Ch. 16 Partnership Liquidation
This chapter deals with the termination of the partnership as a business
entity
1. Liquidation process for a solvent partnership (i.e., partnership
assets are greater than partnership liabilities):
 Noncash assets are converted into cash.
 Gains/losses and liquidation expenses are recognized and
allocated to partners’ capital accounts based on profit/loss
sharing agreement.
 Liabilities are settled.
 Cash is distributed according to partners’ final capital
balances.
o Partners with debit capital balance are obligated to
use their personal assets to settle their partnership
obligations.
o If the partners with debit balances have inadequate
personal assets, the partners with credit balances
assume losses based on their loss sharing ratio.
o Partners’ loan balances should be offset against
capital balances in determining distribution to
partners.
2. Partnership Liquidation Statement
 A summary of transactions and balances during the liquidation
stage
3. 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.

In preparing the schedule, it is assumed that”
o All partners are personally insolvent.
o All noncash assets have no cash value and are
considered losses.
o Some cash may be held to cover liquidation expenses
and contingencies. This amount is considered a loss
in preparing safe payment schedule.
Four steps to prepare a safe payment schedule:
Step 1. Determine each partner’s equity, which is each
partner’s capital plus loans to the partnership and less loans
from the partnership.
Step 2. Possible losses from noncash assets and contingency
cash are allocated to the partners according to profit/loss
sharing ratios.
Step 3. Any negative partner equity is viewed as a loss and is
allocated to partners with credit equity balance according to
their relative profit/loss sharing ratios.
Step 4. Repeat step 3 until there are no negative equity
balances. At that point, the amount show for partners with
credit equity balance will equal the cash available for
distribution.
o
Once all partners are included in the cash distribution, future
distribution will be in the profit sharing ratios and no
additional safe payment schedules are needed.
4. Cash Distribution Plan
o
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.
Three steps:
Step 1. Ranks partners by their vulnerability ranking (each
partner’s equity is divided by his/her profit sharing ratio).
This is the maximum loss that will wipe a partner’s equity
balance.
Step 2. Prepare a schedule of assumed loss absorption based
on vulnerability rankings.
o The schedule begins with partners’ preliquidation
equity balances
o Charges each partner’s equity with his/her share of
the loss that would exactly eliminate the most
vulnerable partner’s equity.
o Charges the remaining partners’ equity with their
share of loss that would eliminate the next most
vulnerable partner’s equity.
o Repeat this process until the all but the least
vulnerable partner’s equity is reduced to zero.
Step 3. Prepare a cash distribution plan which distribute cash
according to the following order:
o The first cash available goes to nonpartner
liabilities.
o Next, the least vulnerable partner will receive the
amount that align his/her equity with next least
vulnerable partner.
o Repeat this process until all partners are
participating in the distribution.
o Remaining distribution will be in the profit/loss
sharing ratio.