CHAPTER 4
Partnership
Liquidation
Group 9
What is
Liquidation?
Liquidation
It is the termination of business operations or
the winding up of affairs.
It is a process
by which:
1. Assets are converted into cash.
2. Liabilities are settled.
3. Any remaining amount is distributed to the
owners.
Conversion of non-cash assets into cash
The conversion of asset into cash is referred
to as "Realization" while the settlement of
claims of creditors and owners is referred
to as "Liquidation”
Methods of
Liquidation
LUMP-SUM LIQUIDATION
All the non-cash asset of the
partnership are sold
simultaneously, or within a short
period of time. And the proceeds
are used to settle first all the
liabilities and any remaining
amount is paid to the partners
under a lump-sum payment.
INSTALLMENT
LIQUIDATION
In most cases, it would take some time
before all the assets of a business are
converted into cash. Partners claims
are settled on an Installment basis as
cash becomes available, but only after
all partnership liabilities are fully
settled.
Settlement of claims:
The available cash of the partnership is used to
settle the claims in the following order of priority:
OUTSIDE CREDITORS
INSIDE CREDITOR
OWNERS CAPITAL BALANCES
Lump-sum vs. Installment
Illustration:
Lump-sum vs. Installment
Liquidation
Statement of
Liquidation
It is a financialreport that highlights the realization (receipts
from asset disposals) and the liquidation (settlement of
creditors’ and partners’ claims)of a partnership.
Marshalling Assets
one of the characteristics of a partnership is
“unlimited liability”. It is applied when
partnership and/or one or more partners are
insolvent.
Rules when applying the doctrine of
marshalling of assets:
1
2
Any available assets of the
partnership are used to
settle the partnership’s
liabilities.
In case the assets of the
partnership are insufficient
to pay all liabilities, the
general partners are
required to provide additional
funds from their personal
assets.
3
In case some partners are
insolvent, their capital
deficiency is offset to the
capital balances of the other
partners.
Non-cash asset
used as
payment for
claim
if a creditor or a partner agrees
to receive non-cash assets as
settlement of his claim, the noncash asset is considered sold at
the amount agreed to be debited
to the creditor's or partner's
claim
The difference between the carrying
amount of the non-cash asset and the
agreed settlement amount is treated
as either gain or loss to be allocated to
all the partner's capital balances.
Safe payment
schedule and Cash
priority program
The computations for
installment liquidation
may be presented in a
formal manner through
either.
1. Safe payments schedule
2. Cash priority program
The basic purpose of these
schedules is to prevent
overpayments to partners
during installment liquidation.
Safe payments schedule
shows how much cash can be “safely” paid to the
partners during installment liquidation, which avoids
any overpayment.
a. unsold non-cash assets are treated loss.
b. expected future liquidation costs and potential
unrecorded liabilities are recognized immediately as
losses.
A + B = Maximum loss possible
Cash priority program
Another method of ensuring that there are no
overpayments to the partners is by preparing a "cash
priority program" or "cash program." This schedule
determines which partner shall be paid first and which
partner shall be paid last, after all the liabilities are
settled. This schedule can be prepared even prior to the
sale of any asset.
The preparation of this schedule requires the application of the
same concepts as those we have applied earlier, namely:
a. Unsold non-cash are treated as loss; and
b. Expected future liquidation costs and potential unrecorded
liabilities are recognized immediately as losses.
When preparing a cash priority program is to
rank the partners according to their maximum
loss absorption capacity. The partner woth
the highest maximum loss absorption capacity
shall be paid first. The partner with the
lowest maximum loss absorption capacity is
computed as follows:
Maximum loss absorption capacity = Total
partner's interest in the partnership /
Partner's P/L percentage
Thank You!