Chapter 16 - Partnerships: Liquidation
CHAPTER 16 PARTNERSHIPS: PARTNERSHIPS: LIQUIDATION ANSWERS TO QUESTIONS Q16-1 The major causes of a dissolution are:
a. b. c. d. e.
With Withdr draw awal al or deat death h of of a part partne ner r The specif specified ied term term or or task task of the partners partnership hip has been been compl complete eted d All All part partne ners rs agre agree e to to dis disso solv lve e the the part partne ners rshi hip p An indi indivi vidu dual al part partne nerr is bank bankru rupt pt By court decree: i. the partne partnersh rship ip cann cannot ot achi achieve eve its econom economic ic purp purpose ose (typically defined as seeking a profit ii. a partne partnerr serio seriousl usly y breach breaches es the the part partner nershi ship p agreem agreement ent that makes it impracticable to continue the partnership business iii. iii. !t is is not prac practic ticabl able e to carry carry on the the partne partnersh rship ip in conf conform ormity ity with the terms of the partnership agreement The accounting implications of a dissolution are to determine each partner"s capital balance on the date of dissolution of the partnership. Q16-2 The #$A %&&' states that a partnerships liabilities to individual partners have the
same legal status as liabilities to outside parties. )owever* as a practical matter* matter* partners often subordinate their loans to the partnership to other debts. Q16-3 The implications that arise for partners + and , are that both of the partners will
be re-uired to contribute a portion of their capital balances or personal assets to satisfy partnership creditors. $artners + and , will share this contribution according to their relative loss ratio. Q16-4 !n an at will/ partnershi partnership p (one without a partnership partnership agreement agreement that states states a
definite time period or specific undertaking for the partnership* a partner may simply withdraw withdraw from the partnership partnership.. 0any partnerships partnerships have a provision provision in their partnership partnership agreement for a buyout of an at will/ partner who wishes to leave the partnership. !n a partnership that has a definite term or a specific undertaking specified in the partners partnership hip agreem agreement ent** a partne partnerr who who simply simply withd withdraw raws s has commit committed ted a wrong wrongful ful dissociation. !f the partnership incurs any damages* the partnership may sue the partner who withdraws for the recovery of those damages. Q16-5 A lump1sum li-uidation of a partnership is one in which all assets are converted
into cash within a very short time* creditors are paid* and a single* lump1sum payment is made to the partners for their capital interests. An installment li-uidation is one that re-uires several months to complete and includes periodic* or installment* payments to the partners during the li-uidation period.
16-1
Chapter 16 - Partnerships: Liquidation
deficit in a partne partner"s r"s capital capital account account (relating (relating to an insolv insolvent ent partner partner is Q16-6 A deficit eliminated by distributing the deficit to the other solvent partners in their resulting loss ratio.
16-2
Chapter 16 - Partnerships: Liquidation
deficit in a partne partner"s r"s capital capital account account (relating (relating to an insolv insolvent ent partner partner is Q16-6 A deficit eliminated by distributing the deficit to the other solvent partners in their resulting loss ratio.
16-2
Chapter 16 - Partnerships: Liquidation
Q16-7 The 234 $artne $artnersh rship ip is insolv insolvent ent becaus because e the liabil liabiliti ities es of the partne partnersh rship ip
(56%* (56%*77 777 7 e8ce e8ceed ed the the asse assets ts of the the part partne ners rshi hip p (599 (599*7 *777 77. . The The liab liabililit itie ies s of the the partnership are calculated as follows: Assets 599*777
1 1
iabilities iabilities iabilities
; ; ;
7*777 = 5?*777 56%*777
Q16-8 A partnership may not legally engage in unlawful activities. !n this e8ample* the
new law re-uires the dissolution and termination of the partnership. The two partners can seek a court decree for the termination of the partnership if the other three partners do not agree to wind up and li-uidate the partnership. The partnerships assets will be sold and the partnerships obligations shall be settled. !ndividual partners are re-uired to remedy remedy any defici deficits ts in their their capita capitall accoun accounts ts and any remain remaining ing resour resources ces will will be distributed to the partners in accordance with their rights. Q16-9 A partner"s personal payment to partnership creditors is accounted for by
recording a cash contribution to the partnership with an increase in the partner"s capital balance. The cash is then used to pay the partnership creditors. Q16-10 The schedule schedule of safe safe paymen payments ts to partne partners rs is used used to determ determine ine the safe safe
payment of cash to be distributed to partners assuming the worst case situations. Q16-11 osses during li-uidation are assigned to the partners" capital accounts using
the normal loss ratio* if a specific ratio for losses during li-uidation is provided for in the partnership agreement. Q16-12 The worst worst case case assump assumptio tion n means means that that two two e8pect e8pectati ations ons are follow followed ed in
computing the payments to partners: a. b.
38pe 38pect ct that that all all nonc noncas ash h ass asset ets s wil willl be writ writte ten n off off as as a loss loss 38pect 38pect that that defi deficit cits s crea created ted in the capita capitall acco account unts s of partne partners rs will will be distributed to the remaining partners Q16-13 The oss Absorption $ower (A$ is the ma8imum loss of a partnership that
can be charged to a partner"s capital account before e8tinguishing the account. The A$ is used to determine the least vulnerable partner to a loss. The least vulnerable partner is the first partner to receive any cash distributions after payment of creditors. Q16-14 $artner B will receive the first payment of cash in an installment li-uidation
because partner B is least vulnerable to a loss based on the highest A$* which is calculated as follows: A$ for $artner A ; 5>9*777 @ .67 ; 5%*66' A$ for $artner B ; 5>9*777 @ .7 ; 56>*977 Q16-15* The process of incorporating a partnership begins with all partners deciding to
incorporate the business. At the time of incorporation* the partnership is terminated and the assets and liabilities are revalued to their market values. The gain or loss on revaluation is allocated to the partners" capital accounts in the profit and loss sharing ratio. apital stock in the new corporation is then distributed in proportion to the capital accounts of the partners.
16-3
Chapter 16 - Partnerships: Liquidation
SOLUTIONS TO CASES C16-1 Ca! D"#$"%&#"'( D"#$"%&#"' ( #' Pa$#()$
The The issu issue e is that that the the part partne ners rshi hip p is bein being g li-u li-uid idat ated ed and and Bull Bull desi desire res s cash cash to be distributed as it becomes available* while Bear wishes no cash to be distributed until all assets are sold and the liabilities are settled. 0ost partnership li-uidations are installment li-uidations in which cash is distributed during the li-uidation. This provides for the partners" li-uidity needs while also providing for the e8tended time period so the partnership partnership may seek the best price for its assets. T. Bear may desire to hold up cash payments in order to encourage a prompt li-uidation of the assets or to ensure that all liabilities are paid. A compromise may be reached to meet the needs of both partners. An agreement may be used to specify the date or other restrictions under which the assets must be li-uidated and the liabilities settled. !n addition* the necessary amounts to settle settle actual actual** and antici anticipat pated* ed* liabil liabiliti ities es (inclu (includin ding g all li-uid li-uidati ation on costs costs may be escrow escrowed ed with with a truste trustee* e* such as a local local bank. bank. The remain remaining ing cash may then be distributed.
16-4
Chapter 16 - Partnerships: Liquidation
C16-2 Ca! D"#$"%&#"'( #' Pa$#()$ A&"(+ #$",# &) ' UPA 1997:
(%67*777
apital accounts account s AdamC Bard 97D
97D
(?7*777
(7*777
7*777 (7*777
CCCCCC (7*777
(?7*777
?7*777 C (?7*777
(?7*777
97D
97D
Eummary of ash 2istribution $lan Etep %: 4irst 5%F7*777 to creditors* including payment of loan from Bard in the amount of 5%77*777. Etep >: Ge8t 57*777 to Adam Etep F: Any additional distributions in the partners loss percentages
%F7*777 7*777 97D
97D
This schedule shows that the partnerships loan payable to Bard has the same legal status as the liabilities to third parties. Bard will be paid for his loan to the partnership prior to any final distributions to the partners. Adam may be able to negotiate that he will pay the 5%7*777 for the partnerships loan receivable with him from other cash received in a distributi distribution on from the partnership partnership.. )owever )owever** the partnership partnership** including including Bard* can obtain obtain a court decree and judgment against Adam if Adam refuses to pay the partnership the 5%7*77 5%7*777 7 to settle settle the loan he receiv received ed from from the partne partnersh rship. ip. After After the liabil liabiliti ities es are provided for* any remaining cash is paid as shown in the cash distribution plan above* with Adam receiving the first 57*777 and then additional distributions will be made in the partners loss sharing ratio.
16-5
Chapter 16 - Partnerships: Liquidation
C16-2 (continued A&"(+ a .$a,#",a/ a..$'a,!:
Although #$A %&&' specifically states that partnership debt is considered e-ual to outside debt* most loans from partners are subordinated to outside debt. Typically this is done at the re-uest of the outside creditors. !n addition* loans to@from partners are treated as an e8tension of their capital accounts. Hiven these assumptions* the following is a cash distribution plan for the partnership: Adam and Bard $artnership ash 2istribution $lan oss Absorption $ower AdamC Bard oss sharing percentages $reli-uidation capital balances oan to (from partner Total oss absorption power (A$ (capital balance @ loss percentage 2ecrease highest A$ to ne8t level: 2ecrease Adam by 5%7*777 (ash distribution: 5%7*777 8 7.97 ; 5'7*777 2ecrease remaining A$s by distributing cash in profit and loss sharing percentages
(%7*777
apital accounts AdamC Bard 97D
97D
(?7*777 %7*777 ('7*777
(7*777 (%77*777 (%7*777
('7*777
C'7*777 ('7*777
(>?7*777 %7*777
C (%7*777
(%7*777
97D
97D
Eummary of ash 2istribution $lan Etep %: 4irst 5F7*777 to creditorsI Etep >: Ge8t 5'7*777 to Bard (applied first to loan Etep F: Any additional distributions in the partners loss percentages
16-6
5F7*777 '7*777 97D
97D
Chapter 16 - Partnerships: Liquidation
C16-3* I(,'$.'$a#"'( ' a Pa$#()$!".
a. omparison of balance sheets The partnerships balance sheet will report the assets and liabilities at their book values while the corporations balance sheet will report the fair values of these items at the point of incorporation. The incorporation of the partnership results in a new accounting entity* for which fair values are appropriate.
16-7
Chapter 16 - Partnerships: Liquidation
C16-4 S!a$"(+ L') &$"(+ L"&"a#"'(
a. i-uidation loss allocation procedures in the #niform $artnership Act of %&&': Eection 7% of the #niform $artnership Act of %&&' specifies that 3ach partner is entitled to an e-ual share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partners share of the profits./ !n the absence of a partnership agreement for the sharing of profits* and for the sharing of losses* all partners have e-ual rights in the management and conduct of the business. !n the case* it is not clear that the partners intend to share losses in the same :F:> ratio used to share profits. A court may decide that the :F:> ratio should be used* or alternatively* in the absence of a specific partnership agreement* that the #$As e-ual provision should be used. This uncertainty should increase the partners willingness to agree among themselves at the beginning of the partnership how losses should be shared. b. Assessment of each partners position: )iller may feel it is best not to get into negative/ types of discussion when the partnership is attempting to get under way. )owever* if the partners are not able to agree at this point in time* it may be best not to move forward with the formation of the partnership. Eimply putting off an important issue is not going to eliminate its possible importance later in time. While not discussing the issue now removes a possibly contentious issue from the discussion* it does not solve the problem. unas argument of e-uality for responsibility of a failure of the partnership is humanistic* but may not be true. ratio or select a specific loss sharing ratio in the event of li-uidation. The important point is that the partners should agree* before a possible li-uidation* on the allocation process to be used in the case of li-uidation. When a partnership fails* emotions will be high and that is not the best time to attempt to reach agreements. !f the partners do not agree beforehand* then many of these types of cases wind up in litigation that involves additional costs and time. Again* the partners should be encouraged to consider the processes to be used in the event of li-uidation as part of the partnership formation agreement. 4inally* if the partners cannot agree* the accountant for the partnership does not have any legal stature to make a unilateral decision. This must be a decision made by all partners* or by a court.
16-8
Chapter 16 - Partnerships: Liquidation
C16-5 A(a/" ' a C'&$# D),""'( '( a Pa$#()$!". L"&"a#"'(
This case asks -uestions about the 0attfield v Kramer Brothers court case decided by the 0ontana Eupreme ourt on 0ay F%* >779. The court case is a really interesting presentation of some of the major types of problems that can occur in a family partnership. Etudents may obtain a copy of the court decision by several alternatives as presented in the case information in the te8tbook. '$ #!) "(#$&,#'$ %)()"# a ,'. ' #!) ,'&$# ),""'( " .$'") a# #!) )( ' #!) '/&#"'( '$ #!" ,!a.#)$ 4aculty might decide to make copies for the students or place copies on reserve in the library used by the accounting students in their advanced accounting classes. ourt cases are within the public domain and can be printed verbatim without re-uesting permission. Answers to the -uestions posed in the te8tbooks %619 are presented in the following paragraphs. a. Summary of history of Kramer Brothers Co-Partnership. The partnership began in the early %&?7s with the father* Laymond Kramer* Er.* providing the initial capital* land* and cattle. The four brothers were 2on* 2ouglas* William and Lay. !n %&?9* Bill stated his desire to dissociate from the partnership. The other three brothers continued the partnership* but 2on was limited as a result of a car accident. !n Muly %&&* 2on left 0ontana but returned in %&&9. !n %&&'* Laymond Er. (the father died which resulted in the four brothers* including 2on* discussing the distribution of their fathers interest in the partnership. F* >777* 2on filed a suit demanding a formal accounting of the partnership* li-uidation of its assets* and distribution of real property held by the partners as tenants in common. 4rom that point* a number of suits and motions went back and forth between 2oug* Lay* ydia (their mother* and 2on. 77>* the 2istrict ourt decided in favor of 2oug* Lay* and ydia* but only for those claims accruing before 0ay >F* %&&9* the five1year period covered by the statute of limitations. 77>* the parties agreed to a buyout of 2ons share of the partnerships interest in real property for 5?'*977. 2ons legal representative* Hreg 0attfield and linton Kramer* the Huardians for 2on* filed a motion seeking to reopen the period of time prior to 0ay >F* %&&9. This motion was rejected by the court* setting up the appeal to 0ontanas Eupreme ourt. b. Type of partnership . The four brothers and their father had an oral agreement to form the farming operation. This typically evidences an at will partnership because there is no written agreement for a definite term or a specific undertaking. The ensuing difficulties of the partnership indicate that a formal* written agreement might have avoided some of the problems. A written agreement could specify a term of e8istenceI might include the procedures to be used if a partner wished to dissociateI the process of determining a dissociated partners partnership buyout price* perhaps involving a neutral valuation and arbitration e8pert* and other matters the family felt were important based on past events and e8periences among the family. 4or a business of this apparent siJe* it is also recommended that they seek advice from an attorney who has e8perience in preparing partnership agreements. Working out the issues before forming a partnership* and getting these resolutions into a formal agreement* can really help minimiJe and* perhaps even avoid future problems.
16-9
Chapter 16 - Partnerships: Liquidation
C16-5 (continued
c. Bill Kramer’s economic interest in partnership. Bill dissociated from the partnership in %&?9* soon after it was formed. The information presented in the courts decision does not state if Bill received a buyout from the partnership. !n addition* Bill received a partial interest from the estate of his father. The appeal motion included Bill as one of the defendants. Thus* it seems clear from the information given that Bill did have a continuing economic interest as of the time the motion was filed on Mune >F* >77. d. Legal recourse of other partners at time Don dissociated. 2ons dissociation appeared to be wrongful for which the other partners could seek damages* and to assure that the dissociated partner is obligated for his or her share of the partnerships liabilities at the time of the dissociation. This normally re-uires a scheduling of all liabilities as of the dissociation date* something accountants can provide for the partnership. !n addition to filing a revised Etatement of $artnership Authority with the Eecretary of Etate and the local court clerk* the remaining partners should also ensure that creditors and other third1party vendors with the partnership are given notice that the dissociated partner no longer has the authority to bind the partnership. The remaining partners could also have a new partnership agreement* this time in writing* to provide written evidence that they are continuing the business. The important thing is that the remaining partners have sufficient documentation and evidence of 2ons partnership interest as of the date he dissociated. e. Reuest for Ray’s and Doug’s personal ta! returns. This was probably an effort to determine the profit or loss of the partnership from the date the partnership was formed to Muly %&&* when 2on left 0ontana. !n addition* 2ons attorney also asked for the accounting records for that same time period. The stated reason for this re-uest was to accomplish an accurate accounting/ of the partnership and to determine the amount the partnership owed 2on. #nder the partnership form of business* the partners recogniJe their share of the partnerships profit or loss on their personal income ta8 returns. The partnership is not a separate ta8able entity. The re-uest for the personal ta8 returns of Lay and 2oug may also have been made to try to gain leverage in negotiating 2ons buyout offer. Gevertheless* this re-uest indicates the intertwining of a partnership and its individual partners. f. T"o ma#or things learned. 0any students will state the need for a written partnership agreement* but there are other interesting items in the court case. Etudents are probably not aware of the five1year statute of limitations on claims. The courts decision that 2ons relocation to Ean 4rancisco in Muly %&& was a wrongful dissociation is interesting because* as a result of a car accident* 2on was not able to fully participate in the partnership. The issue of when the five1year statute of limitations period began is interesting because this shows the importance of the accountant having an accurate record of a partners interest in the partnership as of specific* important times in the history of the partnership that may serve as records of evidence in future legal actions. A great class discussion can be generated from this -uestion.
16-10
Chapter 16 - Partnerships: Liquidation
C16-6 R)");"(+ #!) L"&"a#"'( P$',) ' a L""#) Pa$#()$!".
a. !tem % of the %71K states that the limited partnership Nwas formed on August >F* %&?&* to ac-uire* own and operate 97 4airfield !nn by 0arriott properties (the !nns/* which compete in the economy segment of the lodging industry./ b. !tem % of the %71K states that the original general partner was 0arriott 4!B0 77%* A$14airfield H$ become the general partner. 4or the more adventurous students* you could recommend they look at the 4orm %71%>H that was filed on Manuary >&* %&&?* for additional details under !tem % of that 4orm for more detail on the organiJation of the partnership at the time of formation. The general partner* 0arriott !nternational* !nc. contributed 5?%*'?? for its %D general partnership interest. ,our adventurous students will also find that between Govember %'* %&?&* and Muly F%* %&&7* ?F*FF' limited partnership interests were sold in a public offering at the price of 5%*777 per unit. c. The general partners profit percentage was %D* not including its limited partnership units share of profits@losses. 0arriott !nternational !nc. (0!! had several apparent benefits of investing in the limited partnership. 4irst* 0!! was able to sell a number of its older hotels while still maintaining ownership of the land on which the hotels were constructed (ground rights/. 0!! would be receiving ground rent on the land. Eecondly* the initial property management provider was 4airfield 40 orporation* a wholly owned subsidiary of 0!!. Thus* 0!! would be providing similar types of services it was providing on its 0arriott )otels* and collecting management service fee from the limited partnership. Third* many limited partnerships e8perience operating losses while still making capital distributions. AnalyJing the Etatements of hanges in $artners 2eficits in !tem ? of the %71K* it can be seen that the general partner and the limited partners have a capital deficit as of 2ecember F%* >777. This means that operating losses and@or capital distributions to partners between the time of formation in %&?& and 2ecember F%* >777* were substantial. !nterestingly* the limited partnership did not make any distributions to partners in >77>* probably because of the poor financial position of the limited partnership at that time. d. The Lestructuring $lan was approved by the limited partners via pro8y vote initiated on Muly %6* >77%* included a transfer of general partner interest on August %6* >77%* and was fully implemented on Govember F7* >77%. The transfer of the general partner interest was from 4!B0 77%* Eage 0anagement Lesources !!!* * began providing service to the !nns of the limited partnership* again as specified in the restructuring plan. The limited partnership entered into new franchise agreements with 0!!* modifications of its ground leases with 0!! that resulted in substantially lower ground rents* agreed to complete the property improvement plans re-uired by 0!!* and waived 0!!s rights to receive the deferred fees then owing to it. Also* the partnership sought 5>F million in subordinated notes payable but that public offering filing with the E3 was withdrawn on Manuary 6* >77F* due to the continued financial difficulties of the partnership.
16-11
Chapter 16 - Partnerships: Liquidation
C16-6 (continued
e. The $lan of i-uidation was the result of the partnership not being able to meet its debt service re-uirements on the loan for its properties. The partnership was also in default under the ground lease agreements with 0!!. The plan of li-uidation was implemented beginning on 2ecember 9* >77F* and the partnership began its li-uidation process as of that date. The !nns were to be sold and 0!! was to receive payments for its land under the !nns that were sold. There would be funds advanced to the partnership to invest in the !nns to enhance their marketability during the li-uidation process. 7* >77F* the partnership engaged a national broker to market the inns for sale. The !nns continued to sell* but at a slower pace than anticipated and still had !nns as of 0ay %* >776. f. The li-uidation basis of accounting used by the partnership is discussed in Gote >* Eummary of Eignificant Accounting $olicies. The li-uidation basis of accounting is not HAA$ because HAA$ is based on the going concern concept. The partnership adopted the li-uidation basis of accounting for periods beginning after Eeptember F7* >77F* as a result of the adoption of the plan of li-uidation. The partnership adjusted the assets to their estimated net realiJable value and the liabilities were adjusted to their estimated settlement costs* including estimated costs associated with carrying out the li-uidation. (Etudents should note that 4AEB Etatement Go. %6* Accounting for osts Associated with 38it or 2isposal Activities/ OAS 146 ASC 420 P now re-uires that a liability for a cost associated with an e8it or disposal activity should be recogniJed and measured at its fair value in the period in which the liability is incurred* not before* such as when a plan of li-uidation is approved. g. These are presented in !tem ' of the %71K. The statements will be discussed in their order of presentation in the %71K. %. Balance sheet (going concern basis to Etatement of net liabilities in li-uidation (li-uidation basis. The going concern balance sheet is not unusual for a company that is in a deficit position (assets less than liabilities. )owever* the li-uidation basis statement of net liabilities in li-uidation presents the properties held for sale at fair value* and presents the liabilities owed and e8pected during li-uidation at their settlement values* such as the land purchase obligation to 0!!* and the estimated costs during the period of li-uidation. The focus is on the values of the assets and liabilities for li-uidationI therefore* partners capital accounts are not shown under the li-uidation basis. >. Etatement of operations (going concern basis end at the point the li-uidation basis of accounting is adopted because the statement of operations (statement of income is a going concern statement. Thus* there is no statement of operations under the li-uidation basis of accounting. The flow/ document prepared under the li-uidation basis is the Etatement of hanges in Get iabilities in i-uidation. F. The Etatement of ash 4lows is also a going concern statement and no comparable financial statement e8ists under li-uidation basis accounting. h. 4orm %91%>H* filed on 0ay %* >776* is for termination of registration* acknowledging the partnership will no longer be offering limited partnership units* or debt securities* to the public. This statement shuts the door/ of an entitys E3s filing re-uirements. Thus* a registration statement such as the E1% or EF* that seeks to offer e-uity securities to the general public* is the form for beginning the entitys E3s filing re-uirements and then there is a form re-uired to end the entitys re-uired E3 filings.
16-12
Chapter 16 - Partnerships: Liquidation
SOLUTIONS TO E
%.
c
Moan $rofit ratio $rior capital oss on sale of inventory
>.
a
$rior capital oss on sale of inventory Allocate harles" capital deficit: Moan ; 7.[email protected] Thomas ; 7.%[email protected]
7D
d
$rior capital oss on sale of inventory $ossible loss of remaining inventory Allocate harles" potential capital deficit:
Thomas
97D
%7D
Total %77D
(%67*777
(9*777
(99*777
(>67*777
>*777 (%F6*777
F7*777 (%9*777
6*777 (&*777
67*777 (>77*777
(%67*777
(9*777
(99*777
(>67*777
'>*777 (??*777
&7*777 9*777
%?*777 (F'*777
%?7*777 (?7*777
&*777 (>?*777
(?7*777
(9*777 F6*777 (9>*777
F.
harles
171
(%67*777
(9*777
(99*777
(>67*777
>*777 (%F6*777
F7*777 (%9*777
6*777 (&*777
67*777 (>77*777
6*777 ('>*777
?7*777 69*777
%6*777 (FF*777
%67*777 (7*777
9>*777 (>7*777
(69*777 171
%F*777 (>7*777
(7*777
.
d
The safe payments computations include consideration of the partners loss absorption power and the priority of intervening cash distributions before the last cash distribution.
9.
c
The loan payable to Adam has the same legal status as the partnerships other liabilities according to the #$A of %&&'* but is likely subordinated to the partnerships outside liabilities. After payment of the accounts payable* the deficit balance in Adams capital account needs to be remedied either through cash contribution or setoff against the loan. !f Adam were to contribute additional cash to eliminate his deficit* answer a/ would be correct. )owever* since the problem does not mention a cash contribution* setoff is the only remedy for the deficit and answer c/ is the best solution.
6.
d
$artnership creditors have first claim to partnership assets
'.
a
After the settlement of accounts* partners are re-uired to make additional contributions to the partnership to satisfy partnership obligations.
16-13
Chapter 16 - Partnerships: Liquidation
E16-2
%.
=&/#"./)-C!'",) Q&)#"'( '( Pa$#()$!". L"&"a#"'( >AICPA Aa.#)?
a
asey $rofit and loss ratio Beginning capital Actual loss on assets $otential loss on other assets Balances Eafe payments
>.
b
F.
d
9
2ithers
3dwards
F
>
(?7*777 %9*777
(&7*777 &*777
('7*777 6*777
97*777 (%9*777 %9*777
F7*777 (9%*777 9%*777
>7*777 (*777 *777
Blythe
ooper
Art $rofit and loss ratio
7D
7D
>7D
apital balances
(F'*777
(69*777
(?*777
oss absorption power oss to reduce to B: (''*977 8 7.>7 ; %9*977 Balances oss to reduce B Q to A: (B:'7*777 8 7.7 ; >?*777 (:'7*777 8 7.>7 ; %*777 Balances
(&>*977
(%6>*977
(>7*777
(%6>*977
''*977 (%6>*977
(&>*977
'7*777 (&>*977
(&>*977
'7*777 (&>*977
ash of 5>7*777 after settlement of liabilities: ooper receives first 5%9*977I remaining 5*977 split >@F to Blythe and %@F to ooper. .
d
ash of 5%'*777: ooper receives first 5%9*977I remaining 5%*977 split >@F to Blythe and %@F to ooper.
9.
a
!f all partners received cash after the second sale* then the remaining 5%>*777 is distributed in the loss ratio.
6.
a
Arnie $rofit and loss ratio apital balances oss of 5%77*777 Lemaining e-uities
7D (7*777 7*777 171
Bart F7D (%?7*777 F7*777 (%97*777
Arnie will receive nothingI the entire 5%97*777 will be paid to Bart.
16-14
Kurt F7D (F7*777 F7*777 171
Chapter 16 - Partnerships: Liquidation
E16-3 C'.&#"(+ A/#)$(a#") Ca! D"#$"%&#"'( #' Pa$#()$
a
apital balances before sale of e-uipment 3-uipment sold for 5F7*777I allocation of 5%7*777 loss apital balances after sale 4inal distribution of cash
b. apital balances before sale of e-uipment 3-uipment sold for 5>%*777I allocation of 5%&*777 loss apital balances after sale Allocate capital deficit of ouden: @' 8 5'77 F@' + 5'77 apital balances after allocation of ouden"s deficit 4inal distribution of cash c.
apital balances before sale of e-uipment 3-uipment sold for 5'*777I allocation of 5FF*777 loss apital balances after sale Allocate capital deficit of ouden: @' 8 5*&77 F@' + 5*&77 apital balances after allocation of ouden"s deficit Allocate capital deficit of 0enser: @ 8 5>*777 apital balances after allocation of 0enser"s deficit 4inal distribution of cash
($arentheses indicate credit amount.
16-15
apital Balances Bracken ouden 7D F7D
0enser F7D
(>9*777
(9*777
(%7*777
*777 (>%*777 >%*777
F*777 (>*777 >*777
F*777 ('*777 '*777
(>9*777
(9*777
(%7*777
'*677 (%'*77
9*'77 '77 ('77
9*'77 (*F77
77 CCCCCC (%'*777 %'*777
CCCCCC CCCC171 C171
C F77 C(*777 *777
(>9*777
(9*777
(%7*777
%F*>77 (%%*?77
&*&77 *&77 (*&77
&*&77 (%77
>*?77 CCCCCC (&*777
CCCCCC 171
>*777 ('*777 '*777
CCCCC CCC171 171
>*%77 >*777 (>*777 CCCCC CCC171 171
Chapter 16 - Partnerships: Liquidation
E16-4 L&.-S& L"&"a#"'(
a. BH and 2evelopment ompany Etatement of $artnership LealiJation and i-uidation ump1Eum 2istribution
Balances Eale of assets at a 57*777 loss $ayment to creditors
apital Balances 0atthews 0itchell 0ichaels 97D F7D >7D
ash
Goncash Assets
Accounts $ayable
0itchell* oan
>7*777
%97*777
(F7*777
(%7*777
(?7*777
(F6*777
(%*777
%%7*777 %F7*777
(%97*777 171
(F7*777
(%7*777
>7*777 (67*777
%>*777 (>*777
?*777 (6*777
%7*777 171
(67*777
(>*777
(6*777
67*777 171
>*777 171
6*777 171
(F7*777 (%7*777 &7*777
F7*777 171
171
(&7*777 171
171
171
171
($arentheses indicate credit amount.
16-16
Chapter 16 - Partnerships: Liquidation
E16-4 (continued
b.
(%
(>
(F
ash 0atthews* apital 0itchell* apital 0ichaels* apital Goncash Assets Eell noncash assets at a loss of 57*777.
%%7*777 >7*777 %>*777 ?*777 %97*777
Accounts $ayable 0itchell* oan ash $ay creditors* including 0itchell.
F7*777 %7*777
0atthews* apital 0itchell* apital 0ichaels* apital ash 4inal lump1sum distribution to partners.
67*777 >*777 6*777
7*777
&7*777
Chapter 16 - Partnerships: Liquidation
E16-4 (continued
b.
(%
(>
(F
ash 0atthews* apital 0itchell* apital 0ichaels* apital Goncash Assets Eell noncash assets at a loss of 57*777.
%%7*777 >7*777 %>*777 ?*777 %97*777
Accounts $ayable 0itchell* oan ash $ay creditors* including 0itchell.
F7*777 %7*777
0atthews* apital 0itchell* apital 0ichaels* apital ash 4inal lump1sum distribution to partners.
67*777 >*777 6*777
7*777
&7*777
E16-5 S,!)&/) ' Sa) Pa)(# a) '( #$",# '%)$a(,) ' UPA 1997
Kitchens Must 4or ,ou Echedule of Eafe $ayments to $artners
apital balances* Eeptember %* >7+& Write1off of 5>?*777 in goodwill Write1off of 5%>*777 of receivables oss of 5*777 on sale of 5>*777 of inventory (one1half of 5?*777 book value apital balances* Eeptember F7* >7+& (R ; deficit $ossible loss of 5%&*777 for remaining receivables (including 5&*777 receivable from Terry and 5>*777 for remaining inventory $ossible li-uidation costs of 56*777 Balances (R ; potential deficit 2istribute Terrys and $hyllis potential deficits to onnie* the only partner with a capital credit Eafe payments to partners* Eeptember F7* >7+&
Terry C (F7DC (%>*777 ?*77 F*677
$hyllis CC(97DC (F6*777 %*777 6*777
onnie CC(>7DC (9*777 9*677 >*77
%*>77 %*>77R
>*777 (%*777
?77 (9*>77
%>*&77 %*?77 %9*&77R
>%*977 F*777 %7*977R
?*677 %*>77 (F9*77
(%9*&77 171
(%7*977 171
>6*77 &*777
7+&. An interesting observation is that the newest partner* onnie* will receive the most cash in the partnership li-uidation because of the recognition of so much goodwill at the time of her admission and because of her loan to the partnership.
16-17
Chapter 16 - Partnerships: Liquidation
E16-5 (continued a) '( .$a,#",a/ a..$'a,!:
Kitchens Must 4or ,ou Echedule of Eafe $ayments to $artners
apital balances* Eeptember %* >7+& oans to (from partner Total Write1off of 5>?*777 in goodwill Write1off of 5%>*777 of receivables oss of 5*777 on sale of 5>*777 of inventory (one1half of 5?*777 book value apital balances* Eeptember F7* >7+& (R ; deficit $ossible loss of 5%&*777 for remaining receivables (including 5&*777 receivable from Terry and 5>*777 for remaining inventory $ossible li-uidation costs of 56*777 Balances (R ; potential deficit 2istribute Terrys and $hyllis potential deficits to onnie* the only partner with a capital credit Eafe payments to partners* Eeptember F7* >7+&
Terry C (F7DC (%>*777 &*777 (F*777
$hyllis CC(97DC (F6*777 (F6*777
onnie CC(>7DC (9*777 (%9*777 (6&*777
?*77 F*677
%*777 6*777
9*677 >*77
%*>77 %7*>77R
>*777 (%*777
?77 (67*>77
%>*&77 %*?77 >*&77R
>%*977 F*777 %7*977R
?*677 %*>77 (97*77
(>*&77 171
(%7*977 171
F9*77 %9*777
7+&. An interesting observation is that the newest partner* onnie* will receive the most cash in the partnership li-uidation because of the recognition of so much goodwill at the time of her admission and because of her loan to the partnership.
16-18
Chapter 16 - Partnerships: Liquidation
E16-6 S,!)&/) ' Sa) Pa)(# #' Pa$#()$
0aness and Moiner $artnership ombined Etatement of LealiJation and Echedule of Eafe $ayments apital Accounts 0aness Moiner ash !nventory $ayable ?7D >7D Balances
>9*777
%>7*777
Eale of inventory
7*777
(67*777
$ayment to creditors $ayments to partners (Echedule %
(%7*777 99*777
67*777
(%9*777
(69*777
(69*777
%6*777
*777
%7*777 (9*777
(&*777
(6%*777
(9*777
%*777 (?*777
&*777 (%>*777
>*777
6*777
(97*777 9*777
67*777
Eale of inventory
F7*777
(67*777
$ayment to creditors
(9*777 F7*777
171
9*777 171
(>*777
(6*777
(F7*777 171
CCCCCC 171
171
>*777 171
6*777 171
0aness ?7D (&*777 ?*777 (%*777
Moiner >7D (6%*777 %>*777 (&*777
$ayments to partners Balances
Echedule % Eafe payments at end of first month: apital balances $otential loss of 567*777 on remaining inventory Eafe payments to partners ($arentheses indicate credit amount. Gote that the 59*777 cash remaining after safe payments at the end of the first month is the amount re-uired to li-uidate the remaining accounts payable. #sing just the partners capital balances to compute safe payments indirectly includes both the assets and the liabilities of the partnership.
16-19
Chapter 16 - Partnerships: Liquidation
E16-7 A/#)$(a#") P$'"# a( L' S!a$"(+ Ra#"' "( a Pa$#()$!". L"&"a#"'(
apital balances at beginning of li-uidation a.
$artnership ratio of F:F:>:> e-uals percentages of:
Gelson
$eters
(%9*777
('9*777
('9*777
Suincy (F7*777
F7D
F7D
>7D
>7D
Allocation of 5&7*777 loss on sale of noncash assets
>'*777
>'*777
%?*777
apital balances after allocation of loss
%>*777
(?*777
(9'*777
2istribution of deficit of insolvent partner:
(%>*777
*777
9*%F
$eters: >7@'7 8 5%>*777
F*>?
Suincy: >7@'7 8 5%>*777
b.
F*>&
apital balances after distribution of Gelson deficit
171
(>*?9'
(9F*9'>
(?*9'%
$ayment to partners
171
>*?9'
9F*9'>
?*9'%
$artnership ratio of F:%:F:F e-uals percentages of:
F7D
%7D
F7D
Allocation of 5&7*777 loss on sale of noncash assets
>'*777
&*777
>'*777
apital balances after allocation of loss
%>*777
(66*777
(?*777
2istribution of deficit of insolvent partner:
(%>*777
*777
F7D >'*777 (F*777
%*'%
$eters: F7@'7 8 5%>*777
9*%F
Suincy: F7@'7 8 5%>*777
9*%F
apital balances after distribution of Gelson deficit
171
(6*>?6
(>*?9'
2istribution of deficit of insolvent partner:
>*%F (>*%F
*%F
9F6
$eters: F7@7 8 5>*%F
c.
%?*777 (%>*777
%*67'
apital balances after distribution of Suincy deficit
171
(6F*'97
(%*>97
171
$ayment to partners
171
6F*'97
%*>97
171
$artnership ratio of F:%:>: e-uals percentages of:
F7D
%7D
>7D
7D
Allocation of 5&7*777 loss on sale of noncash assets
>'*777
&*777
%?*777
F6*777
apital balances after allocation of loss
%>*777
(66*777
(9'*777
6*777
2istribution of deficits of two insolvent partners:
(%>*777
(6*777 6*777
$eters: >7@F7 8 5%?*777
%>*777
apital balances after distribution of capital deficits
171
(67*777
(9*777
171
$ayment to partners
171
67*777
9*777
171
$arentheses indicate credit amount.
!n case c. both Gelson and Suincy are personally insolvent so their capital deficits resulting from the allocation of the loss can be added together and distributed to the two solvent partners. )owever* if Suincy had been personally solvent* then he would be re-uired to remedy any capital deficit* including one that was distributed to him because of the insolvency of another partner* as from the distribution of Gelsons capital deficit in case b.
16-20
Chapter 16 - Partnerships: Liquidation
16-21
Chapter 16 - Partnerships: Liquidation
E16-8 Ca! D"#$"%&#"'( P/a( a) '( #$",# '%)$a(,) ' UPA 1997:
A$B $artnership ash 2istribution $lan oss Absorption $ower Adams
$eters
apital Accounts
Blake
$rofit and loss percentages
2ecrease highest A$ to ne8t highest: Adams (5>9*777 8 7.>7 2ecrease A$s to ne8t highest: Adams (5%%7*777 8 7.>7 $eters (5%%7*777 8 7.F7
$eters
>7D
$reli-uidation capital balances oss absorption power (apital balances @ oss percentage
Adams
(>'9*777
(>97*777
(%7*777
>9*777 (>97*777
(>97*777
(%7*777
%%7*777 (%7*777
Blake
F7D
97D
(99*777
('9*777
('7*777
9*777 (97*777
('9*777
('7*777
FF*777 (>*777
('7*777
>>*777 %%7*777 (%7*777
(%7*777
(>?*777
Gote: $arentheses indicate credit amount.
Eummary of ash 2istribution $lan 4irst 597*777 to creditors Ge8t 59*777 Ge8t 599*777 Any additional
Adams
$eters
%77D 7D >7D
67D F7D
Blake
97D
Gote that the receivable from Adams is not included in the ash 2istribution $lan. The #$A %&&' does not include any offsets of receivables from partners against capital accounts. Thus* the partnership should treat the receivable from Adams as any other partnership asset. !f the partnership were to prepare a schedule of safe payments* it would include a provision for a possible loss on any unpaid loan receivables with partners just as with other unrealiJed partnership assets.
16-22
Chapter 16 - Partnerships: Liquidation
E16-8 (continued: a) '( .$a,#",a/ a..$'a,!:
A$B $artnership ash 2istribution $lan oss Absorption $ower Adams
$eters
apital Accounts
Blake
$rofit and loss percentages
(>>9*777
(>97*777
(%7*777
(>>9*777
>9*777 (>>9*777
(%7*777
2ecrease highest A$ to ne8t highest: Adams (5>9*777 8 7.>7 2ecrease A$s to ne8t highest: Adams (5%%7*777 8 7.>7 $eters (5%%7*777 8 7.F7
$eters
>7D
$reli-uidation capital balances oan to Adams Total oss absorption power (apital balances @ oss percentage
Adams
?9*777 (%7*777
Blake
F7D
97D
(99*777 %7*777 (9*777
('9*777
('7*777
('9*777
('7*77
(9*777
'*977 (6'*977
('7*777
>9*977 (>*777
('7*777
%'*777 ?9*777 (%7*777
(%7*777
(>?*777
Gote: $arentheses indicate credit amount.
Eummary of ash 2istribution $lan 4irst 597*777 to creditors Ge8t 5'*977 Ge8t 5>*977 Any additional
16-23
Adams
$eters
7D >7D
%77D 67D F7D
Blake
97D
E16-9 C'("$a#"'( ' Ca! D"#$"%&#"'( P/a( a) '( #$",# '%)$a(,) ' UPA 1997:
A$B $artnership Etatement of $artnership LealiJation and i-uidation !nstallment i-uidation Adams* Goncash Adams* ash oan Assets iabilities >7D
apital $eters* F7D
Blake* 97D
Balances
7*777
(99*777
('9*777
('7*777
Eale of assets $ayment to creditors
69*777
*777
6*777
%7*777
$ayment to partners (Ech. % Eale of assets ollection of Adams loan $ayment to creditors $ayment to partners Balances
%7*777
>77*777
(97*777
(?9*777
(>%*777 ?*777
% 7*777
%%9*777
>%*777 (>&*777
(9%*777
(6&*777
(67*777
(99*777 >&*777
% 7*777
%%9*777
(>&*777
>9*777 (>6*777
F7*777 (F&*777
171 (67*777
'*>77
%7*?77
%?*777
'&*777
(%%9*777
%7*777
(%7*777
(>&*777 ?&*777
171
171
>&*777 171
(%?*?77
(>?*>77
(>*777
(?&*777 171
171
171
171
%?*?77 171
>?*>77 171
>*777 171
($arentheses indicate credit amount.
E16-9 (continued
Echedule %: A$B $artnership Echedule of Eafe $ayments to $artners Adams >7DCC apital balances* end of first month $ossible loss of 5%>9*777 on noncash assets (5%7*777 loan and 5%%9*777 other Allocate Blakes potential deficit: >7@97 8 5>*977 F7@97 8 5>*977 Eafe payment to partners
$eters F7D CC
Blake 97DCC
(9%*777
(6&*777
(67*777
>9*777 (>6*777
F'*977 (F%*977
6>*977 >*977 (>*977
%*777 CCCCCCC >9*777
CC%*977 F7*777
CCC CC 171
E16-9 (continued
Echedule %: A$B $artnership Echedule of Eafe $ayments to $artners Adams >7DCC apital balances* end of first month $ossible loss of 5%>9*777 on noncash assets (5%7*777 loan and 5%%9*777 other Allocate Blakes potential deficit: >7@97 8 5>*977 F7@97 8 5>*977 Eafe payment to partners
$eters F7D CC
Blake 97DCC
(9%*777
(6&*777
(67*777
>9*777 (>6*777
F'*977 (F%*977
6>*977 >*977 (>*977
%*777 CCCCCCC >9*777
CC%*977 F7*777
CCC CC 171
E16-9 (continued a) '( .$a,#",a/ a..$'a,!:
A$B $artnership Etatement of $artnership LealiJation and i-uidation !nstallment i-uidation ash Balances Adams loan write1off Eale of assets $ayment to creditors
7*777
Adams* oan
Goncash Assets
iabilities
%7*777 (%7*777
>77*777
(97*777
69*777
$ayment to partners (Ech. % Eale of assets $ayment to creditors $ayment to partners Balances
(?9*777
apita
l $eters* F7D
Blake* 97D
(99*777 %7*777 *777
('9*777
('7*777
6*777
%7*777
Adams* >7D
(>%*777 ?*777
171
%%9*777
>%*777 (>&*777
(%*777
(6&*777
(67*777
(99*777 >&*777
171
%%9*777
(>&*777
%?*777 (>F*777
F*977 (F*977
>*977 (9'*977
'&*777 (>&*777 '&*777
(%%9*777 171
('&*777 171
171
'*>77
%7*?77
%?*777
171
>&*777 171
(%9*?77
(>F*'77
(F&*977
171
171
%9*?77 171
>F*'77 171
F&*977 171
($arentheses indicate credit amount.
E16-9 (continued
Echedule %: A$B $artnership Echedule of Eafe $ayments to $artners Adams >7DCC apital balances* end of first month $ossible loss of 5%%9*777 on assets Eafe payment to partners
$eters F7D CC
Blake 97DCC
(%*777 >F*777 (%?*777
(6&*777 F*977 (F*977
(67*777 9'*977 (>*977
%?*777
F*977
>*977
E16-9 (continued
Echedule %: A$B $artnership Echedule of Eafe $ayments to $artners Adams >7DCC apital balances* end of first month $ossible loss of 5%%9*777 on assets Eafe payment to partners
$eters F7D CC
Blake 97DCC
(%*777 >F*777 (%?*777
(6&*777 F*977 (F*977
(67*777 9'*977 (>*977
%?*777
F*977
>*977
E16-10* I(,'$.'$a#"'( ' a Pa$#()$!".
a.
$artnership"s Books (%
(>
(F
b.
Alice* apital (5%%*>77 8 7.67 Betty* apital (5%%*>77 8 7.7 Accounts Leceivable !nventory 3-uipment To record revaluation of assets.
6*'>7 *?7 ?77 F*>77 '*>77
!nvestment in A Q B orporation Etock Accounts $ayable ash Accounts Leceivable !nventory 3-uipment To record transfer of net assets to A Q B corporation.
?9*>77 %'*>77
Alice* apital (56>*77 1 56*'>7 Betty* apital (5F*777 1 5*?7 !nvestment in A Q B orporation Etock To record distribution of stock to prior partners.
99*6?7 >&*9>7
?*777 >%*677 F>*?77 7*777
?9*>77
A Q B orporation"s Books ash Accounts Leceivable !nventory 3-uipment Accounts $ayable ommon Etock Additional $aid1!n apital To record receipt of net assets from partnership.
?*777 >%*677 F>*?77 7*777 %'*>77 '%*777 %*>77
E16-11A
=&/#"./)-C!'",) Q&)#"'( '( P)$'(a/ "(a(,"a/ S#a#))(# >AICPA Aa.#)?
%. b >. a F. a
. d 9. a 6. c '. b ?. c &. d %7. b %%. d
%7*777 shares 8 (5>9 1 5%7
;
5%97*777 options fair value 8 7.69 net1of1ta8 rate 5 &'*977 value* net1of1ta8 =77*777 pre1option net worth 5&'*977 net worth
E16-12A P)$'(a/ "(a(,"a/ S#a#))(#
eonard and 0ichelle Etatement of hanges in Get Worth 4or the ,ear 3nded August F%* >7+F LealiJed increases in net worth: Ealaries 4arm income 2ividends and interest income LealiJed decreases in net worth: !ncome ta8es $ersonal e8penditures oss on sale of marketable securities !nterest e8pense Get realiJed decrease in net worth #nrealiJed increases in net worth: Lesidence !nvestment in 4arm #nrealiJed decreases in net worth: 0arketable securities !ncrease in estimated income ta8es on the difference between the estimated current values of assets and liabilities and their ta8 bases
5 *F77 6*'77 %*77 5 9>*77 5 %%*77 F*977 F77 *677 5(9&*?77 5 ('*77 5 '*F77 &*F77 5 %6*677
(F
5
(%
77
F*>77 5 F*677
Get unrealiJed increase in net worth
5 %F*777
Get increase in net worth: LealiJed and unrealiJed changes in net worth Get worth at beginning of period Get worth at end of period
5 9*677 67*?77 5 66*77
(% LealiJed loss: 5%%*777 1 5%7*'77 ; 5F77 #nrealiJed loss on remaining securities: (5%6*F77 1 5%%*777 1 5*&77 ; 577 (> 0ortgage payable: 5'6*777 1 5'%*777 ; 59*777 principal payment 5&*777 paid 1 59*777 ; 5*777 interest payment ife insurance loan: 5*777 8 7.%9 ; 5677 interest payment (F #nrealiJed holding gain on farm land #nrealiJed holding loss on net farm e-uipment (5>>*77 1 5&*777 1 5%*777
(% (>
5&*&77 (677 5&*F77
SOLUTIONS TO PROLE=S P16-13 L&.-S& L"&"a#"'(
a. 2H $artnership Etatement of LealiJation and i-uidation ump1sum i-uidation on 2ecember %7* >7+6
$reli-uidation balances Eale of assets and distribution of 5>%9*777 loss ash contributed by Hail to e8tent of positive net worth
apital Balances 2an 7D
ash
Goncash Assets
iabilities
arlos >7D
>9*777
'9*777
(>'7*777
(%>7*777
(97*777
(67*777
>67*777 >?9*777
('9*777 171
(>'7*777
F*777 (''*777
?6*777 F6*777
?6*777 >6*777
>9*777 F%7*777
171
(>'7*777
(''*777
F6*777
(>9*777 %*777
2istribution of deficit of insolvent partner: >7@67(5%*777 7@67(5%*777
Hail 7D
(%*777 FFF F%7*777
171
(>'7*777
('6*66'
66' F6*66'
171
F6*66' F6*66'
171
(>'7*777
('6*66'
(F6*66' 171
171
(>'7*777 '6*66'
171
>'7*777 171
('6*66'
171
171
171
171
ontribution by 2an to remedy deficit $ayment to creditors $ayment to partner
('6*66'
$ostli-uidation balances
171
'6*66' 171
171
171
($arentheses indicate credit amount.
P16-13 (continued
b. 2H $artnership Get Worth of $artners 2ecember %7* >7+6 arlos $ersonal assets* e8cluding partnership capital interests $ersonal liabilities $ersonal net worth* e8cluding partnership capital interests* 2ec. %* >7+6 ontribution to partnership i-uidating distribution from partnership Get worth* 2ecember %7* >7+6
2an
Hail
>97*777 (>F7*777
F77*777 (>7*777
F97*777 (F>9*777
>7*777
67*777 (F6*66' 171 >F*FFF
>9*777 (>9*777 171 171
'6*66' &6*66'
This computation assumes that no other events occurred in the %71day period that changed any of the partners personal assets and personal liabilities. !n practice* the accountant must be sure that a computation of net worth is current and timely. The table shows the effects of the transactions between the partnership and each partner. A presumption of this table is that the personal creditors of 2an or Hail would not seek court action to block the settlement transactions with the partnership. #pon winding up and li-uidation* the partnership does not have any priority to the partners personal assets. Thus* the personal creditors may seek to block the transactions with the partnership in order to provide more resources from which they can be paid. A partner who fails to remedy his or her deficit can be sued by the other partners who had to make additional contributions or even by a partnership creditor if the failed partner is liable to the partnership creditor. But those claims are not superior to the other claims to the partners individual assets. When accountants provide professional services to partnerships and to its partners* the accountant should e8pect* at
P16-13 (continued
b. 2H $artnership Get Worth of $artners 2ecember %7* >7+6 arlos $ersonal assets* e8cluding partnership capital interests $ersonal liabilities $ersonal net worth* e8cluding partnership capital interests* 2ec. %* >7+6 ontribution to partnership i-uidating distribution from partnership Get worth* 2ecember %7* >7+6
2an
Hail
>97*777 (>F7*777
F77*777 (>7*777
F97*777 (F>9*777
>7*777
67*777 (F6*66' 171 >F*FFF
>9*777 (>9*777 171 171
'6*66' &6*66'
This computation assumes that no other events occurred in the %71day period that changed any of the partners personal assets and personal liabilities. !n practice* the accountant must be sure that a computation of net worth is current and timely. The table shows the effects of the transactions between the partnership and each partner. A presumption of this table is that the personal creditors of 2an or Hail would not seek court action to block the settlement transactions with the partnership. #pon winding up and li-uidation* the partnership does not have any priority to the partners personal assets. Thus* the personal creditors may seek to block the transactions with the partnership in order to provide more resources from which they can be paid. A partner who fails to remedy his or her deficit can be sued by the other partners who had to make additional contributions or even by a partnership creditor if the failed partner is liable to the partnership creditor. But those claims are not superior to the other claims to the partners individual assets. When accountants provide professional services to partnerships and to its partners* the accountant should e8pect* at some time* legal suits involving the partnership and@or individual partners. A strong and thorough understanding of the legal and accounting foundations of partnerships will be very important to that accountant.
P16-14 I(#a//)(# L"&"a#"'( >AICPA Aa.#)? AB $artnership Etatement of $artnership LealiJation and i-uidation 4or the period from Manuary %* >7+%* through 0arch F%* >7+%
Balances before li-uidation* Manuary %* >7+% Manuary transactions: %. ollection of accounts receivable at a loss of 5%9*777 >. Eale of inventory at a loss of 5%*777 F. i-uidation e8penses paid . Ehare of credit memorandum 9. $ayments to creditors Eafe payments to partners (Echedule % 4ebruary transactions: 6. i-uidation e8penses paid Eafe payments to partners (Echedule > 0arch transactions: ?. Eale of 0Q3-. at a loss of 5F*777 &. i-uidation e8penses paid
ash %?*777 9%*777 F?*777 (>*777 (97*777 99*777 (9*777 %7*777 (*777 6*777 171 6*777 %6*777 (9*777 %'*777 (
Accounts $ayable (9F*777
(66*777 (9>*777
Art 97D (??*777
apital Balances Bru hou F7D >7D (%%7*777 ('*777 *977 *>77 677 (&77
F*777 >*?77 77 (677
%?&*777
F*777 97*777 1 71
'*977 '*777 %*777 (%*977 ('*777
%?&*777
171
('*777
(%7%*677 >6*677 ('9*777
(6?*77 %?*77 (97*777
%?&*777
171
%?&*777
171
>*777 ('>*777 171 ('>*777
%*>77 ('F*?77 171 ('F*?77
?77 (&*>77 171 (&*>77
171
>%*977 >*977 (?*777
%>*&77 %*977 (9&*77
?*677 %*777 (F&*677
(%?&*777 171
P16-14 I(#a//)(# L"&"a#"'( >AICPA Aa.#)? AB $artnership Etatement of $artnership LealiJation and i-uidation 4or the period from Manuary %* >7+%* through 0arch F%* >7+%
Balances before li-uidation* Manuary %* >7+% Manuary transactions: %. ollection of accounts receivable at a loss of 5%9*777 >. Eale of inventory at a loss of 5%*777 F. i-uidation e8penses paid . Ehare of credit memorandum 9. $ayments to creditors Eafe payments to partners (Echedule % 4ebruary transactions: 6. i-uidation e8penses paid Eafe payments to partners (Echedule > 0arch transactions: ?. Eale of 0Q3-. at a loss of 5F*777 &. i-uidation e8penses paid %7. $ayments to partners
ash %?*777 9%*777 F?*777 (>*777 (97*777 99*777 (9*777 %7*777 (*777 6*777 171 6*777 %6*777 (9*777 %'*777 (%'*777
Balances at end of li-uidation* 0arch F%* >7+% ($arentheses indicate credit amount.
171
Accounts $ayable (9F*777
(66*777 (9>*777
Art 97D (??*777
apital Balances Bru hou F7D >7D (%%7*777 ('*777 *977 *>77 677 (&77
F*777 >*?77 77 (677
%?&*777
F*777 97*777 1 71
'*977 '*777 %*777 (%*977 ('*777
%?&*777
171
('*777
(%7%*677 >6*677 ('9*777
(6?*77 %?*77 (97*777
%?&*777
171
%?&*777
171
>*777 ('>*777 171 ('>*777
%*>77 ('F*?77 171 ('F*?77
?77 (&*>77 171 (&*>77
>%*977 >*977 (?*777 ?*777
%>*&77 %*977 (9&*77 9&*77
?*677 %*777 (F&*677 F&*677
(%?&*777 171
171
171
171
171
171
P16-14 (continued
AB $artnership Echedules of Eafe $ayments to $artners Art 97D
Bru F7D
hou >7D
apital balances $ossible loss:
('*777
(%7%*677
(6?*77
&&*977 >9*977
9&*'77 (%*&77
F&*?77 (>?*677
Absorption of Arts potential deficit balance Bru: (5>9*977 8 F@9 ; 5%9*F77 hou: (5>9*977 8 >@9 ; 5%7*>77 Eafe payment* Manuary F%* >7+%
(>9*977
Echedule %: Manuary F%* >7+%
%9*F77 171
(>6*677
%7*>77 (%?*77
171
P16-14 (continued
AB $artnership Echedules of Eafe $ayments to $artners Art 97D
Bru F7D
hou >7D
apital balances $ossible loss:
('*777
(%7%*677
(6?*77
&&*977 >9*977
9&*'77 (%*&77
F&*?77 (>?*677
Absorption of Arts potential deficit balance Bru: (5>9*977 8 F@9 ; 5%9*F77 hou: (5>9*977 8 >@9 ; 5%7*>77 Eafe payment* Manuary F%* >7+%
(>9*977
Echedule %: Manuary F%* >7+%
Echedule >: 4ebruary >'* >7+% apital balances $ossible loss: 9*977 8 F@9 ; 5%9*F77 hou: (5>9*977 8 >@9 ; 5%7*>77 Eafe payment* 4ebruary >'* >7+%
%9*F77 171
(>6*677
%7*>77 (%?*77
('>*777
('F*?77
(&*>77
&'*977 >9*977
9?*977 (%9*F77
F&*777 (%7*>77
(>9*977 %9*F77 171
171
%7*>77 171
Gote that the computation of safe payments on 4ebruary >'* >7+%* resulted in no payments to partners. This is due to the large book value of
P16-15 Ca! D"#$"%&#"'( P/a(
$3T $artnership ash 2istribution $lan Mune F7* >7+% oss Absorption $ower $en
3van
apital Accounts
Torves
$en
$rofit and loss percentages
97D
$reli-uidation capital balances oss absorption $ower (apital balances @ oss percent
3van
(%%7*777
(%97*777
(%>7*777
(%%7*777
F7*777 (%>7*777
(%>7*777
2ecrease highest A$ to ne8t highest: 3van (5F7*777 8 7.F7 2ecrease A$s to ne8t highest: 3van (5%7*777 8 7.F7 Torves (5%7*777 8 7.>7
F7D
(%%7*777
>7D
(99*777
(9*777
(>*777
(99*777
&*777 (F6*777
(>*777
%7*777 (%%7*777
Torves
F*777 %7*777 (%%7*777
(99*777
(FF*777
>*777 (>>*777
Eummary of ash 2istribution (!f
5%76*777 (%'*777 (&*777 (9*777 ('9*777 5 171
$en 97D
3van F7D
Torves >7D
5 &*777 F*777
5 >*777
>>*977 5F*977
%9*777 5%'*777
5%'*777
CCCCCC 5%'*777
5F'*977 5F'*977
P16-16 I(#a//)(# L"&"a#"'(
$3T $artnership Etatement of $artnership i-uidation and LealiJation 4rom Muly %* >7+%* through Eeptember F7* >7+% $reli-uidation balances Muly: Assets LealiJed $aid li-uidation costs $aid creditors Eafe $ayments (Ech. %
ash 6*777 >6*977 (%*777 (%'*777 %*977 (6*977 ?*777
August: 3-uipment withdrawn (allocate 56*777 gain $aid li-uidation costs Eafe $ayments (Ech. > Eeptember: Assets LealiJed $aid li-uidation costs $ayments to partners $ostli-uidation balances
Goncash Assets %F9*777
$en 97D (99*777
apital 3van F7D (9*777
*'97 977
>*?97 F77
%'*777 171
(&*'97
(%*?97 6*977
(>%*&77
171
(&*'97
(F9*F97
(>%*&77
(F*777
(%*?77
?*?77 F77 (%>*?77
*777 >77 (?.677 ?*677 171
Accounts $ayable (%'*777
(F6*777 &&*777 &&*777 (*777
(%*977 6*977 (*777 >*977 '9*777 (%*777 '6*977 ('6*977 171
&9*777
171
'97 (9>*777
&9*777
171
(9>*777
97 (F6*'77 *777 (F>*'77
171
171
171
171
%7*777 977 (%*977 %*977 171
6*777 F77 (>6*77 >6*77 171
(&9.777
Torves >7D (>*777 %*&77 >77
(%>*?77
$arentheses indicate credit amount
P16-16 (continued
$3T $artnership Echedules of Eafe $ayments to $artners Echedule %: Muly F%* >7+% apital balances $ossible loss on noncash assets (5&&*777 ash retained (5?*777 Absorption of $en"s potential deficit 3van: 5F*'97 8 [email protected] Torves: 5F*'97 8 7.>[email protected] Absorption of Torves potential deficit 3van: 5%*777 8 [email protected] Eafe payment
$en 97D
3van F7D
Torves >7D
(&*'97 &*977 *777 F*'97 (F*'97
(%*?97 >&*'77 >*77 (&*'97
(>%*&77 %&*?77 %*677 (977
>*>97 171
('*977
171
%*777 (6*977
%*977 %*777 (%*777 171
P16-16 (continued
$3T $artnership Echedules of Eafe $ayments to $artners Echedule %: Muly F%* >7+% apital balances $ossible loss on noncash assets (5&&*777 ash retained (5?*777 Absorption of $en"s potential deficit 3van: 5F*'97 8 [email protected] Torves: 5F*'97 8 7.>[email protected] Absorption of Torves potential deficit 3van: 5%*777 8 [email protected] Eafe payment
$en 97D
3van F7D
Torves >7D
(&*'97 &*977 *777 F*'97 (F*'97
(%*?97 >&*'77 >*77 (&*'97
(>%*&77 %&*?77 %*677 (977
>*>97 171
('*977
171
%*777 (6*977
(9>*777 '*977 %*>97 (F*>97
(F6*'77 >?*977 '97 ('*97
%*977 %*777 (%*777 171
Echedule >: August F%* >7+% apital balances $ossible loss on noncash assets (5&9*777 ash retained (5>*977 Absorption of Torves potential deficit $en: 56*'77 8 7.97@7.?7 3van: 56*'77 8 7.F7@7.?7 Absorption of $en"s potential deficit 3van: 5&F? 8 [email protected] Eafe payment
(%>*?77 %&*777 977 6*'77 (6*'77
*%?? &F? (&F? 171
>*9%> (*&F?
171
&F? (*777
171
P16-17 I(#a//)(# L"&"a#"'(
2E $artnership Etatement of $artnership LealiJation and i-uidation U !nstallment i-uidation 4rom Muly %* >7+9* through Eeptember F7* >7+9 apital Balances Goncash 2 E ash Assets iabilities 97D F7D >7D $reli-uidation balances* 97*777 6'7*777 (79*777 (%77*777 (%7*777 ('9*777 Mune F7 Muly* >7+9: Eale of assets and distribution of 5%>7*777 loss F&7*777 (9%7*777 67*777 F6*777 >*777 7*777 %67*777 (79*777 (7*777 (%7*777 (9%*777 i-uidation e8penses (>*977 %*>97 '97 977 F'*977 %67*777 (79*777 (F?*'97 (%7F*>97 (97*977 $ayment to creditors (79*777 79*777 F>*977 %67*777 171 (F?*'97 (%7F*>97 (97*977 Eafe payments to partners (Ech. % (>>*977 >>*977 %7*777 %67*777 171 (F?*'97 (?7*'97 (97*977 August* >7+9: Eale of assets and distribution of 5%F*777 loss >>*777 (F9*777 6*977 F*&77 >*677 F>*777 %>9*777 171 (F>*>97 ('6*?97 ('*&77 i-uidation e8penses (>*977 %*>97 '97 977 >&*977 %>9*777 171 (F%*777 ('6*%77 ('*77 Eafe payments to partners (Ech. > (%&*977 %F*'77 9*?77 %7*777 %>9*777 171 (F%*777 (6>*77 (%*677 Eeptember* >7+9: Eale of assets and distribution of 5'7*777 loss 99*777 (%>9*777 F9*777 >%*777 %*777 69*777 171 171 *777 (%*77 (>'*677 Allocate 2"s deficit to E (*777 >*77 %*677 and 69*777 171 171 171 (F&*777 (>6*777 i-uidation e8penses (>*977 %*977 %*777 6>*977 171 171 171 (F'*977 (>9*777 $ayments to partners (6>*977 171 F'*977 >9*777 $ostli-uidation balances 171 171 171 171 171 171 ($arentheses indicate credit amount
P16-17 (continued
2E $artnership Echedule of Eafe $ayments to $artners Echedule %* Muly F%* >7+9: apital balances* Muly F%* Before cash distribution Assume full loss of 5%67*777 on remaining noncash assets and 5%7*777 in possible future li-uidation e8penses Assume 2"s potential deficit must be absorbed by E and : F7@97 8 56*>97 >7@97 8 56*>97
2 97D
E F7D
>7D
(F?*'97
(%7F*>97
(97*977
?9*777 6*>97
9%*777 (9>*>97
F*777 (%6*977
(6*>97 >'*'97 (>*977
%?*977 >*777
>*777
(>*777
171
(>>*977
171
(F%*777
('6*%77
('*77
6'*977 F6*977
7*977 (F9*677
>'*777 (>7*77
171 Assume "s potential deficit must be absorbed by E completely Eafe payments to partners on Muly F%* >7+9
Echedule >* August F%* >7+9: apital balances* August F%* before cash distribution Assume full loss of 5%>9*777 on remaining noncash assets and5%7*777 in possible li-uidation e8penses Assume 2"s potential deficit must be absorbed by E and : F7@97 8 5F6*977 >7@97 8 5F6*977 Eafe payments to partners ($arentheses indicate credit amount
(F6*977 >%*&77 171
(%F*'77
%*677 (9*?77
P16-18 Ca! D"#$"%&#"'( P/a(
2E $artnership ash 2istribution $lan Mune F7* >7+9 oss Absorption $ower 2 $rofit and loss sharing ratio $reli-uidation capital balances oss absorption power (A$ capital accounts @ loss sharing percentage
(>77*777
2ecrease highest A$ to ne8t highest A$: 2ecrease E by 5&%*66' (ash distribution: 5&%*66' 8 7.F7
E
apital Accounts
(66*66'
2
E
97D (%77*777
F7D (%7*777
>7D ('9*777
(%77*777
>'*977 (%%>*977
('9*777
(F'9*777
&%*66' (>77*777
2ecrease A$ to ne8t highest level: 2ecrease E by 5%'9*777 (ash distribution: 5%'9*777 8 7.F7 2ecrease by 5%'9*777 (ash distribution: 5%'9*777 8 7.>7
(F'9*777
(F'9*777
%'9*777 9>*977 %'9*777 F9*777 (>77*777
2ecrease A$s by distributing cash in the $@ sharing ratio
97D
(>77*777 F7D
(>77*777
(%77*777
(67*777
>7D
P16-18 (continued
%. >. F. . 9.
Eummary of ash 2istribution $lan (3stimated on Mune F7* >7+9 i-uidation reditors 38penses %77D %77D
4irst 579*777 Ge8t 5%7*777 Ge8t 5>'*977 Ge8t 5?'*977 Any additional distributions in the partners" profit and loss ratio
2
E
%77D 67D
7D
F7D
>7D
97D
b. onfirmation of cash distribution plan
$rofit and loss ratio
2E $artnership apital Account Balances Mune F7* >7+9* through Eeptember F7* >7+9 2 97D
E F7D
>7D
(7*777
P16-18 (continued
%. >. F. . 9.
Eummary of ash 2istribution $lan (3stimated on Mune F7* >7+9 i-uidation reditors 38penses %77D %77D
4irst 579*777 Ge8t 5%7*777 Ge8t 5>'*977 Ge8t 5?'*977 Any additional distributions in the partners" profit and loss ratio
2
97D
E
%77D 67D
7D
F7D
>7D
b. onfirmation of cash distribution plan 2E $artnership apital Account Balances Mune F7* >7+9* through Eeptember F7* >7+9 2 E $rofit and loss ratio 97D F7D $reli-uidation balances* Mune F7 (%77*777 (%7*777 Muly loss of 5%>7*777 on disposal of assets and 5>*977 paid in li-uidation costs 6%*>97 F6*'97 (F?*'97 (%7F*>97 Muly F% distribution of 5>>*977 of available cash to partners (Ech. % 4irst 5>>*977 of 5>'*977 layer: %77D to E >>*977 (F?*'97 (?7*'97 August loss of 5%F*777 on disposal of assets and 5>*977 paid in li-uidation costs '*'97 *697 (F%*777 ('6*%77 August F% distribution of 5%&*977 of available cash to partners (Ech. > Lemaining 59*777 of 5>'*977 layer of which 5>>*977 paid on Muly F%: %77D to E 9*777 Ge8t 5%*977 of 5?'*977 layer: 67D to E ?*'77 7D to (F%*777 (6>*77 Eeptember loss of 5'7*777 on disposal of assets and 5>*977 paid in li-uidation costs F6*>97 >%*'97 9*>97 (7*697 2istribution of 2"s deficit (9*>97 F*%97 171 (F'*977 Eeptember F7 distribution of 56>*977 of available cash to partners (Ech. F Ge8t 56>*977 of 5?'*977 layer of which 5%*977 paid on August F%: 67D to E F'*977 7D to $ostli-uidation balances 171 171
>7D ('9*777 >*977 (97*977
(97*977 F*%77 ('*77
9*?77 (%*677 %*977 (>'*%77 >*%77 (>9*777
>9*777 171
P16-18 (continued
Echedule %* Muly F%* >7+9: omputation of 5>>*977 of cash available to be distributed to partners on Muly F%* >7+9: ash balance* Muly %* >7+9 ash from sale of noncash assets ess: $ayment of actual li-uidation e8penses ess: $ayments to creditors ess: Amount held for possible future li-uidation e8penses ash available to partners* Muly F%* >7+9
5 97*777 F&7*777 (>*977 (79*777 (%7*777 5 >>*977
Echedule >* August F%* >7+9: omputation of 5%&*977 of cash available to be distributed to partners on August F%* >7+9: ash balance* August %* >7+9 ash from sale of noncash assets ess: $ayment of actual li-uidation e8penses ess: Amount held for possible future li-uidation e8penses ash available to partners* August F%* >7+9
5%7*777 >>*777 (>*977 (%7*777 5 %&*977
Echedule F* Eeptember F7* >7+9: omputation of 56>*977 of cash available to be distributed to partners on Eeptember F7* >7+9: ash balance* Eeptember %* >7+9 ash received from sale of noncash assets ess: $ayment of actual li-uidation e8penses ash available to partners* Eeptember F7* >7+9
5%7*777 99*777 (>*977 56>*977
P16-19 =a#,!"(+
%.
4
>.
2
F.
A
.
M
9.
K
6.
'.
3
?.
B
&.
)
%7.
!
P16-20 Pa$#()$!". A+$)))(# I&) >AICPA Aa.#)? Pa$# A:
%.
,
The admission of a new partner re-uires the consent of all e8isting partners.
>.
,
The withdrawal of a partner causes the dissolution of the partnership. But a termination and li-uidation can be avoided by having the other partners agree to continue the partnership and buy out okes partnership interest.
F.
,
A third1party beneficiary is not a party to a contract* but is a beneficiary of it.
.
G
The liability of a withdrawing partner may be limited by an agreement between the partners* but that agreement is not binding on third parties unless they join in on the agreement.
9.
,
A partner may retire at any time if there is no specified term of e8istence or undertaking for the partnership.
Pa$# :
6.
,
A new partner is personally liable for all partnership debts incurred subse-uent to entry into the partnership.
'.
,
ontinuation of the partnership does not release the partnership from the liabilities e8isting prior to the admission of the new partner.
?.
,
White is liable for debts prior to his admission only to the e8tent of his capital contribution.
&.
G
As in item ?* White is liable for pre1e8isting debts only to the e8tent of his capital contribution.
%7.
G
A partner may dissociate at any time there is no specified term of e8istence for the partnership* and there is no minimum time period before a partner is subject to personal liability for the partnerships obligations incurred while a partner.
Ca) 16-5: =a##")/ @$a)$ $'#!)$ 2005 =T 126 N A copy of the 0ontana Eupreme ourts decision is on the following eight pages. Eupreme ourt cases are within the public domain and can be printed verbatim without re-uesting permissions. The decision of the court includes a summary of the disputes and lower court decisions. ,our students can obtain the case via an internet search. Alternatively* the case may be obtained* along with the legal briefs from each side* at the Etate aw ibrary of 0ontana site: http:@@courts.mt.gov@library and then click on ases to get to case number 7F1'&6 or use the te8t term of 0attfield. The Etate of 0ontana is continually revising its libraries of legal documents so doing a Hoogle search may be the most efficient method for your students.
No. 03-796 N !"# $%P&#'# C(%&! () !"# $!*!# () '(N!*N* 2005 '! 136N
+&#+ '*!!)#L, and CLN!(N &*'#& as Per/anent )u Co-Conserators o the Person and #state o ,(N*L, ,. &*'#& an napaitated and Proteted Person Paintis and *ppeants . &*'#& &(!"#&$ C(-P*&!N#&$"P LL*' &*'#& Co-Partner &*'(N, &*'#& Co-Partner ,(%+L*$ &*'#& Co-Partner LL*' &*'#& &*'(N, &*'#& and ,(%+L*$ &*'#& as Co-Persona &epresentaties o the #$!*!# () &*'(N, &*'#& and L,* &*'#& ndiidua ,eendants and &espondents.
*PP#*L )&(':
,istrit Court o the !ent-$eond udiia ,istrit n and )or the Count o Car;on Cause No. ,< 2000-40 "onora;e air ones Presidin= ud=e
C(%N$#L () &#C(&,: )or *ppeants: )od *. roer roer La )ir/ &oundup 'ontana )or &espondents: Phiip P. '+i/pse '+i/pse La )ir/ iin=s 'ontana iia/ ra/er pro se Laure 'ontana
$u;/itted on ries: une 23 2004 ,eided: 'a 31 2005 )ied:
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Cer? ustie i/ &ie deiered the (pinion o the Court. a.Pursuant to $etion Para=raph 3@A o the 'ontana $upre/e Court 1996 nterna (peratin=
&ues the ooin= deision sha not ;e ited as preedent. t sha ;e ied as a pu;i dou/ent ith the Cer? o the $upre/e Court and sha ;e reported ; ase tite $upre/e Court ause nu/;er and resut to the $tate &eporter Pu;ishin= Co/pan and to est +roup in the quarter ta;e o nonita;e ases issued ; this Court. b.,onad ,. ra/er @,onA appeas ro/ the su//ar Bud=/ent entered on *u=ust 21 2003 in
the !ent-$eond udiia ,istrit Court Car;on Count in aor o the ra/er rothers CoPartnership @PartnershipA and aso haen=es the order entered ; the ourt on *u=ust 30 2002 dis/issin= ,ons ai/s aruin= prior to u 23 1995 as ti/e ;arred. e air/. c.e restate the issue on appea as oos: d.,id the ,istrit Court err in =rantin= su//ar Bud=/ent to the ra/er rothers Co-
PartnershipD FACTUAL AND PROCEDURAL BACKGROUND
e.n the ear 1980s the ra/er ;rothers ,on ,ou=as @,ou=A iia/ @iA and &a/ond
@&aA and their ather &a/ond ra/er $r. @&a/ondA ora or/ed a ar/in= f.operation partnership ith &a/ond urnishin= the initia apita rea estate and head o
atte.
g.n 1985 i deter/ined to dissoiate ro/ the Partnership and requested distri;ution o his
interest under the &eised %nior/ Partnership *t @&%P*A. a !hereater &a/ond ,ou= &a and ,on a;eit i/ited in his /ana=e/ent responsi;iities due to a neuropshoo=ia untionin= i/pair/ent resutin= ro/ a ar aident in 1984 ontinued under the ori=ina partnership a=ree/ent unti u 1994 hen ,on et 'ontana to reside in $an )raniso. ,on returned to 'ontana in 1995 ;ut did not assoiate ith the Partnership nor did he initia see? an re/ed as a dissoiated partner as set orth under the &%P*. n at ,on oud not ie an ation a=ainst the Partnership unti 'a 23 2000 ater /an aied atte/pts to ne=otiate a ;uout oer o his interest in the Partnership ith &a and ,ou=. h.n 1997 &a/ond died and the ra/er ;rothers disussed distri;ution o their athers assets
inudin= distri;ution o &a/onds interest in the Partnership propert. !his as the irst ti/e ,on had an ontat ith the Partnership sine his return ro/ $an )raniso. ,on had preious onsuted ith attorne )od *. roer @roerA re=ardin= his interest in the Partnership as a dissoiated partner and requested roers assistane in representin= hi/ in the distri;ution o his athers persona estate and interest in the Partnership.
a*thou=h the 1993 Le=isature did not a/end the tite o the %nior/ Partnership
*t it adopted the han=es e/;odied ithin the &eised %nior/ Partnership *t @E&%P*EA and thereore e sha reer to the at throu=hout this opinion as F&%P*.G See McCormick v. Brevig 2004 '! 179 H 37 n.1 322 'ont. 112 H 37 n.1 96 P.3d 697 H 37 n.1.
i.(n )e;ruar 27 1998 roer requested opies o the Partnerships aountin= reords ro/
the date o its ineption unti u 1994 hen ,on departed to $an )raniso and opies o &as and ,ou=s persona taI returns ro/ attorne Caro "ard @"ardA ho represented the Partnership. roer stated in his etter that "ards o/piane ith his request as ruia as this inor/ation as neessar to Fao/pish an aurate aountin=G o the Partnerships reords to deter/ine an /onies oed to ,on and indiated that he oud ie suit a=ainst the j.Partnership i the request as not honored ithin ten das. "ard did not respond to roers
etter unti 'arh 9 1998 ;ut roer did not then ie a o/paint. k.(n ,ee/;er 9 1998 &a and ,ou= oered to purhase ,ons interest in the Partnership.
%nder the oer ,on as to reeie ninet head o atte or the assi=n/ent o his interest in the Partnerships ;rand na/e. "oeer ,on reBeted the oer and thereater the parties ontinued to ne=otiate ith no resoution. l."oeer it as not unti 'a 23 2000 that ,on ied suit de/andin= a or/a aountin= o
the Partnership iquidation o the Partnerships assets and diision o the rea propert hed ; partners as tenants in o//on. &a and ,ou= responded ; iin= a /otion see?in= Boinder o the #state o &a/ond ra/er @&a/onds #stateA as a neessar part ;eause &a/ond had hed an interest in the Partnerships rea propert as a o-tenant. !he ourt ordered ,on to Boin the neessar parties and on *u=ust 10 2000 ,on ied an a/ended o/paint na/in= &a/onds #state and Ldia ra/er @LdiaA /other o the our ra/er
m. ;rothers ho as /arried to &a/ond unti his death. n.(n ,ee/;er 18 2001 ,ou= &a and Ldia ied a /otion to dis/iss ,ons ai/s under
the &%P* as ti/e ;arred under the =enera ie-ear i/itation proision J 27-2-231 'C* hih /otion as Boined ; i. n response +re= 'attied @'attiedA ho had ;een preious appointed as ,ons te/porar u =uardian and onserator /oed or eae to a/end ,ons a/ended o/paint to su;stitute hi/se or ,on as the rea part in interest pursuant to &ue 17 '.&.Ci.P. and to raise the air/atie deenses o aier ahes and equita;e estoppe ar=uin= that he had no opportunit to respond to the statute o i/itations deense raised ; the ,eendants in their /otion to dis/iss. o.(n *u=ust 30 2002 the ,istrit Court =ranted the ,eendants /otion to dis/iss ;ut on as
to those ai/s aruin= prior to 'a 23 1995. !he ourt onuded that ,ons reoation to $an )raniso in u 1994 onstituted a ron=u ithdraa ro/ the Partnership and that the ieear statute o i/itations period on his partnership ai/s ;e=an to run at that ti/e requirin= an ation to ;e ied ; u 1999. ,on had ied his ation on 'a 23 2000 and the ,istrit Court thereore onuded that ,ons ai/s ere ti/e ;arred uness it oud ;e de/onstrated that a ai/ had arued ater 'a 23 1995 ie ears prior to the iin= o this ation. !he ourt denied 'attieds /otion or eae to a/end the o/paint. !he ,istrit Court then set a sheduin= onerene to address an re/ainin= ai/s hih had suried its order appin= the ti/e ;ar. p.(n (to;er 17 2002 the parties entered into a /utua reease sette/ent and eIhan=e
a=ree/ent re=ardin= the rea propert hed ; the parties as tenants in o//on and the rea propert hih the parties oned as partners. Pursuant to the a=ree/ent &a and ,ou= purhased ,ons share o the Partnerships interest in rea propert or K487500.00 to ;e paid to
q.,ons onseratorship. r.(n Noe/;er 15 2002 Ldia and &a/onds #state requested an order dis/issin= the/ as
deendants in the /atter upon the ourts approa o the rea propert sette/ent a=ree/ent. 'attied and Cinton ra/er @+uardiansA ho ; then had ;een appointed as ,ons per/anent i/ited o-=uardians and per/anent u o-onserators responded ; iin= a /otion a=ain assertin= the air/atie deenses o aier ahes and equita;e estoppe and requestin= the ,istrit Court to reonsider its *u=ust 2002 order. !he ar=ued that a =uardianship proeedin= onduted su;sequent to the entr o the *u=ust 2002 order had deter/ined the eItent and seerit o ,ons /enta inapait hih shoud retroatie to the ie-ear statute o i/itations period enored ; the ,istrit Courts *u=ust 2002 order. &a and ,ou= then ied a /otion or Bud=/ent on the peadin=s and a /otion to dis/iss the +uardians /otion raisin= deenses and see?in= reonsideration. !he asserted that ,on aied to ie an ation ithin 120 das o their initia ;u-out oer as required ; J 35-10-619@5A 'C* o the &%P* and thus an o ,ons ai/s that had arued ater 'a 23 1995 ere aso ti/e ;arred under this proision. s.(n anuar 28 2003 the ,istrit Court =ranted the /otion ied ; Ldia and &a/onds
#state to dis/iss the/ as parties to the ation. (n anuar 30 2003 Ldia and &a/onds #state ied a notie o entr o Bud=/ent on ;oth the anuar 2003 and *u=ust 2002 orders. t.(n une 18 2003 the ,istrit Court issued an order onertin= &a and ,ou=s /otion or
Bud=/ent on the peadin=s and their /otion to dis/iss the +uardians /otion raisin= deenses to a /otion or su//ar Bud=/ent pursuant to &ue 12@;A and @A '.&.Ci.P. )urther the ,istrit Court denied the +uardians /otion or reonsideration o its *u=ust 2002 order and
u.resered a deter/ination on their /otion raisin= deenses pendin= urther proeedin=s. v.(n *u=ust 21 2003 the ,istrit Court =ranted &a and ,ou=s /otion or su//ar Bud=/ent
on ,ons re/ainin= ai/s inudin= an aountin= o the Partnerships reords ro/ 1994 throu=h 1997 the Partnerships aiure to proper ;u out his interest or an other ai/ he oud hae raised as a dissoiated partner under the &%P*. ,on appeas therero/. STANDARD OF REVIEW
w. (ur reie o a su//ar Bud=/ent order is de noo. R.C. Hobbs Enter., LLC v. J.G.L.
Distrib., Inc. 2004 '! 396 H 20 325 'ont. 277 H 20 104 P.3d 503 H 20. e reie su//ar
Bud=/ent to deter/ine i the distrit ourt orret deter/ined no =enuine issue o /ateria ats eIisted and i it appied the a orret. R.C. Hobbs Enter. H 20. DISCUSSION
x.Did the District Court err in granting summary judgment to the Kramer Brothers Co !artnership"
y. #. aa.*s a prei/inar /atter e /ust deter/ine hether ,ons appea is proper ;eore the
Court. !he Partnership ontends that ,ons ai/s ere disposed o ; the ,istrit Courts *u=ust 2002 order hih onuded that ai/s aruin= prior to 'a 23 1995 ere ti/e ;arred and are not proper ;eore this Court or deter/ination. !he Partnership notes that ,on as =ien notie o the entr o Bud=/ent on the *u=ust 2002 order dis/issin= his ai/s on anuar 30 2003 ;ut did not appea unti $epte/;er 17 2003 ei=ht /onths ater. e o;sere that the appea as ta?en ooin= the ,istrit Courts su//ar Bud=/ent order on *u=ust 21 2003 hih purported disposed o an re/ainin= ai/s. !hus the appea as ta?en ithin thirt das pursuant to &ue 5@aA@1A '.&.*pp.P. ater the su//ar Bud=/ent order ;ut ei=ht /onths ater the notie o entr o Bud=/ent on the ourts *u=ust 2002 order dis/issin= ai/s. e a=ree ith the Partnership. *thou=h urther proeedin=s ere onduted ooin= the ,istrit Courts *u=ust 2002 order the purpose o those proeedin=s as to deter/ine hether an ai/s had suried the appiation o the ti/e ;ar. !he ,istrit Court had onuded in its *u=ust 2002 order that ,on eIpress ithdre ro/ the Partnership upon his reoation to $an )raniso in u 1994 and thereore his ri=ht to /aintain an ation or an aountin= distri;ution or an other ai/ under the &%P* arued at that ti/e. *thou=h the ,istrit Court addressed seera /otions ater the *u=ust 2002 order the on su;stantie question hih re/ained as hether ,on had an ai/s or hih he oud sti /aintain an ation. n
