Notes to Partnership Liquidation

Partnership Liquidation

1. Conversion of non-cash assets to cash (Sale of NCA)

2. Pay liquidation expenses
3. Pay outside creditors
4. Pay INTEREST of partners

*Before a partner receives his payment, he must absorb Total Gain/Loss:

a. G/L on sale of Realization of Non-cash Assets (Inc: Actual Liquidation Expenses)
b. Maximum Possible Loss (MPL) for installment liquidation
i. Book value of Unrealized Non-cash Assets
ii. Cash withheld for future liquidation expenses & possible
unrecorded liabilities
c. Deficiency

SAFE PAYMENT SCHEDULE

A B C TOTAL

Capital Balances before Liquidation xxx xxx xxx xxx

Add/Less: Loan to/(from) partnership x(x) x(x) x(x) x(x)
Total Interest before Realization xxx xxx xxx xxx
Share in G/L on Realization x(x) x(x) x(x) x(x)
Total
Gain/Loss Share in the MPL(if, installment) (xx) (xx) (xx) (xx)
Total Balance after Realization xxx xxx xxx xxx

Contribution of Partner to cover xx xxx xxx xxx

deficiency(If Solvent)
Absorption of Deficiency(1ST, 2ND, and so on) (xx) (xx) (xx) (xx)
Amount received by each partner xxx xxx xxx xxx

*Total Cash available for the partners

Cash beginning balance xxx
Proceed of realization xxx
Payment of Liquidation Expenses (xx) EQUAL
Payment outside creditors (xx)
Total cash withheld for:
Future liquidation/future expenses (xx)
Unpaid balance of liability (xx)
Total amount available for the Partners xxx

Proceeds from realization of N-cash assets xxx *For Installment liquidation:

Less: Actual Liquidation Expenses (xx) Book value of Unrealized Non-cash Assets xxx
Book value of the asset sold (xx) Cash withheld for future liquidation expenses &
GAIN/(LOSS) ON REALIZATION XX(XX possible unrecorded liabilities xxx
MAXIMUM POSSIBLE LOSS (MPL) XXX
ILLUSTRATION:

The statement of financial position of ABC Co. before the liquidation is as follows:

Cash 40,000 Accounts Payable 60,000

Account Receivable 120,000 Payable B 40,000
Inventory 240,000 A, Capital (20%) 200,000
Equipment 800,000 B, Capital (30%) 300,000
Acc. Depreciation (200,000) C, Capital (50%) 400,000
Total Assets 1,000,000 Total Liabilities & Equity 1,000,000

Case 1: Lump-sum liquidation

Assuming the non-cash assets were realized as follows:
a. Of the total accounts receivable, only 100,000 were collected.
b. The entire inventory was sold for 140,000.
c. The equipment was sold for 500,000.
d. 4,000 liquidation expenses were paid.

Compute for the cash distributions to the partners.

Proceeds from realization of N-cash assets:
Collection on accounts receivable 100,000
Sale of inventory 140,000
Sale of equipment 500,000
Proceeds from Realization 740,000
Actual Liquidation Expenses (4,000)
Carrying amount of non-cash assets sold
(120K + 240K + 600K) (960,000)
Gain/Loss on Realization (224,000)

The final settlement to partners is computed as follows:

A B C TOTAL

Capital Balances before Liquidation 200,000 300,000 400,000 900,000

Add/Less: Loan to/(from) partnership 40,000
Total Interest before Realization 200,000 340,000 400,000 940,000
Share in G/L on Realization (44,800) (67,200) (112,000) (224,000)
Share in the MPL(if, installment) - - - -
Total Balance after Realization 155,200 272,800 288,000 716,000

Contribution of Partner to cover Deficiency(If Solvent) - - - -

Absorption of Deficiency(1ST, 2ND, and so on) - - - -
Amount received by each partner 155,200 272,800 288,000 716,000

Total Cash available for the partners

Cash beginning balance 40,000
Proceed of realization 740,000
Payment of Liquidation Expenses (4,000)
Payment outside creditors (60,000)
Total cash withheld for:
Future liquidation/future expenses -
Unpaid balance of liability -
Total amount available for the Partners 716,000