Chapter 2: Partnership

Liquidation and Incorporation;

Joint Ventures
 Liquidation of a Partnership
• Liquidation of LLP means winding up its activities, usually by
selling assets, paying liabilities, and distributing any remaining
cash to the partners. Partnership assets may be sold:
• as a unit
• in installments
• During partnership liquidation, the accounting records of the
partnership are adjusted and closed, and the net income of the
final period is entered in the capital accounts of the partners.
• The first of liquidation process is the realization of noncash
assets.
• The losses and gains from the realization are divided among the
partners in the income-sharing ratio and entered into their capital
accounts.
 Liquidation of a Partnership
• If the partner’s capital account has a debit balance, any credit
balance in that partner’s loan account must be offset against the
deficit in the capital account.
• The order of distribution of cash from liquidation is as follows:
– Payment to creditors
– Payment of loans from partners
– Payment of partner’s capital account credit balances
• If a partner has debit balance in his/her capital account, he/she
must pay cash to the partnership.
• If he/she is unable to do so, the deficit must be absorbed and
shared by the other partners as an additional loss.
 Liquidation of a Partnership
Example 1: After realization of all noncash assets and the
payment of all liabilities, the balance sheet of the liquidating
Barre, Qalib, & Roda LLP on January 31, 2015, showed cash,
$15,000; Barre, capital, ($9,000); Qalib, capital, $8,000; and
Roda, capital, $16,000. The partners share net income and
losses equally.

a) Prepare journal entries for Barre, Qalib, & Roda LLP on

January 31, 2015 to show the payment of $15,000 cash in
a safe manner to the partners.
 Liquidation of a Partnership
Example 2: Aden and Badri, partners of Aden & Badr LLP,
who share net income and losses in a 60:40 ratio,
respectively, decided to liquidate the partnership. A portion of
the noncash assets had been realized, but assets with a
carrying amount of $42,000 were yet to be realized. All
liabilities had been paid and cash of $20,000 was available for
distribution to partners. The partners’ capital account credit
balances were $40,000 for Aden and $22,000 for Badri

a) Prepare working paper to compute the amount of cash

($20,000) to be distributed to each partner.
 Liquidation of a Partnership
Example 3: The balance sheet of Ridwan, Sayid, & Tani LLP on the date it
commenced liquidation was as follows, with partner’s income sharing ratio
in parenthesis:
Ridwan, Sayid, & Tani LLP
Balance Sheet
September 24, 2015
Assets Liabilities & Capital
Cash $20,000 Liabilities $240,000
Other Asset $480,000 Ridwan, capital (40%) $80,000
Sayid, capital (40%) $120,000
Tani, capital (20%) $60,000
Total Assets $500,000 Total liabilities & capital $500,000
On September 24, 2015, other assets with carrying amount of $480,000
were realized $300,000.
a) Prepare a statement of realization and liquidation for Ridwan, Sayid, &
Tani LLP on September 24, 2015
 Liquidation of a Partnership
Example 4: The balance sheet of Farah, Gulied, & Hassan LLP on the date
it commenced liquidation was as follows,
Farah, Gulied, & Hassan LLP
Balance Sheet
March 14, 2016
Assets Liabilities & Capital
Cash $80,000 Liabilities $60,000
Other Asset $100,000 Farah, capital $50,000
Gulied, capital $60,000
Hassan, capital $10,000
Total Assets $180,000 Total liabilities & capital $180,000
On March 14, 2016, other assets with carrying amount of $100,000 were
realized $50,000. (Ratio 1:2:1 to Farah, Gulied, & Hassan)
a) Prepare a statement of realization and liquidation for Farah, Gulied, &
Hassan LLP on March 14, 2016 (Hassan defaulted)
 Liquidation of a Partnership
Example 5: The balance sheet of Khadar, Liban, Muse, & Nasir LLP on the
date it commenced liquidation was as follows,
Khadar, Liban, Muse, & Nasir LLP
Balance Sheet
April 8, 2016
Assets Liabilities & Capital
Cash $20,000 Liabilities $90,000
Other Asset $250,000 Khadar, capital $80,000
Liban, capital $60,000
Muse, capital $25,000
Nasir, capital $15,000
Total Assets $270,000 Total liabilities & capital $270,000
On April 8, 2016, other assets with carrying amount of $250,000 were
realized $150,000. (Ratio 1:2:2:3 to Khadar, Liban, Muse, & Nasir)
a) Prepare a statement of realization and liquidation for Khadar, Liban,
Muse, & Nasir LLP on April 8, 2016 (Muse & Nasir defaulted)
 Liquidation of a Partnership
Example 6: Following is the balance sheet of Omer, Barre, &
Qali LLP on January 31, 2015, the date partners authorized
liquidation of the partnership.
Balance Sheet
Assets Liabilities & Capital
Cash $10,000 Trade Payable $90,000
Loan Rec. from Barre $50,000 Loan to Omer $60,000
Other assets $240,000 Omer, Capital $140,000
Barre, Capital ($70,000)
Qali, Capital $80,000
Total Assets $300,000 Total Liabilities
& Capital $300,000
 Liquidation of a Partnership
Additional information for 2015
1. The partners’ income (loss) sharing ratio was Omer, 40%; Barre, 40%;
and Qali, 20%
2. On February 1, noncash assets with carrying amount of $180,000
realized $140,000
3. On February 4, noncash assets with a carrying amount of $60,000
realized $50,000.
4. On February 5, Barre, who was almost insolvent, paid $30,000 on the
loan from the partnership. Omer and Qali agreed that partnership
would receive from Barre and they instructed the accountant to close
the partnership’s accounting records.

a) Prepare a statement of realization and liquidation for Omer, Barre, &

Qali LLP.
 Liquidation of a Partnership
Example 7: On September 30, 2015, the partners Ali, Bonne, & Cawo LLP, who
shared net income and losses in the ratio of 5:3:2 respectively, decided to liquidate
the partnership. The partnership trial balance on that date was as follows:
Trial Balance
Debit Credit
Cash $18,000
Loan receivable from Ali $30,000
Trade Receivable $66,000
Inventories $52,000
Machinery & Equipment $189,000
Trade payable $53,000
Loan payable to Bonne $20,000
Ali, Capital $118,000
Bonne, Capital $90,000
Cawo, Capital $74,000
Total $355,000 $355,000
 Liquidation of a Partnership
The partners planned a lengthy time period for realization of noncash
assets in order to minimize liquidation losses. All available cash, less an
amount retained to provide for future liquidation costs, was to be
distributed to the partners at the end of each month.

a) Prepare a cash distribution program for Ali, Bonne, & Cawo LLP on
September 30, 2015, showing how cash should be distributed to creditors
and to partners as it become available during liquidation.
 Liquidation of a Partnership
Example 8: The balance sheet Dahir, Eid, & Farid LLP on September 29,
2015 included cash, $20,000; Other assets, 262,000; Liabilities, $50,000,
and Dahir, $80,000; Eid, $80,000; Farid, $72,000. On that date, the three
partners decided to dissolve and liquidate the partnership. The cash
distribution program prepared by the partnership’s accountant follows:
Total Creditors Dahir Eid Farid
First $50,000 100%
Next $40,000 100%
Next $12,000 33.3% 66.7%
All over $102,000 40% 20% 40%
On September 30, 2015, noncash assets with carrying amount of
$140,000 were sold for $100,000. On October 5, 2015, a noncash asset
with carrying value of $122,000 were sold for $92,000.
a) Prepare a statement of realization and liquidation for Dahir, Eid, &
Farid LLP
 Incorporation of Partnership
Example 9: The balance sheet of Faisal & Wahib LLP, immediately before
the partnership was incorporated as Fawib Corporation, follows:
Balance Sheet
Assets Liabilities & Partners’ Capital
Cash $10,500 Trade payables $16,400
Trade Rec. $15,900 Faisal, Capital $60,000
Inventories $42,000 Wahib, Capital $52,000
Equipment $60,000
Total $128,400 Total $128,400

The following adjustments to the balance sheet of the partnership were

recommended by CPA before accounting records for Fawib Corporation:
1. An allowance for doubtful accounts was to be established in the
amount of $1,200.
 Liquidation of a Partnership
2. Short-term prepayments of $800 were to be recognized
3. The current fair value of inventories, $48,000, and the current fair
value of equipment, $72,000, were to be recognized
4. Accrued liabilities of $750 were to be recognized

a) Prepare a balance sheet for Fawib Corporation on October 1, 2015,

assuming that 10,000 shares of $5 par common stock were issued to the
partners in exchange for their equities in the partnership. Fifty thousand
shares of common stock were authorized to be issued.