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Partnership Liquidation: One Time Payment Liquidation Process

There are two methods for partnership liquidation: lump sum liquidation and liquidation by installment. Lump sum liquidation involves a one-time payment, while liquidation by installment is done through a series of payments. Both methods follow the same steps: non-cash assets are sold, gains/losses are allocated, liabilities and expenses are paid, deficiencies are eliminated, and payments are made to partners first for loans and then capital accounts. Capital accounts must be adjusted before liquidation begins.

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Alarich Catayoc
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35 views

Partnership Liquidation: One Time Payment Liquidation Process

There are two methods for partnership liquidation: lump sum liquidation and liquidation by installment. Lump sum liquidation involves a one-time payment, while liquidation by installment is done through a series of payments. Both methods follow the same steps: non-cash assets are sold, gains/losses are allocated, liabilities and expenses are paid, deficiencies are eliminated, and payments are made to partners first for loans and then capital accounts. Capital accounts must be adjusted before liquidation begins.

Uploaded by

Alarich Catayoc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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PARTNERSHIP LIQUIDATION

2 METHODS:

1. LUMP SUM LIQUIDATION


2. LIQUIDATION BY INSTALLMENT

LUMP SUM LIQUIDATION – ONE TIME PAYMENT


LIQUIDATION PROCESS:

STEP 1: SALE OF NON-CASH ASSETS AND DISTRIBUTION OF GAIN OR LOSS TO PARTNERS


(REALIZATION OF NCA)

STEP 2: PAYMENT OF LIABILITIES (DOES NOT AFFECT CAPITAL BALANCES)

PAYMENT OF EXPENSES (AFFECTS CAPITAL BALANCES)

STEP 3: ELIMINATION OF DEFICIENCY (ORDER OF PRIORITY)

1. RIGHT OF OFFSET (IF DP HAS LOANS RECEIVABLE FROM THE PARTNERSHIP)


2. ADDITIONAL INVESTMENT (IF DP IS SOLVENT; UP TO EXTENT OF HIS SOLVENCY)
3. ABSORPTION OF OTHERS WITH ADEQUATE BALANCE (IF DP IS INSOLVENT;
ALLOCATE BASED ON REMAINING PL RATIO)

STEP 4: PAYMENT TO PARTNERS (ORDER OF PRIORITY)

1. LOAN ACCOUNTS
2. CAPITAL ACCOUNTS

NOTE: BEFORE LIQUIDATION, ALL ACCOUNT BALANCES MUST BE ADJUSTED, SPECIFICALLY CAPITAL
ACCOUNTS OF PARTNERS

LIQUIDATION BY INSTALLMENT- SERIES OF PAYMENT


SAME PROCESS OF LUMP SUM LIQUIDATION BUT IT IS DONE BY INSTALLMENT.

1. IN DETERMINING THE CAPITAL ACCOUNTS OF PARTNERS BEFORE LIQUIDATION:


A. RECEIVABLES FROM PARTNERSHIP ADDED TO CAPITAL
B. PAYABLES TO PARTNERSHIP DEDUCTED FROM CAPITAL
C. LOANS ACCOUNTS MAINTAINED
D. DRAWING ACCOUNTS CLOSED TO CAPITAL
E. PARTNERSHIP GOODWILL WRITTEN OFF AND ADJUSTED CAPITAL (P/L
RATIO)

2. GAIN OR LOSS IS DISTRIBUTED TO CAPITAL ACCOUNTS BASED ON PARTNER’ PL RATIO


3. LIABILITIES SHOULD BE PAID IN FULL OR CASH SUFFICIENT TO ENSURE PAYMENT OF
ALL LIABILITIES AND FUTURE EXPENSES MUST BE WITHHELD
4. AFTER PAYMENT OF ALL LIABILITIES, PARTNERS LOAN ACCOUNTS MUST BE PAID WITH
RIGHT OF OFFSET.
5. CASH DISTRIBUTION TO PARTNERS SHOULD BE MADE WITH THE OBJECTIVE OF
SYSTEMATICALLY BRINGING THE RATIO OF CAPITAL ACCOUNTS IN AGREEMENT WITH
PARTNERS PL RATIO. THUS, IN THE END, PL RATIO=CAPITAL RATIO.

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