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Chap 15 - Chapter 15 Partnerships Termination and...

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Chapter 15 - Partnerships: Termination and Liquidation CHAPTER 15 PARTNERSHIPS: TERMINATION AND LIQUIDATION Chapter Outline I. The termination of a partnership and liquidation of its property may take place for a number of reasons. A. The death, withdrawal, or retirement of a partner can lead to cessation of business activity. B. The bankruptcy of either an individual partner or the partnership as a whole can necessitate this same conclusion. II. Because of the importance of liquidating and distributing assets fairly, all parties look to the accountant to play an important role in the process. A. The accountant provides timely financial information. B. The accountant works to ensure an equitable settlement of all claims. III. The schedule of liquidation A. The liquidation process usually involves the disposal of noncash assets, payment of liabilities and liquidation expenses, and distribution of any remaining cash to the partners based on their final capital balances. B. A schedule of liquidation should be produced periodically by the accountant to disclose losses and gains that have been incurred, remaining assets and liabilities, and current capital balances. IV. Deficit capital balances A. By the end of the liquidation process, one or more partners may have a negative (or deficit) capital balance often as a result of losses incurred in disposing of assets. B. The Uniform Partnership Act indicates that any deficit capital balance should be eliminated by having that partner contribute enough additional assets to offset the negative balance. C. If this contribution is not immediately received, the remaining partners may request a preliminary distribution of any partnership cash that is available. 1. This payment is based on safe capital balances, the amounts that will remain in the individual capital accounts even if all deficits and other assets prove to be complete losses that must be absorbed by the remaining partners. 2. If a portion (or all) of a deficit is subsequently recovered from a partner, a further distribution to the other partners is made based on newly computed safe capital balances. 3. Any deficit that is not recovered from a partner must be charged to the remaining partners based on their relative profit and loss ratio. V. Treatment of partner’s loan to partnership 15-1
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Chapter 15 - Partnerships: Termination and Liquidation A. The Uniform Partnership Act states that, in a liquidation, partnership assets should be used to first settle claims of partnership creditors, including claims of partners who are creditors. 1. This implies that the partnership would first repay partners’ loans before distributing any cash to partners based on their capital balances. B. However, in practice, to avoid making a cash distribution to a partner who subsequently develops a deficit capital balance, partners’ loan accounts typically are combined with partners’ capital accounts and funds are distributed accordingly.
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