advanced accounting 6e by jeter chaney chapter 16

• Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation... Exercise 16-6: Determine the amounts that the personal credit

Trang 2

• Prepare a liquidation schedule to settle debts and allocate assets.

• Prepare a “safe payment approach” liquidation schedule.

• Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation.

• Prepare the journal entries to incorporate a partnership.

2

Trang 3

Steps in the Liquidation Process

• First Step: Compute net income or loss up to the date of dissolution

– The closing process should be completed and– any net income or loss should be allocated to the partners in accordance with their profit and loss agreement

• Second Step: Assets not acceptable for distribution in their present form are converted into cash

• Last Step: Distribute available assets to creditors and partners

– Follow the provisions of Section 40(b) of the Uniform Partnership Act

(UPA)

3

LO 1 Steps in the liquidation process.

Trang 4

• Section 40(b) of the Uniform Partnership Act (UPA)

– Liabilities rank in order of payment, as follows:

I Liabilities to creditors other than partners,

II Liabilities to partners other than for capital and

profits (such as loans), III Liabilities to partners in respect of capital,

IV Liabilities to partners in respect of profits.

4

LO 1 Steps in the liquidation process.

Trang 5

Review Question

The first step in the liquidation process is to

a) Convert noncash assets into cash.

b) Pay partnership creditors.

c) Compute any net income (loss) up to the date of

Trang 6

Priorities of Partnership and Personal Creditors

• UPA (Section 15) provides that partners are jointly liable for all contracts and other obligations of the partnership

• Order of Priority concerning availability of assets:

a) Partnership assets1) Partnership creditors

2) Personal creditors that did not recover their claims in full from personal assets

b) Personal assets1) Personal creditors

2) Partnership creditors not satisfied from partnership assets

3) Claims of partnership against partner with deficit equity

6

LO 2 Order of priority for each class of creditors.

Trang 8

Review Question

If a partner with a debit capital balance during liquidation is insolvent, the following results:

a) The partner must borrow money to invest in the partnership

b) The partnership will give the partner cash to the extent of the partners’ debit balance.

c) The partner’s debit balance will be allocated to the other partners.

d) None of the above.

8

LO 2 Order of priority for each class of creditors.

Trang 9

Review Question

In accordance with the marshaling of assets provision of the Uniform Partnership Act, rank the following liabilities of a partnership in order of payment.

1) $20,000 loan from B Barry who is a partner.

2) $30,000 of profits from the last year of operations.

Trang 10

Exercise 16-6: Pete, Tom, and Zack have operated a laundromat for 10 years The partners, who share profits 4:3:3, respectively, decide to liquidate the partnership The firm’s balance sheet just before the partners sell other assets for $30,000 is as follows:

LO 3 Preparing a liquidation schedule.

Simple Liquidation Illustrated10

Other assets 110,000 Pete, Capital 55,000

Tom, Capital 14,000 Zack, Capital 14,000 125,000

Trang 11

Exercise 16-6: Determine the amount of cash each partner will receive in liquidation and how much cash each partner must invest in the firm, given their personal positions.

Trang 12

Exercise 16-6: Determine the amounts that the personal creditors will receive from personal assets and any distribution from the partnership.

Trang 13

LO 4 Safe payment approach.

– Total cash available are known,

• Safeguards must be taken to protect the interests of the creditors and the respective interests of each partner.

13

Trang 14

Installment Liquidation

Safe Payment Approach

• Based on three assumptions:

1) Loan to or from an individual partner will be combined with respective partner’s capital account.

2) Remaining noncash assets will not provide any additional cash 3) Partner with a debit balance in capital account will be unable to pay amounts owed.

• A safe payment schedule is prepared each time cash is to be distributed.

14

Trang 15

Installment Liquidation15

Exercise 16-5: Following is the balance sheet of the BDO Partnership:

Trang 16

Exercise 16-5: Determine the proper distribution of cash, using the safe payment approach

Trang 17

LO 5 Four steps in an advance plan.

Advance Plan for the Distribution of Cash

• Objective is to derive the order and the amount of cash that should be distributed to each partner such that no partner receiving a cash

distribution will have to make an additional investment.

• Such a distribution plan will bring the balances of the partners’

capital accounts into their profit and loss ratio as soon as possible.

– Rationale : Once the capital balances are in the profit and loss ratio, no one partner is in any better position than any other to absorb losses.

17

Trang 18

Advance Plan for the Distribution of Cash

• Step 1 Determine net capital interest of each partner.

• Step 2 Provide an order of cash distribution in which the ratio of partners’ capital interest will eventually be equal to their profit and loss ratio

• All partners will then have an equal ability to absorb their share of partnership losses.

• Step 3 Determine the amount of cash to distribute to bring the ratios of their capital interests into alignment with their profit and loss ratios.

• Step 4 Prepare a cash distribution plan.

18

Trang 19

19

Problem 16-5: Baker, Strong, and Weak have called on you to assist them

in winding up the affairs of their partnership

1 The trial balance of the partnership at June 30, 2014, is:

Strong, Capital 45,000

Weak, Capital 31,500

$160,500

Trang 20

Problem 16-5:

2) The partners share profits and losses as follows: Baker, 40%;

Strong, 40%; and Weak, 20%.

3) The partners are considering an offer of $100,000 for the accounts receivable, inventory, and plant and equipment as of June 30 The

$100,000 would be paid to the partners in installments, the number and amounts of which are to be negotiated.

Required:

• Prepare an advance cash distribution plan as of June 30, 2014 Prepare

a schedule to show how the potential cash ($106,000) would be distributed as it becomes available.

20

Trang 21

Problem 16-5:

Step 1 Determine net capital interest of each partner.

Trang 22

Problem 16-5:

Step 2 Provide an order of cash distribution in which the ratio of partners’ capital interest will eventually be equal to their profit and loss ratio.

Trang 23

Problem 16-5:

Step 3 Determine the amount of cash to distribute to bring the ratios

of their capital interests into alignment with their profit and loss ratios.

Trang 24

Problem 16-5: Step 4 Prepare a cash distribution plan.

Trang 25

Review Question

In a partnership liquidation, the final cash distribution to the partners should be made in accordance with the:

a) a partners' profit and loss sharing ratio.

b) b balances of the partners' capital accounts.

c) c ratio of the capital contributions by the partners.

d) d ratio of capital contributions less withdrawals by

the partners

25

Trang 26

LO 6 Incorporation of a partnership.

Incorporation of a Partnership

• After a partnership has been operating for a period of time, the partners may find that the partnership form of business is no longer satisfactory.

• Incorporation may be attractive because of:

– Limited liability.

– Continuity of existence.

– Ability to raise needed resources

26

Trang 27

Retention of Partnership Books by Corporation

• Steps to record the incorporation 1) Assets and liabilities are adjusted to fair value A valuation adjustment account is created to accumulate the gains or losses.

2) The valuation adjustment account is closed to the partners’

capital accounts in accordance with their profit and loss ratio 3) Partners’ capital accounts are closed upon the transfer of

capital stock

27

Trang 28

Problem 16-7: Jan and Sue have engaged successfully as partners in their law firm for a number of years The partners decide to organize a corporation

to take over the business The Dec 31, 2014, after-closing trial balance is as follows:

Debit Credit

Trang 29

Problem 16-7: The partners have hired you as an accountant to adjust the recorded assets and liabilities to their market values and to close the partners’ capital accounts to the new corporate capital stock The corporation is to

retain the partnership’s books, and the assets of the partnership should be taken over by the corporation in the following amounts:

Trang 30

Problem 16-7: A Prepare the necessary journal entries to express the

agreement described

Incorporation of a Partnership30

Office Equipment14,200

Valuation Adjustment2,700

Trang 31

Problem 16-7: B Prepare the journal entries assuming the issuance of 400

shares (par value $100) of stock to Jan and Sue

Incorporation of a Partnership31

Trang 32

New Books Established by Corporation

• If the corporation establishes a new set of books:

– All accounts on the partnership books will end with a zero balance.

– Asset and liability accounts will be closed on the partnership books and transferred to the corporation.

– The corporation records the assets received and the liabilities assumed on the new books at the net cost of the stock issued (which equals the adjusted value of the net assets on the

partnership books).

32

Trang 33

Review Question

If a partnership is undergoing a transformation to a corporation, which of the following is a result?

a) Assets and liabilities are adjusted to fair value.

b) The net assets are distributed to the partners in their

profit and loss ratio.

c) The partners receive stock in the new corporation.

d) Both (a) and (c) are correct.

33

Định dạng
Số trang	33
Dung lượng	493,13 KB