5th Meeting

Partnership Liquidation
- A liquidation is the winding up of the partnership business. That is, it sells all of its noncash assets called
realization, pay its liabilities and makes a final liquidating distribution to the remaining partners.
- Every time na may liquidation, may dissolution.
- Cinoconvert na lahat ng assets sa cash, babayaran na all liabilities, distribution of remaining cash

Legal doctrine of Set-Off/ Right of Offset – allows a deficit in partner’s capital account to be offset by a loan payable to
that partner.

Marshalling of Asset – involves the order of creditors rights against the partnership’s assets and the personal assets of
the individual partners. (insolvency of partnership/partner) (mga priorities)

-The order in which claims against the partnership’s assets will be marshalled is as follows:
a. Partnership Asset – (1) Partnership creditors (2) Personal creditors that did not recover their claims from
personal assets (limited lang sa interest ng partner na sisingilin ag pwede).
b. Personal Asset – (1) Personal Creditors (2) Partnership creditors who were not satisfied from partnership
assets (3) Amounts owned to partners by way of contribution.
 Basic Steps to a partnership’s liquidation:
1. Any operating income or loss up to date of the liquidation should be computed and allocated to the partner’s
capital accounts on the basis of their P&L ratio. (update lagi capital balances ng partners)
2. All noncash assets are sold and converted to cash. The gain (loss) realized on the sale of such assets is allocated
to the partner’s capital account on the basis of their P&L ratio.
3. Any creditor’s claims, including liquidation expenses or anticipated future claims (cash withheld), are satisfied
through the payment or reserve of cash.
4. The remaining unreserved cash is distributed to the remaining partners in accordance with the balance in their
capital accounts. Note that this is not necessarily the P&L ratio. (babayran muna loans sa partners bago
idistribute capital) (sa final distribution ng cash, capital balance ang gagamitin hindi p&L ratio) (if deficient,
aayusin) (pag noncash assets ang ginamit pambayad sa partners, considered as if sold kaya pwede magrecognize
ng gain/loss galling sa difference ng BV at FV nong asset at dinidistribute sa lahat ng partners using P&L ratio)
(parang irerevalue muna yong asset from BV to FV, ang ibabawas sa capital ng partner ay yong FV)(yong partner
na nakareceive ng asset na yon, may deduction equal to FV nong asset)

A. Existence of Capital Deficiencies

- Capital deficiencies (negative balance sa capital account, hidni pa kasama loans) should be eliminated in the
following order of priority:
a. If the partner has a loan balance, exercise the right of offset.(loan payable to partners ay liab ng partnership,
idededuct doon sa negative balance) (Loan receivable from partners ay asset ng partnership, dinidisregard
dito)
b. If the deficient partner is solvent, then additional investment is necessary. (marshalling of asset)
c. If the deficient partner is insolvent, the remaining partners will absorb the capital deficiency. (pag nagging
solvent na ulit yong insolvent na partner, babayaran niya partner na nag-absorb ng deficiency siya) (pag
silent sa problem regarding sa solvency, insolvent or absorb ng ibang partner yong insolvent na partner)

B. Types of Liquidation

Lump-Sum Liquidation – no distributions are made to the partners until the realization process is completed when
the full amount of the realization gain or loss is known. (kailangan muna tapusin liquidation process bago
magdistribute ng pera)

Installment liquidation – distributions are made to some or all of the partners as cash become available. Cash
distribution are made to partners before the full amount of the realization gain or loss is known. (ang distribution ng
cash ay everytime na may available)

- Cash distribution to partners under installment liquidation is computed using either (para maiwasan
overpayment):
a. Schedule of Safe Payments
b. Cash Priority Program
Ex: Lump-Sum

1st step: ibenta noncash asset

Cash 68k

A, Capital(112k*2/6)= 37333

B, Capital(112k*3/6)= 56k

C, Capital(112k*1/6)= 18667

Noncash Asset 180k

2nd Step: Statement of Partnership Liquidation

*after maidistribute yong loss sa pagbenta nong noncash asset, may deficiency si B pero insolvent siya kaya mag-offset
muna ng loans.

Entry:

Loan Payable to B 5k

B, Capital 5k

*may 6k pa rin na deficiency si B, kaya paghahatian ng solvent na partners based on P&L ratio. (A:C=2:1) (For A, 6k*2/3)
(For B, 6k*1/3)

A, Capital 4k
B, capital 2k

C, Capital 6k

*pag kungyari bago ideduct yong 6k, 3k na lang pala capital balance ni A, pwede pa rin siya deductan ng share niya sa 6k
kasi solvent pa siya. Mag-iinvest si A ng kulang which is sa example, 1k if wala siyang loans. Pag insolvent si A at walang
loans, iaabsorb lahat ni C.

*after non, ididistribute na yong remaining cash sa solvent na partners based on their capital balances.

SHORTCUT:

1st step: Determine cash available for distribution to partners

Cash Available to Partners = Beginning Cash+ Proceeds from Sale of noncash Asset – Liability to Outside Creditors (hindi
kasama yong loans payable to partners kasi sa pagdetermine ng interest siya idadagdag)(eto yong balance at the
beginning of period, yong nasa balance sheet) – Liquidation expenses incurred – Cash withheld or future liquidation
expenses or estimated liquidation expenses – unrecorded liabilities

Sa example sa itaas:

Cash Available to Partners = 20k + 68k – 25k = 63k

2nd Step: Compare na yong total Partners’ Interest.

Partner’s Interest= Capital Balance + Loan Payable to Partners – Loan Receivable from partners

A B C
Capital Balance 50k 45k 75k
Loan Payable to partner (idadagdag sa capital interest) 5k
Running Balance 50k 50k 75k
Total Capital Interest 175k
Diff. of interest and cash available (equal to loss sa (112k*2/6 (112k*3/6 = (112k*1/6= 112k
liquidation nong nagbenta ng asset plus all other losses na i- = 37 333) 56k) 18667)
aallocate based on P&L ratio)
Cash Available to Partners 63k
Running Balance(totals equal to cash available to partners) 12 667 (6k) 56, 333
Pag-allocate nong deficiency sa solvent partners (4k) 6k (2k)
Balance 8667 0 54 333

Ex: Installment Liquidation

Safe Payments – this schedule show how much cash can be “safely” paid to the partners during installment liquidation,
which avoids any overpayment. The preparation of this schedule requires the allocation of Maximum Possible Loss
(estimates only) which consist of the following: (inefficient pag maraming periods kasi every end of period kailangan
gumawa ng schedule of safe payment, inefficient din sa planning kasi end of the period para malaman sino mga
makakareceive ng pera)

a. Unsold noncash assets (Book Value) (maximum na loss ay kapag walang nareceive na proceeds sa pagbenta ng
assets or hidni sila naibenta)
b. Expected future liquidation costs or cash withhel for future liquidation expenses and potential unrecorded
liabilities
*after madistribute etong mga possible loss, kung may capital balance pa, safe pa magdistribute sa partner na
yon. If di enough balance, di kayang bigyan ng pera.
*Cash sa January = 20k-1k

*Sale at Loss na inallocate sa partners sa January = 50k – 20k +1k = 31k (Inallocate sa partners based on P&L ratio)
(1:20:00)
For January

Total Interest 48k 72k 80k

Loss (9300) (9300) (12400)

Possible Loss