Sand, Mell, and Rand are partners who share incomes and losses in a 1:4:5 ratio.

Question

Sand, Mell, and Rand are partners who share incomes and losses in a 1:4:5 ratio. After lengthy disagreements among the partners and several unprofitable periods, the partners decided to liquidate the partnership. Before the liquidation, the partnership balance sheet showed the following: Cash $10,000 Total "other assets," $106,000 Total liabilities, $88,000 Sand, Capital, $1,200 Mell, Capital, $11,700 Rand, Capital, $15,100 The "other assets" were sold for $ 85,000. Determine the following: The gain (or loss) realized on the sale of the assets. The balances in the partners' capital accounts after the distribution of this gain or loss to the capital accounts. Assume that if any capital deficits exist, they are not made up and the deficient partner pays down his or her deficit to zero. How much cash will each of the partners receive in the final liquidation? Provide an explanation between 200 and 300 words in length of the requirements for liquidating the partnership. What documents will be needed? How will the money be distributed? What other options might there be in place of liquidation?

Explanation / Answer

Solution: a. Loss on sale of other assets = Sale of the other assets - Book value of other asset

= $85000 - $106000 =( $21000)

b. balances in the partner's capital accounts after the distribution of this loss to the capital accounts:

Partner Sand = 1200 - 2100 (1/10th) = $ -900

Partner Mell = 11700 - 8400 (4/10th) = $3300

   Partner Rand = 15100 - 10500 (5/10th) = $4600

   c. The deficient partner pays down his or her deficit to zero.

  

d. Requirements for Liquidation of Partnership:  

Partnership liquidation ends both the legal and economic life of the entity. Liquidation may result from the sale of the business by mutual agreement of the partners, from the death of a partner, or from bankruptcy.

For all mutual agreement dissolution / liquidation, each and every partners to the partnership must sign an "Partnership Dissolution Agreement and Winding Up" to start the process of liquidation.

In liquidation, the realisation of assets take-place i.e. the sale of non-cash assets for cash. Any difference between book value and the cash proceeds is called the gain or loss on realization. To liquidate a partnership, it is necessary to:

1. Sell non-cash assets for cash and recognize a gain or loss on realization.

2. Allocate gain/loss on realization to the partners based on their income ratios.

3. Creditors are being paid-off and get the certificate towards that effect.

4. Pay partnership liabilities in cash.

5. Distribute remaining cash to partners on the basis of their capital balances.

These all steps must be performed in sequence as it has legality in Law. The partnership must pay creditors before partners receive any cash distributions.

In place of liquidation, the other options are selling the business to the some third party which will give a good value of the association or goodwill gained on being in partnership.

particalars Cash / Asset / Liability (balance) Sand Mell Rand Capital Total Capital Balance after adjusting losses Cash $10,000 , other liability $3000 -900 3300 4600 $7000 deficit in capital made good to zero Cash $10,900 , other liability $3000 +900 + 900 Capital Balance after paying off the other liabilities Cash $7,900 0 3300 4600 $7900 Final cash received by partners in the final liquidation Cash $7900 - $7900 = 0 0 (3300) (4600) 0

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