Research Paper: Liquidation of a Partnership

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Liquidation of a Partnership

Any Issue Related To: Partnership Taxation

Liquidation of a Partnership including Partnership Interest

Liquidation is the process of gathering the assets of a business so as to settle its outstanding debts. The partners should make wise decisions before deciding as to whether they should declare their business insolvent. However if the partnership is with severe debts, there may be no alternative since creditors can actually petition for its liquidation. However, where the partnership is solvent then the possible alternatives for voluntary termination should be look at. Partnerships provide unique challenges as far as liquidation is concerned.

Since a partnership does not have distinct legal identity, it may be terminated by an accord between the partners or by simply a notice of dissolution issued by one partner to the rest. Moreover since the partners decided to merge, they may concur also to split. In some instances, the partnership accord may grant for dissolution after a particular period of time or on other established conditions. Additionally, a partnership may be terminated if the partnership does not make profit, and there is no longer any cause to continue with doing business. Further, the partnership may be dissolved if the partners cannot concur between themselves on how to run the partnership. They thus decide to terminate the partnership. Better still, it may be dissolve due to factors such as ill-health or old age. Once an accord has been reached, dissolution may go on in the usual way, normally dealt with by the partners themselves. Partnership accounts are prepared and the dissolution should then be publicized. It is significant that all customers and creditors be given a notification that the partnership business has been shut down. The issuance of this particular notification earmarks the end of the partners' influence to concur to contracts and dealings with clients (Fiona, 2003, p.12).

The Process of Liquidating a Partnership Business

It is very important for the partners to converse with legal counsel so as to establish the precise situation and liabilities of their partnership. Generally, where a business is bankrupt and partners cannot reimburse its debts, it may be treated as an unregistered company. Nevertheless, once partnership assets have been depleted in the imbursement of creditors, creditors can file an appeal against the partners' personal estates. Frequently, when mutual insolvency orders are made against partners, a certified receiver instantly turns out to be trustee of the partners' distinct estates and trustee of the partnership. The partnership is then made to pay its debts. That is, assets will be collected and utilized in meeting business debts, and subsequently the partnership is dissolved.

Initial step: The Assets must be summarized

In contrast with a sole proprietorship type of business, whose individual and business assets are added up collectively for the purposes of insolvency, in a partnership, distinct accounts should be maintained for the mutual partnership estate. Moreover each partner's individual estate accounts should be maintained distinctively. Immediately a partnership is disbanded, distinct statements of affairs for mutual and personal estates should be filed with the court. In any type of liquidation, the partners cannot sell any of the important assets or issue them to relatives or friends, except that the assets can be firmly established that the discarding was a genuine transaction (Robert, 2007, p.15).

Second Step: All Creditors must be paid

As far as unlimited liability is concerned, it is imaginable that a circumstance may crop up where two groups of creditors are pursuing payment of debts from partners. That is, creditors owed a particular sum of money by the partnership along with personal creditors of personal partners. In such situations, partnership assets must be utilized in settling of partnership debts. The partners' personal estates should be used in settling their individual debts. Henceforth, any excess in the mutual estate should go to the partners' estates in accordance to their split in the partnership, while any excess money from partners' estates should be directed to the joint estate to settle partnership debts. It is also important to note that some particular secured creditors may have direct declaration on certain assets which will require to be fulfilled. Other creditors may be paid in accordance with their status. The third step involves repaying the partners their advances and current balances. Advances are the amounts they have put in above and beyond the capital. The last step entails paying the partners the final amounts due to them on their capital accounts (Geoffrey, 2006, p.7).

Accounting Entries for Partnership Dissolution during liquidation

The main account which the dissolution entries are made is known as the realization account. It is in this account in which it is calculated whether the realization of the assets is at a profit or a loss.

Illustration

The last balance sheet of Joseph and Mary, who share profits, Joseph one-third and Mary two-third, is shown below. On this day they are to dissolve the partnership as the partnership is placed under receivership.

Balance sheet as at 31 December 2009

Fixed Assets 100,000

Buildings 20,000

Motor vehicle 120, 000

Current Assets

Stock

30,000

Debtors 40,000

Bank 10,000

80,000

Current liabilities

Creditors

(20,000) 60,000

180,000

Capitals:

Joseph 120, 000

Mary 60,000

180,000

The buildings were sold for $100,500 and the stock for $26,000. $35, 000 was collected from debtors. The Motor vehicle was taken over by Joseph at an agreed value of 17, 000, but he did not pay any cash for it. $20, 000 was paid to creditors. The costs of the dissolution were paid which was $2,000. The accounting entries required are as follows. Firstly, book values of all assets are transferred to the realization account. That is the realization account is debited and the assets account credited. Secondly, as far as the amounts obtained from disposal of accounts are concerned, the bank is debited and thenceforth the realization account is credited. Thirdly, in dealing with the value of assets taken over by partner without payment, the partners' capital account is debited whereas the realization account is credited. Fourthly, the creditors are paid the outstanding amount of debts. That is, the creditor's accounts are debited and the bank account credited. Fifthly, in dealing with the cost of dissolution, the realization account is debited whereas the bank account is debited. Sixthly, the profit or loss on realization should be split between partners in profit and loss splitting ratios. If a profit has been made, the realization account is debited and the partner's capital accounts credited. If a loss has been made, the partner's capital accounts are debited and the realization account credited. Lastly, partners are paid their final balances. That is the partner's capital accounts are debited and the bank account debited. The entries are listed below.

Buildings

Bal. b/d 100,000 Realization 100, 000

Motor Vehicle

Bal. b/d 20,000 Realization 20, 000

Stock

Bal. b/d 30,000 Realization 30, 000

Debtors

Bal. b/d 40,000 Realization 40, 000

Debtors

Assets to be realized:

Bank: Assets sold

Buildings

100,000 Buildings 100,500

Motor vehicle

20,000 Stock 26,000

Stock

30,000 Debtors 35,000

Debtors

40,000 Taken over by partnership a:

Bank: Motor Vehicle 17,000

Dissolution costs

2,000 Loss on realization

Joseph 6000

Mary 3000-9000

2,000 192,000 192,000

Bank

Bal. b/d 10,000 Creditors 20,000

Realization: Assets sold

Realization: Costs 2,000

Buildings 105,000 Capitals: to clear

Stock

26,000 Joseph 97,000

Debtors

35,000 Mary 57,000

176,000 176,000

Creditors

Bank 20,000 Bal. b/d 20, 000

Joseph: Capital

Realization: Motor 17,000

Bal. b/d 120, 000

Realization: Share of loss 6,000

Bank: to close 97,000

120,000 120, 000

Mary: Capital

Bal. b/d 60, 000

Realization: Share of loss 3,000

Bank: to close 57,000

60,000 60, 000

The final balances on the partner's capitals accounts should always equal the amount in the bank (Hans et al., 2004, p. 56). From the computations above, it is crystal clear that during liquidation, a partnership business will be compelled to halt its operations and to prepare the relevant accounts. Liquidation is as a result of a number of problems. Firstly, if the partners withdraws excess sum of money or if they take goods from the partnership for personal use, the business is likely to be embroiled in a cash crisis. Secondly, a partnership may be specializing in a product which is not popular amongst the people of a particular area. Henceforth they will not record enough sales and thus are likely to shut down the business since it will be running at a loss. Thirdly, disagreements may crop up on certain issues concerning the management of the business. These disagreements may trigger them to halt the operations of the business and subsequently share the resources in the business in accordance with their capital contribution or in accordance with the partnership act. Fourthly, the stock of the partnership business may be stolen or part of it destroyed by floods, fire and etc. thenceforth the partners may choose to shut the business.

During the preparation of the final accounts as illustrated above, a number of problems do arise. First of all the computations involved… [END OF PREVIEW]

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"Liquidation of a Partnership."  Essaytown.com.  May 26, 2010.  Accessed May 19, 2019.
https://www.essaytown.com/subjects/paper/liquidation-partnership-issue-related/33012.