B. Woods Chapter 16 - Chapter 16 DISSOLUTION AND...

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48 Chapter 16 DISSOLUTION AND LIQUIDATION OF A PARTNERSHIP Answers to Questions 1 Dissolution of a partnership terminates the partnership as a legal entity, but the partnership business may continue under a new agreement. When a partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity. Thus, a partnership may be dissolved without liquidation, but it may not be liquidated without dissolution. 2 A simple partnership liquidation is the liquidation of a solvent partnership in which all partners have equity capital and all gains and losses are realized and recognized before any distributions are made to the partners. In simple partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances. 3 The priority ranking for the distribution of assets in liquidation pursuant to the Uniform Partnership Act is Rank I Amounts owed to creditors other than partners Rank II Amounts owed to partners other than for capital and profits Rank III Amounts due to partners in respect to capital Rank IV Amounts owing to partners in respect to profits Since all profits and losses and drawings balances are closed to capital before distributions are made, Ranks III and IV may be considered together. 4 The distribution of assets for capital interests (Rank III) prior to the payment of loan balances to the partners (Rank II) is not in accordance with the Uniform Partnership Act. But the partners may agree to distribute cash or other assets for capital interests before all losses on liquidation are known. With agreement among all partners, distributions to the partners would be based on each partner's equity (combined capital and loan balances) in relation to his share of possible future losses. A partner with sufficient equity to absorb his share of possible future losses would be included in distributions, but a partner with loans to the partnership would not be included in distributions until his equity was sufficient to absorb his share of possible future losses.
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49 Dissolution and Liquidation of a Partnership 5 The assumptions for determining distributions to partners prior to recognition of all gains and losses on liquidation are (1) all partners are personally bankrupt such that no partner could contribute personal assets into the partnership and (2) all noncash assets are possible losses and should be considered actual losses for purposes of determining amounts to be distributed. In addition, liquidation expenses and probable loss contingencies should be estimated and assumed to be actual losses for purposes of determining advance distributions. 6 Capital balances represent one factor in determining a partner's equity, but loans and advances payable to and receivable from the partnership are factors that must also be considered in calculating safe payments. Partner equities, rather than capital balances, are used in safe payment
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This note was uploaded on 04/04/2012 for the course ACCT 111 taught by Professor Bemo during the Spring '12 term at Nanyang Technological University.

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B. Woods Chapter 16 - Chapter 16 DISSOLUTION AND...

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