AFAR 04: PARTNERSHIP LIQUIDATION
Objectives of A Partnership During the
Liquidation Process
1. To convert the partnership assets to cash
(realization of assets); and
2. To pay off partnership obligations and to
distribute cash and any unrealized assets to
the individual partners.
Order of Priority in the Distribution of Cash to
Parties
1. First, to outside creditors;
2. Second, to partners for loan accounts; and
3. Third, to partners for capital accounts.
Methods of Partnership Liquidation
1. Lump-sum liquidation/total liquidation/single
distribution
2. Installment liquidation or installment
distribution
Lump-Sum Liquidation
It is a method of partnership liquidation in which all
the assets are converted into cash within a very
short time, outside creditors are paid, and a single,
lump-sum payment is made to the partners for their
total interests.
Going-out-of-Business Sale
It is a sale made by a liquidating partnership in
which its inventory is marked doen well below
normal selling price to encourage immediate sale.
Components of a Partner's Interest in the
Partnership
1. His capital account balance; and
2. His loan balance(s).
Treatment of Loss on Realization of Noncash
Assets Sold in the Liquidation Process
Such loss shall be allocated among the partners
(debit to capital accounts) based on their profit and
loss sharing ratio.
Treatment of Liquidation Expenses Incurred
(e.g., Legal and Accounting Expenses, Etc.)
Such expenses shall be allocated among the
partners (debit to capital accounts) based on their
profit and loss sharing ratio.
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Lump-Sum Liquidation Procedures
1. Realization of assets and distribution of gain
or loss on realization among the partners;
2. Payment of expenses;
3. Payment of liabilities;
4. Elimination of partner's capital deficiencies
5. Payment to partners of their loan account
balances; and
6. Payment to partners of their capital account
balances.
Capital Deficiency
It refers to a capital account with a debit or negative
balance.
Methods of Eliminating a Partner's Capital
Deficiency
In order of priority:
1. If the deficient partner has a loan balance,
exercise the right of offset;
2. If the deficient partner is solvent, make him
invest cash to eliminate his deficiency; or
3. If the deficient partner is insolvent, let the
other partners absorb his deficiency (based
on their profit/loss ratio).
Methods of Determining Installment Cash
Payments to Partners Under Installment
Liquidation
1. Preparation of schedule of safe payments
2. Preparation of cash distribution program or
cash priority program
Preparation of Schedule of Safe Payments
It is a method of determining installment cash
payments to partners whereby cash is distributed to
a partner only if he has an excess credit balance in
his partnership interest after absorption of his share
of the maximum possible loss that may occur (just
to be safe).
Components of Maximum Possible Loss
1. Total value of remaining (unrealized)
noncash assets
2. Cash withheld to pay for anticipated
expenses and unrecorded liabilities that
may arise
Computation of Safe Payments To Partners
Partner's interest - allocated possible loss = safe
payment
 AFAR 04: PARTNERSHIP LIQUIDATION

Preparation of Cash Priority Program

It is a method of determining installment cash
payments to partners whereby such payments are
predetermined through a plan that is designed to
allow for the safe distribution of cash when it
becomes available.

Procedures to Prepare a Cash Distribution

Program
1. Compute the loss absorption potential of
each partner;
2. Determine the priority of payments to
partners; and
3. Compute the amount of cash to be paid to
the partners under each priority.

Partner’s Loss Absorption Potential

Partner's interest / partner's profit and loss
percentage = partner's loss absorption potential

Rule in the Determination of Priority of

Payments to Partners
The partner who has the biggest loss absorption
potential has the first priority.

Amount of Cash to Be Paid to the Partners

Under Each Priority
Partner's excess loss absorption potential over the
partner whose priority is next to his * partner's profit
and loss share percentage = cash prioritized to be
paid to partner

Treatment of Any Amount in Excess of Total

Priority Payments Available for Cash
Distribution
Such amount shall be paid to the partners
according to their profit and loss sharing
agreement.

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