Partnership Liquidation

Chapter 5
Partnerships:
Liquidation
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
LIQUIDATION
The liquidation of a partnership

is the winding up of its business
activities characterized by sale
of all non-cash assets,
settlement of all liabilities and
distribution of the remaining
cash to the partners.
16-2
TERMS RELATIVE TO LIQUIDATION
Realization. The conversion of non-cash assets

into cash.
Capital deficiency. It is the excess of a partner’s
share in losses over the partner's capital credit
balance.
Partner's interest. The sum of his capital and loan
accounts in the partnership.
Right of offset. The legal right of the partner with
the loan account the option to apply part or all of
his loan account balance against his capital
deficiency resulting from losses in the realization of
the partnership assets.
16-3
Overview of Partnership Liquidations
Order of Preference
The assets of a general partnership shall be applied in the

following order:
1. First, those owing to outside creditors,

2. Second, those owing to inside creditors. in the form of
loans or advances for business expenses by the partners.
3. Third, those owing to the partners with respect to their
capital contributions,
4. Lastly, those owing to the partners with respect to their
share of the profits.
16-4
Preference of Partnership Creditors and
Partners' Separate Creditors
Distribution of Separate Properties of an Insolvent Partner

If a partner is insolvent, hi~ personal properties shall be
distributed as follows:
1. First, those owing to separate creditors,
2. Second, those owing to partnership creditors,
3. Lastly, those owing to the partners by way of additional
contributions when the assets of the partnership were
insufficient to settle all obligations.
16-5
METHODS OF PARTNERSHIP LIQUIDATION
The following methods may be used when a partnership is

liquidated:
1. Lump-sum method. Under this method, all non-cash

assets are realized and the related gains or losses
distributed and all liabilities are paid before a single final
cash distribution is made to the partners.
2. Installment method. Under this method, realization of

non-cash assets is accomplished over an extended period
of time. When cash is available, creditors may be partially
or fully paid. Any excess may be distributed to the
partners in accordance with a program of safe payments
or a cash priority program. This process persists until all
the non-cash assets are sold. 16-6
Relative Journal Entries
16-7
16-8
16-9
16-10
Lump-Sum Liquidation
The procedures below may be followed in lump-sum liquidation:

1. Realization of non-cash assets and distribution of gain or loss on
realization among the partners based on their profit and loss
ratio.
2. Payment of liabilities.
3. Elimination of partners' capital deficiencies. If after the
distribution of loss on realization a partner incurs a capital
deficiency (i.e., partner's share of realization loss exceeds his
capital credit), this deficiency must be eliminated by using one of
the following methods, in the order of priority:
a) If the deficient partner has a loan balance, then exercise the right of
offset.
b) If the deficient partner is solvent, he should invest cash to eliminate
his deficiency.
c) If the deficient partner is insolvent, then the other partners should
absorb his deficiency
4. Payments to partners, in the order of priority:
a) loan accounts
b) Capital accounts 16-11
Installment Liquidation
The procedures below may be followed in installment
liquidation:
1. Realization of non-cash assets and distribution of gain or
loss on realization among the partners based on their profit
and loss ratio.
2. Payment of liquidation expenses and adjustment for
unrecorded liabilities; both of these items will be distributed
among the partners in their profit and loss ratio.
3. Payment of liabilities to outsiders.
4. Distribution of available cash based on a schedule of safe
payments which assumes possible losses due to inability
of the partnership to dispose of part or all the remaining
non-cash assets and failure of the partners with capital
deficiencies to make additional contributions. Payments to
partners can also be made based on a cash priority
program.
16-12
16-13
 Dissociation
 The legal description of the withdrawal of a
partner, including the following:
1. A partner’s death.
2. A partner’s voluntary withdrawal.
3. A judicial determination.
 Not all dissociations result in a partnership
liquidation.
16-14
 Dissolution
 The dissolving of a partnership
 Events that cause dissolution and winding up:
1. In a partnership at will, a partner’s express notice
to leave the partnership.
2. In a partnership for a definite term or specific
undertaking:
a) When after a partner’s death or wrongful dissociation, at
least half of the remaining partners decide to wind up the
partnership business.
b) When all of the partners agree to wind up the business .
c) When the term or specific undertaking has expired or
been completed.
16-15
 Events that cause dissolution and

winding up:
 An event that makes it unlawful to carry on a
substantial part of the partnership business.
 A judicial determination.
 On dissolution, the partnership begins the
winding up of the partnership’s business.
16-16
 Winding up and liquidation begins after

the dissolution of the partnership.
 The partnership continues for the limited
purpose of winding up the business and
completing work in process.
 Winding up process includes the transactions
necessary to liquidate the partnership.
 Some partnerships change to the liquidation
basis of accounting once they no longer consider
the business to be a going concern.
16-17
 Loans to/from partners

 According to the UPA 1997, liabilities to partners
for loans the partners made to the partnership
generally have the same status as liabilities to
the partnerships’ third party creditors.
 These loans have no priority for payment.
 Receivables from partners for loans or other
advances made by the partnership to partners
have the same status as other assets of the
partnership.
16-18
 Deficits in partners’ capital accounts

 Generally, a partner with a deficit in his or her
capital account must make a contribution to the
partnership to remedy that capital deficit.
 Liquidating distributions, in cash, are made to
each partner with a capital credit balance.
 If a partner fails to remedy his or her capital
deficit, all other partners must contribute, in the
proportion to which those partners share
partnership losses, the additional amount
necessary to pay the partnership’s obligations.
16-19
 Statement of partnership realization and

liquidation
 May be prepared to guide and summarize the
partnership liquidation process.
 Often called a “statement of liquidation.”
 It presents, in worksheet form, the effects of the
liquidation on the partnership balance sheet
accounts.
16-20
Practice Quiz Question #1
The difference between disassociation and
dissolution is:
a. Dissolution relates to adding a powder to a
liquid.
b. Disassociation relates to the withdrawal of
a partner and dissolution relates to the
winding up of a partnership.
c. Dissolution relates to the dissolving of a
partner’s personal assets.
d. Dissolution relates to the withdrawal of a
partner and disassociation relates to the
winding up of a partnership.
16-21
Learning Objective 2
Make calculations related to

lump-sum partnership
liquidations.
16-22
The Liquidation Process
1. Non-cash assets
converted to cash.
2. Creditors paid to
the extent possible.
3. Remaining funds
(if any) distributed
to partners.
16-23
Group Exercise 1: Lump-sum Liquidation
Partners Larry, Curly, and Moe share profits and losses in the ratio of 3:2:1,
respectively. The partners voted to liquidate the partnership when its assets,
liabilities, and capital were as follows:
Cash $ 7,000 Liabilities $24,000
Non-cash assets 90,000 Loan, Larry 5,000
Loan, Moe 10,000
Capital, Larry 22,000
Capital, Curly 27,000
__________ Capital, Moe 9,000
Total Assets $97,000 Total Liabilities & Equity $97,000
Assume that all the noncash assets were sold for $42,000 and that all cash
was distributed to outside creditors and partners.
REQUIRED
Prepare a statement of realization and liquidation.
16-24
Group Exercise 1: Lump-sum Liquidation
Partners Larry, Curly, and Moe share profits and losses in the ratio of 3:2:1,
Non-cash assets 90,000 Loan, Larry 5,000
Loan, Moe 10,000
Capital, Larry 22,000
Capital, Curly 27,000
__________ Capital, Moe 9,000
Assume that all the noncash assets were sold for $42,000 and that all cash
was distributed to outside creditors and partners.
Priorities
• What to do with the loss on sale of non-cash assets?
• Pay outside debt.
• Pay inside debt.
• Distribute remainder to partners 16-25
Group Exercise 1: Solution
Larry, Curly, and Moe
Statement of Realization and Liquidation
Assets Outside Partners' Loans Partners' Capital
Cash Noncash Liabilities Larry Moe Larry Curly Moe
Beginning Balance 7,000) 90,000) (24,000) (5,000) (10,000) (22,000) (27,000) (9,000)
Proceeds $42,000)
 Book Value (90,000)
Loss $(48,000)
Larry (3/6) Curly (2/6) Moe (1/6)

($24,000) ($16,000) ($8,000)
16-26
Larry, Curly, and Moe
Assets Outside Partners' Loans Partners' Capital
Cash Noncash Liabilities Larry Moe Larry Curly Moe
Beginning Balance
Asset sale & loss

allocation
Subtotal
Right to setoff
Outside Distributions
Outside Loans
Partners' Loans
Partners' Capital
Ending Balance
16-27
Sharing of Gains & Losses During Liquidation
 Gains and losses incurred on the

realization of noncash assets
during liquidation are:
 allocated among the partners in the
profit-and-loss sharing ratio (such as
4:3:1).
 unless agreed to otherwise by the
partners.
16-28
Consequences of a Partner Being Personally
Insolvent
 A partner having a capital
account deficit may be able to
eliminate the deficit by
 capital contribution.
 setoff (against loans to the
partnership).
 A deficit that cannot be
eliminated is allocated to
 the remaining partners who have
positive capital balances (using their
P/L sharing ratio).
16-29
Consequences of a Partner Being Personally
Insolvent
 A partner that winds up
absorbing some or all of
another partner’s capital
deficit has
 legal recourse against that
partner.
 because that partner has
broken the terms of the
partnership agreement.
16-30
Sharing Profits and Losses: In The Ratio of Capital
Balances
 Sharing profits and losses in the ratio of

capital balances
 is one of the most important safeguards used in
partnership agreements.
 results in no partner ever having a capital
account deficit balance until the losses incurred
in liquidation exceed the total partnership capital.
 Thus, all partners go into a deficit position
simultaneously.
16-31
The Rule of Setoff
A deficit balance in a partner’s capital

account can be eliminated to the extent that
such partner has a loan to the partnership.
Note Payable Capital,

to Jones Jones
Balances before setoff $30,000) $(11,000)
Apply rule of setoff (11,000) 11,000)
Balances after setoff $19,000) $0)
16-32
How to Know You’ve Done it Right?
If you allocate losses correctly, the

remaining cash balances at the end should
be exactly enough to pay back partners’
capital balances.
Capital
=
16-33
Group Exercise 2: Lump-sum Liquidation—
Insolvent
Partners Huey, Dewey, and Louie share profits and losses in the ratio of 3:3:2,
NR from Louie 4,000 Loan, Dewey 17,000
Non-cash assets 82,000 Capital, Huey 11,000
Capital, Dewey 13,000
Capital, Louie 12,000
• All the noncash assets of $82,000 were sold for $46,000.
• Louie was personally insolvent and unable to contribute any cash.
• Huey and Dewey were both personally solvent and able to eliminate any
deficits in their capital accounts through setoff or contribution.
• All cash was distributed to outside creditors and partners.
REQUIRED
Prepare a statement of realization and liquidation.
16-34
Huey, Dewey, and Louie
Assets Outside Part Loan Partners' Capital
Cash Noncash Liabilities Dewey Huey Dewey Louie
Beginning Balance 2,000) 86,000 (35,000) (17,000) (11,000) (13,000) (12,000)
16-35
Beginning Balance 2,000) 86,000 (35,000) (17,000) (11,000) (13,000) (12,000)

NR Write-off (4,000) 4,000)
Proceeds $46,000)
 Book Value (82,000)
Loss $(36,000)
Huey (3/8) Dewey (3/8) Louie (2/8)

($13,500) ($13,500) ($9,000)
16-36
Beginning Balance
NR Write-off
Asset sale & loss allocation
Subtotal
Write off Louie
Subtotal
Right to setoff
Huey contribution
Outside Distributions
Outside Loans
Partners' Loans
Ending Balance
16-37
Which of the following statements is true

about a lump-sum partnership liquidation?
a. Lump-sum liquidations take place over an
extended period of time.
b. Lump-sum liquidations can only take place
when the partnership has two partners.
c. Lump-sum liquidations relate mainly to
corporations.
d. Lump-sum liquidations take place all at
once or over a short period of time .
16-38
Learning Objective 3
Make calculations related to

installment partnership
liquidations.
16-39
Installment Liquidations: Priority In Distributing
Cash
 What is an installment liquidation?

 Assets are sold over time.
 Cash is distributed throughout the liquidation
process.
 Who gets priority in each round?
 No cash distributions are made to partners
until outside creditors have been paid in full.
 This holds true for both:
 Lump-sum liquidations.
 Installment liquidations.
16-40
The Statement of Realization and Liquidation
 The statement of realization and

liquidation
 is an historical statement.
 portrays what actually happened in the past
(during the liquidation process).
 is usually prepared in a lump-sum liquidation
(or as a “look back” at an installment
liquidation).
16-41
The Schedule of Safe Payments
 The schedule of safe payment

 is a pro forma (what if) statement for
installment liquidations.
 portrays what could happen in the future
—on a worst-case basis.
 Must prepare a new schedule for
each $ distribution
16-42
Cash Distribution Plan
 The cash distribution plan

 is a pro forma (what if) statement for
installment liquidations.
 is only prepared once at the beginning
of the winding up process.
16-43
Installment Liquidations: “Inside” versus
“Outside” Loans
 Some people seem to have a “fixation” on “equality”
between “inside” and “outside” debt.
 Strictly speaking, the UPA of 1997 says they are equal.
 In practice, partners frequently need to subordinate their debt
to existing “outside” debt.
 We will assume subordination in all in-class examples.
 It makes sense to make payments in the following order:
 Outside debt
 Inside debt
 Capital
 However, this order can result in inequities.
 Partner gets payment for loan and spends it.
 Partner can’t make up deficit balance.
 Other partners have to cover the deficit.
 The legal doctrine of setoff effectively treats loans as
additional capital investments to avoid inequities.
16-44
Thoughts on Installment Liquidations
 Don’t sell everything at once … BE PATIENT!

 You can’t just start handing out cash!
 You need a plan to ensure FAIRNESS!
 Two types of “plans” for distributing cash:
1. Cash Distribution Plan
(beginning of the process)
2. Schedule of Safe Payments
(with each distribution)
 Ensures that no one gets too much cash too soon.
16-45
Group Exercise 3: Distributing Available $ to
Partners
The partnership of Snap, Crackle, and Pop is in the process of being liquidated.
The trial balance immediately after the sale of a portion of the noncash assets
and full payment to outside creditors is as follows:
Cash $27,000
NR from Crackle 13,000
Non-cash assets 42,000
Loan, Snap $12,000
Capital, Snap 10,000
Capital, Crackle 19,000
Capital, Pop __________ 41,000
Totals $82,000 $82,000
Snap wants the available cash distributed to her to pay off her loan—she cites
Section 807 of the UPA, which states that partners’ loans have priority over
partners’ capital. Pop wants the cash distributed to him because he has the
largest capital investment. Crackle believes that it should be distributed
equally, which is how profits and losses are shared.
REQUIRED
1. Evaluate the position of each partner.
2. Who should receive the $27,000 available cash?
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets having a
book value of $30,000 are sold for $9,000, who receives the $9,000?
16-46
PART 1
 Snap quotes the UPA properly but does not consider the rule
of setoff, which essentially treats a partner’s loan as a capital
contribution in determining how cash should be distributed
to partners.
 Pop’s position indirectly states that he is most able to bear
losses and the cash should be distributed considering this
ability. This general approach is used in distributing cash to
partners.
 Crackle’s position is without merit. The distribution of cash in
liquidation is not related to the manner of sharing profits and
losses.
16-47
Schedule of Safe Payments
 No cash to partners until AFTER all outside

creditors are paid in full.
 Before any cash goes to the partners, consider
two hypothetical worst-case scenarios.
 All non-cash assets worthless (distribute losses)
 Assume partners absorb any deficits
 Cash only goes to partners with positive

balances.
 It means they have enough excess invested to absorb
even the worst possible scenarios!
16-48
Group Exercise 3 Continued: Schedule of Safe
Payments
The partnership of Snap, Crackle, and Pop is in the process of being
liquidated. The trial balance immediately after the sale of a portion of the
noncash assets and full payment to outside creditors is as follows:
Cash $27,000
Loan, Snap $12,000
Capital, Pop __________ 41,000
Totals $82,000 $82,000
Snap wants the available cash distributed to her to pay off her loan—she
cites Section 807 of the UPA, which states that partners’ loans have priority
over partners’ capital. Pop wants the cash distributed to him because he has
the largest capital investment. Crackle believes that it should be distributed
REQUIRED
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets having
a book value of $30,000 are sold for $9,000, who receives the $9,000?
16-49
PART 2
 The two worst-case assumptions are needed to determine
who gets the cash. A schedule of safe payments follows:
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance
Preliquidation capital balance
Preliquidation loan from partnership
First worst-case assumption:

Assume full loss of all non-cash assets
Subtotal
Second worst-case assumption:
Assume Crackle's deficit is absorbed by
other partners
Cash to be distributed to Snap and Pop
16-50
Group Exercise 3 Continued: Schedule of Safe
Payments
Cash $27,000
NR from Crackle 13,000 Proceeds $9,000)
Loan, Snap $12,000  Book Value (30,000)
Loss $(21,000)
Capital, Pop __________ 41,000
Totals $82,000 $82,000
REQUIRED
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets
having a book value of $30,000 are sold for $9,000, who receives the $9,000?
16-51
PART 3
Snap Snap Crackle Pop

Loan Capital Capital Capital
Beginning Balances $12,000) $10,000) $19,000) $41,000)
First Cash Distribution

Updated Balances
Allocation of loss on sale

Updated Balances
16-52
PART 3
 Beginning Balances are after the above cash distribution of $27,000 and
after the $21,000 loss on the sale of noncash assets for $9,000.
Partner
Snap Crackle Pop
Preliquidation loan balance
Preliquidation capital balance
Preliquidation loan from partnership

Subtotal
Assume Crackle's deficit is absorbed by other
partners
Cash to be distributed to Snap and Pop
16-53
Installment Liquidations: Different Strokes For
Different Folks
 The amount to be distributed to each
partner at any point in time can be
determined by preparing either of the
following items:
 Schedules of safe payments at each cash
distribution date.
 Will have to be done several times.
 A cash distribution plan at the beginning of the
liquidation process.
 Need be done only once.
16-54
Installment Liquidations
 The effect of distributing cash to partners

based on either
(a) schedules of safe payments or
(b) cash distribution plans
is to bring the capital balances into the
profit-and-loss sharing ratio.
16-55
Installment Liquidations: Loss Absorption
Potential
 Conceptually, the first cash distribution
to partners goes to that partner who
has the highest loss absorption
potential (LAP).
 This is not necessarily the partner who has the
highest capital balance.
16-56
Potential—Calculating
 The loss absorption potential (LAP) of

each partner is calculated by
 dividing the partner’s capital balance by his or
her profit-and-loss sharing percentage.
Capital balance, Jones $80,000

= $400,000
Jones’ P/L sharing percentage 20%
Loss
Absorption
Potential
16-57
Potential—Loans “To”
 In calculating a partner’s loss absorption
potential, a partner’s loan to the partnership
is added to the partner’s capital balance.

PLUS
Note payable to Jones 10,000
Total $90,000
= $450,000
Loss
Absorption
Potential
16-58
Potential—Loans “From”
 In calculating a partner’s loss absorption
potential, a partner’s loan from the
partnership is subtracted from the partner’s
capital balance.
MINUS
Note payable from Jones (5,000)
Total $75,000
= $375,000
Loss
Absorption
Potential
16-59
Potential—Implications
 Consequences of Having the Highest Loss
Absorption Potential:
He or she will be:
 The first partner to receive cash.
 The partner that could suffer the greatest inequity
in relation to his or her capital balance.
It is NOT a good thing to have

the highest loss absorption potential.
16-60
Group Practice: Loss Absorption Potential
Cash $27,000
Loan, Snap $12,000
Capital, Pop __________ 41,000
Totals $82,000 $82,000
REQUIRED
 Calculate the loss absorption potential for Snap, Crackle, and Pop.
16-61
Snap Crackle Pop

Capital $10,000) $19,000) $41,000)
Loan to (from) partnership
Profit/loss sharing ratio

Loss absorption potential
Based on these calculations, who should receive cash first?
16-62
In liquidation, cash distributions to

partners are determined based on:
a. Who has the highest capital balance.
b. How profits and losses are shared.
c. Partners’ loans to the partnership
having priority over partners’ capital
balances.
d. The marshalling of assets principle.
e. The rule of setoff.
f. None of the above.
16-63
Group Exercise 3 Continued: Cash Distribution
Plan
Cash $27,000
Loan, Snap 12,000
Capital, Pop __________ 41,000
Totals $82,000 $82,000
REQUIRED
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets
having a book value of $30,000 are sold for $9,000, who receives the $9,000?
16-64
Cash Distribution Plan: Snap, Crackle, and Pop
First $27,000 Distribution Next $9,000 Distribution
Snap Pop $ 27,000) Snap Pop $ 9,000)

Loss Absorption Potential Snap Snap Crackle Pop
Snap Crackle Pop Loan Capital Capital Capital
12,000 10,000 6,000 41,000 )
Loss absorption potential 66,000 18,000 123,000
Cash distributed to Pop
Cash distributed to Pop/ Snap
Priorities:
16-65
Group Exercise 4: Installment Liquidation
Partners Potter, Granger, and Weasley share profits and losses in the ratio
2:1:1, respectively. The partners voted to liquidate the partnership when
its assets, liabilities, and capital were as follows:
Cash $ 25,000
NR from Potter 15,000
Other assets 210,000
Liabilities $ 70,000
Loan, Granger 18,000
Capital, Potter 44,000
Capital, Granger 10,000
Capital, Weasley __________ 108,000
Totals $250,000 $250,000
The partnership will be liquidated over a long period of time. Cash will be
distributed to the partners as it becomes available. The first sale of
noncash assets having a book value of $110,000 realized $80,000.
REQUIRED
 Determine how the available cash should be distributed to the partners after this
first sale.
16-66
Group Exercise 4: Schedule of Safe Payments
Step 1: Sale of Non-cash Assets
Proceeds
 Book Value, non-cash assets sold
Realized loss
Remaining non-cash assets
Step 2: Payment of Outside Liabilities

Original cash on hand
+ Sale proceeds
Total cash available for debt payment
 Payment of outside liabilities
Cash available for distribution to partners
16-67
Step 3: Update Capital Balances

Potter Granger Weasley
Original balance 44,000) 10,000) 108,000)
 Loss allocation from asset
sale
Updated Balance
16-68
Loan to partnership
Pre-distribution capital balance
Loan from partnership
Equivalent Capital
Subtotal
Assume deficits are absorbed by Weasley
Cash to be distributed to Weasley
16-69

Capital $44,000) $10,000) $108,000)
Loan to (from) partnership
Profit/loss sharing ratio

Loss absorption potential
Based on these calculations, who should receive cash first?
16-70
Group Exercise 4: Cash Distribution Pl
First $35,000 Distribution
Potter Granger Weasley $ 35,000)

50% 25% 25%
Loss Absorption Potential Granger Potter Granger Weasley
Potter Granger Weasley Loan Capital Capital Capital
18,000 29,000 10,000 108,000 )
Loss absorption potential 58,000 112,000 432,000
Cash distributed to Weasley
Cash distributed to Weasley

and Granger
Priorities:
16-71
Which of the following is NOT true about the
schedule of safe payments and cash distribution
plans?
a. Cash distribution plans are prepared multiple
times during the liquidation as cash comes in.
b. Cash distribution plans are prepared at the
beginning of the liquidation.
c. Schedules of safe payments are prepared
multiple times during the liquidation as cash
comes in.
d. The allocation of assets to partners is the
same under the cash distribution plan and
schedule of safe payments.
16-72
Conclusion
The End
16-73

Partnership Liquidation

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Partnership Liquidation

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Chapter 5

The liquidation of a partnership

Realization. The conversion of non-cash assets

The assets of a general partnership shall be applied in the

1. First, those owing to outside creditors,

Distribution of Separate Properties of an Insolvent Partner

The following methods may be used when a partnership is

1. Lump-sum method. Under this method, all non-cash

2. Installment method. Under this method, realization of

The procedures below may be followed in lump-sum liquidation:

 Events that cause dissolution and

 Winding up and liquidation begins after

 Loans to/from partners

 Deficits in partners’ capital accounts

 Statement of partnership realization and

Make calculations related to

Larry (3/6) Curly (2/6) Moe (1/6)

Asset sale & loss

 Gains and losses incurred on the

 Sharing profits and losses in the ratio of

A deficit balance in a partner’s capital

Note Payable Capital,

If you allocate losses correctly, the

Beginning Balance 2,000) 86,000 (35,000) (17,000) (11,000) (13,000) (12,000)

Beginning Balance 2,000) 86,000 (35,000) (17,000) (11,000) (13,000) (12,000)

Huey (3/8) Dewey (3/8) Louie (2/8)

Which of the following statements is true

Make calculations related to

 What is an installment liquidation?

 The statement of realization and

 The schedule of safe payment

 The cash distribution plan

 Don’t sell everything at once … BE PATIENT!

 No cash to partners until AFTER all outside

 Cash only goes to partners with positive

First worst-case assumption:

Snap Snap Crackle Pop

First Cash Distribution

Allocation of loss on sale

First worst-case assumption:

 The effect of distributing cash to partners

 The loss absorption potential (LAP) of

Capital balance, Jones $80,000

Capital balance, Jones $80,000

It is NOT a good thing to have

Snap Crackle Pop

Loan to (from) partnership

Profit/loss sharing ratio

Based on these calculations, who should receive cash first?

In liquidation, cash distributions to

Cash Distribution Plan

Cash distributed to Pop/ Snap

Remaining non-cash assets

Step 2: Payment of Outside Liabilities

Cash available for distribution to partners

Step 3: Update Capital Balances

Cash to be distributed to Weasley

Potter Granger Weasley

Loan to (from) partnership

Profit/loss sharing ratio

Based on these calculations, who should receive cash first?

Cash Distribution Plan

Cash distributed to Weasley

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