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    Partnership Liquidation (Installment)

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    Johncel Tawat
    This document discusses liquidation by installment for partnerships. It involves selling non-cash assets over time and distributing cash to partners as it becomes available, even before all assets are sold. A schedule of safe payments must be prepared each time cash is distributed to ensure reserves are set aside for remaining assets, contingencies, and capital deficiencies. Alternatively, a cash priority program can be established upfront to determine how cash will be distributed as it becomes available based on partners' loss absorption capacities and profit/loss ratios.

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    Partnership Liquidation (Installment)

    Uploaded by

    Johncel Tawat
    28 views3 pages
    This document discusses liquidation by installment for partnerships. It involves selling non-cash assets over time and distributing cash to partners as it becomes available, even before all assets are sold. A schedule of safe payments must be prepared each time cash is distributed to ensure reserves are set aside for remaining assets, contingencies, and capital deficiencies. Alternatively, a cash priority program can be established upfront to determine how cash will be distributed as it becomes available based on partners' loss absorption capacities and profit/loss ratios.

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    This document discusses liquidation by installment for partnerships. It involves selling non-cash assets over time and distributing cash to partners as it becomes available, even before all assets are sold. A schedule of safe payments must be prepared each time cash is distributed to ensure reserves are set aside for remaining assets, contingencies, and capital deficiencies. Alternatively, a cash priority program can be established upfront to determine how cash will be distributed as it becomes available based on partners' loss absorption capacities and profit/loss ratios.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    28 views3 pages

    Partnership Liquidation (Installment)

    Uploaded by

    Johncel Tawat
    This document discusses liquidation by installment for partnerships. It involves selling non-cash assets over time and distributing cash to partners as it becomes available, even before all assets are sold. A schedule of safe payments must be prepared each time cash is distributed to ensure reserves are set aside for remaining assets, contingencies, and capital deficiencies. Alternatively, a cash priority program can be established upfront to determine how cash will be distributed as it becomes available based on partners' loss absorption capacities and profit/loss ratios.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    This module focuses on the other type of partnership liquidation: liquidation by installment.

    Under
    installment liquidation, non-cash assets are sold on a piece-meal basis over an extended period of time.
    Cash realized is immediately distributed to partners after fully satisfying creditors’ claims or after setting
    aside sufficient cash for these liabilities.

    After successful completion of this module, you should be able to:


     Understand partnership liquidation by installment
     Prepare a statement of liquidation (installment basis)
     Make a schedule of safe payments and cash priority program

    Under this type of liquidation, the cash is distributed to partners as it becomes available even before all
    non-cash assets are converted into cash, and the total gain or loss on realization is known.

    Steps in Installment Liquidation


    1. Sale of non-cash assets and distribution or allocation of gain or loss
     Must be performed every time a portion of the non-cash assets are sold.
    2. Payment of liabilities
     If there are liquidation expenses, it must also be paid at this point
    3. Distribution of cash to partners (observe the marshaling of asset & right of offset
    concepts here)
     Schedule of Safe Payments
     Cash Priority Program

    The schedule of safe payments is similar to the schedule of cash distribution in lump-sum partnership
    liquidation. The only difference is that the restricted interest in the schedule of safe payments is composed
    of: [1] the book value of the remaining unsold assets, [2] cash withheld for contingencies, and [3] capital
    deficiency of partner(s). This schedule must be prepared every time there is cash distribution to partners
    to ensure that cash is distributed after safely setting aside the appropriate reserves. The schedule of safe
    payments is prepared as follows:

    Partner 1 Partner 2 Partner 3


    Capital balances before distribution XX XX XX
    Add: Loan balance XX XX XX
    Total partner’s interest XX XX XX
    Add (Less): Restricted interest
    1. BV of remaining unsold assets (XX) (XX) (XX)
    2. Cash withheld for contingencies (XX) (XX) (XX)
    3. Capital deficiency of partner(s) (XX) XX (XX)
    Free interest − Amounts paid to partners (first
    XX XX XX
    applied to loan, then on capital balance)

    Instead of preparing a schedule of safe payments every time cash is distributed, the partners may decide
    to determine in advance how cash must be distributed as it becomes available through the preparation
    of a cash priority program. It is prepared prior to liquidation through the following steps:

    1. Determine the total partners’ interest (capital+/-loans)


    2. Determine each partners’ loss absorption capacity (partners’ interest ÷ P/L ratio). The
    partner with the highest loss absorption balance has the first priority on cash
    distribution.
    3. Allocate the payments. Starting with the highest loss absorption balance, determine the
    first allocation by reducing the highest balance to the next highest. The difference is
    then multiplied to that partners’ P/L ratio to get the payment. Repeat the process until
    all loss absorption balance is the same. When cash is not enough to cover an allocation,
    the partners must share the insufficient cash based on their P/L ratio.
    4. Further cash distributions after the cash payments based on the program are satisfied
    must be made using the partner’s profit and loss ratio.
    NOTE: The amount of distribution to partners must be the same under the schedule of safe payments
    and cash priority program.

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