BENDAÑA AFAR 04: PARTNERSHIP LIQUIDATION

Objectives of a Partnership During the Lump-Sum Liquidation Procedures

Liquidation Process
1. Realization of assets and distribution of gain
1. To convert the partnership assets to cash or loss on realization among the partners;
(realization of assets); and 2. Payment of expenses;
2. To pay off partnership obligations and to 3. Payment of liabilities;
distribute cash and any unrealized assets to 4. Elimination of partner's capital deficiencies
the individual partners.
5. Payment to partners of their loan account
balances; and
Order of Priority in the Distribution of Cash to
6. Payment to partners of their capital account
Parties
balances.
1. First, to outside creditors; 2. Second, to
partners for loan accounts; and Capital Deficiency
3. Third, to partners for capital accounts. It refers to a capital account with a debit or negative
balance.
Methods of Partnership Liquidation
1. Lump-sum liquidation/total liquidation/single Methods of Eliminating a Partner's Capital
distribution Deficiency
2. Installment liquidation or In order of priority:
installment distribution
1. If the deficient partner has a loan balance,
exercise the right of offset;
Lump-Sum Liquidation
2. If the deficient partner is solvent, make him
It is a method of partnership liquidation in which all
invest cash to eliminate his deficiency; or
the assets are converted into cash within a very
3. If the deficient partner is insolvent, let the
short time, outside creditors are paid, and a single,
other partners absorb his deficiency (based
lump-sum payment is made to the partners for their
on their profit/loss ratio).
total interests.

Going-out-of-Business Sale It is a sale made by a Methods of Determining Installment Cash

liquidating partnership in which its inventory is Payment to Partners Under Installment
marked doen well below normal selling price to Liquidation
encourage immediate sale. 1. Preparation of schedule of safe payments
2. Preparation of cash distribution program or
Components of a Partner's Interest in the cash priority program
Partnership
Preparation of Schedule of Safe Payments It is a
1. His capital account balance; and
method of determining installment cash payments to
2. His loan balance(s).
partners whereby cash is distributed to a partner
only if he has an excess credit balance in his
Treatment of Loss on Realization of Noncash
Assets Sold in the Liquidation Process partnership interest after absorption of his share of
the maximum possible loss that may occur (just to
Such loss shall be allocated among the partners
be safe).
(debit to capital accounts) based on their profit and
loss sharing ratio.
Components of Maximum Possible Loss
1. Total value of remaining (unrealized)
Treatment of Liquidation Expenses Incurred
noncash assets
(e.g., Legal and Accounting Expenses, Etc.)
2. Cash withheld to pay for anticipated
Such expenses shall be allocated among the
expenses and unrecorded liabilities that may
partners (debit to capital accounts) based on their
arise
profit and loss sharing ratio.
Computation of Safe Payments To Partners
Partner's interest - allocated possible loss = safe
payment.

Preparation of Cash Priority Program

It is a method of determining installment cash
payments to partners whereby such payments are
predetermined through a plan that is designed to
allow for the safe distribution of cash when it
becomes available.

Procedures to Prepare a Cash Distribution Program

1. Compute the loss absorption potential of each
partner;
2. Determine the priority of payments to partners;
and
3. Compute the amount of cash to be paid to the
partners under each priority.

Partner’s Loss Absorption Potential

Partner's interest / partner's profit and loss
percentage = partner's loss absorption potential

Rule in the Determination of Priority

of Payments to Partners
The partner who has the biggest loss absorption potential has
the first priority.

Amount of Cash to Be Paid to the Partners

Under Each Priority
Partner's excess loss absorption potential over the
partner whose priority is next to his * partner's profit
and loss share percentage = cash prioritized to be
paid to partner

Treatment of Any Amount in Excess of Total Priority

Payments Available for Cash Distribution
Such amount shall be paid to the partners according
to their profit and loss sharing agreement.