PARTNERSHIP

LIQUIDATION
Liquidation
 means winding up its activities, usually by selling
assets, paying liabilities, and distributing any
remaining cash to the partners. In some cases, the
partnership net assets may be sold as a unit; in other
cases, the assets may  be sold in installments, and
most or all of the cash received must be used to pay
partnership creditors.

 This process of liquidation may be completed quickly,

or it may require several months.
 Order of distribution of assets in a
liquidation of a partnership
1. Amounts owed to creditors other than partners
2. Amounts owed to partners other than for capital and profits
No distribution should be made to a partner with a negative capital balance

Partners’ loan balances should be offset against capital balances in

determining distributions to partners (see exception for a partner with a
debit capital balance)

A partner’s loan balance should be charged before his/her capital balance is

reduced by a distribution

3. Amounts due to partners with respect to their capital interests [All profits,
losses, and drawing balances are closed to capital accounts before any
distributions are made.]
Rules regarding Partnership Liquidation
1. The partners with debit balances are obligated to use their personal
assets to settle their partnership obligations.

2. If the partners with debit capital balances have inadequate personal

assets, the partners with credit balances assume losses equal to the
debit capital balances and share the losses in their relative profit and
loss sharing ratios.

3. If the partnership has a loan balance from an insolvent partner:

 No cash should be distributed for the loan without agreement from
all partners.

 A partner’s personal creditors have a prior claim on personal assets.

Steps in Partnership Liquidation
• Sell non cash assets for cash.

• Gains/losses and liquidation expenses are recognized

and allocated to partners’ capital accounts based on
profit/loss sharing agreement.

• Pay any liabilities of the partnership.

• Distribute the remaining cash to the partners

Sell non cash assets for cash

The non cash assets of 140,000 are sold for

100,000 making a loss on sale of 40,000.
Allocate loss on the sale to each
partner using the income ratio

Partner A Partner B Total

Opening
50,000 60,000 110,000
balances
Loss on sale -20,000 -20,000 -40,000
Total 30,000 40,000 70,000
Pay any liabilities of the partnership

After the sale of the non cash assets, the cash

available to the partnership is the opening
balance of 20,000 plus the cash from the
disposal of the non cash assets of 100,000
which equals a total of 120,000. This cash is
used to settle the liabilities of 50,000 leaving
remaining cash of 120,000 – 50,000 = 70,000 to
be distributed.
Distribute the remaining cash to the
partners
The remaining cash of 70,000 is paid out to the partners
using the capital ratio.

Liquidation of a Partnership – Distribution of remaining cash

Partner A Partner B Total
Opening balances 30,000 40,000 70,000
Remaining cash -30,000 -40,000 -70,000
Total 0 0 0
Distribute the remaining cash to the
partners
Partners with debit capital balance are obligated to use
their personal assets to settle their partnership obligations.

If the partners with debit balances have inadequate

personal assets, the partners with credit balances assume
losses based on their loss sharing ratio.

Partners’ loan balances should be offset against capital

balances in determining distribution to partners.
 PARTNERSHIP LIQUIDATION

1. Lump-sum Liquidation – single
distribution

2. Installment Liquidation – “piece meal

STEPS IN LUMP SUM LIQUIDATION
1. Realization of Non-cash Asset (Profit/Loss)

2. Payment of liabilities and liquidation expense

Liability

3. Elimination of deficiencies

4. Distribution
Exercise
The balance sheet of the Alba, Blick, and Calvo partnership on
January 1, 2021 (the date of partnership dissolution) was as
follows:
Cash $ 5,000 Liabilities $ 4,010
Other assets 10,000 Loan from Alba 500
Loan to Calvo 1,000 Alba, capital (20%) 990
Blick, capital(40%) 4,500
Calvo, capital(40%) 6,000
Total assets $ 16,000 Total liab./equity $ 16,000

In January, other assets with a book value of $10,000 were sold for $5,000 in
cash.

Required: Determine how the available cash on January 31, 2021 will be
distributed.
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.

 The liquidation continues until all noncash

assets have  been realized and all cash has
been distributed to partnership creditors and
partners.
INSTALLMENT LIQUIDATION

Cash beginning ₱xx  

Add: Proceed xx
Minus: Liabilities xx
Liquidation Expense xx
Distribution ₱xx
Safe Payment Schedule
 The purpose of safe payment schedule is to ensure
that cash distributed to partners will NOT have to be
returned to the partnership.

 A safe payment schedule should be prepared

whenever cash is distributed to partners after all
creditors’ claims are paid and before all partnership
assets are liquidated.

 Advance distribution must be approved by all

partners
Safe Payments

1. Determine the interest

2. Deduct the Maximum Possible Loss

3. Absorb deficiency

4. Distribute
Maximum Possible Loss (MPL)
Unsold Non-cash Asset ₱xx
Anticipated Liquidation
Expense (future LE) xx (Unpaid)
₱xx
Safe Payments Schedule Sample
Safe Payment Schedule
January 31, 2021
Possible Denver Elsie Fannie George
Losses (20%) (10%) (50%) (20%)
Partner’s equity at 1/1 $150,000 $80,000 $140,000 $78,000
January profit/loss
transactions:
Inventory sale (6,000) (3,000) (15,000) (6,000)
Land sale 20,000 10,000 50,000 20,000
Partner’s equity at 1/31 $164,000 $87,000 $175,000 $92,000
Possible losses—noncash $395,000 (79,000) (39,500) (197,500) (79,000)
Possible losses—contingent 20,000 (4,000) (2,000) (10,000) (4,000)
$ 81,000 $45,500 $(32,500) $ 9,000
Possible losses—Fannie (13,000) (6,500) 32,500 (13,000)
$ 68,000 $39,000 $0 $(4,000)
Possible losses—George (2,667) (1,333) 4,000
$ 65,333 $37,667 $0
CASH PRIORITY PROGRAM

 Cash distribution plan is a planning tool, and is

usually prepared at the early stage of
partnership liquidation.

 It informs partners at what stage they might

expect to receive distributions.
CASH PRIORITY PROGRAM
1. Determine the capital interest
2. Compute loss absorption balance
(LAB): Interest ÷ P/L Ratio
3. Equalize the LAB – deduct the second highest from
the highest until equal
4. Distribution: Difference in LAB × P/L Ratio

When to use Cash Priority Program?

 When the problem says, what amount should be
distributed to the partners
CASH PRIORITY PROGRAM SAMPLE
  A G J
Total Interest ₱100000 ₱  80000 ₱  75000
P/L % ÷ 50% ÷ 20% ÷ 30%
LAB ₱200000 ₱400000 ₱250000
Priority 1 150000 _______
₱200000 ₱250000 ₱250000
Priority 2 50000 50000
₱200000 ₱200000 ₱200000
Exercises
The balance sheet of the Nebe, Oak, and Pang partnership on
October 1, 2021 (the date of partnership dissolution) was as follows:
Cash $ 3,000 Liabilities $ 9,000
Other assets 33,000 Loan from Nebe 1,000
Loan to Oak 4,000 Nebe, capital (20%) 3,000
Oak, capital (30%) 6,000
Pang, capital (50%) 21,000
Total assets $ 40,000 Total liab./equity $ 40,000

In October, other assets with a book value of $15,000 were sold for
$17,000 in cash.

Required: Determine how the available cash on October 31, 2021

will be distributed.
Exercises
2021, all assets had been converted into cash and all partnership
liabilities were paid. The partnership balance sheet on August 1, 2021
(with partner residual profit and loss sharing percentages) was as
follows: Cash $ 50,000 Hanly, capital(30%) $ 4,000
Ide, capital(20%) (60,000) Jen, capital(50%)
106,000
Total assets $ 50,000 Total equity $ 50,000

The value of partners' personal assets and liabilities on August 1, 2021

were as follows:
Hanly Ide Jen
Personal assets $ 74,000 $ 120,000 $ 56,000
Personal liabilities 72,000 80,000 60,000

Required: Prepare the final statement of partnership liquidation.

END