Partnership Liquidation

Process of Converting all

assets of the business into cash
(realization) followed by
payments of creditors’ caliams
and the partners’ interests
When • All accounts must be adjusted and closed

partnership is • The resulting income and loss in the final period is

transferred to the capital accounts of the

liquidated partnership
Definition of terms
• Winding up – is the process of settling the business or partnership affairs
• Termination – is the point I time when all affairs are ended
• Liquidation - is the interval between dissolution and termination of partnership affairs.
• Realization – is the process of converting non-cash assets into cash
• Gain on realization – is the excess of the selling price over the book value of the assets sold through
realization
• Loss on realization – is the excess of the book value over the selling price of the assets sold through
realization
 Cont.
• Capital deficiency – is the excess of the partners’ share of losses over their capital credit balances
• Deficient partner – is a partner with a debit balance in his capital account after receiving his share on
the loss on realization
• Right of offset – is the legal right of a partner to apply part or all of hos loan account balance against
his capital deficiency resulting from losses in the realization of the partnership assets
• Partner’s interest – is the sum of partner’s capital and loan accounts in the partnership.
 Liquidation expenses
• Expenses are usually incurred during the
liquidation process such as legal and accounting
expenses and advertising cost of selling the assets.
These expenses are allocated to partner’s using
profit and loss ratio.
 General Rule on the cash
distribution
1. Outside creditors
2. Partners for loan or advances to the business by
partners
3. Partners for capital accounts.
 Two Methods of Liquidation

• Lump-sum Method (Total Liquidation or Single

Distribution)
• Installment method (Installment Distribution)
Lumpsum
Liquidation
 Procedures in Lump-sum
Liquidation
1. Realization of non-cash assets
2. Distribution of gains or loss on realization of non-cash assets
3. Payment of liquidation expenses
4. Payment of liabilities
5. Elimination of partners’ capital deficiencies
- If a certain partner has a capital deficiency, this deficiency is eliminated in either of
the following
a. If the deficient partner has a loan balance, exercise right of offset
b. If the deficient partner is solvent, make him invest cash to eliminate deficiency
c. If the deficient partner is insolvent, let the other partners absorb his deficiency
6. Payments to partners, in the order of priority
a. Loan accounts
b. Capital accounts
 Cash Other Liabilities Partner’ Partner’s
Cash s Loans Capital
Balance
Profit or loss ratio
Balances before
liquidation
Sale of Assets and
Distribution of
Gain/Loss
Balances
Payment of Liabilities
Exercising the Right of

Statement of Offset
Additional Investment

Liquidation
of Deficient
Partner/Distribution of
Deficiency to other
partners

Balances
Payment to Partners
Installment
Liquidation
• Also referred as ”Piecemeal Liquidation”
• Is a process of selling some assets, paying the
liabilities of the partnership, dividing the available
cash to the partners, selling additional assets and
making further payments to partners.
 • Realization of assets
• Distribution of gain or loss on
realization among the partners based
on their P/L
• Payment of liquidation expenses and
Procedures adjustments for unrecorded liabilities
and distributing it to partners based on
their P/L
• Payment of liabilities to outsiders
• Distribution of available cash based on
a Schedule of Safe Payments/ Cash
Priority Program.
Schedule of Safe
Payments

• It is prepared when there is cash available

for distribution after payment to outside
creditors has been made.
• It indicates how the available cash should
be distributed to partners.
How does a Schedule of Safe Payments work?

1. You record the sale and distribute the gains and losses, as well as liquidation expenses.
2. Assume the remaining book value of non-cash assets does not get sold and distribute
the losses to the partners
3. Partners with capital deficiency are to be absorbed by solvent partners.
4. Each payment, a different Schedule of Safe Payments will be prepared?
What if there are 20 installments?
Does it mean that the entity should
prepare 20 Schedule of Safe
Payments?
Yes And because of that inconvenience, a
Cash Priority Program is prepared.
Cash Priority Program

• This program which is prepared at the start of the liquidation process, will
help partners project when they can expect to be included in the cash
distribution.
• Any amount of cash received from the realization of partnership assets may
be paid immediately to partnership creditors and later, the partners as
specified in the program.
 1. Make a table indicating each partners’ total interest
before liquidation (Capital +/- loan balances)
2. Divide it by their P/L ratio in order to get the Loss
Absorption Balances
Steps in 3. The Partners with the most Loss Absorption Balance
shall be prioritized in cash distribution.

Preparing a 4. The next step is to make the highest loss absorption

balance equal to the next highest (taking the

Cash Priority
difference between the highest and the next
highest)
5. The cash priority payment is determined by
Program 6.
multiplying the difference by their P/L ratio
The process goes on until all absorption balances
are equal, in which case, the remaining cash is
distributed to partners according to their P/L ratio.
END