Name: Cristina Marie Alvarez

Subject: Advanced Accounting 1

SUMMARY OF CHAPTER 5: PARTNERSHIP INSTALLMENT LIQUIDATION

Installment Liquidation

- is a process of realizing some assets, paying creditors, paying the remaining

available cash to partners, realizing additional assets, and making additional cash
payments to partners.

Basic Principles in Installment Liquidation

1. Distribute no cash to the partners until all liabilities and actual liquidation
expenses have been paid.

2. Distribute cash
a. Schedule of cash/safe payments ( Schedule to Accompany Statement of
Liquidation).

o Assume a total loss on all remaining noncash assets, and provide all
possible losses, including potential liquidation costs and unrecorded
liabilities.

o Assume that partners with a potential capital deficit will be unable to

pay anything to the partnership (assumed to be personally insolvent).

Result: Cash is distributed only to the partners who have capital balances
sufficient to absorb their share of:

 The maximum potential loss on noncash assets, and

 Any capital deficiencies that may result to other partners as a result
of a maximum loss on noncash assets.

When installment payments have proceeded to the point that the partner’s capital
and loan account balances (capital) correspond with the profit and loss ratio, all
subsequent payments may be made in that ratio, because each partner’s capital will be
sufficient to absorb an appropriate share of the maximum possible remaining loss.
 b. Cash payment priority program ( cash distribution plan/ pre-distribution
plan)

o Ranking the partners

 Distribution to highest-ranking partner. Distribute sufficient cash to

partner so that his equity is brought into profit and loss sharing ratio
with the next highest ranking partner.

 Distribute next highest-ranking partner(s). Distribute sufficient cash

to partners in their respective profit and loss ratio so that their equity
balances are brought into their profit and loss sharing ratio.

o Vulnerability Rankings
- A partner with the lowest absorption abilities is considered to be the
most vulnerable to partnership losses, In other words, if the maximum
absorbable loss will be attained, it consumes all of the partner’s capital,
thus no amount be given to the partner concerned.

Following are the limitations of the cash priority program:

1. The program is operable only after outside creditors have been paid in full;
2. The program reflects only the order in which cash distributions to the partners will
be made if cash is available to distribute to the partners; and
3. The sequence of distributing cash in the program coincides with the sequence
that would result if cash were distributed using the schedule of safe payments.

Steps in the development of cash payment priority program:

1. Determine the total interest/equity of each partner by combining the balance

in the partner’s capital plus or minus the balance (if any) of a loan made by a
partner to the partnership or a loan made by the partnership to a partner.
2. The total interest/equity of each partner is divided by his or her profit sharing
ratio to identify the maximum loss that the partner could absorb without
reducing his or her equity below zero.
3. Compute the amount of cash each partner is to receive as it becomes
available for distribution
4. The monthly schedule of payment to partners should be prepared every time
cash is available using the cash priority program as a basis.