Answer
First of all let us understand the liquidation of partnership. Liquidation means from the sale of the business by mutual agreement of the partners, from the death of a partner, or from bankruptcy. It ends both the legal and economic life of the entity.
In this process of liquidation sale of noncash assets for cash is called realization. Any difference between book value and the cash proceeds is called the gain or loss on realization
in the process of liquidation ,partner should do following step by step
1 First step is to Sell noncash assets for cash and recognize a gain or loss on realization
2Second step is to allocate gain/loss on realization to the partners based on their income ratios
3 third step is to pay partnership liabilities in cash
4 Now whatever remaining is to pay to partners on the basis of their capital balances.
From the above discussion we could see that partnership must pay creditors before partners receive any cash distributions
We could highlight the example as follow
Assume that XYZ Company is liquidated when its ledger shows the following balances
| Assets | Liability and Equity | ||
| Cash | 10,000 | Notes Payable | 30,000 |
| Accounts Receivable | 30,000 | Accounts Payable | 32000 |
| Inventory | 36000 | X Capital | 30000 |
| Equipment | 70000 | y Capital | 35600 |
| Accumulated Depr. On Equipment | -16000 | Z Capital | 2400 |
| 130,000 | 130,000 |
Now partnership will sell its noncash assets to Jackson Enterprises for $150,000 cash. (2) The partnership will pay its partnership liabilities. The income ratios of the partners are 3 : 2 : 1, respectively. The steps in the liquidation process are as follow
Xyz sells the noncash assets (accounts receivable, inventory, and equipment) for $150,000. The book value of these assets is $120,000 ($30,000 + $36,000 + $70,000 – $16,000). Thus Ace realizes a gain of $30,000 on the sale
Accounting entry for these transaction is as follow
| Cash | 150000 | |
| Accumulated Depreciation–Equipment | 16000 | |
| Accounts Receivable | 30,000 | |
| Inventory | 36000 | |
| Equipment | 70000 | |
| Gain on Realization | 30,000 |
From the cash received they should pay the creditor first and the accounting entry will be as follow
Partnership liabilities consist of Notes Payable $,30000 and Accounts Payable $32,000. Ace pays creditors in full by a cash payment of $30,000.
entry is:
| Notes Payable | 30,000 | |
| Accounts Payable | 32000 | |
| Cash | 62000 |
In this way we could see that creditor of the partnership would receive their money
