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Partnership Liquidation

The document discusses the process and key steps for liquidating a partnership. Liquidation involves converting partnership assets to cash, paying off creditors and distributing any remaining cash to partners based on their capital account balances. There are two main methods for liquidating a partnership - lump sum liquidation, where all assets are sold and a single payment is made to partners, or installment liquidation, where cash is distributed to partners over time as losses are realized. Key steps include realizing gains/losses on assets, paying expenses and liabilities, eliminating any partner deficiencies, and distributing cash first to loan accounts and then capital accounts.

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481 views2 pages

Partnership Liquidation

The document discusses the process and key steps for liquidating a partnership. Liquidation involves converting partnership assets to cash, paying off creditors and distributing any remaining cash to partners based on their capital account balances. There are two main methods for liquidating a partnership - lump sum liquidation, where all assets are sold and a single payment is made to partners, or installment liquidation, where cash is distributed to partners over time as losses are realized. Key steps include realizing gains/losses on assets, paying expenses and liabilities, eliminating any partner deficiencies, and distributing cash first to loan accounts and then capital accounts.

Uploaded by

Japs
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Partnerships Liquidation

*Process of converting business assets into cash and making settlement with creditors.

*Winding up the business usually by selling the assets, paying liabilities, and distributing the
remaining cash to the partners.

*Realization – sale of assets.

*Accounts must be adjusted and closed, and the resulting Income or Loss in the final period is
transferred to the capital accounts of the partners.

Basic objective of liquidation: To convert the partnership assets to cash (Realization), to pay off
partnership obligations and to distribute cash and any unrealized assets to the partners.

- Computation of gains or losses on realization of assets.


- Payment of liabilities
- Distribution of cash to the partners

Rules that should be followed in the liquidation of the partnership:

1. Always allocate and close gains or losses to the partners’ capital accounts prior to
distributing any to the partners
2. Partners entitled to an amount depending upon his capital contribution (effecting
drawings, share in P&L before liquidation, G&L on realization, balance of loan account

Each partners will receive in the final settlement the amount of his equity in the business.

Deficiency (debit balance) must be paid to the partnership otherwise fellow partners would bear
more than their contractual share in losses

Cash distribution schedule:

1. Outside creditors
2. Partners for loan accounts (Supported by legal doctrine called right of offset)
3. Partners for capital accounts

Right of offset – law permits the exercise of the right of offset by part or all of his loan against
the capital deficiency.

Debit balance causes: losses incurred in the realization of assets or by prorata absorption of an
uncollectible deficit of partner whose combined capital and loan accounts is not enough to
absorb the partner’s share of total losses.

Methods of Partnership Liquidation

1. Lump-sum liquidation, Total Liquidation or Single Distribution


2. Installment Liquidation, Installment Distribution

For internal use only


Lump-Sum Liquidation

All assets are converted into cash within a very short time, outside creditors are paid, and a
single, lump-sum payment is made to the partners for their total interests.

Expenses of Liquidation: Expenses incurred such as legal, accounting, and advertising cost are
allocated to partners’ capital accounts in their P&L Ratio.

Procedures:

1. Realization of assets and distribution of Gain or Loss on realization among the partners
based on P&L ratio
2. Payment of Expenses
3. Payment of Liabilities
4. Elimination of Partner’s capital deficiencies
4.1 Exercise right of offset
4.2 If the deficient partner is solvent, invest cash to eliminate deficiency
4.3 If the deficient partner is insolvent, other partners absorb deficiency
5. Payment to partners
5.1 Loan Accounts
5.2 Capital Accounts

Partnerships Liquidation by Installment

Cash distributions to the partners are authorized even before all the losses that may be incurred
and charged against the partners are known.

Cash is only distributed to partners only if he has an excess credit balance in his partnership
interest after absorption of his share of the MAXIMUM POSSIBLE LOSS that may occur

Schedule of Safe Payments – safe installment payments to partners. Prepared as if no more cash
is forthcoming, either from sale of assets or from collection of deficiencies.

Steps:

1. Determine the total interest of each partner. (Capital interest and Loans)
2. Compute the total possible loss of the partnership to be absorbed by each partner.

When do you make a schedule of safe payments? – When the initial schedule for the first month
of installment resulted to a deficient partner as the ratio of the capital balances after the initial
cash distribution in the first month is not equal to the P&L ratio

For internal use only

For internal use only Partnerships Liquidation *Process of converting business assets into cash and making settlement w
For internal use only Lump-Sum Liquidation All assets are converted into cash within a very short time, outside credi

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