remain open: Cash 20,000 Holland CA (6,000) Dozier CA 15,000 Ross CA 11,000 Total capital 20,000 If Holland's 6,000 deficit proves uncollectible, the loss:

will be written off against the capital accounts of Dozier and Ross: Dozier: 2/3 of 6,000 = (4,000) Ross: 1/3 of 6,000 = (2,000)

final loss attributable to Smith:

At this final point in the simulation, an additional loss of this amount also ends Smith's right to receive any funds from the liquidation process. Having the sole positive capital balance remaining, this partner would have to absorb the entire amount of the final loss

how much can the partnership transfer to the partners immediately without fear of injuring any participants in liquidation?

Because the partnership holds $60,000 in cash, it can transfer the extra $14,000 to the partners immediately without fear of injuring any participants in the liquidation.

The balance sheet shows that Mason has conveyed $20,000 to the business, an amount that was considered a loan rather than additional capital. Is the $20,000 to be viewed as a liability to the partnership or as a part of the partner's capital balance?

The loan is merged with the partner's capital account balance at the beginning of liquidation.

refer to previous. assume that partners estimate that 6,000 will be the maximum expense incurred in carrying out the liquidation. How much cash does the partnership need to carry out liquidation?

The partnership needs $46,000 to meet all obligations: $40,000 to satisfy partnership liabilities. $6,000 for liquidation expenses.

procedures involved in terminating and liquidating partnership assets:

1. assets are converted into cash to pay business 2. remaining assets distributed to partners based on capital balances 3. partnership books are closed once assets are distributed

liquidation of a partnership generally involves 3 steps:

1. noncash assets sold for cash, and gains and losses allocated to capital accounts 2. partnership liabilities and expenses incurred during liquidation are paid out with available cash 3. any cash remaining is distributed to partners based on their capital balances

the statement of partnership liquidation is prepared at periodic intervals to disclose:

1. transactions up to date 2. assets still being held by partnership 3. liabilities remaining to be paid 4. current cash and capital balances

once safe payments are made, there is an assumption about funds

assumption that no further funds will be generated to ensure that negative capital balances cannot arise as a result of premature payments being made to partners

Refer to previous. First, determine the maximum loss that each partner can absorb. Divide each partner's capital balance by their respective income sharing percent.

Based on a 50 percent share of income, a loss of only $60,000 would reduce this partner's capital account to a zero balance. If the partnership does incur a loss of this amount, Rubens can no longer hope to recover any funds from the liquidation process.

effect of liquidation expenses on distribution of assets

Because these expenses have the same effect on the capital accounts as losses, they do not change the sequential pattern by which assets eventually will be distributed.

safe payment made to Ross:

a 9,000 safe payment to Ross decreases his capital account to the 2,000 limit.

safe payments

distribute cash in installments without the risk of a negative capital balance

After the ending capital balances have been calculated, the remaining cash can be:

distributed to the partners to close out the financial records of the partnership

purpose of frequent statements of partnership liquidation

keeps stakeholders, creditors, and partners updated

Because Rubens's capital balance already has been eliminated, Trice is now in the most vulnerable position:

Only a $55,000 Step 2 loss is required to reduce this partner's capital balance to zero. According to this second schedule, a total loss of $115,000 ($60,000 from Step 1 plus $55,000 from Step 2) leaves capital of only $6,000, a balance attributed entirely to Smith.

Assume the partnership of Holland, Dozier, and Ross was terminated at the beginning of the current year. Business activities ceased and all noncash assets were subsequently converted into cash. During the liquidation process, the partnership incurred a number of large losses that have been allocated to the partners' capital accounts on a 4:4:2 basis, respectively. A portion of the resulting cash is then used to pay all partnership liabilities and liquidation expenses. Assume that the following four account balances remain open: Cash 20,000 Holland CA (6,000) Dozier CA 15,000 Ross CA 11,000 Total capital 20,000 What is required to replenish the negative capital balance according to the UPA?

Holland legally is required to contribute an additional $6,000 to eliminate the deficit balance.

Assume the liquidation of Morgan and Houseman proceeds in an orderly fashion through the following events: 2020 June 1: The inventory is sold at auction for $15,000. June 15: Of total accounts receivable, $9,000 is collected and the remainder is written off as bad debts. July 1: Fixed assets are sold for a total of $29,000. July 5: All partnership liabilities are paid. July 10: $3,000 in liquidation expenses is paid to cover costs such as accounting, legal fees, and commissions incurred in disposing of partnership property. July 12: All remaining cash is distributed to the owners based on their final capital account balances. JE to record the liquidation of Morgan and Houseman:

first JE: DEBIT Cash 15,000 Morgan CA (60% of loss) 4,200 Houseman CA (40% of loss) 2,800 CREDIT Inventory 22,000 last JE: DEBIT Morgan CA 1,800 Houseman CA 1,200 CREDIT Cash 3,000

Assume the partnership of Holland, Dozier, and Ross was terminated at the beginning of the current year. Business activities ceased and all noncash assets were subsequently converted into cash. During the liquidation process, the partnership incurred a number of large losses that have been allocated to the partners' capital accounts on a 4:4:2 basis, respectively. A portion of the resulting cash is then used to pay all partnership liabilities and liquidation expenses. Assume that the following four account balances remain open: Cash 20,000 Holland CA (6,000) Dozier CA 15,000 Ross CA 11,000 Total capital 20,000 what is the cash balance after the 6,000 is replenished by Holland? What does this allow?

the cash balance is raised to 26,000, which allows a complete distribution to be made to Dozier (15,000) and Ross (11,000) based on their capital account balances