Accounting for Partnerships

A. Formation
1. Accounting Treatment--the assets and liabilities contributed to the
partnership should be recorded at their fair market value at the date
of formation of the partnership, and the partners' capital accounts are
credited for their capital interests multiplied by the recorded value
of the net assets of the partnership
a. Contribution Not Equal to Capital Interest--if the recorded value
of the net assets contributed by each partner is not equal to his
capital interest multiplied by the recorded value of the net assets
of the partnership, the difference is accounted for under a bonus
method or a goodwill method
1) Bonus Method--goodwill is not recognized, and each partner's
capital account is credited for his capital interest multiplied
by the recorded value of the net assets of the partnership (the
difference between the recorded value of the net assets
contributed by each partner and his capital account balance is
a bonus payment)
2) Goodwill Method--goodwill is recognized for the amount of the
bonus payment calculated in 1) divided by the capital interest
of the partner or partners making the bonus payment and is
allocated entirely to the partner receiving the bonus payment,
and each partner's capital account is credited for the recorded
value of the assets, other than goodwill, that he contributed
to the partnership
b. Profit-and-loss Sharing Ratios--if the profit-and-loss sharing
ratios of the partners are equal to their capital interests, the
partners should be indifferent whether the bonus method or the
goodwill method is used to record the formation of the partnership
2. Illustrations
a. A, B, and C formed a partnership; A contributed inventory with a
fair market value of $100,000 for a 20% capital interest in the
partnership; B contributed equipment with a fair market value of
$180,000 and a building with a fair market value of $600,000 and
subject to a $480,000 mortgage for a 60% capital interest in the
partnership; C contributed $100,000 in cash for a 20% capital
interest in the partnership
Goodwill = (100,000 – 20% x (100,000 + 180,000 + 600,000 –
480,000 + 100,000) or (300,000 – 60% x 500,000) or
(100,000 – 20% x 500,000) = 0

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 Cash 100,000
Inventory 100,000
Equipment 180,000
Building 600,000
Mortgage Payable 480,000
A, Capital 100,000
(20% x 500,000)
B, Capital 300,000
(60% x 500,000)
C, Capital 100,000
(20% x 500,000)

b. A, B, and C formed a partnership; A contributed inventory with a

fair market value of $100,000 for a 20% capital interest in the
partnership; B contributed equipment with a fair market value of
$180,000 and a building with a fair market value of $600,000 and
subject to a $480,000 mortgage for a 60% capital interest in the
partnership; C contributed $60,000 in cash and goodwill with a fair
market value of $40,000 for a 20% capital interest in the
partnership
Goodwill = (100,000 + 180,000 + 600,000 – 480,000 – (20% + 60%)
x (400,000 + 60,000)) / 80% = 40,000

Bonus Method:
Cash 60,000
Inventory 100,000
Equipment 180,000
Building 600,000
Mortgage Payable 480,000
A, Capital 92,000
(20% x 460,000)
B, Capital 276,000
(60% x 460,000)
C, Capital 92,000
(20% x 460,000)

Goodwill Method:
Goodwill 40,000
C, Capital 40,000

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 Cash 60,000
Inventory 100,000
Equipment 180,000
Building 600,000
Mortgage Payable 480,000
A, Capital 100,000
B, Capital 300,000
C, Capital 60,000

B. Division of Profits--the objective of the partnership's profit-and-loss

sharing arrangement is to allocate the profit and loss of the partnership
among the partners in a way that reflects each partner's contribution to
the success of the firm
1. Allocation Methods--bases for the allocation of the profit and loss of
the partnership usually take one or a combination of the following
forms:
a. Fixed Ratios--profit and loss is allocated to the partners by
providing a fixed percentage of profit and loss to the individual
partners
b. Service Contributions--salary allowances are provided to the
partners to reward the individual partners for their different
service contributions to the operation of the partnership
c. Capital Investments--capital allowances, usually in the form of
interest on the capital balances of the individual partners, are
provided to the partners to reward the individual partners for
their different capital investments
2. Insufficient Earnings--when net income fails to meet the provision for
salaries and interest in the partnership agreement, the partnership
agreement usually handles the earnings deficiency in one of the
following ways:
a. Total Distribution--the total amount of salaries and interest
provided in the partnership agreement is allocated to the
individual partners with the resulting earnings deficiency
allocated to the individual partners using their profit-and-loss
sharing ratios
b. Partial Distribution--salaries and interest provided in the
partnership agreement are allocated to the individual partners in
a specified sequence to the extent that profits are sufficient to
provide then
3. Correction of Prior Years' Net Income--when an error in the
computation of a prior year's net income is discovered, the allocation
of profit and loss for the prior year should be recalculated using the
corrected net income
4. Illustrations
a. A, B, and C are partners with profit-and-loss sharing ratios of
30%, 25%, and 45%, respectively, and capital balances of $50,000,
$100,000, and $350,000, respectively; the partnership agreement

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 provided for salaries of $20,000 for A, $25,000 for B, and $15,000
for C and 10% interest on the partners' capital balances; net
income was $140,000; salaries and interest are to be allocated in
full
_ A B C Total_
Salaries 20,000 25,000 15,000 60,000
Interest 5,000 10,000 35,000 50,000
Fixed Ratio _ 9,000 7,500 13,500 30,000
_34,000 42,500 63,500 140,000

Interest:
A = 10% x 50,000 = 5,000
B = 10% x 100,000 = 10,000
C = 10% x 350,000 = 35,000

Fixed Ratio:
A = 30% x (140,000 – (60,000 + 50,000)) = 9,000
B = 25% x 30,000 = 7,500
C = 45% x 30,000 = 13,500

b. A, B, and C are partners with profit-and-loss sharing ratios of

30%, 25%, and 45%, respectively, and capital balances of $50,000,
$100,000, and $350,000, respectively; the partnership agreement
provided for salaries of $20,000 for A, $25,000 for B, and $15,000
for C and 10% interest on the partners' capital balances; net
income was $100,000; salaries and interest are to be allocated in
full
_ A B C Total_
Salaries 20,000 25,000 15,000 60,000
Interest 5,000 10,000 35,000 50,000
Fixed Ratio ( 3,000) ( 2,500) ( 4,500) ( 10,000)
_22,000 32,500 45,500 100,000

Interest:
A = 10% x 50,000 = 5,000
B = 10% x 100,000 = 10,000
C = 10% x 350,000 = 35,000

Fixed Ratio:
A = 30% x (100,000 – (60,000 + 50,000)) = (3,000)
B = 25% x (10,000) = (2,500)
C = 45% x (10,000) = (4,500)

c. A, B, and C are partners with profit-and-loss sharing ratios of

30%, 25%, and 45%, respectively, and capital balances of $50,000,
$100,000, and $350,000, respectively; the partnership agreement
provided for salaries of $20,000 for A, $25,000 for B, and $15,000

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 for C and 10% interest on the partners' capital balances; net
income was $100,000; salaries and interest are to be allocated to
the extent of net income with salaries being allocated first
_ A B C Total_
Salaries 20,000 25,000 15,000 60,000
Interest _ 4,000 8,000 28,000 40,000
_24,000 33,000 43,000 100,000

Interest:
A = (100,000 – 60,000) / (10% x (50,000 + 100,000 +
350,000) x 10% x 50,000 = 4,000
B = 40,000 / 50,000 x 10% x 100,000 = 8,000
C = 40,000 / 50,000 x 10% x 350,000 = 28,000

C. Changes in Ownership--since a change in ownership creates a new

partnership, the assets and liabilities of the old partnership should be
revalued to reflect fair market value at the date of change in ownership
1. Investment in the Partnership--the new partner gains admission to the
partnership by investing assets directly into the partnership
a. Accounting Treatment--the assets and liabilities invested in the
partnership should be recorded at their fair market value at the
date of investment in the partnership, and the new partner's
capital account is credited for his capital interest multiplied by
the recorded value of the net assets of the partnership after the
investment of the new partner
1) Payment Not Equal to Capital Interest--if the recorded value of
the net assets invested by the new partner is not equal to his
capital interest multiplied by the recorded value of the net
assets of the partnership after the investment of the new
partner, the difference is accounted for under either a bonus
method or a goodwill method
a) Bonus Method--goodwill is not recognized, and the new
partner's capital account is credited for his capital
interest multiplied by the recorded value of the net assets
of the partnership after the investment of the new partner
with the difference between the recorded value of the net
assets invested by the new partner and the amount recorded
in his capital account (bonus payment) allocated to the old
partners on the basis of their profit-and-loss sharing
ratios before the investment of the new partner
b) Goodwill Method--goodwill is recognized for the amount of
the bonus payment calculated in a) divided by either the
capital interest of the old partners if the new partner is
receiving the bonus payment or the capital interest of the
new partner if the old partners are receiving the bonus
payment and is allocated either entirely to the new partner
if the new partner is receiving the bonus payment or to the

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 old partners on the basis of their profit-and-loss sharing
ratios before the investment of the new partner if the old
partners are receiving the bonus payment, and the new
partner's capital account is credited for the recorded
value of the net assets, other than goodwill, invested by
the new partner
2) Profit-and-loss Sharing Ratios--if the profit-and-loss sharing
ratio of the new partner is equal to his capital interest and
the profit-and-loss sharing ratios of the old partners are in
the same proportion as before the investment of the new
partner, the partners should be indifferent whether the bonus
method or the goodwill method is used to record the investment
of the new partner
b. Illustrations
1) A and B are partners with profit-and-loss sharing ratios of
25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C invested $50,000 in cash for a
20% capital interest in the partnership
C = 20% x (200,000 + C)
C = 50,000

Goodwill = 50,000 - 20% x (200,000 + 50,000) = 0

Cash 50,000
C, Capital 50,000
(50% x 250,000)

2) A and B are partners with profit-and-loss sharing ratios of

25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C invested $60,000 in cash for a
20% capital interest in the partnership; C agreed that the
partnership had goodwill of $40,000
C = 20% x (200,000 + 40,000 + C)
C = 60,000

Goodwill = (60,000 - 20% (200,000 + 60,000)) / 20% =

40,000

Bonus Method:
Cash 60,000
C, Capital 52,000
(20% x 260,000)
A, Capital 2,000
(25% x 8,000)
B, Capital 6,000
(75% x 8,000)

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 Goodwill Method:
Goodwill 40,000
A, Capital 10,000
(25% x 40,000)
B, Capital 30,000
(75% x 40,000)

Cash 60,000
C, Capital 60,000
(20% x 300,000)

3) A and B are partners with profit-and-loss sharing ratios of

25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C invested $30,000 in cash for a
20% capital interest in the partnership; A and B agreed that C
had goodwill of $20,000
C + 20,000 = 20% x (200,000 + C + 20,000)
C = 30,000

Goodwill = (30,000 - 20% x (200,000 + 30,000)) / 80% =

20,000

Bonus Method:
Cash 30,000
A, Capital 4,000
(25% x 16,000)
B, Capital 12,000
(75% x 16,000)
C, Capital 46,000
(20% x 230,000)

Goodwill Method:
Goodwill 20,000
C, Capital 20,000

Cash 30,000
C, Capital 30,000
(20% x 250,000 - 20,000)

2. Purchase of an Interest--the new partner gains admission to the

partnership by transferring assets directly to one or more of the old
partners
a. Accounting Treatment--the new partner's capital account is credited
for the fair market value of the net assets transferred by the new
partner to the old partners, and the old partners' capital accounts
are debited for the fair market value of the net assets received by
each from the new partner

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 1) Payment Not Equal to Capital Interest--if the fair market value
of the net assets transferred by the new partner to the old
partners is not equal to his capital interest multiplied by the
recorded value of the net assets of the partnership, the
difference is accounted for under either a bonus method or a
goodwill method
a) Bonus Method--goodwill is not recognized, and the new
partner's capital account is credited for his capital
interest multiplied by the recorded value of the net assets
of the partnership with the difference between the purchase
price of the partnership interest by the new partner and
the amount recorded in his capital account (bonus payment)
allocated to the old partners on the basis of their profit-
and-loss sharing ratios before the purchase of the
partnership interest by the new partner
b) Goodwill Method--goodwill is recognized for the amount of
the bonus payment in a) divided by either the capital
interest of the old partners if the new partner is
receiving the bonus payment or the capital interest of the
new partner if the old partners are receiving the bonus
payment and is allocated either entirely to the new partner
if the new partner is receiving the bonus payment or to the
old partners on the basis of their profit-and-loss sharing
ratios before the purchase of the partnership interest by
the new partner if the old partners are receiving the bonus
payment, and the new partner's capital account is credited
for the purchase price, other than goodwill, of the
partnership interest by the new partner
2) Profit-and-loss Sharing Ratios--if the profit-and-loss sharing
ratio of the new partner is equal to his capital interest and
the profit-and-loss sharing ratios of the old partners are in
the same proportion as before the purchase of the partnership
interest by the new partner, the partners should be indifferent
whether the bonus method or the goodwill method is used to
record the purchase of the partnership interest by the new
partner
b. Illustrations
1) A and B are partners with profit-and-loss sharing ratios of
25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C purchased a 20% capital interest
in the partnership from A for $40,000
C = 20% x 200,000
C = 40,000

Goodwill = 40,000 - 20% x 200,000 = 0

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 A, Capital 40,000
C, Capital 40,000
(20% x 200,000)

2) A and B are partners with profit-and-loss sharing ratios of

25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C purchased a 20% capital interest
from A for $48,000; C agreed that the partnership had goodwill
of $40,000
C = 20% x (200,000 + 40,000)
C = 48,000

Goodwill = (48,000 - 20% x 200,000) / 20% = 40,000

Bonus Method:
A, Capital 48,000
C, Capital 48,000

C, Capital 8,000
(48,000 - 20% x 200,000)
A, Capital 2,000
(25% x 8,000)
B, Capital 6,000
(75% x 8,000)

Goodwill Method:
Goodwill 40,000
A, Capital 10,000
(25% x 40,000)
B, Capital 30,000
(75% x 40,000)

A, Capital 48,000
C, Capital 48,000
(20% x 240,000)

3) A and B are partners with profit-and-loss sharing ratios of

25% and 75%, respectively, and capital balances of $130,000
and $70,000, respectively; C purchased a 20% capital interest
in the partnership from A for $30,000; A and B agreed that C
had goodwill of $12,500
C + 12,500 = 20% x (200,000 + 12,500)
C = 30,000

Goodwill = (30,000 - 20% x 200,000) / 80% = 12,500

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 Bonus Method:
A, Capital 30,000
C, Capital 30,000

A, Capital 2,500
(25% x 10,000)
B, Capital 7,500
(75% x 10,000)
C, Capital 10,000
(20% x 200,000 - 30,000)

Goodwill Method:
Goodwill 12,500
C, Capital 12,500

A, Capital 30,000
C, Capital 30,000
(20% x 212,500 - 12,500)

3. Withdrawal of a Partner--the old partner leaves the partnership by

withdrawing assets from the partnership to liquidate his capital
interest
a. Accounting Treatment--the retiring partner's capital account is
debited for the recorded value of the net assets withdrawn by the
retiring partner
1) Payment Not Equal to Capital Balance--if the recorded value of
the net assets withdrawn by the retiring partner is not equal
to the balance in his capital account, the difference is
accounted for under either a bonus method or a goodwill method
a) Bonus Method--goodwill is not recognized, and the retiring
partner's capital account is closed with the difference
between the recorded value of the net assets withdrawn from
the partnership and the balance in the retiring partner's
capital account (bonus payment) allocated to the remaining
partners on the basis of their relative profit-and-loss
sharing ratios before the withdrawl of the retiring partner
b) Goodwill Method--goodwill is recognized for the amount of
the bonus payment calculated in a) divided by the retiring
partner's profit-and-loss sharing ratio and is allocated to
the partners on the basis of their profit-and-loss sharing
ratios, and the retiring partner's capital account is
debited for the recorded value of the net assets withdrawn
by the retiring partner
I) Fractional Goodwill--goodwill is recognized for the
amount of the bonus payment calculated in a) and is
allocated entirely to the retiring partner, and the
retiring partner's capital account is debited for the

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 recorded value of the net assets withdrawn by the
retiring partner
2) Profit-and-loss Sharing Ratios--if the profit-and-loss sharing
ratios of the remaining partners are in the same proportion as
before the withdrawl of the old partner, the partners should be
indifferent whether the bonus method or the goodwill method is
used to record the withdrawl of the old partner
b. Illustrations
1) A, B, and C are partners with profit-and-loss sharing ratios
of 20%, 60%, and 20%, respectively, and capital balances of
$135,000, $70,000, and $55,000, respectively; C withdrew
$55,000 in cash from the partnership to liquidate his capital
interest in the partnership
C = 55,000 + 20% x 0
C = 55,000

Goodwill = 55,000 - 55,000 = 0

C, Capital 55,000
Cash 55,000

2) A, B, and C are partners with profit-and-loss sharing ratios

of 20%, 60%, and 20%, respectively, and capital balances of
$135,000, $70,000, and $55,000, respectively; C withdrew
$65,000 in cash from the partnership to liquidate his capital
interest in the partnership; A, B, and C agreed that the
partnership had goodwill of $50,000
C = 55,000 + 20% x 50,000
C = 65,000

Goodwill = (65,000 - 55,000) / 20% = 50,000

Bonus Method:
C, Capital 55,000
A, Capital 2,500
(20% / 80% x 10,000)
B, Capital 7,500
(60% / 80% x 10,000)
Cash 65,000

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 Goodwill Method:
1) Goodwill 50,000
A, Capital 10,000
(20% x 50,000)
B, Capital 30,000
(60% x 50,000)
C, Capital 10,000
(20% x 50,000)

C, Capital 65,000
Cash 65,000

2) Goodwill 10,000
C, Capital 10,000

C, Capital 65,000
Cash 65,000

D. Liquidation--the sale of the partnership assets, payment of the

partnership's liabilities, and the distribution of any remaining assets to
the partners
1. Lump-sum Liquidation--a liquidation in which all the assets of the
partnership are converted into cash within a very short time,
creditors are paid, and a single payment is made to the partners for
their capital interests
a. Accounting Treatment
1) Realization of Assets--any gains or losses realized from the
sale of partnership assets are allocated to the partners using
their profit-and-loss sharing ratios
2) Distribution of Realization Proceeds
a) Solvent Partnership--the claims against the assets of the
partnership are satisfied in the following order:
I) Creditors--amount owed to partnership creditors other
than partners
II) Liabilities to Partners--amounts owed to partners
other than for their capital balance
A) Right of Offset--a deficit balance in a partner's
capital account is offset against any loan payable
to that partner
III) Capital Balances--amounts owed to partners for their
capital balances to the extent of credit balances in
their capital accounts
A) Right of Offset--a loan receivable from a partner
is offset against any credit balance in that
partner's capital account
B) Capital Deficiency--a debit balance in a partner's
capital account represents a claim of the

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 partnership against that partner
1) Cash Contribution--if a partner with a debit
balance in his capital account contributes
cash to the partnership to make up his capital
deficiency, the debit balance in his capital
account is reduced for the amount of cash
contributed
2) No Contribution--if a partner with a debit
balance in his capital account does not
contribute cash to the partnership to make up
his capital deficiency or contributes
insufficient cash to the partnership to make up
his capital deficiency, the debit balance in
his capital deficiency is allocated to the
other partners in their relative profit-and-
loss sharing ratios
b) Insolvent Partnership--the claims against the personal
assets of the individual partners of the partnership are
satisfied in the following order:
I) Personal Creditors--personal creditors of the
individual partners
II) Partnership Creditors--partnership creditors for
unpaid liabilities, regardless of the individual
partner's capital balance
b. Illustrations
1) A, B, and C are partners with profit-and-loss sharing ratios
of 20%, 60%, and 20%, respectively; the partnership balance
sheet consisted of cash of $20,000, noncash assets of
$270,000, liabilities of $40,000, and capital balances of
$140,000 for A, $60,000 for B, and $50,000 for C; the
partnership was liquidated by selling the noncash assets for
$310,000; the partners have sufficient cash to make up any
capital deficiencies
Noncash A B C
_ Cash_ _Assets Payables Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
310,000 (270,000) _ _ 8,000 _24,000 _ 8,000
330,000 _ --- _ 40,000 148,000 84,000 58,000
( 40,000) (_40,000) _ _ _ _ _ _
290,000 _ --- _ 148,000 84,000 58,000
(290,000) (148,000) ( 84,000) ( 58,000)
_ --- _ _ --- _ _ --- _ _ --- _

Gain Allocation:
A = 20% x (310,000 – 270,000) = 8,000
B = 60% x 40,000 = 24,000
C = 20% x 40,000 = 8,000

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2) A, B, and C are partners with profit-and-loss sharing ratios
of 20%, 60%, and 20%, respectively; the partnership balance
sheet consisted of cash of $20,000, noncash assets of
$270,000, liabilities of $40,000, and capital balances of
$140,000 for A, $60,000 for B, and $50,000 for C; the
partnership was liquidated by selling the noncash assets for
$220,000; the partners have sufficient cash to make up any
capital deficiencies
Noncash A B C
_ Cash_ _Assets Payables Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
220,000 (270,000) _ (_10,000) (_30,000) (_10,000)
240,000 _ --- _ 40,000 130,000 30,000 40,000
( 40,000) (_40,000) _ _ _ _ _ _
200,000 _ --- _ 130,000 30,000 40,000
(200,000) (130,000) ( 30,000) ( 40,000)
_ --- _ _ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (220,000 – 270,000) = (10,000)
B = 60% x (50,000) = (30,000)
C = 20% x (50,000) = (10,000)

3) A, B, and C are partners with profit-and-loss sharing ratios

of 20%, 60%, and 20%, respectively; the partnership balance
sheet consisted of cash of $20,000, noncash assets of
$270,000, liabilities of $40,000, and capital balances of
$140,000 for A, $60,000 for B, and $50,000 for C; the
partnership was liquidated by selling the noncash assets for
$160,000; the partners have sufficient cash to make up any
capital deficiencies
Noncash A B C
_ Cash_ _Assets Payables Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
160,000 (270,000) _ (_22,000) (_66,000) (_22,000)
180,000 _ --- _ 40,000 118,000 ( 6,000) 28,000
( 40,000) (_40,000) _ _ _ _ _ _
140,000 _ --- _ 118,000 ( 6,000) 28,000
_ 6,000 _ 6,000
146,000 _ --- _
(146,000) (118,000) ( 28,000)
_ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (160,000 – 270,000) = (22,000)
B = 60% x (110,000) = (66,000)
C = 20% x (110,000) = (22,000)

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4) A, B, and C are partners with profit-and-loss sharing ratios
of 20%, 60%, and 20%, respectively; the partnership balance
sheet consisted of cash of $20,000, noncash assets of
$270,000, liabilities of $40,000, and capital balances of
$140,000 for A, $60,000 for B, and $50,000 for C; the
partnership was liquidated by selling the noncash assets for
$160,000; the partners are personally insolvent
Noncash A B C
_ Cash_ _Assets Payables Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
160,000 (270,000) _ (_22,000) (_66,000) (_22,000)
180,000 _ --- _ 40,000 118,000 ( 6,000) 28,000
( 40,000) (_40,000) _ _ _ _ _ _
140,000 _ --- _ 118,000 ( 6,000) 28,000
_ ( 3,000) _ 6,000 ( 3,000)
140,000 115,000 _ --- _ 25,000
(140,000) (115,000) ( 25,000)
_ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (160,000 – 270,000) = (22,000)
B = 60% x (110,000) = (66,000)
C = 20% x (110,000) = (22,000)

B’s Deficit Allocation:

A = 20% / (20% + 20%) x (6,000) = (3,000)
C = 20% / 40% x (6,000) = (3,000)

5) A, B, and C are partners with profit-and-loss sharing ratios

of 20%, 60%, and 20%, respectively; the partnership balance
sheet consisted of cash of $0, liabilities of $50,000, and
capital balances of $15,000 for A, ($55,000) for B, and
($10,000) for C; the partnership was being liquidated; A is
personally insolvent; B and C are personally solvent in the
amount of $35,000 and $80,000, respectively; the creditors
obtained judgment against C for $50,000

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 A B C
_ Cash_ Payables Capital Capital Capital
--- 50,000 15,000 ( 55,000) ( 10,000)
_50,000 _ _ _ _ _ _ _50,000
50,000 50,000 15,000 ( 55,000) 40,000
( 50,000) ( 50,000) _ _ _ _ _ _
--- _ --- _ 15,000 ( 55,000) 40,000
_35,000 _ _ _35,000 _ _
35,000 15,000 ( 20,000) 40,000
_ _ ( 10,000) _20,000 ( 10,000)
35,000 5,000 _ --- _ 30,000
( 35,000) ( 5,000) ( 30,000)
_ --- _ _ --- _ _ --- _

B’s Deficit Allocation:

A = 20% / (20% + 20%) x (20,000) = (10,000)
C = 20% / 40% x (20,000) = (10,000)

2. Installment Liquidations--a liquidation in which all the assets of the

partnership are converted into cash over a longer period of time,
outside creditors are paid, and periodic payments are made to the
partners for their capital interests
a. Safe Payment Schedule
1) Accounting Treatment
a) Creditors--no cash is distributed to the partners until
all liabilities and all actual and potential liquidation
expenses are paid or provided for by reserving the
necessary cash
b) Worst Case Scenario--the worst possible case is
anticipated before determining the amount of installment
payment each partner receives
I) Maximum Possible Loss--it is assumed that nothing will
be realized from the sale of the remaining assets of
the partnership
A) Unrecorded Expenses--any potential liquidation
expenses are added to the maximum possible loss
from sale of the remaining assets of the
partnership
II) Partner Insolvency--it is assumed that the partners
will not be able to make up any capital deficiencies
c) Distribution to Partners--the remaining credit balances in
the loan and the capital accounts of the partners
represent the amount of cash to be distributed to each
partner
2) Illustrations
a) A, B, and C are partners with profit-and-loss sharing

16
 ratios of 20%, 60%, and 20%, respectively; the partnership
balance sheet consisted of cash of $20,000, noncash assets
of $270,000, liabilities of $40,000, and capital balances
of $140,000 for A, $60,000 for B, and $50,000 for C; the
partnership was liquidated; during the first month noncash
assets with a book value of $75,000 were sold for $60,000;
during the second month noncash assets with a book value of
$60,000 were sold for $65,000; during the third month
noncash assets with a book value of $80,000 were sold for
$70,000; during the fourth month noncash assets with a book
value of $55,000 were sold for $35,000
Noncash A B C
_ Cash_ _Assets Payables Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
_60,000 ( 75,000) _ _ ( 3,000) ( 9,000) ( 3,000)
80,000 195,000 40,000 137,000 51,000 47,000
( 40,000) _ _ ( 40,000) _ _ _ _ _ _
40,000 195,000 _ --- _ 137,000 51,000 47,000
( 40,000) _ _ ( 40,000) _ _ _ _
--- 195,000 97,000 51,000 47,000
_65,000 ( 60,000) _ 1,000 _ 3,000 _ 1,000
65,000 135,000 98,000 54,000 48,000
( 65,000) _ _ ( 57,500) _ _ ( 7,500)
--- 135,000 40,500 54,000 40,500
_70,000 ( 80,000) ( 2,000) ( 6,000) ( 2,000)
70,000 55,000 38,500 48,000 38,500
( 70,000) _ _ ( 27,500) ( 15,000) ( 27,500)
--- 55,000 11,000 33,000 11,000
_35,000 ( 55,000) ( 4,000) ( 12,000) ( 4,000)
35,000 _ --- _ 7,000 21,000 7,000
( 35,000) ( 7,000) ( 21,000) ( 7,000)
_ --- _ _ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (60,000 – 75,000) = (3,000)
B = 60% x (15,000) = (9,000)
C = 20% x (15,000) = (3,000)

Gain Allocation:
A = 20% x (65,000 – 60,000) = 1,000
B = 60% x 5,000 = 3,000
C = 20% x 5,000 = 1,000

Loss Allocation:
A = 20% x (70,000 – 80,000) = (2,000)
B = 60% x (10,000) = (6,000)
C = 20% x (10,000) = (2,000)

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 Loss Allocation:
A = 20% x (35,000 – 55,000) = (4,000)
B = 60% x (20,000) = (12,000)
C = 20% x (20,000) = (4,000)

Safe Payment Schedules:

First Month:
A B C
Capital Capital Capital
137,000 51,000 47,000
Maximum loss ( 39,000) (117,000) ( 39,000)
98,000 ( 66,000) 8,000
B's deficit ( 33,000) _66,000 ( 33,000)
65,000 _ --- _ ( 25,000)
C's deficit ( 25,000) _25,000
_40,000 _ --- _

Loss Allocation:
A = 20% x (195,000) = (39,000)
B = 60% x (195,000) = (117,000)
C = 20% x (195,000) = (39,000)

B’s Deficit Allocation:

A = 20% / (20% + 20%) x (66,000) = (33,000)
C = 20% / 40% x (66,000) = (33,000)

C’s Deficit Allocation:

A = 20% / 20% x (25,000) = (25,000)

Second Month:
A B C
Capital Capital Capital
98,000 54,000 48,000
Maximum loss ( 27,000) ( 81,000) ( 27,000)
71,000 ( 27,000) 21,000
B's deficit ( 13,500) _27,000 ( 13,500)
_57,500 --- 7,500

Loss Allocation:
A = 20% x (135,000) = (27,000)
B = 60% x (135,000) = (81,000)
C = 20% x (135,000) = (27,000)

B’s Deficit Allocation:

A = 20% / (20% + 20%) x (27,000) = (13,500)
C = 20% / 40% x (27,000) = (13,500)

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 Third Month:
A B C
Capital Capital Capital
38,500 48,000 38,500
Maximum loss ( 11,000) ( 33,000) ( 11,000)
27,500 15,000 27,500

Loss Allocation:
A = 20% x (55,000) = (11,000)
B = 60% x (55,000) = (33,000)
C = 20% x (55,000) = (11,000)

b) A, B, and C are partners with profit-and-loss sharing

ratios of 20%, 60%, and 20%, respectively; the partnership
balance sheet consisted of cash of $20,000, noncash assets
of $270,000, liabilities of $40,000, and capital balances
of $140,000 for A, $60,000 for B, and $50,000 for C; the
partnership was liquidated; during the first month noncash
assets with a book value of $75,000 were sold for $60,000;
during the first month $8,000 in cash was to be withheld
from the distribution to cover unrecorded liabilities;
during the second month unrecorded liabilities of $7,500
were discovered and paid; during the second month noncash
assets with a book value of $60,000 were sold for $65,000;
during the third month noncash assets with a book value of
$80,000 were sold for $70,000; during the fourth month
noncash assets with a book value of $55,000 were sold for
$35,000

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 Noncash A B C
_ Cash_ _Assets Payables Capital Capital Capital
20,000 270,000 40,000 140,000 60,000 50,000
_60,000 ( 75,000) _ _ ( 3,000) ( 9,000) ( 3,000)
80,000 195,000 40,000 137,000 51,000 47,000
( 40,000) _ _ ( 40,000) _ _ _ _ _ _
40,000 195,000 _ --- _ 137,000 51,000 47,000
( 32,000) _ _ ( 32,000) _ _ _ _
8,000 195,000 105,000 51,000 47,000
( 7,500) ( 1,500) ( 4,500) ( 1,500)
500 195,000 103,500 46,500 45,500
_65,000 ( 60,000) _ 1,000 _ 3,000 _ 1,000
65,500 135,000 104,500 49,500 46,500
( 65,500) _ _ ( 61,750) _ _ ( 3,750)
--- 135,000 42,750 49,500 42,750
_70,000 ( 80,000) ( 2,000) ( 6,000) ( 2,000)
70,000 55,000 40,750 43,500 40,750
( 70,000) _ _ ( 29,750) ( 10,500) ( 29,750)
--- 55,000 11,000 33,000 11,000
_35,000 ( 55,000) ( 4,000) ( 12,000) ( 4,000)
35,000 _ --- _ 7,000 21,000 7,000
( 35,000) ( 7,000) ( 21,000) ( 7,000)
_ --- _ _ --- _ _ --- _ _ --- _

Loss Allocation:
A = 20% x (60,000 – 75,000) = (3,000)
B = 60% x (15,000) = (9,000)
C = 20% x (15,000) = (3,000)

Unrecorded Liabilities Allocation:

A = 20% x (7,500) = (1,500)
B = 60% x (7,500) = (4,500)
C = 20% x (7,500) = (1,500)

Gain Allocation:
A = 20% x (65,000 – 60,000) = 1,000
B = 60% x 5,000 = 3,000
C = 20% x 5,000 = 1,000

Loss Allocation:
A = 20% x (70,000 – 80,000) = (2,000)
B = 60% x (10,000) = (6,000)
C = 20% x (10,000) = (2,000)

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 Loss Allocation:
A = 20% x (35,000 – 55,000) = (4,000)
B = 60% x (20,000) = (12,000)
C = 20% x (20,000) = (4,000)

Safe Payment Schedules:

First Month:
A B C
Capital Capital Capital
137,000 51,000 47,000
Maximum loss ( 40,600) (121,800) ( 40,600)
96,400 ( 70,800) 6,400
B's deficit ( 35,400) _70,800 ( 35,400)
61,000 _ --- _ ( 29,000)
C's deficit ( 29,000) _29,000
_32,000 _ --- _

Loss Allocation:
A = 20% x (195,000 + 8,000) = (40,600)
B = 60% x (203,000) = (121,800)
C = 20% x (203,000) = (40,600)

B’s Deficit Allocation:

A = 20% / (20% + 20%) x (70,800) = (35,400)
C = 20% / 40% x (70,800) = (35,400)

C’s Deficit Allocation:

A = 20% / 20% x (29,000) = (29,000)

Second Month:
A B C
Capital Capital Capital
104,500 49,500 46,500
Maximum loss ( 27,000) ( 81,000) ( 27,000)
77,500 ( 31,500) 19,500
B's deficit ( 15,750) _31,500 ( 15,750)
_61,750 --- 3,750

Loss Allocation:
A = 20% x (135,000) = (27,000)
B = 60% x (135,000) = (81,000)
C = 20% x (135,000) = (27,000)

B’s Deficit Allocation:

A = 20% / (20% + 20%) x (31,500) = (15,750)
C = 20% / 40% x (31,500) = (15,750)

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 Third Month:
A B C
Capital Capital Capital
40,750 43,500 40,750
Maximum loss ( 11,000) ( 33,000) ( 11,000)
29,750 10,500 29,750

Loss Allocation:
A = 20% x (55,000) = (11,000)
B = 60% x (55,000) = (33,000)
C = 20% x (55,000) = (11,000)

b. Advanced Cash Distribution Plan

1) Accounting Treatment
a) Maximum Absorbable Loss--the maximum absorbable loss is
computed for each partner by dividing his capital account
balance by his profit-and-loss sharing ratio
b) Distribution Plan
I) Creditors--cash is distributed 100% to the creditors
up to the amount of the partnership liabilities
II) Partners
A) Cash is distributed 100% to the partner with the
largest maximum absorbable loss in the amount of
the difference between the largest maximum
absorbable loss and the second largest maximum
absorbable loss multiplied by his profit-and-loss
sharing ratio
B) Cash is then distributed to the partners with the
two largest maximum losses using their relative
profit-and-loss sharing ratios in the amount of the
difference between the second largest maximum
absorbable loss and the third largest maximum
absorbable loss multiplied by their combined
profit-and-loss sharing ratios
C) Step b) is repeated, adding one partner at a time,
until all the partners are included in the
distribution plan
2) Illustration--A, B, and C are partners with profit-and-loss
sharing ratios of 20%, 60%, and 20%, respectively; the
partnership balance sheet consisted of cash of $20,000,
noncash assets of $270,000, liabilities of $40,000, and
capital balances of $140,000 for A, $60,000 for B, and $50,000
for C; the partnership was liquidated; during the first month
noncash assets with a book value of $75,000 were sold for
$60,000; during the second month noncash assets with a book
value of $60,000 were sold for $65,000; during the third month
noncash assets with a book value of $80,000 were sold for

22
$70,000; during the fourth month noncash assets with a book
value of $55,000 were sold for $35,000
Maximum Absorbable Loss:
A = 140,000 / .20 = 700,000
B = 60,000 / .60 = 100,000
C = 50,000 / .20 = 250,000

Advanced Cash Distribution Plan:

Payables A B C
First $40,000 100%
Next $90,000 100%
((700,000 – 250,000) x .20)
Next $60,000 50% 50%
((250,000 – 100,000) x (.20 + .20))
Any additional cash 20% 60% 20%

Cash Payments:
First Month:
First $40,000 40,000
Next $40,000 40,000
40,000 40,000

Second Month:
Next $50,000 50,000
(90,000 – 40,000)
Next $15,000 7,500 7,500
57,500 7,500

Third Month:
Next $45,000 22,500 22,500
(60,000 – 15,000)
Next $25,000 5,000 15,000 5,000
27,500 15,000 27,500

Fourth Month:
Next $35,000 7,000 21,000 7,000

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