2Methous: 1. LUMP SUM LIQUIDATION 2, LIQUIDATION BY INSTALLMENT ‘one time payment LIQUIDATION PROCESS sta 1: Sale of Non-Cash Assets and Distribution of Gain or Loss to partners, (Realization of NCA} STEP 2: Payment of Liabilities (does not affect capital balances) Payment of Fenenses (affects capital balances) ST=P 3: Elimination of Deficiency {order of priority} A, Right of Offset (If DP has Loans Receivable from the partnership} B. Additionat Investment {if DP is salvent; up to extent of his solvency) C. Absorption of others with adequate balance (If DP is insolvent) allocate based on remaining PL ratio Payment to partners {order of priority) A. Loan Accounts B. Capital Accounts NOTE: Before Liquidation, All Account Balances MUST BE ADIUSTED, specifically capital accounts of partners LIQUID |BY INSTALLMENT - series of payment ™ SAME liquidation process as in Lump sum Liquidation, but itis done by installment. 1. ndetermining the Capital Accounts of partners before liquidation: 4, Receivables from partnership ‘Added to Capital B, Payables to partnership Deducted from Capital ©. Loan Accounts Maintained D. Drawing Accounts Closed to Capital E, Partnership Goodwill Written off and adjust Capital (PLratio) 2. Gain or Loss is distributed to capital accounts based on partners’ PL ratio, 3. abilities should be paid in full OR cash sufficient to ensure payment of all lfabilltfes and future expense must be withheld 2. After payment of all liabilities, partners loan accounts must be paid th right of offset 4. Cash distribution to partners should be made with the objective of systematically bringing the ratio of capital accounts In agreement with partners PL ratio. Thus, in the end, PL RATIO = CAPITAL RATIO.DETERMINATION OF CASH DISTRIBUTION (TWO ALTERNATIVE METHODS) SAFE PAVMENT ~ Done every cash payment to partners A B Capital Balance wot woo (-] Maximum Loss boo) oo) rote t Free Interest voor (oo) (+/+) Absorption (oocx) you note? To be Distributed 00 a note Maximum Loss is composed of: A. Unreatized Non-Cash Assets 2. Cash Withheld Other componants: 3. Unreatized Loss Liabilities note 2: In case, there is a deficient partner during sate payment, deficiency shalt be ABSORBED ONLY by other partners. as they are all considered insolvent under safe payment. If No Deficiency, Free Interest = Distributable Cash. CASH DISTRIBUTION PROGRAM ~ determines partner to be paid first A 8 Capital Balance v0 xo (7+) Loans sorted) 200%b00%) Adjusted Capital Batance 00 200 (+) corresponding PL ratio % % Loss Absorption Ability mo m0 note: whoever has the HIGHEST LAA shall be the FIRST PRIORITY in cosh distribution, 50 on and s0 forth, st Priority LAA vox “Any EXCESS CASH ofter (-] 2nd Priority LAA pox) _ paying all the prionties for Excess nox €aSh distribution shail be (*} corresponding PL ratio s%_ tstrtuted to alt partners Tobe clstrouteds ot Priority poo PO**#O” Mew PL RATIO. 50 on and so forth SHORTCUT SOLUTION Cash, Beginning Balance vo Proceeds trom sale of NCA vo Uquidation Expense (oo) ual Z ocx) Cash withheld booe)