Partnership Liquidation

Terms used:

1. Liquidation – winding up of business by selling the assets, paying

the liabilities and distributing the remaining cash to the partners.

2. Realization – sale of assets

Rules in Liquidation:

1. Allocate and close gains and losses to the partners’ capital

accounts prior to distributing any cash to the partners.
2. When business is liquidated, partner is entitled to an amount
depending on his capital, his drawing, his share in the net income
or loss from operations before liquidation, gains and losses on
realization, and the balance of his loan account, if any.
General rule on distribution:

1. Outside Creditors
2. Partners for loan accounts
3. Partners for capital accounts
Methods of Partnership Liquidation:

1. LUMP SUM LIQUIDATION– TOTAL

LIQUIDATION - SINGLE DISTRIBUTION

2. INSTALLMENT LIQUIDATION –
INSTALLMENT DISTRIBUTION
Liquidation Procedures:

1. Realization of assets and distribution of gain or loss on

realization among the partners based on the profit and loss
ratio.

2. Payment of expenses.

3. Payment of liabilities.
Liquidation Procedures:

4. Elimination of partner’s capital deficiencies. Deficiency must be

eliminated. Order of priority:
a. exercise right of offset
b. partner is solvent, make him invest in cash
c. partner is insolvent, other partners absorb his deficiency

5. Payment to partners (order of priority):

a. Loan accounts
b. Capital accounts
LUMP SUM LIQUIDATION Cases:

1. Loss on Realization: Fully absorbed by Partners’ Capital Balances;

2. Loss on Realization Resulting Capital Deficiency to a Partner with

a Loan Account;

3. Loss on Realization Resulting Capital Deficiency to a Solvent

Partner;
LUMP SUM LIQUIDATION Cases:

4. Loss on Realization Resulting Capital Deficiency to a

Insolvent Partner:

a. Partner is Insolvent but Partners are Personally Solvent;

b. Partner is Insolvent but Partners are Personally Insolvent.

INSTALLMENT LIQUIDATION

1. Realization of assets and distribution of gain or loss on realization among

the partners based on the profit and loss ratio.

2. Payment of expenses.

3. Payment of liabilities.

4. Distribute cash to the partners after possible future loss have been
apportioned to partners or in accordance with a cash distribution program.
INSTALLMENT LIQUIDATION

Schedule of Safe Payments – installment of

cash is distributed as if no more cash is
forthcoming, either from sale of assets or from
collection of deficiencies from partners.
INSTALLMENT LIQUIDATION

Possible loss (hypothetical loss)

1. Total value of remaining non-cash assets. (Assumed
unrealizable)

2. Cash withheld to pay for anticipated liquidation

expenses and unrecorded liabilities that may rise.
INSTALLMENT LIQUIDATION Cases:
1. Each partner has sufficient interest to absorb possible loss.

2. One or more partners have insufficient interest to absorb

possible loss

3. One or more partners becomes deficient after

absorbing additional possible loss
INSTALLMENT LIQUIDATION
Cash Withheld
-- cash set aside to ensure payments of potential
liquidation expenses which may be incurred,
and unrecorded liabilities which may be
discovered
INSTALLMENT LIQUIDATION
Cash Distribution Program (Pre-determination
plan)
-- this program permits the partners to
determine how cash should be safely
distributed if and when it becomes available
INSTALLMENT LIQUIDATION
Cash Distribution Program Procedure:

1. Compute the loss absorption potential of each

partner.

2. Determine the priority of payments to partners.

3. Compute the amount of cash to be paid to the

partners under each priority.