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Liquidation

The document discusses the key steps and accounting entries involved in liquidating a partnership. It describes the lump sum and installment methods. Under the lump sum method, all assets are realized at once, liabilities are paid, and any remaining cash is distributed to partners. The installment method realizes assets and distributes cash over time according to a cash priority program or schedule of safe payments to protect against future losses.

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Rein Malabana
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11 views18 pages

Liquidation

The document discusses the key steps and accounting entries involved in liquidating a partnership. It describes the lump sum and installment methods. Under the lump sum method, all assets are realized at once, liabilities are paid, and any remaining cash is distributed to partners. The installment method realizes assets and distributes cash over time according to a cash priority program or schedule of safe payments to protect against future losses.

Uploaded by

Rein Malabana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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LIQUIDA

TION
PARTNERSHIP LIQUIDATION
-winding up of its business activities characterized by sale of all non-
cash assets, settlement of all liabilities and distribution of the remaining
cash to the partners

STEPS IN LIQUIDATION
• Realization of all non-cash assets- non-cash to cash
• Settlement of Liabilities
• Distribution to partners
Methods of Partnership Liquidation
• Lump-Sum Method
• Installment
RULES ON SETTLING ACCOUNTS AFTER
DISSOLUTION
Settlement of Liabilities

Order of Preference
a. Outside Creditors (LSTC)
b. Inside Creditors (ACP)
-partners may exercise right of offset
RULES ON SETTLING ACCOUNTS AFTER
DISSOLUTION
Insufficient Partnership Assets

• Partners should make additional contributions in the partnership


• Any partner who contributed in excess of his share in the liability
has a right to collect the supposed additional contributions from the
other partners.
RULES ON SETTLING ACCOUNTS AFTER
DISSOLUTION
Preference of Partnership Creditors and Partners’ Separate
Creditors

• Creditors of the Partnership – priority in payments over those of the


partners’ separate creditors as regards the partnership properties

• Creditors of the Partners – preferred with respect to the separate or


personal properties of the partners
RULES ON SETTLING ACCOUNTS AFTER
DISSOLUTION
Distribution of Separate Properties of an Insolvent Partner

Personal properties of insolvent partners shall be distributed as


follows:
• Owing to separate creditors
• Owing to partnership creditors
• Owing to the partners by way of additional contributions when
partnership assets were insufficient to settle all obligations
METHODS OF PARTNERSHIP LIQUIDATION
Lump-sum Method
- all non-cash are realized and the related gains or losses distributed and
all liabilities are paid before a single final cash distribution is made to
the partners

• Realization of Non-cash asset


• Settlement of Liabilities
• Distribution to partners
METHODS OF PARTNERSHIP LIQUIDATION
Entries Related to Liquidation
1. Sale of Non-cash assets
• At Book Value
Cash xxx
Non-cash Assets xxx

• Above Book Value Below Book Value


Cash xxx Cash xxx
Non-cash Assets xxx Loss xxx
Gain on Realization xxx Non-cash xxx
METHODS OF PARTNERSHIP LIQUIDATION
Entries Related to Liquidation
2. Distribution of Gain or Loss on Realization based on Partners’ P/L
Ratio
• Distribution of Gain on Realization
Gain on Realization xxx
Partner, Capital xxx

• Distribution of Loss on Realization


Partner, Capital xxx
Loss on Realization xxx
METHODS OF PARTNERSHIP LIQUIDATION
Entries Related to Liquidation
3. Payment of Liabilities
Liabilities xxx
Cash xxx

4. Exercise of Right of Offset


Partner, Loan xxx
Partner, Capital xxx
METHODS OF PARTNERSHIP LIQUIDATION
Entries Related to Liquidation
5. Additional Investment by Deficient Partner
Cash xxx
Partner, Capital xxx

6. Deficiency Absorbed by Solvent Partner


Partner, Loan xxx
Partner, Capital xxx
ILLUSTRATION-LUMP SUM
Sample Problem
METHODS OF PARTNERSHIP LIQUIDATION
Installment Method
-realization of non-cash assets is accomplished over an extended period
of time
-creditors may be partially or fully paid when cash is available
-Any excess may be distributed to the partners in accordance with
program of safe payments or cash priority program

• Realization
• Settlement
• Distribution
METHODS OF PARTNERSHIP LIQUIDATION
Procedures of Installment Liquidation
• Realization of non-cash assets and distribution of gain or loss on
realization among the partners
• Payment of liquidation expenses and adjustment for unrecorded
liabilities (distributed among the partners)
• Payment of liabilities to outsiders
• Distribution of available cash based on schedule of safe payments
or cash priority program
METHODS OF PARTNERSHIP LIQUIDATION
Restricted Interest
-Portion of a partner’s interest which should remain available to absorb
possible future losses
-Provided for assumed non-sale of remaining non-cash assets and for
assumed insolvency of deficient partners

Free Interest
- Resulting balance when all restricted interests are satisfied
METHODS OF PARTNERSHIP LIQUIDATION
Safeguards
• Schedule of safe payments
⚬ Worst case scenarios
￭ All non-cash assets will never be realized
￭ All partners are insolvent
• Cash Priority Program
• prepared at the start of the liquidation process
Loss Absorption Balances
• Maximum loss that partners can absorb without reducing their
equity below zero
ILLUSTRATION-INSTALLMENT
METHOD:CASH
Sample problem PRIORITY PROGRAM
ILLUSTRATION-INSTALLMENT
METHOD:SCHED
Sample problem OF SAFE PAYMENTS

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