PARTNERSHIP LIQUIDATION

The assets and equities of the Queen, Reed, and Stac Partnership at the end of its fiscal
year on October 31, 20x5 are as follows:

The partners decide to liquidate the partnership. They estimate that the noncash
assets, other than the loan to Reed, can be converted into P100,000 cash over the
two-months period ending December 31, 20x5. Cash is to be distributed to the
appropriate parties as it becomes available during the liquidation process. The
partner most vulnerable to partnership losses on liquidation is:

a. Queen c. Reed and Queen equally

b. Reed d. Stac

(Adapted)

Answer: (b)

Quen Reed Stac

Balances before liquidation
Loan (to) from P(5,000) P10,000
Capital balances P45,000 30,000 15,000
Total interest P45,000 P25,000 P25,000
Divided by: P&L ratio 30% 50% 20%
Loss absorption abilities/potential P150,000 P50,000 P125,000
Vulnerability ranking (1 most vulnerable) 3 1 2

The most vulnerable is the partner with the lowest absorption ability. In order to determine
their vulnerability to possible losses, the equity of each partner is divided by his or her profit
sharing ratio to identify the maximum loss that a partner could absorb without reducing his or
her equity below zero. The vulnerability ranks indicate that Reed is most vulnerable to losses
because his equity would be reduced to zero with a total partnership loss on liquidation of
P50,000.

Partnership Liquidation | ©jipb162021