When a partnership dissolves, the first step in the dissolution process is to allocate the gain or loss on sale based on income sharing ratio.
A partnership's liquidation or dissolution is parallel with the company's closure.
This can happen as a result of a mutual partnership agreement to sell the company, the death of a partner, or insolvency.
Before proceeding with liquidation, the partnership must complete the accounting process for its final operational period
This will necessitate closing the books and leaving only accounts that are on balance sheets open.
After that, there are four steps left to be done in the financial reporting for the dissolution, each requiring an accounting entry.
They are as follows:
- Sell noncash assets for cash and record the resulting gain or loss. The sale of noncash assets for cash is known as realization.
- Distribute the realization gain or loss to the partners based on their income ratios.
- Make a cash payment to the partnership's liabilities.
- Divide any remaining cash among the partners based on their capital balances.
Hence, the correct answer is to allocate the gain or loss on sale based on income sharing ratio.
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