4 - Partnership Liquidation

PARTNERSHIP
LIQUIDATION
DEFINITION
 Winding up of affairs: begins after dissolution and ends with the termination
of partnership activities
 Includes the following activities:
 Collection of receivables, including those from partners
 Conversion of noncash assets to cash (realization)
 Payment of liabilities
 Distribution of net balance to partners according to their capital interests
BASIC PROCEDURES IN LIQUIDATION
1. Sharing Gains and Losses
2. Advance planning when the partnership is formed
 Realization may cause a partner’s capital balance to result in a deficit, and that
partner may not be able to contribute further. The partner(s) who do(es) not have
deficit balance(s) must absorb the deficit.
3. Rule on set-off: Loan receivable from partner – deduct in partner’s capital
balance
4. Rule on set off: Loan payable to partner
 Follow the priority system:
I. Amounts owed to creditors other than partners
II. Amounts owed to partners other than for capital and profits
III. Amounts owed to partners as capital
IV. Amounts owed to partners as profits not closed to capital accounts
BASIC PROCEDURES IN LIQUIDATION
5. Liquidation Expenses –
 Reduce from the proceeds of the sale: directly arising from realization of non cash assets (e.g.
cost to complete inventory, freight in disposal, title transfer fees for real properties)
 Other liquidation costs should be treated as expenses
6. Marshalling of Assets – applied when the partnership or one or more partners are insolvent
 Partnership assets priority system:
I. Partnership creditors
II. Personal creditors that did not recover their claims in full from personal assets, only to
the extent of the partner’s credit interest
 Personal assets priority system:
I. Personal creditors
II. Partnership creditors not satisfied from partnership assets
III. Amounts owed to partners by way of contribution (in cases of deficit balance)
7. Distribution of cash or other assets to partners – no distribution of partnership assets may
be made unless all outside partnership creditors have been paid
TYPES OF LIQUIDATION
 LUMP SUM LIQUIDATION – no distributions to partners are made until

realization is complete and the full amount of realization gain/loss is known
 INSTALLMENT LIQUIDATION – distributions are made to some or all partners as

cash is available
LUMP SUM LIQUIDATION
 All assets are converted into cash within a very short time
 Creditors are paid
 Lump sum payment to partners are made for their capital interest
 Rare or non-existent
LUMP SUM LIQUIDATION - PROCEDURES
I. Realization and distribution of gain or loss to all partners on the basis of P/L
ratio
II. Payment of liquidation expenses, if any
III. Payment of liabilities to third parties
IV. Elimination of capital deficiencies – follow priority:
a) If the deficient partner has a loan balance, exercise the right of offset
b) If the deficient partner is solvent, then additional investment is necessary
c) If the deficient partner is insolvent, then the remaining partners will absorb the
capital deficiency
V. Payment to partners – should be in order of priority
a) Loan accounts
b) Capital accounts
INSTALLMENT LIQUIDATION
 Distributions are made to partners as and when cash becomes available
 Payments are made to partners before all noncash assets are realized; hence,
there may be total losses which will be discovered later
 Liquidator (accountant) may be liable for inappropriate payment to partners
INSTALLMENT LIQUIDATION -
PROCEDURES
 No cash distribution until all outside liabilities and actual liquidation expenses
have been paid.
 Distribute cash after every realization period, following the schedules:
A. Schedule of Cash/Safe payments (Schedule to Accompany Statement of Liquidation)
– anticipate the two worst case scenarios
1. Assume a total loss on all remaining assets (as if all remaining assets would not
be realized) and provide all possible losses (potential liquidation costs and
unrecorded liabilities)
2. Assume insolvency of partners
 The result of the worst case scenarios above is that cash is distributed only to
the partners who have capital balances sufficient to absorb their share of:
1. Maximum potential loss on non cash assets
2. Any capital deficiencies that may result to other partners as a result of (1)
INSTALLMENT LIQUIDATION –
PROCEDURES (cont)
B. Cash Payment Priority Program (Cash distribution plan / Pre-distribution
plan)
• Prepared at the beginning of the liquidation process
• Outside creditors should have been paid in full
• Ranking the partners: Total interest before liquidation / PL ratio =
maximum absorbable loss

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PARTNERSHIP

 LUMP SUM LIQUIDATION – no distributions to partners are made until

 INSTALLMENT LIQUIDATION – distributions are made to some or all partners as

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