Installment Liquidation

Installment Liquidation
Installment Liquidation Procedures

* Realization of assets on a piecemeal basis
* Distribution of gain or loss on realization
* Preparation of cash distribution schedule
* Distribution of available cash
Statement of Liquidation
* Schedule to accompany the statement of liquidation
* Cash Priority Program
- Loss absorption capacity
- Cash allocation
NATURE OF INSTALLMENT LIQUIDATION

Under the installment liquidation, noncash assets are sold on a piecemeal over an extended period of
time. Cash realized is immediately distributed to after fully satisfying creditors' claims or after setting aside
sufficient cash for these liabilities. In as much as cash distributions are made before realizing all noncash
assets and the total gain or loss on realization is not yet determined, it is necessary that each cash distribution
to partners be considered as if it were the last. Remaining unsold assets, therefore, must be treated as a
complete loss, assuming that nothing is realized on them. Also, debit balances in capital and potential capital
deficiencies are assumed uncollectible. In this sense, partners' interests are reduced by cash distributions to a
balance proportionate to the partners' profit and loss ratios. Succeeding cash distributions are then based on
the profit and loss ratio.
The liquidation procedures shall be the same as in lump sum liquidation except that:
(l) Cash is distributed to partners even before fully realizing noncash assets and determining
total gain or loss on realization.
(2) Restricted interest, in the accompanying schedule to determine amounts to be paid to
partners, shall consist of:
(a) Remaining unsold assets
(b) Cash withheld (for possible expenses)
(c) Debit balances in capital
Illustrative Problem A:
The balance sheet of the partnership of A, B, and C on December 31, 2000, when the partners decide to
liquidate follows:
Cash P200,000
Other Assets 500,000
Liabilities P250,000
A Loan 70,000
A, Capital (30%) 200,000
B, Capital (40%) 30,000
C, Capital (30%) 150,000
Cash is realized on the other assets as follows, and amounts realized are distributed at the end of each month
to the appropriate parties.
Fiscal year 2001 Asset Book Value Cash proceeds

January P 300,000 P260,000
February 200,000 230,000
Instructions:
1. Prepare the Statement of Liquidation to summarize the course of liquidation. Provide schedules in support
of monthly distributions.
2. Prepare the journal entries to record the liquidation.
Schedule of Safe Payments

The balance sheet of the partnership of A, B, and C on December 31 when the partners decide to liquidate
follows:
Assets
Cash 200,000
Total Assets 700,000
Liabilities and Capital
Liabilities 250,000
A, Loan 70,000
A, Capital (30%) 200,000
B, Capital (40%) 30,000
C, Capital (30%) 150,000
Total Liabilities and Capital 700,000
Cash is realized on the other assets as follows, and amounts realized are distributed at the end of each
month to the appropriate parties.
Fiscal Year 2001 Asset Book Value Cash Proceeds
January 300,000 260,000
February 200,000 230,000
Statement of Liquidation
Other A, Capital B, Capital C, Capital
Cash Liabilities A, loan
Assets (30%) (40%) (30%)
Balances 200,000 500,000 250,000 70,000 200,000 30,000 150,000
January Sale 260,000 (300,000) (12,000) (16,000) (12,000)
Balances 460,000 200,000 250,000 70,000 188,000 14,000 138,000
Debt Payment (250,000) (250,000)
Balances 210,000 200,000 70,000 188,000 14,000 138,000
Schedule 1 (210,000) (70,000) (95,000) (45,000)
Balances 200,000 93,000 14,000 93,000
February Sale 230,000 (200,000) 9,000 12,000 9,000
Payment (230,000) (102,000) (26,000) (102,000)
Balances 0 0 0 0 0 0 0
Schedule of Safe Payments (Schedule 1)

A (30%) B (40%) C (30%)
Balances before Cash Distribution 188,000 14,000 138,000
Add: Loans 70,000
Total Partners' Interest 258,000 14,000 138,000
Restricted Interest
- possible loss of 200,000 if nothing is realized on (60,000) (80,000) (60,000)
remaining unsold assets
Balance 198,000 (66,000) 78,000
Restricted interest
- additional possible loss of 66,000 to A and C if B
(33,000) 66,000 (33,000)
is unable to pay his possible deficiency, shared in
the ratio of 30:30
Free interest - payment to partners 165,000 0 45,000
Payment to apply on:
Loan 70,000
Capital 95,000 45,000
Total Cash Distribution 165,000 45,000
January
Cash 260,000
A, Capital 12,000
B, Capital 16,000
C, Capital 12,000

Liabilities 250,000
Cash 250,000

A, loan 70,000
A, Capital 95,000
C, Capital 45,000
Cash 210,000
February
Cash 230,000
Other assets 200,000
A, Capital 9,000
B, Capital 12,000
C, Capital 9,000
A, Capital 102,000
B, Capital 26,000
C, Capital 102,000
Cash 230,000

PROGRAM OF CASH DISTRIBUTION

Partners may desire to determine in advance as to whom cash distributions shall be made as cash may
become available. This procedure requires the preparation of a program called "Cash Priority Program", "Cash
Predistribution Plan" or "Program of Priorities". The program is prepared prior to liquidation, that is before
cash becomes available for distribution. Cash realized on other assets is distributed based on the program
without the need for the preparation of the schedule previously used to accompany the statement of
liquidation. The steps in the preparation of the program are the following:
1. Determine total partners' interest, that is, capital balances before liquidation plus loans by partners
to the partnership less advances by the partnership to the partners.
2. Divide total partners' interest by their profit and loss ratio to get each partner's loss absorption
capacity. The loss absorption capacity is the maximum amount of loss that the partners may absorb which
may eliminate any partner in any cash distribution. A partner, therefore, with the highest loss absorption
balance has the first priority on cash distributions.
3. When the loss absorption balances are determined, allocations may now be made, starting with
Allocation I wherein the highest loss absorption balance is reduced to the next highest. Each reduction in the
loss absorption balance requires payment to partners computed by multiplying the amount of reduction by the
partner's profit and loss ratio.
4. Once the partners' loss absorption balances are equal, cash distributions are made in the profit and
loss ratio.
A B C A B C
Capital Balances 200,000 30,000 150,000
Add Loans 70,000
Total Partner's interest 270,000 30,000 150,000
Divided by the profit and loss ratio 30% 40% 30%
Loss Absorption capacity 900,000 75,000 500,000
Allocation I:
Cash to A reducing loss absorption balance (400,000
120,000
to an amount reported for C; reduction of )
400,000 requires payment of 30% x 400,000
Balances 500,000 75,000 500,000
Allocation II:
Cash to A and C to reduce their loss
absorption balances to amount reported for (425,000
127,500
B; reduction of 425,000 requires payments )
as follows:
To A, 30% x 425,000
To C, 30% x 425,000 (425,000) 127,500
Balances 75,000 75,000 75,000 247,500 127,500
Allocation III: Further cash distributions are to be made in the profit and loss ratio.
A summary of the information provided by the cash priority program follows:
After fully satisfying liabilities:
1. the first 120,000 cash available to partners should be paid to A.
2. The next 255,000. should be paid to A and C in the ratio of 30:30.
3. Amounts in excess of 375,000 should be paid to A, B, and C in the profit and loss ratio of 30:40:30.
January Installment distribution
Amount A B C
Cash Available 210,000
Allocation I - Payable to A 120,000 120,000
Allocation II - Payable to A and C, 30:30 90,000 45,000 45,000
Balance 165,000 45,000
February Installment Distribution

Amount A B C
Cash Available 230,000
Allocation II - Balance
165,000 82,500 82,500
255,000 - 90,000 payable to A and C, 30:30
Allocation III - Payable to A, B, and C, 30:40:30 65,000 19,500 26,000 19,500
102,000 26,000 102,000

Installment Liquidation

Uploaded by

Copyright:

Available Formats

Installment Liquidation

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Installment Liquidation

Uploaded by

Copyright:

Available Formats

Installment Liquidation

Installment Liquidation Procedures

NATURE OF INSTALLMENT LIQUIDATION

Fiscal year 2001 Asset Book Value Cash proceeds

Schedule of Safe Payments

Schedule of Safe Payments (Schedule 1)

PROGRAM OF CASH DISTRIBUTION

February Installment Distribution

You might also like