PARTNERSHIP LIQUIDATION

Liquidation is the termination of business operations or the winding up of affairs. It is the process by which:
1. assets are converted into cash (Realization)
2. liabilities are settled (Liquidation)
3. any remaining amount is distributed to the owners

Liquidation may be either volunatry (per agreement) or involuntary (bankruptcy)

Methods of liquidation
1. Lump-sum liquidation
all the non-cash assets of the partnership are sold simultaneously, or within a very short period of time
and the proceeds are used to settle first all the liabilities and any remaining amount is paid to
partners under a lump-sum payment.
2. Installment method
Partners' claims are settled on an installment basis as cash becomes available, but only after all
partnership liabilities are fully settled.
All the assets of the partnership are restated to their realizable values, and all liabilities to
their expected settlement amounts

Settlement of claims A Payable to A

1. Outside creditors B Receivable B
2. Inside creditors C
3. Owners' capital balances

Right of offset -legal right of offset allows a deficit in the parter's capital account
to be offset by a loan to that partner.

Lump-sum Installment
All of non-cash assets are converted into cash Some of non-cash assets are converted into cash
Total gain/loss on sale is allocated to the Carrying amount of any unsold non cash assets is
partners capital balances based on considered as a loss, which allocated to
P/L ratios partner's capital account
Actual liquidation expenses are allocated Actual and estimated liquidation expenses are alloc
to the capital balances to the capital balances
The liabilities to outside creditors are The liabilities to outside creditors are
fully settled partially or fully settled
The liabilities to inside creditors are The liabilities to inside creditors are
fully settled partially or fully settled
Any remaining cash is distributed to If both the liabilities to outside and inside creditors
the owners in full settlement Any remaining cash less cash set aside to
of their interest the owners in partial settlement of their

Marshalling of assets
 One characteristic of partnership - Unlimited liability
Personal assets of general partners are subject to the claims of partnership
creditors incase of partnership insolvency
Rules applying the doctrine of marshalling of assets
1. Available assets of partnership are used to settle the partnerships liabilities
2. Incase the assets of the partnership are insufficient to pay all liabilities, the solvent general partners
are required to provide additional funds from their personal assets
Claims to the personal assets:
1. Personal creditors
2. Partnership creditors
3. Partners by way of contribution
3. In case some partners are insolvent, their capital deficiency is offset to the capital balances
of ther partners. If after allocating the capital deficiency of an insolvent partner, a
solvent partner's capital balance results to negative amount, the solvent partner is
required to provide additional contribution

SCENARIO 1
A B (INS) C A
100 -20 10 100
-5 20 -15 -5
95 0 -5 95
0 0 5 -5
Amount received 95 0 0 90
 is the process by which:

Installment liquidation may be presented in a formal manner either:

hin a very short period of time 1. Safe payment method
ng amount is paid to a. Unsold non-cash assets are treated as loss
b. Expected future liquidation cost and potential unrecorded
liabilities are recognized immediately as losses
able, but only after all 2. Cash priority program
This schedule determines which partner shall be paid first and
nd all liabilities to after all liabilities are settled
a. Unsold non-cash assets are treated as loss
b. Expected future liquidation cost and potential unrecorded
liabilities are recognized immediately as losses
Additional procedure is to rank the partners according to the
maximum loss absorption capacity
a. the partner with highest MLAC shall be paid first
b. the partner with lowest MLAC shall be paid last

Maximum loss absorption capacity = Total partner's interest/Partner's

sets are converted into cash The basic purpose of these schedules is to prevent overpayments to par
any unsold non cash assets is during installment liquidation
d as a loss, which allocated to
capital account
d liquidation expenses are allocated
pital balances
ide creditors are
or fully settled
de creditors are
or fully settled
to outside and inside creditors are fully settled.
ining cash less cash set aside to future liquidation is distributed to
rs in partial settlement of their interest
 f partnership

nt general partners

SCENARIO 2 SCENARIO 3 SCENARIO

B (INS) C A B (INS) C A B C
-20 10 100 -20 10 100 -20 10
20 -15 -5 20 -15 20
0 -5 95 0 -5 100 0 10
0 5 0 3
0 0 95 0 -2
-2 2
93
n a formal manner either:

reated as loss
ost and potential unrecorded
zed immediately as losses

h partner shall be paid first and last,

reated as loss
ost and potential unrecorded
zed immediately as losses
the partners according to their
rption capacity
ighest MLAC shall be paid first
owest MLAC shall be paid last

l partner's interest/Partner's P&L ratio

prevent overpayments to partners

 ASSETS
CASH
Balances before liquidation 20,000.00

Conversion of non-cash assets 100,000.00

and distribution of loss
Totals 120,000.00

Payment to outside creditors (30,000.00)

Totals 90,000.00

Payment to inside creditors (20,000.00)

Totals 70,000.00

Payment to partners (70,000.00)

Totals -

The statement of financial position of ABC Co. before liquidation is as follows:

Cash 20,000.00 Accounts payable
Accounts receivable 60,000.00 Payable to B
Inventory 120,000.00 A, capital (20%)
Equipment 500,000.00 B, capital (30%)
Accum. Depreciation (200,000.00) C, capital (50%)
Total assets 500,000.00 Total Liab & Equity

Assumptions
NCA realized with a loss of 200k

Capital
Payable to B
Total capital interest
Maximum Loss
Cash distribution
ASSETS LIABILITIES EQUITY
NON-CASH ACCOUNTS PAYABLE PAYABLE TO B A, CAPITAL (20%)
480,000.00 (30,000.00) (20,000.00) (100,000.00)

(240,000.00) 28,000.00
-
240,000.00 (30,000.00) (20,000.00) (72,000.00)

30,000.00
240,000.00 - (20,000.00) (72,000.00)

20,000.00
240,000.00 - - (72,000.00)

(240,000.00) 48,000.00
- - - (24,000.00)

30,000.00
20,000.00
100,000.00
150,000.00
200,000.00
500,000.00

0.2 0.3 0.5

A B C Total
100 150 200 450
20 20
100 170 200 470
-76 -114 -190 -380
24 56 10 90

Total cash available 120

Payments to creditor -30
90
 EQUITY
B, CAPITAL (30%) C, CAPITAL (50%) A, CAPITAL (20%)
(150,000.00) (200,000.00) MLAC (500,000.00)

42,000.00 70,000.00 (500,000.00)

- - (100,000.00)
(108,000.00) (130,000.00) (400,000.00)

(108,000.00) (130,000.00)

(108,000.00) (130,000.00) SCENARIO (Not offset)

A
72,000.00 120,000.00 B
(36,000.00) (10,000.00) C

SCENARIO (Offset)
A
B
C

A, CAPITAL (20%)
Noncash 480,000.00 100,000.00
Realized 60,000.00 Loss (84,000.00)
420,000.00 Cash available 16,000.00
(4,000.00)
12,000.00

A, CAPITAL (20%)
100,000.00
10,000.00
 Cash available 30,000.00
B, CAPITAL (30%) C, CAPITAL (50%)
(566,666.67) (400,000.00) 1st priority
(66,666.67) B (20,000.00)
(500,000.00) (400,000.00)
(100,000.00) 2nd priority
(400,000.00) (400,000.00) A (20,000.00)
B (30,000.00)

A B C
1st Priority 20,000.00
2nd Priority 20,000.00 30,000.00
4,000.00 Remaining 4,000.00 6,000.00 10,000.00
26,000.00 24,000.00 56,000.00 10,000.00
-

A B C
12,000.00 1st Priority 20,000.00
38,000.00 2nd Priority 4,000.00 6,000.00
- Remaining
4,000.00 26,000.00 -

B, CAPITAL (30%) C, CAPITAL (50%) TOTAL

170,000.00 200,000.00 470,000.00
(126,000.00) (210,000.00) (420,000.00)
44,000.00 (10,000.00) 50,000.00
(6,000.00) 10,000.00 -
38,000.00 - 50,000.00

B, CAPITAL (30%) C, CAPITAL (50%) TOTAL

170,000.00 200,000.00 470,000.00
15,000.00 25,000.00 50,000.00
Total
20000
50000
20000
90000

Total
20000
10000

30000
The statement of financial position of ABC Co. before liquidation is as follows:
Cash 40,000.00 Accounts payable 60,000.00
Accounts receivable 120,000.00 Payable to B 40,000.00
Inventory 240,000.00 A, capital (20%) 200,000.00
Equipment 800,000.00 B, capital (30%) 300,000.00
Accum. Depreciation (200,000.00) C, capital (50%) 400,000.00
Total assets 1,000,000.00 Total Liab & Equity 1,000,000.00

CASE 1
The non-cash assets were realized as follows: Cash received
a. Total receivable, only 100,000 were collectible AR 100,000.00
b. The entire inventory was sold for 140,000 Inventory 140,000.00
c. The equipment was sold for 500,000 Equipment 500,000.00
d. 4,000 liquidation expenses were paid Liquidation expense (4,000.00)
736,000.00
Noncash 960,000.00
Loss 224,000.00
 Scenario 1
0.2 0.3 0.5
A B C TOTAL
200,000.00 300,000.00 400,000.00 900,000.00
(44,800.00) (67,200.00) (112,000.00) (224,000.00)
155,200.00 232,800.00 288,000.00 676,000.00

0.2 0.3 0.5

A B C TOTAL
200,000.00 340,000.00 400,000.00 940,000.00
(44,800.00) (67,200.00) (112,000.00) (224,000.00)
155,200.00 272,800.00 288,000.00 716,000.00

PROFORMA
0.2 0.3 0.5
A B C TOTAL
CAPITAL BALANCE 200,000.00 300,000.00 400,000.00 900,000.00
PAYABLE (RECEIVABLE) 40,000.00
200,000.00 340,000.00 400,000.00 900,000.00
Allocation of Loss (44,800.00) (67,200.00) (112,000.00) (224,000.00)
Amt. received by partners 155,200.00 272,800.00 288,000.00 676,000.00
 ASSETS
CASH
Balances before liquidation 40,000.00

Conversion of non-cash assets

and distribution of los 736,000.00
Totals 776,000.00

Payment to outside creditors (60,000.00)

CASH AVAILABLE Totals 716,000.00
736,000.00
40,000.00 Payment to inside creditors (40,000.00)
TOTAL CASH 776,000.00 Totals 676,000.00
OUTSIDE CR (60,000.00)
716,000.00 Payment to partners (676,000.00)
INSIDE CR (40,000.00) Totals
676,000.00
A 135,200.00
B 202,800.00
C 338,000.00
ASSETS LIABILITIES EQUITY
NON-CASH ACCOUNTS PAYABLE PAYABLE TO B A, CAPITAL (20%) B, CAPITAL (30%)
960,000.00 (60,000.00) (40,000.00) (200,000.00) (300,000.00)

(960,000.00) 44,800.00 67,200.00

- (60,000.00) (40,000.00) (155,200.00) (232,800.00)

60,000.00
- - (40,000.00) (155,200.00) (232,800.00)

40,000.00
- - - (155,200.00) (232,800.00)

155,200.00 232,800.00
QUITY
C, CAPITAL (50%)
(400,000.00) (900,000.00)

112,000.00
(288,000.00)

(288,000.00)

(288,000.00) (676,000.00)

288,000.00
The statement of financial position of ABC Co. before liquidation is as follows:
Cash 40,000.00 Accounts payable
Accounts receivable 120,000.00 Payable to B
Inventory 240,000.00 A, capital (20%)
Equipment 800,000.00 B, capital (30%)
Accum. Depreciation (200,000.00) C, capital (50%)
Total assets 1,000,000.00 Total Liab & Equity

CASE 1
The non-cash assets were realized as follows:
a. Total receivable, only 100,000 were collectible
b. The entire inventory was sold for 140,000
c. The equipment was sold for 500,000
d. 4,000 liquidation expenses were paid

CASE 2
The non-cash assets were realized as follows:
a. 80% of receivable, was collected for only 60,000
b. 2/3 of inventory was sold for 80,000
c. The equipment with carrying amount of 300,000 was sold for 240,000
d. 4,000 liquidation expenses were paid. An additional 2,000 is expected to be incurred in the succeding periods
e. 18,000 cash is set aside for potential unrecorded liabilities
 CASE 3
The non-cash assets were sold for 100,000.
60,000.00 The financial conditions of the partners are as follows
40,000.00 A B C
200,000.00 Personal assets 600,000.00 520,000.00 400,000.00
300,000.00 Personal liabiliti (440,000.00) (440,000.00) (640,000.00)
400,000.00
1,000,000.00 CASE 4
The non-cash assets realized on January 20x1 were as follows:
a. 75% of receivable, was collected for only 60,000
b. Half of inventory was sold for 80,000
c. The equipment with carrying amount of 400,000 was sold for 240,000
d. 4,000 liquidation expenses were paid. An additional 2,000 is
expected to be incurred in the succeding periods
e. 18,000 cash is set aside for potential unrecorded liabilities

The non-cash assets realized on February 20x1 were as follows:

a. 20,000 were collected on the remaining receivables
b. The other half of inventory was sold for 40,000
c. The remaining equipment was sold for 60,000
d. 20,000 liquidation expense and previously unrecorded liabilities were paid
e. The liquidation process ended on February 20x1
o be incurred in the succeding periods
COMPUTE FOR THE CASH DISTRIBUTION
for 240,000

bilities were paid