Question

Assume that because of a new law, the types of significant transactions a partnership engages in are no longer lawful. Two of the five partners wish to wind up and terminate the partnership. Discuss the following:

1. Can these two partners require the partnership to be terminated?

2. Discuss the accounting for a liquidation where there is no deficit.

3. Discuss how the accounting differs if there is a deficit in one of the partner’s capital accounts

4. How would the accounting for a liquidation differ for a lump-sum payment vs. installment payments?

Answer 1

1. Yes they can initiate proceedings to terminate the partnership, remaining partners can reconsitutute partnership firm among themselves.

2. All the assets are sold, the net of receipts from asset sold and the liabilities are paid in the profit sharing ratio. Afterwards the balance of the capital accounts are paid to each partner

3. If there is deficit then the concerned partners bring in the capital to set off the deficiency. If he is not able to do so then the remaining partners may sue that partner for the losses. However in case partner declares bankruptcy then the partnership considers it as loss which is shares by partners in their profit sharing ratio

4. In lumpsum, net of receipts of assets sold and the liabilities paid are distributed to the partners in their profit sharing ratio. Whereas in later, assets are accounted as at the book value of reailizable value whichever is low and reserves are creates for the liabilities payoff. Gains and losses are determined on the basis of Statement of Partnership realization during the period of installment liquidation.