Partnership Liquidation

- Winding up the business usually by selling the assets, paying the liabilities, and distributing the remaining cash to the
partners

Realization
- The sale of assets or conversion of non-cash assets to cash

Right of Offset
- When a partner’s 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 all his loan against the capital deficiency

Liquidation Expense
- These are allocated to partners’ capital accounts in their profit and loss ratio

The cash should be distributed as follows: (Order of priority)

1. To outside creditors
2. To partners for loan accounts
3. To partners for capital accounts

Lump-Sum Liquidation
- All 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 interests
- The following procedures are used:
1. Realization of assets and distribution of gain and loss on realization among the partners based on the profit and loss
ratio
2. Payment of expenses
3. Payment of liabilities
4. Elimination of partner’s capital deficiencies. If after the distribution of loss on realization, a partner incurs a capital
deficiency, this deficiency must be eliminated by using one of the following methods, in the order of priority.
- If the deficient partner has a loan balance, exercise the right of offset.
- If the deficient partner is solvent, make him invest cash to eliminate his deficiency.
- If the deficient partner is insolvent, let the other partners absorb his deficiency.
5. Payment to partners (in order of priority)
- Loan accounts
- Capital accounts

Solvency of a Partner
a. Partners personal assets > personal liabilities
Solvent to the extent of the excess

b. Partners personal assets < personal liabilities

The partner is insolvent

Illustrative Problem 1
On January 2, 2021, DEF Partnership has the following records and will undergo lump-sum liquidation:
Cash 20,000 Liabilities 28,000
Other Assets 80,000 D, Loan 2,000
D, Capital (40%) 9,000
E, Capital (40%) 21,000
F, Capital (20%) 40,000
Total 100,000 Total 100,000

Case 1 Other Assets were realized at 60,000

Case 2 Other Assets were realized at 55,000
Case 3 Other Assets were realized at 49,500, assume D is personally solvent
Case 4 Other Assets were realized at 49,500, assume D is personally insolvent

Prepare the statement of liquidation and journal entries for each case.
Procedures for Liquidation by Installment
The following are the accounting procedures that may be followed in liquidating a partnership by installments:
1. Record the realization of assets and distribute the realized gains or losses among the partners using the profit and loss
ratio
2. Pay liquidation expenses and unrecorded liabilities, if there are any, and distribute these among the partners using the
profit and loss 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 distribution program

Eliminate any capital deficiency only before final payments to partners.

Schedule of Safe Payments

- Each installment of cash is distributed as if no more cash is forthcoming, either from sale of assets or from collection of
deficiencies from partners. Cash is, therefore 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. The possible loss
(hypothetical loss) consists of the following:
a. Total value of remaining non-cash assets
b. Cash withheld to pay for anticipated liquidation expenses and unrecorded liabilities that may arise

- Additional loss may also accrue to the partners when a debit balance in any of the capital accounts results from the
foregoing allocations of possible loss. The deficiency of any of the partners is absorbed by the other partners as additional
possible loss to them because he is presumed unable to pay anything to the firm.
- Payment to partners based on periodic computation of safe payments brings at some point of liquidation, the partners’
capitals to the profit and loss ratio.
- The absence of any partner’s deficiency after distribution of the possible loss signifies that the ratio of the capital
balances is in the profit and loss ratio.
- Preparation of schedules of safe payments in subsequent periods is no longer necessary because all subsequent payments
can be made based solely on the profit and loss ratio. Each partner’s capital is adequate to absorb his share of the
maximum remaining possible loss.

Illustrative Problem 2
Partners X, Y and Z sharing profits and losses equally, decide to liquidate their partnership.
Prior to the liquidation, the partnership has the following records on June 30, 2021:
Cash 5,000 Liabilities 40,000
Other Assets 155,000 X, Capital 30,000
Y, Capital 40,000
Z, Capital 50,000
Total 160,000 Total 160,000

The following data relate to the realization of other assets:

Book Value Cash Realized Loss
July 80,000 65,000 15,000
August 42,000 24,000 18,000
September 33,000 12,000 21,000
155,000 101,000 54,000

Illustrative Problem 3
The partnership of A, B, C and D have P/L of 50%, 20%, 20% and 10% respectively.
On March 31, 2021, they agree to liquidate their partnership with the following information:
Cash 10,000 Liabilities 6,000
Noncash Assets 80,000 B, Loan 2,000
A, Capital 20,000
B, Capital 29,000
C, Capital 23,000
D, Capital 10,000
Total 90,000 Total 90,000
The following data relate to the realization of noncash assets:
Book Value Cash Realized Loss
April 54,000 30,000 24,000
May 24,000 18,000 6,000
June 2,000 1,000 1,000
80,000 49,000 31,000

Illustrative Problem 4
The partnership of A, B, C and D have P/L of 60%, 15%, 10% and 15% respectively.
On March 31, 2021, they agree to liquidate their partnership with the following information:
Cash 10,000 Liabilities 6,000
Noncash Assets 80,000 B, Loan 2,000
A, Capital 20,000
B, Capital 29,000
C, Capital 23,000
D, Capital 10,000
Total 90,000 Total 90,000

The following data relate to the realization of noncash assets:

Book Value Cash Realized Loss
April 54,000 30,000 24,000
May 24,000 18,000 6,000
June 2,000 1,000 1,000
80,000 49,000 31,000

Cash Withheld
- The cash set aside in a separate fund is not a factor in computing possible loss. It is the cash set aside to insure payments
of potential liquidation expenses which may be incurred and unrecorded liabilities which may be discovered. This is
explicitly stated in the problem.
- This cash withheld is added to the total value of the remaining noncash assets to obtain the maximum possible loss
needed in the computation of safe installment payment. Also, cash available for distribution to the partners for the period
is net of the cash withheld.
- Unrecorded liabilities are obligations which are discovered or incurred during the liquidation. These are allocable to the
partners according to their profit and loss sharing agreement.

Illustrative Problem 5
R, S and T are partners who share profits and losses 50%, 30% and 20% respectively.
All partners are personally insolvent. On December 31, 2021,
they agree to liquidate their partnership with the following information:
Cash 5,430 Accounts Payable 12,892
Other Assets 61,870 R, Loan 8,000
R, Capital 16,402
S, Capital 5,469
T, Capital 24,537
Total 67,300 Total 67,300

The following data relate to the realization of other assets:

Book Value Cash Realized Loss Cash Liquidation Unrecorded
Withheld Expenses Paid Liabilities Paid
January 24,700 20,120 4,580 3,000 1,200 1,550
February 33,170 21,000 12,170 800 1,400 200
March 4,000 3,700 300 P0 200 P0
Cash Priority Program
- Advance installment distribution plan or cash pre-determination plan
- This program permits the partners to determine how cash should be safely distributed if and when it becomes available.

Procedures to Prepare a Cash Priority Program

1. Compute the loss absorption balance of each partner
2. Determine the priority of payments to partners
3. Compute the amount of cash to be paid to the partners under each priority

Illustrative Problem 6
A, B and C are partners who share profits and losses as follows: A 40%, B 30% and C 30%.
They decide to liquidate the partnership and would like to have an advance cash priority program.
The following information is available on June 30, 2021:
Cash 8,000 Liabilities 61,000
Other Assets 192,000 C, Loan 4,000
A, Capital 40,000
B, Capital 45,000
C, Capital 50,000
Total 200,000 Total 200,000

The following amount of cash is available:

July 2021 33,000
August 2021 43,000

Illustrative Problem 7
Assume the partners of Bankrupt Company agree to liquidate their partnership on July 1, 2021.
The following information is available: (P/L Ratio is 20%, 20%, 50% and 10% for B, C, D and E)
Cash 6,000 Accounts Payable 130,000
Noncash Assets 244,000 B, Loan 14,000
C, Loan 4,000 D, Loan 4,000
B, Capital (20%) 36,000
C, Capital (20%) 28,000
D, Capital (50%) 12,000
E, Capital (10%) 30,000
Total 254,000 Total 254,000

The following amount of cash is available:

July 2021 2,000
August 2021 25,000
September 2021 24,000