This module focuses on the other type of partnership liquidation: liquidation by installment.

Under
installment liquidation, 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.

After successful completion of this module, you should be able to:

 Understand partnership liquidation by installment
 Prepare a statement of liquidation (installment basis)
 Make a schedule of safe payments and cash priority program

Under this type of liquidation, the cash is distributed to partners as it becomes available even before all
non-cash assets are converted into cash, and the total gain or loss on realization is known.

Steps in Installment Liquidation

1. Sale of non-cash assets and distribution or allocation of gain or loss
 Must be performed every time a portion of the non-cash assets are sold.
2. Payment of liabilities
 If there are liquidation expenses, it must also be paid at this point
3. Distribution of cash to partners (observe the marshaling of asset & right of offset
concepts here)
 Schedule of Safe Payments
 Cash Priority Program

The schedule of safe payments is similar to the schedule of cash distribution in lump-sum partnership
liquidation. The only difference is that the restricted interest in the schedule of safe payments is composed
of: [1] the book value of the remaining unsold assets, [2] cash withheld for contingencies, and [3] capital
deficiency of partner(s). This schedule must be prepared every time there is cash distribution to partners
to ensure that cash is distributed after safely setting aside the appropriate reserves. The schedule of safe
payments is prepared as follows:

Partner 1 Partner 2 Partner 3

Capital balances before distribution XX XX XX
Add: Loan balance XX XX XX
Total partner’s interest XX XX XX
Add (Less): Restricted interest
1. BV of remaining unsold assets (XX) (XX) (XX)
2. Cash withheld for contingencies (XX) (XX) (XX)
3. Capital deficiency of partner(s) (XX) XX (XX)
Free interest − Amounts paid to partners (first
XX XX XX
applied to loan, then on capital balance)

Instead of preparing a schedule of safe payments every time cash is distributed, the partners may decide
to determine in advance how cash must be distributed as it becomes available through the preparation
of a cash priority program. It is prepared prior to liquidation through the following steps:

1. Determine the total partners’ interest (capital+/-loans)

2. Determine each partners’ loss absorption capacity (partners’ interest ÷ P/L ratio). The
partner with the highest loss absorption balance has the first priority on cash
distribution.
3. Allocate the payments. Starting with the highest loss absorption balance, determine the
first allocation by reducing the highest balance to the next highest. The difference is
then multiplied to that partners’ P/L ratio to get the payment. Repeat the process until
all loss absorption balance is the same. When cash is not enough to cover an allocation,
the partners must share the insufficient cash based on their P/L ratio.
4. Further cash distributions after the cash payments based on the program are satisfied
must be made using the partner’s profit and loss ratio.
NOTE: The amount of distribution to partners must be the same under the schedule of safe payments
and cash priority program.