Partnership Liquidation

January 21, 2015

Review Questions
What does the term “realization” mean?
“capital deficiency”?
What is the order of preference in the
liquidation of a partnership?
State the procedures in lump-sum liquidation.
What is the basis for distributing gain or loss
on realization?
Who is preferred as to the partnership assets?
As to the partners’ separate assets?
Lump-sum Liquidation
Case 1: Loss on Realization Fully Absorbed by
Partners’ Capital Balances
Case 2: Loss on Realization Resulting to a
Capital Deficiency with Right of Offset
Case3: Loss on Realization Resulting to a
Capital Deficiency to a Personally Solvent
Partner
Case 4: Loss on Realization Resulting to a
Capital Deficiency to a Personally Insolvent
Partner
 Lump-sum Liquidation: Procedures
1. Realization of non-cash assets and distribution of gain or loss
on realization among the partners based on their profit and loss
ratio
2. Payment of liabilities
3. Elimination of partners’ capital deficiencies in order of priority:
a. Exercise of the right of offset
b. If the deficient partner is solvent, investment of cash
c. If the deficient partner is insolvent, absorption by the other
partners
4. Payment to partners, in order of priority
a. Loan accounts
b. Capital accounts