PARTNERSHIP LIQUIDATION

Liquidation is the termination of business operations or the winding up of affairs. It is the process by which:
1. assets are converted into cash (Realization)
2. liabilities are settled (Liquidation)
3. any remaining amount is distributed to the owners

Liquidation may be either volunatry (per agreement) or involuntary (bankruptcy)

Methods of liquidation
1. Lump-sum liquidation
all the non-cash assets of the partnership are sold simultaneously, or within a very short period of time
and the proceeds are used to settle first all the liabilities and any remaining amount is paid to
partners under a lump-sum payment.
2. Installment method
Partners' claims are settled on an installment basis as cash becomes available, but only after all
partnership liabilities are fully settled.
All the assets of the partnership are restated to their realizable values, and all liabilities to
their expected settlement amounts

Settlement of claims
1. Outside creditors
2. Inside creditors
3. Owners' capital balances

Right of offset -legal right of offset allows a deficit in the parter's capital account
to be offset by a loan to that partner.

Lump-sum
All of non-cash assets are converted into cash
Total gain/loss on sale is allocated to the
partners capital balances based on
P/L ratios
Actual liquidation expenses are allocated
to the capital balances
The liabilities to outside creditors are
fully settled
The liabilities to inside creditors are
fully settled
Any remaining cash is distributed to
the owners in full settlement
of their interest
Installment
Some of non-cash assets are converted into cash
Carrying amount of any unsold non cash assets is
considered as a loss, which allocated to
partner's capital account
Actual and estimated liquidation expenses are allocated
to the capital balances
The liabilities to outside creditors are
partially or fully settled
The liabilities to inside creditors are
partially or fully settled
If both the liabilities to outside and inside creditors are fully s
Any remaining cash less cash set aside to future liq
the owners in partial settlement of their interest

Marshalling of assets
 One characteristic of partnership - Unlimited liability
Personal assets of general partners are subject to the claims of partnership
creditors incase of partnership insolvency
Rules applying the doctrine of marshalling of assets
1. Available assets of partnership are used to settle the partnerships liabilities
2. Incase the assets of the partnership are insufficient to pay all liabilities, the solvent general partners
are required to provide additional funds from their personal assets
Claims to the personal assets:
1. Personal creditors
2. Partnership creditors
3. Partners by way of contribution
3. In case some partners are insolvent, their capital deficiency is offset to the capital balances
of ther partners. If after allocating the capital deficiency of an insolvent partner, a
solvent partner's capital balance results to negative amount, the solvent partner is
required to provide additional contribution
s the process by which:

Installment liquidation may be presented in a formal manner either:

n a very short period of time 1. Safe payment method
g amount is paid to a. Unsold non-cash assets are treated as loss
b. Expected future liquidation cost and potential unrecorded
liabilities are recognized immediately as losses
ble, but only after all 2. Cash priority program
This schedule determines which partner shall be paid first and last,
d all liabilities to after all liabilities are settled
a. Unsold non-cash assets are treated as loss
b. Expected future liquidation cost and potential unrecorded
liabilities are recognized immediately as losses
Additional procedure is to rank the partners according to their
maximum loss absorption capacity
a. the partner with highest MLAC shall be paid first
b. the partner with lowest MLAC shall be paid last

Maximum loss absorption capacity = Total partner's interest/Partner's P&L ratio

nverted into cash The basic purpose of these schedules is to prevent overpayments to partners
non cash assets is during installment liquidation
which allocated to

on expenses are allocated

and inside creditors are fully settled.

ess cash set aside to future liquidation is distributed to
settlement of their interest
partnership

general partners
 manner either:

tential unrecorded
diately as losses

hall be paid first and last,

tential unrecorded
diately as losses
rs according to their

AC shall be paid first

C shall be paid last

interest/Partner's P&L ratio

verpayments to partners
 ASSETS
CASH NON-CASH
Balances before liquidation

Conversion of non-cash assets

and distribution of loss
Totals

Payment to outside creditors

Totals

Payment to inside creditors

Totals

Payment to partners
Totals
 LIABILITIES EQUITY
ACCOUNTS PAYABLE PAYABLE TO B A, CAPITAL (20%) B, CAPITAL (30%)
TY
C, CAPITAL (50%)
The statement of financial position of ABC Co. before liquidation is as follows:
Cash 40,000.00 Accounts payable 60,000.00
Accounts receivable 120,000.00 Payable to B 40,000.00
Inventory 240,000.00 A, capital (20%) 200,000.00
Equipment 800,000.00 B, capital (30%) 300,000.00
Accum. Depreciation (200,000.00) C, capital (50%) 400,000.00
Total assets 1,000,000.00 Total Liab & Equity 1,000,000.00

CASE 1
The non-cash assets were realized as follows:
a. Total receivable, only 100,000 were collectible
b. The entire inventory was sold for 140,000
c. The equipment was sold for 500,000
d. 4,000 liquidation expenses were paid

CASE 2
The non-cash assets were realized as follows:
a. 80% of receivable, was collected for only 60,000
b. 2/3 of inventory was sold for 80,000
c. The equipment with carrying amount of 300,000 was sold for 240,000
d. 4,000 liquidation expenses were paid. An additional 2,000 is expected to be incurred in the succeding periods
e. 18,000 cash is set aside for potential unrecorded liabilities

ed in the succeding periods
CASE 3
The non-cash assets were sold for 100,000.
The financial conditions of the partners are as follows
A B C
Personal assets 600,000.00 520,000.00 400,000.00
Personal liabilities (440,000.00) (440,000.00) (640,000.00)
CASE 4
The non-cash assets realized on January 20x1 were as follows:
a. 75% of receivable, was collected for only 60,000
b. Half of 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. An additional 2,000 is expected to be incurred in the
e. 18,000 cash is set aside for potential unrecorded liabilities
The non-cash assets realized on February 20x1 were as follows:
a. 20,000 were collected on the remaining receivables
b. The other half of inventory was sold for 40,000
c. The remaining equipment was sold for 60,000
d. 20,000 liquidation expense and previously unrecorded liabilities were paid
e. The liquidation process ended on February 20x1
ected to be incurred in the succeding periods