AdvAcctg Reviewer

Partnership Liquadation
Liquidation
termination of business, winding up of affairs, may be voluntary or involuntary.
1. assets are converted into cash,
2. liabilities are settled, and
3. any remaining amount is distributed to the owners.
Realization, conversion of assets into cash.

Liquidation, settlement of claims of creditors and owners.
Methods of lliquidation
1. Lump-sum liquidation
non cash assets are sold simultaneously or within a very short period of time.
settle first the liabilities
any remaining amount is paid to partners on one-time or single payment.
assets are sold on a "package deal" basis.
2. Installment Liquidation
all NCA takes time before converted into cash.
partner's claims are settled on an installment basis as cash becomes available,
but only after all partnership liabilities are fully settled.
Safe Payment Schedule and Cash Priority Program

its purpose is to prevent overpayments to partners during installment method
Safe Payment Schedule (SSP)

shows how much cash can be "safely" paid to the partners during installment
liquidaiton, which avoids any overpayments.
application of the same concepts:

a. unsold non-cash assets are treated as loss; and
b. expected fututre liquidation costs and potential unrecorded liabilities
are recognized immediately as losses.
"maximum loss possible" sum of (a) and (b)
Cash Priority Program (CPP)

determines which partner shall be paid first and which partner shall be
paid last, after all the liabilities are settled.
ranks partners according to their maximum loss absorption capacity.
highest maximum loss absorption paid first
lowest maximum loss absorption paid last
application of the same concepts:
a. unsold non-cash assets are treated as loss; and
b. expected fututre liquidation costs and potential unrecorded liabilities
are recognized immediately as losses.
MLAC = total partner's interest in the partnership/ partner's P/L percentage
maximum loss absorption capacity
Settlement of claims
1. outside creditors
2. inside creditors (payables to partners)
3. owners' capital balances
Right of offset
a loan payable to a partner has a higher priority over the partner's capital balance.
the legal right of offset allows a deficit in apartner's capital account to be offset by
a loan payable to that partner.
Illustration 1: Lump-sum Liquidation vs Installment Liquidation
Case 1: Lump-sum Liquidation
Fact pattern: On January 1, 20x1, the partners of ABC Co. decided to liquidate
their partnership.
a. 50,000 was collected on the accounts receivable; the balance is uncollectible.
b. 70,000 was received for the entire inventory.
c. the equipment was sold for 250,000.
d. 2,000 liquidation expenses were paid.
cash NCA a/p payable, b

20,000.00 480,000.00 30,000.00 20,000.00
1. NCA sold 368,000.00 (480,000.00)

388,000.00 0.00 30,000.00 20,000.00
2. paymets outside cr (30,000.00) (30,000.00)

358,000.00 0.00 0.00 20,000.00
3. paymets inside cr (20,000.00) (20,000.00)

338,000.00 0.00 0.00 0.00
4.payments to partners (338,000.00)
0.00 0.00 0.00 0.00
Case 2: Installment Liquidation - Safe payments schedule

P&L ratio os 60%-25%-15%
assume NCA are partially sold in january at book value 1,000,000.00
in feb, remaining NCA is sold for 300,000.00
all partners are solvent
0.60
cash NCA liab t, cap
100,000.00 1,850,000.00 700,000.00 900,000.00
1. NCA sold - jan 1,000,000.00 (1,000,000.00)

1,100,000.00 850,000.00 700,000.00 900,000.00

400,000.00 850,000.00 0.00 900,000.00
3. cash distri. - 1st payment (400,000.00) (380,000.00)

0.00 850,000.00 0.00 520,000.00
4. NCA realize losses, feb 300,000.00 (850,000.00) (330,000.00)

300,000.00 0.00 0.00 190,000.00
5. distribution of rem cash (300,000.00) (190,000.00)

0.00 0.00 0.00 0.00
Case 3: Installment Liquidation - Cash Priority Program

P&L ratio os 60%-25%-15%
assume NCA are partially sold in january at book value 500,000.00
in feb, remaining NCA is sold for 150,000.00
all partners are solvent
0.60
cash NCA liab t, cap
50,000.00 925,000.00 350,000.00 450,000.00
1. NCA sold - jan 500,000.00 (500,000.00)

550,000.00 425,000.00 350,000.00 450,000.00
200,000.00 425,000.00 0.00 450,000.00
3. cash distri. - jan (200,000.00) (190,000.00)

0.00 425,000.00 0.00 260,000.00
4. NCA realize losses, feb 150,000.00 (425,000.00) (165,000.00)

150,000.00 0.00 0.00 95,000.00
5. distribution of rem cash (150,000.00) (95,000.00)

0.00 0.00 0.00 0.00
Lump-sum Liquidation vs. Installment Liquidation
Lump-sum Liquidation Installment Liquidation

1. all of the non-cash asset are converted to 1. some of the non-cash assets are
cash. converted to cash
2. the total gain or loss on the sale is
allocated to the partner's capital balances
based on their P/L ratios. 2. the carrying amount of any unsold non-
cash asset is considered as a loss. this is
allocated to the partners' capital balances
based on their P/L ratios.
3. actual liquidation exenses are allocated to

the partners' capital balances based on their
P/L ratios. 3. actual and estimated future liquidation
expenses are allocated to the partners'
capital balances based on their P/L ratios.
4. the liabilities to outside creditors are fully 4. the liabilities to outside creditors are
settled. partially or fully settled.
5. the liabilitiese to inside creditors are fully
settled. 5. the liabilities to inside creditors are
partially or fully settledbut only after the
full settlement of the liabilities to outside
creditors.
6. any remaining cash is distributed to the

owners in full settlement of their interests.
6. if boht the liabilities to outside and
inside creditors are fully settled, any
remaining cash set aside for future
liquidation expenses is distributed to the
owners as partial settlement of their
interests.
Assets liab & equity
N
cash 20,000.00 a/r 30,000.00 C
A
a/r 60,000.00 payable, b 20,000.00 a/r
inventory 120,000.00 a, cap 100,000.00 inv
equip, net 300,000.00 b, cap 150,000.00 equ
500,000.00 c, cap 200,000.00
500,000.00
0.20 0.30 0.50

capital, a capital, b capital, c
100,000.00 150,000.00 200,000.00
(22,400.00) (33,600.00) (56,000.00)

77,600.00 116,400.00 144,000.00
77,600.00 116,400.00 144,000.00
77,600.00 116,400.00 144,000.00

(77,600.00) (116,400.00) (144,000.00)
0.00 0.00 0.00
0.25 0.15
o, cap y, cap
200,000.00 150,000.00
200,000.00 150,000.00 0.60 0.25 0.15

t, cap o, cap y, cap
cap, beg 900,000.00 200,000.00 150,000.00
200,000.00 150,000.00 loans
900,000.00 200,000.00 150,000.00
(20,000.00) res int. 1
200,000.00 130,000.00 850,000 loss (510,000.00) (212,500.00) (127,500.00)
390,000.00 (12,500.00) 22,500.00
(137,500.00) (82,500.00) res int. 2
62,500.00 47,500.00 o, cap def - o (10,000.00) 12,500.00 (2,500.00)
380,000.00 0.00 20,000.00
(62,500.00) (47,500.00) 400,000.00
0.00 0.00
0.25 0.15
o, cap y, cap t, cap o, cap y, cap
100,000.00 75,000.00 cap, beg 450,000.00 100,000.00 75,000.00
loans
450,000.00 100,000.00 75,000.00
100,000.00 75,000.00 partner's % 60% 25% 15%
750,000.00 400,000.00 500,000.00
t- 1st prio (250,000.00)
100,000.00 75,000.00 500,000.00 400,000.00 500,000.00
t- 1st prio, y- (100,000.00) (100,000.00)
(10,000.00) 2nd prio 400,000.00 400,000.00 400,000.00
100,000.00 65,000.00
(68,750.00) (41,250.00)
31,250.00 23,750.00
(31,250.00) (23,750.00)
0.00 0.00
sold
60,000.00 50,000.00
120,000.00 70,000.00
300,000.00 250,000.00
480,000.00 (2,000.00) liq exp.
368,000.00
t, cap o, cap y, cap
150,000.00
60,000.00 15,000.00
210,000.00 0.00 15,000.00
225,000.00
200,000 - January
150,000.00
40,000.00 10,000.00
190,000.00 0.00 10,000.00
200,000.00
150,000 - February
20,000.00 5,000.00
75,000.00 31,250.00 18,750.00

95,000.00 31,250.00 23,750.00
150,000.00

AdvAcctg Reviewer

Uploaded by

Copyright:

Available Formats

AdvAcctg Reviewer

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

AdvAcctg Reviewer

Uploaded by

Copyright:

Available Formats

Partnership Liquadation

Realization, conversion of assets into cash.

Safe Payment Schedule and Cash Priority Program

Safe Payment Schedule (SSP)

application of the same concepts:

Cash Priority Program (CPP)

Illustration 1: Lump-sum Liquidation vs Installment Liquidation

Case 1: Lump-sum Liquidation

cash NCA a/p payable, b

1. NCA sold 368,000.00 (480,000.00)

2. paymets outside cr (30,000.00) (30,000.00)

3. paymets inside cr (20,000.00) (20,000.00)

Case 2: Installment Liquidation - Safe payments schedule

1. NCA sold - jan 1,000,000.00 (1,000,000.00)

2. paymets outside cr (700,000.00) (700,000.00)

3. cash distri. - 1st payment (400,000.00) (380,000.00)

4. NCA realize losses, feb 300,000.00 (850,000.00) (330,000.00)

5. distribution of rem cash (300,000.00) (190,000.00)

Case 3: Installment Liquidation - Cash Priority Program

1. NCA sold - jan 500,000.00 (500,000.00)

3. cash distri. - jan (200,000.00) (190,000.00)

4. NCA realize losses, feb 150,000.00 (425,000.00) (165,000.00)

5. distribution of rem cash (150,000.00) (95,000.00)

Lump-sum Liquidation Installment Liquidation

3. actual liquidation exenses are allocated to

6. any remaining cash is distributed to the

0.20 0.30 0.50

(22,400.00) (33,600.00) (56,000.00)

77,600.00 116,400.00 144,000.00

77,600.00 116,400.00 144,000.00

200,000.00 150,000.00 0.60 0.25 0.15

75,000.00 31,250.00 18,750.00

You might also like