Chapter 16 - MGMT 503
types of liquidation
1. Lump-sum Liquidation (all assets are converted into cash, creditors paid and lump-sum payment made to partners within a very short time! 2. Installment Liquidation (typically takes several months - majority of cases)
Liquidation Process
1. Non-cash assets conversion into cash (Gains and losses incurred on the realization of non-cash assets during liquidation are allocated among the partners in the profit-and- loss sharing ratio) 2. creditor payments to the extent possible 3. remaining funds distributed to partners - always in cash
Events that cause dissolution
1. partnership at will 2. partnership for a definite term or specific undertaking 3. event that makes it unlawful to carry on 4. judicial determination - partnership begins in the winding up
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 .
C
Cash Distribution Plan/LAP
The loss absorption potential (LAP) of each partner is calculated by dividing the partner's capital balance (incl loan to/from partnership!) by his or her profit-and-loss sharing percentage.
Cash Distribution Plan
- "Safe Payment Schedule" is inefficient to be used as a plan. It is only to ensure no excessive payments are made to partners on a round by round basis. - "Cash Distribution Plan" is a pro forma (what if) statement for installment liquidations (not relevant for lump-sum liquidation) Plan - first cash distribution to partners goes to that partner who has the highest loss absorption potential (LAP)
Installment liquidation
- Assets are sold over time. - Goal: higher proceeds on sale of assets, no fire sale - Cash is distributed throughout the liquidation process - No cash distributions are made to partners until outside creditors have been paid in full.
Deficits in partners' capital accounts
- Generally, a partner with a deficit in his or her capital account must make a contribution to the partnership to eliminate it in cash or setoff against loans to the partnership - Liquidating distributions, in cash, are made to each partner with a capital credit balance only. - If a partner fails to remedy his or her capital deficit, all other partners must absorb
Statement of partnership realization and liquidation - statement of liquidation
- Is a historical statement. - Documents what actually happened in the past during the liquidation process - It presents, in worksheet form, the effects of the liquidation on the partnership capital accounts.
Loans to/from partners
- Liabilities to partners for loans the partners made to the partnership generally have the same status as liabilities to 3rd party creditors - Receivables from partners for loans or other advances made by the partnership to partners have the same status as other assets of the partnership.
Winding up and liquidation
- The partnership continues for the limited purpose of winding up the business and completing work in process. - Winding up process includes the transactions necessary to liquidate the partnership. - Some partnerships change to the liquidation basis of accounting once they no longer consider the business to be a going concern and liquidation is 'imminent'
Uniform partnership act of 1997
- includes 7 sections which deal specifically with the dissolution and winding up of a partnership - creditors have first claim - based on balances in their capital accounts
Schedule of safe payments
- is a pro forma (what if) statement for installment liquidations (not relevant for lump-sum liquidation) - Prepare a new "Schedule of Safe Payments" for each DOLLAR DISTRIBUTION using updated "Schedule of Liquidation" - shows what could happen in the future—on a worst-case basis. Before any cash goes to the partners, consider two hypothetical worst-case assumptions. - partnership may also withhold specific amounts - cash only goes to partners with positive balances
Dissociation
- the legal description of the withdrawal of a partner includes: partner's death, voluntary withdrawal, or judicial determination - Not all dissociations result in a partnership dissolution/liquidation.
Ensure the following before making distribution payments
A. have paid all outside creditors b. have an up-to-date statement of realization/liquidation C. Schedule of Safe payments D. Cash distribution plan (loss absorption)
The difference between dissociation and dissolution is: a. Dissolution relates to adding a powder to a liquid. b. Dissociation 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
