Notes to Partnership Liquidation

Partnership Liquidation

1. Conversion of non-cash assets to cash (Sale of NCA)

2. Pay liquidation expenses
3. Pay outside creditors
4. Pay INTEREST of partners

*Before a partner receives his payment, he must absorb Total Gain/Loss:

a. G/L on sale of Realization of Non-cash Assets (Inc: Actual Liquidation Expenses)
b. Maximum Possible Loss (MPL) for installment liquidation
i. Book value of Unrealized Non-cash Assets
ii. Cash withheld for future liquidation expenses & possible
unrecorded liabilities
c. Deficiency

SAFE PAYMENT SCHEDULE

A B C TOTAL

Capital Balances before Liquidation xxx xxx xxx xxx

Add/Less: Loan to/(from) partnership x(x) x(x) x(x) x(x)
Total Interest before Realization xxx xxx xxx xxx

Total Share in G/L on Realization x(x) x(x) x(x) x(x)

Gain/Loss Share in the MPL(if, installment) (xx) (xx) (xx) (xx)
Total Balance after Realization xxx xxx xxx xxx

Contribution of Partner to cover xx xxx xxx xxx

deficiency(If Solvent)
Absorption of Deficiency(1ST, 2ND, and so on) (xx) (xx) (xx) (xx)
Amount received by each partner xxx xxx xxx xxx

*Total Cash available for the partners

Cash beginning balance xxx
Proceed of realization xxx
Payment of Liquidation Expenses (xx) EQUAL
Payment outside creditors (xx)
Total cash withheld for:
Future liquidation/future expenses (xx)
Unpaid balance of liability (xx)
Total amount available for the Partners xxx

Proceeds from realization of N-cash assets xxx *For Installment liquidation:

Less: Actual Liquidation Expenses (xx) Book value of Unrealized Non-cash Assets xxx
Book value of the asset sold (xx) Cash withheld for future liquidation expenses &
GAIN/(LOSS) ON REALIZATION XX(XX possible unrecorded liabilities xxx
MAXIMUM POSSIBLE LOSS (MPL) XXX
)
ILLUSTRATION:

The statement of financial position of ABC Co. before the liquidation is as follows:

Cash 40,000 Accounts Payable 60,000

Account Receivable 120,000 Payable B 40,000
Inventory 240,000 A, Capital (20%) 200,000
Equipment 800,000 B, Capital (30%) 300,000
Acc. Depreciation (200,000) C, Capital (50%) 400,000
Total Assets 1,000,000 Total Liabilities & Equity 1,000,000

Case 1: Lump-sum liquidation

Assuming the non-cash assets were realized as follows:
a. Of the total accounts receivable, only 100,000 were collected.
b. The entire inventory was sold for 140,000.
c. The equipment was sold for 500,000.
d. 4,000 liquidation expenses were paid.

Compute for the cash distributions to the partners.

Proceeds from realization of N-cash assets:
Collection on accounts receivable 100,000
Sale of inventory 140,000
Sale of equipment 500,000
Proceeds from Realization 740,000
Actual Liquidation Expenses (4,000)
Carrying amount of non-cash assets sold
(120K + 240K + 600K) (960,000)
Gain/Loss on Realization (224,000)

The final settlement to partners is computed as follows:

A B C TOTAL

Capital Balances before Liquidation 200,000 300,000 400,000 900,000

Add/Less: Loan to/(from) partnership 40,000
Total Interest before Realization 200,000 340,000 400,000 940,000
Share in G/L on Realization (44,800) (67,200) (112,000) (224,000)
Share in the MPL(if, installment) - - - -
Total Balance after Realization 155,200 272,800 288,000 716,000

Contribution of Partner to cover Deficiency(If Solvent) - - - -

Absorption of Deficiency(1ST, 2ND, and so on) - - - -
Amount received by each partner 155,200 272,800 288,000 716,000

Total Cash available for the partners

Cash beginning balance 40,000
Proceed of realization 740,000
Payment of Liquidation Expenses (4,000)
Payment outside creditors (60,000)
Total cash withheld for:
Future liquidation/future expenses -
Unpaid balance of liability -
Total amount available for the Partners 716,000
Case 2: Installment Method
The partnership will be liquidated on an installment basis. Distributions to the partners will be made as
cash becomes available.
The following transactions occurred in the first month:
a. 75% of the total accounts receivable was collected for only 60,000.
b. Half of the inventory was sold for 80,000.
c. The equipment with carrying amount of 400,000 was sold for 240,000.
d. 4,000 liquidation expenses were paid. Estimated future liquidation expenses totaled 2,000.
e. 18,000 cash was retained in the business for potential unrecorded liabilities and anticipated
expenses.

Proceeds from realization of N-cash assets:

Collection on accounts receivable 60,000
Sale of inventory 80,000
Sale of equipment 240,000
Proceeds from Realization 380,000
Actual Liquidation Expenses (4,000)
Carrying amount of non-cash assets sold
(90K + 120K + 400K) (610,000)
Gain/Loss on Realization (234,000)

Carrying amount of Unrealized Non-cash Assets (30,000+120,000+200,000)

Cash withheld for future liquidation expenses & possible unrecorded liabilities (2,000+18,000)
TOTAL MAXIMUM POSSIBLE LOSS (MPL) 370,000

SAFE PAYMENT SCHEDULE (First Month)

A B C TOTAL

Capital Balances before Liquidation 200,000 300,000 400,000 900,000

Add/Less: Loan to/(from) partnership 40,000
Total Interest before Realization 200,000 340,000 400,000 940,000
Share in G/L on Realization (46,800) (70,200) (117,000) (234,000)
Share in the MPL(if, installment) (74,000) (111,000) (185,000) (370,000)
Total Balance after Realization 79,200 158,800 98,000 336,000

Contribution of Partner to cover Deficiency(If Solvent) - - - -

Absorption of Deficiency(1ST, 2ND, and so on) - - - -
Amount received by each partner 79,200 158,800 98,000 336,000

Total Cash available for the partners

Cash balance 40,000
Proceed of realization 380,000
Payment of Liquidation Expenses (4,000)
Payment outside creditors (60,000)
Total cash withheld for:
Future liquidation/future expenses (20,000)
Unpaid balance of liability -
Total amount available for the Partners 336,000
 *Interest of the partner in NEXT installment
Total Interest before Realization prior month xxx
Share in G/L on Realization x(x)
Cash paid to each partner in prior installment (xx)
Interest of a partner in NEXT installment xxx

Continuation….
The following transactions occurred in the second month:
a. 20,000 was collected on the remaining accounts receivable; the balance was deemed uncollectible.
b. The other half of the inventory was sold for 40,000.
c. The remaining items included in the equipment account were sold for 60,000.
d. 20,000 liquidation expenses and previously unrecorded liabilities were paid.
e. The liquidation process ended at the end of the month.

Proceeds from realization of N-cash assets:

Collection on accounts receivable 20,000
Sale of inventory 40,000
Sale of equipment 60,000
Proceeds from Realization 120,000
Actual Liquidation Expenses (20,000)
Carrying amount of non-cash assets
(90K + 120K + 400K) (350,000)
Gain/Loss on Realization (250,000)

Book value of Unrealized Non-cash Assets -

Cash withheld for future liquidation expenses -
TOTAL MAXIMUM POSSIBLE LOSS (MPL) 0

A B C TOTAL

Total Interest before Realization 200,000 340,000 400,000 940,000

Share in G/L on Realization (46,800) (70,200) (117,000) (234,000)
Cash paid to each partner in prior installment (79,200) (158,800) (98,0000 (336,000)
Interest of each partner for next installment 74,000 111,000 185,000 370,000

*Equal to the recognized MPL in the prior safe payment schedule.

SAFE PAYMENT SCHEDULE (Second Month)

A B C TOTAL

Interest of each partner(Beg. of the month) 74,000 111,000 185,000 370,000

Share in G/L on Realization (50,000) (75,000) (125,000) (250,000)
Share in the MPL(if, installment) - - - -
Total Balance after Realization 24,000 36,000 60,000 120,000

Contribution of Partner to cover Deficiency(If Solvent) - - - -

Absorption of Deficiency(1ST, 2ND, and so on) - - - -
Amount received by each partner 24,000 36,000 60,000 120,000
 Total Cash available for the partners
Cash balance 20,000
Proceed of realization 120,000
Payment of Liquidation Expenses (20,000)
Payment outside creditors -
Total cash withheld for:
Future liquidation/future expenses -
Unpaid balance of liability -
Total amount available for the Partners 120,000

CASH PRIORITY PROGRAM (CPP)

Total Cash available for the partners

Cash balance xxx
Proceed of realization xxx
Payment of Liquidation Expenses (xx)
Payment outside creditors (xx)
Total cash withheld for:
Future liquidation/future expenses (xx)
Unpaid balance of liability (xx)
Total amount available for the Partners xxx

A B C A B C
Priority to receive cash
Capital Balances before Liquidation xxx xxx xxx
Loan to/(from) partnership x(x) x(x) x(x)
Total Interest of each Partner xxx xxx xxx

Divide: P/L RATIO x% x% x%

rd nd
MAXIMUM ABSORPTION LOSS xxx(3 ) xxx(2 ) xxx(1st)

Equate 1ST & 2nd highest (xx) xx

BALANCE xxx xxx xxx
Equate 1ST, 2nd, & 3rd, so on… (xx) (xx) xx xx
BALANCE Equal Equal Equal
Equal Proportionate to P/L ratio

CASH PRIORITY PROGRAM (CPP) – First Month

Cash balance 40,000

Proceed of realization 380,000
Payment of Liquidation Expenses (4,000)
Payment outside creditors (60,000)
Total cash withheld for:
Future liquidation/future expenses (20,000)
Unpaid balance of liability -
Total amount available for the Partners 336,000
 A B C A B C
Priority to receive cash
Capital Balances before Liquidation 200,000 300,000 400,000
Loan to/(from) partnership - 40,000 -
Total Interest of each Partner 200,000 340,000 400,000

Divide: P/L RATIO 20% 30% 50%

MAXIMUM ABSORPTION LOSS 1,000,000 1,133,333 800,000

Equate 1ST & 2nd highest (133,333) 40,000

BALANCE 1,000,000 1,000,000 800,000
Equate 1ST, 2nd, & 3rd, so on… (200,000) (200,000) 40,000 60,000
BALANCE 800,000 800,000 800,000
Equal 39,200 58,800 98,000
79,200 158,800 98,000

CASH PRIORITY PROGRAM (CPP) – Second Month

Cash balance 20,000

Proceed of realization 120,000
Payment of Liquidation Expenses (20,000)
Payment outside creditors -
Total cash withheld for:
Future liquidation/future expenses -
Unpaid balance of liability -
Total amount available for the Partners 120,000

Since the priority of cash distribution is already satisfied in the first month of liquidation, the available
cash for the partners in the second month is distributed using the profit or loss ratio.

A (20%) B (30%) C (50%) Total

Cash available end of second month 120,000
Allocation:
Payment after priorities
[60K x (20%; 30% & 50%)] 24,000 36,000 60,000 (120,000)
Final payment 24,000 36,000 60,000 -

END