Partnership Liquidation – Installment Liquidation

Introduction

When the company ended up in liquidation, sometimes it is not possible to realize their assets in one time. Sometimes it may
take several months to convert non-cash assets to cash. That’s why, partnership liquidation by installment exists.

Under this method, non-cash assets are sold on a piece-meal basis over an extended period of time. Cash realized is
immediately distributed to partners after fully satisfying creditors’ claims or after setting aside sufficient cash for these
liabilities.

The following are the accounting procedures that may be followed in liquidating a partnership by installment.

1. Record the realization of assets and distribute the realized gains or losses among the partners using the profit and loss
ratio.
2. Pay liquidation expenses and unrecorded liabilities, if there are any, and distribute these among the partners using the
profit and loss ratio.
3. Pay the liabilities to outsiders.
4. Distribute cash to the partners after possible future losses have been apportioned to partners or in accordance with a
cash distribution program.

Safe Payment Computation.

- In installment liquidation, cash distributions to the partners are authorized even before all the losses that may be
incurred and charged against the partners are known. Considerable care is, therefore, required to insure an equitable
distribution of cash to the partners.
- The Statement of Partnership Liquidation is usually supported by a schedule of safe installment payments to partners,
simply called Schedule of Safe Payments, prepared periodically. According to the schedule, each installment of cash is
distributed as if no more cash is forthcoming, either from sale of assets or from collection of deficiencies from partners.

Cash in, therefore, distributed to a partner only if he has an excess credit balance in his partnership
interest (i.e., capital account or capital and loan accounts combined) after absorption of his share of the
maximum possible loss that may occur. The possible losses (hypothetical loss) consist of the following.
 Total value the remaining non-cash assets. These assets are assumed unrealized, i.e., they cannot be
sold, hence, they are considered loss chargeable to the partners’ capital.
 Cash withheld to pay for anticipated liquidation expenses and unrecorded liabilities that may arise. The
said expenses and liabilities represent possible loss to the partners because upon their payment, the
amount paid is to be correspondingly absorbed by the partners.
- Additional loss may also accrue to the partners when a debit balance in any of the capital accounts result from the
foregoing allocations of possible loss. The deficiency of any of the partners is absorbed by the other partners as
additional possible loss to them because he is presumed unable to pay anything to the firm.
- Payment to partners based on periodic computation of safe payments bring, at some point liquidation, the partner’s
capitals to the profit and loss ratio. The absence of any partner’s deficiency after distribution of the possible loss
signifies schedule of safe payments in subsequent periods are no longer necessary because all subsequent payment
can be made based solely on the profit and loss ratio. Each partner’s capital is adequate to absorb his share of the
maximum remaining possible loss.

Illustrations of Installment Liquidation

Case 1: Each Partner has sufficient interest to absorb possible loss.

X, Y and Z, partners sharing profits and losses equally, decided to liquidate their partnership. Prior to liquidation, the
partnership Statement of Financial Position on June 30, 2022 is presented as follows:
X, Y and Z Partnership
Statement of Financial Position
June 30, 2022

Assets Liabilities and Equity

Cash 5,000 Liabilities 40,000
Other Assets 155,000 X, Capital 30,000
Y, Capital 40,000
Z, Capital 50,000
Total 160,000 Total 160,000

The following data relate to the realization of other assets:

Book Value Cash Realized Loss
July 80,000 65,000 15,000
August 42,000 24,000 18,000
 September 33,000 12,000 21,000
115,000 101,000 54,000
In July, the first month of installment, the Statement of Liquidation before the payment to the partners appears below:
X, Y and Z Partnership
Statement of Liquidation
July 2022
Assets Liabilities Partners’ Capital
Cash Other Liabilities X (1/3) Y (1/3) Z (1/3)
Bal. Before Liquidation 5,000 155,000 40,000 30,000 40,000 50,000
July Realization 65,000 (80,000) (5,000) (5,000) (5,000)
Balances 70,000 75,000 40,000 25,000 35,000 45,000
Payment of liabilities (40,000) (40,000)
Balances 30,000 75,000 -0- 25,000 35,000 45,000

To determine how the available cash of 30,000 is to be distributed to the partners, a schedule of safe payment is to be
prepared. The calculation of the safe payment requires the following steps.

- Determine the total interest of each partner. Before cash distribution, a partner’s capital is added to the loan he
granted to the firm to arrive at his interest. The total interest of the partners are computed as follows:

X Y Z
Capital Balances 25,000 35,000 45,000
Add: Loan Balances - - -
Total 25,000 35,000 45,000

Compute the total possible loss of the partnership to be absorbed by each partner. This consists of the total
value of remaining non-cash assets and the cash withheld. Each partner absorbs a possible loss of an amount
equal to the total necessary computations are as follows:

Other Assets (Unsold) 75,000

Add Cash withheld -
Total possible Loss 75,000

Possible loss absorbed by-

X: 75,000 x 1/3 = 25,000
Y: 75,000 x 1/3 = 25,000
Z: 75,000 x 1/3 = 25,000

The schedule of safe payments prepared based on the above procedures is shown below:
**Schedule 1
Schedule of Safe Payments – July 2022
X (1/3) Y (1/3) Z (1/3)
Total Capital 25,000 35,000 45,000
Possible Loss (25,000) (25,000) (25,000)
Payment to partners -0- 10,000 20,000

Illustration 1. Below shows the compete picture of the liquidation of the partnership of X, Y and Z from July to September
2022.
X, Y and Z Partnership
Statement of Liquidation
July 2022
Assets Liabilities Partners’ Capital
Cash Other Liabilities X (1/3) Y (1/3) Z (1/3)
Bal. Before Liquidation 5,000 155,000 40,000 30,000 40,000 50,000
July Realization 65,000 (80,000) (5,000) (5,000) (5,000)
Balances 70,000 75,000 40,000 25,000 35,000 45,000
Payment of liabilities (40,000) (40,000)
Balances 30,000 75,000 -0- 25,000 35,000 45,000
**Payment to Partners (30,000) (10,000) (20,000)
Balances -0- 75,000 -0- 25,000 25,000 25,000
August Realization 24,000 (42,000) (6,000) (6,000) (6,000)
Balances 24,000 33,000 -0- 19,000 19,000 19,000
Payment to Partners (24,000) (8,000) (8,000) (8,000)
Balances -0- 33,000 -0- 11,000 11,000 11,000
September Realization 12,000 (33,000) (7,000) (7,000) (7,000)
Balances 12,000 -0- -0- 4,000 4,000 4,000
Final Payment (12,000) -0- -0- (4,000) (4,000) (4,000)
Balances -0- -0- -0- -0- -0- -0-
The journal entries for liquidation of the partnership of X, Y and Z are as follows:

JULY
To record July Sale of Assets and the distribution of loss among the partners.
Cash 65,000
X, Capital 5,000
Y, Capital 5,000
Z, Capital 5,000
Other Assets 80,000

To record full payment of liabilities.

Liabilities 40,000
Cash 40,000

To record the first installment payment to partners.

Y, Capital 10,000
Z, Capital 20,000
Cash 30,000

AUGUST
To record August sale of assets and the distribution of loss among the partners.
Cash 24,000
X, Capital 6,000
Y, Capital 6,000
Z, Capital 6,000
Other Assets 42,000

To record the second installment payment to partners.

X, Capital 8,000
Y, Capital 8,000
Z, Capital 8,000
Cash 24,000

SEPTEMBER
To record September sale of assets and the distribution of loss among the partners.
Cash 12,000
X, Capital 7,000
Y, Capital 7,000
Z, Capital 7,000
Other Assets 33,000

To record the final payment to partners.

X, Capital 4,000
Y, Capital 4,000
Z, Capital 4,000
Cash 12,000

Note: Several important conclusion can be drawn from analysis of the Statement of Liquidation (Illustration 1). These are:
- The order of payment on the Statement of Liquidation is in accordance with the order of priority stated in the
partnership law, that is, payment are first made to creditors, then to the partners.
- The total installment payment to each partner is equal to the amount of single payment computed under the lump-
sum method, as shown below.

Installment Liquidation Method

X Y Z
July -0- 10,000 20,000
August 8,000 8,000 8,000
September 4,000 4,000 4,000
Total Payment 12,000 22,000 32,000

Lump-Sum Liquidation Method

X Y Z
Capital 30,000 40,000 50,000
Realization (18,000) (18,000) (18,000)
Total Payment 12,000 22,000 32,000
Case 2: One partner has insufficient interest to absorb possible loss.
The partners of ABE & Co. share profits and losses as follows: A, 50%; B, 20%; C, 20%; D, 10%. On March 31, 2022, the agree to
liquidate their partnership. The statement of financial position is shown as follows:

ABE & Co Partnership

Statement of Financial Position
March 31, 2022

Assets Liabilities and Equity

Cash 10,000 Liabilities 6,000
Other Assets 80,000 B, Loan 2,000
A, Capital 20,000
B, Capital 29,000
C, Capital 23,000
D, Capital 10,000
Total 90,000 Total 90,000

The following data relate to the realization of other assets:

Book Value Cash Realized Loss
April 54,000 30,000 24,000
May 24,000 18,000 6,000
June 2,000 1,000 1,000
80,000 49,000 31,000

In April, May and June, the Statement of Liquidation before the payment to the partners appears below:

Illustration 2. Below shows the compete picture of the liquidation of the partnership of ABE & Co. from April to June 2022.
ABE & Co Partnership
Statement of Liquidation
June 2022
Assets Liabilities Partners’ Capital
Cash Other Liabilities B, Loan A B C D
Bal. B4 Liquidation 10,000 80,000 6,000 2,000 20,000 29,000 23,000 10,000
April Realization 30,000 (54,000) (12,000) (4,800) (4,800) (2,400)
Balances 40,000 26,000 6,000 2,000 8,000 24,200 18,200 7,600
Payment of liabilities (6,000) (6,000)
Balances 34,000 26,000 -0- 2,000 8,000 24,200 18,200 7,600
Payment to Partners (34,000) (2,000) (17,000) (11,000) (4,000)
Balances -0- 26,000 -0- -0- 8,000 7,200 7,200 3,600
May Realization 18,000 (24,000) -0- -0- (3,000) (1,200) (1,200) (600)
Balances 18,000 2,000 -0- -0- 5,000 6,000 6,000 3,000
Payment to Partners (18,000) (4,000) (5,600) (5,600) (2,800)
Balances -0- 2,000 -0- -0- 1,000 400 400 200
June Realization 1,000 (2,000) (500) (200) (200) (100)
Balances 1,000 -0- -0- -0- 500 200 200 100
Final Payment (1,000) (500) (200) (200) (100)
Balances -0- -0- -0- -0- -0- -0- -0- -0-

The schedule of safe payments prepared based on the above procedures is shown below:
Schedule 1
Schedule of Safe Payments – April 2022
A (50%) B (20%) C (20%) D (10%)
Total Capital 8,000 24,200 18,200 7,600
Loan Balance 2,000
Balances 8,000 26,200 18,200 7,600
Possible Loss 26,000 (13,000) (5,200) (5,200) (2,600)
Balances (5,000) 21,000 13,000 5,000
Additional Possible loss (BCD) 5,000 (2,000) (2,000) (1,000)
Payment to Partners -0- 19,000 11,000 4,000

The schedule of safe payments prepared based on the above procedures is shown below:
Schedule 2
Schedule of Safe Payments – May 2022
A (50%) B (20%) C (20%) D (10%)
Total Capital 5,000 6,000 6,000 3,000
Possible Loss 2,000 (1,000) (400) (400) (200)
Balances 4,000 5,600 5,600 2,800

Case 3: One or more partners become deficient after absorbing additional possible loss.
Assume the balance sheet and the data pertaining to the realization of non-cash assets of ABE & Co. in case 2. The partners
share profit and losses as follows: A, 60%; B, 15%; C, 10%; D, 15%. The statement of liquidation and the supporting schedule of
safe payments are presented as follows:

ABE & Co Partnership

Statement of Financial Position
March 31, 2022

Assets Liabilities and Equity

Cash 10,000 Liabilities 6,000
Other Assets 80,000 B, Loan 2,000
A, Capital 20,000
B, Capital 29,000
C, Capital 23,000
D, Capital 10,000
Total 90,000 Total 90,000

In April, May and June, the Statement of Liquidation before the payment to the partners appears below:

Illustration 2. Below shows the compete picture of the liquidation of the partnership of ABE & Co. from April to June 2022.
ABE & Co Partnership
Statement of Liquidation
June 2022
Assets Liabilities Partners’ Capital
Cash Other Liabilities B, Loan A B C D
Bal. B4 Liquidation 10,000 80,000 6,000 2,000 20,000 29,000 23,000 10,000
April Realization 30,000 (54,000) (14,400) (3,600) (2,400) (3,600)
Balances 40,000 26,000 6,000 2,000 5,600 25,400 20,600 6,400
Payment of liabilities (6,000) (6,000)
Balances 34,000 26,000 -0- 2,000 5,600 25,400 20,600 6,400
Payment to Partners (34,000) (2,000) (17,000) (15,000)
Balances -0- 26,000 -0- -0- 5,600 8,400 5,600 6,400
May Realization 18,000 (24,000) -0- -0- (3,600) (900) (600) (900)
Balances 18,000 2,000 -0- -0- 2,000 7,500 5,000 5,500
Payment to Partners (18,000) (800) (7,200) (4,800) (5,200)
Balances -0- 2,000 -0- -0- 1,200 300 200 300
June Realization 1,000 (2,000) (600) (150) (100) (150)
Balances 1,000 -0- -0- -0- 600 150 100 150
Final Payment (1,000) (600) (150) (100) (150)
Balances -0- -0- -0- -0- -0- -0- -0- -0-

The schedule of safe payments prepared based on the above procedures is shown below:
Schedule 1
Schedule of Safe Payments – April 2022
A (60%) B (15%) C (10%) D (15%)
Total Capital 5,600 25,400 20,600 6,400
Loan Balance 2,000
Balances 5,600 27,400 20,600 6,400
Possible Loss 26,000 (15,600) (3,900) (2,600) (3,900)
Balances (10,000) 23,500 18,000 2,500
Additional Possible loss (BCD) 10,000 (3,750) (2,500) (3,750)
Balances -0- 19,750 15,500 (1,250)
Additional Possible loss (BC) -0- (750) (500) 1,250
Payment to Partners -0- 19,000 15,000 -0-

The schedule of safe payments prepared based on the above procedures is shown below:
Schedule 2
Schedule of Safe Payments – May 2022
A (60%) B (15%) C (10%) D (15%)
Total Capital 2,000 7,500 5,000 5,500
Possible Loss 2,000 (1,200) (300) (200) (300)
Balances 800 7,200 4,800 5,200