PARTNERSHIP LIQUIDATION:

Partnership Liquidation - means winding up the business

usually by selling the assets, paying the liabilities and distributing the
remaining cash to partners.
General rule in cash distribution:
1) first, to outside creditors
2) Second, to partners for loan accounts
3) Third, to partners for capital accounts

Note: When a partners capital account shows a debit balance and

said partner has a loan account, the law permits the exercise of the
right of offset by part or his entire loan against the capital deficiency.
Methods of Partnership Liquidation
1) Lump-Sum Liquidation- one in which all the assets are
converted into cash within a very short time, outside
creditors are paid, and a single, lump-sum payment is made
to the partners for their total interest.
Procedures for Lump-Sum Liquidation
1) Realization of assets and distribution of gain or loss on
realization among the partners based on the P/L ratio.
2) Payment of Expenses
3) Payment of Liabilities
4) Elimination of partners capital deficiencies, if any. This
deficiency is eliminated by using one of the following
methods, in order of priority:
a) If the deficient partner has a loan balance, exercise the
right of offset.
b) If the deficient partner is solvent, make him invest cash
to eliminate his deficiency.
c) If the deficient partner is insolvent, let the other
partners absorb his deficiency.
5) Payment to partners ( in order of priority):
a) Loan accounts
b) Capital accounts

Note: If the partnership is insolvent, at least one, or perhaps, all of

the partners will have deficiencies in their capital. If the partner/s with
capital deficiencies pay the required amounts, the partnership will
have enough cash to pay its liabilities in full. However, in accordance
with law, the creditors may demand payment from any partner
regardless of whether his capital account shows a debit or credit
balance.

Note: If the partnership is insolvent and the partners are personally

insolvent, too, the assets of the partnership are first available to
creditors of the partnership, and that the personal assets of the
partners are first available to his personal creditors.
If after the debts of the partnership are paid in full and some
assets still remain in the partnership, the creditors of a partner have a
claim against the assets of the partnership only to the extent of his
share.
Similarly, after the personal creditors of a partner have been paid
in full from his personal assets, any remaining asset is available to the
partnership creditors regardless of whether the partners capital
accounts shows a debit or credit balance.
2) INSTALLMENT LIQUIDATION- involves the selling of some
assets, paying the liabilities of the partnership, dividing the available
cash to partners, selling additional assets and making further
payments to partners.
Procedure for Installment Liquidation
1) Record the realization of assets and distribute the gains or
losses among the partners using the P/L ratio.
2) Pay liquidation expenses and unrecorded liabilities, if any,
and distribute these among the partners using the P/L ratio.
3) Pay the liabilities to outsiders.
4) Distribute cash to the partners after possible future losses
have been apportioned to partners or in accordance with a
cash priority program.

NOTE: Eliminate any capital deficiency only before final payments to

partners.
Schedule of Safe Payments

- a schedule of safe installment payments to partners which is

prepared periodically.
- Cash is distributed to a partner only if he has an excess credit
balance in his partnership interest after absorption of his share of the
maximum possible loss that may occur.
Possible loss includes:
1) Total value of remaining non-cash assets.
2) Cash withheld to pay for anticipated liquidation expenses and
unrecorded liabilities.
STEPS IN THE CALCULATION OF SAFE PAYMENT
1)
2)

Determine the total interest (capital + loan balances) of

each partner.
Compute the total possible loss of the partnership to be
absorbed by each partner. Each partner absorbs a possible
loss of an amount equal to the total possible loss multiplied
by his P/L share percentage.

Note: If payments to partners in the 1st installment are not sufficient

to bring the ratio of the capital balances after the cash distribution to
equal the P/L ratio, there is a need to prepare a schedule of the safe
payments in the second installment and onwards until the payments to
partners are in accordance with the P/L ratio.
Cash withheld- is the cash set aside in a separate fund to insure
payments of potential / anticipated liquidation expenses and
unrecorded liabilities. It is added to the total value of the remaining
non-cash assets to obtain the maximum possible loss needed in the
computation of safe installment payment.
Cash Priority Program an installment distribution plan or cash predetermination plan which permits the partners to determine how cash
should be safely distributed if and when it becomes available.
CPP Procedures
1)

Compute the loss absorption capacity of each partner by

dividing the partners total interest (capital + loan balances)
by his P/L ratio.

2)
3)

Determine the priority of payments to partners. The partner

with the biggest loss absorption capacity has the first
priority.
Compute the amount of cash to be paid to the partners
under each priority by multiplying the partners excess loss
absorption capacity by his P/L share percentage.