Partnership Liquidation

Cards (14)

  • Liquidation refers to the termination of business operation. It is the winding up of business activities, where partnership assets are sold, the partnership liabilities are paid, and distribution of remaining cash to the partners.
  • The objective of the firm during the liquidation process is to convert non-cash assets to cash, to pay the partnership liabilities, and to distribute the cash and any unrealized assets to the partners.
  • Partnership assets shall be applied in the order of: (1) Those owing to partnership creditors; (2) Those owing to partners other than for capital and profits; (3) Those owing to partners for capital; and (4) Those owing to partners for their share in profits.
  • The two types of partnership liquidation are lump-sum liquidation and installment liquidation.
  • Lump-sum liquidation involves a single distribution of cash to partners after all non-cash assets are realized and the gain or loss has been distributed and all liabilities of the partnership are settled
  • Installment liquidation involves multiple distribution of cash, conversion of nca, and settlement of liabilities.
  • Liquidation expenses are expenses incurred in the liquidation process such as sales commission and shipping cost related to disposal of sale of non-cash assets.
  • If the deficient partner has a loan balance, exercise the right of offset.
  • Right of offset is the legal right to use all or part of his loan account balance against his capital deficiency resulting from losses in the process of liquidation.
  • If the partner is solvent, make an additional investment of cash to eliminate the deficiency.
  • If the deficient partner is insolvent, then the other partners will absorb his deficiency.
  • Insolvent partner is a partner whose personal liabilities exceed his personal assets
  • Cash Priority Program is a plan prepared before the liquidation process. It is an alternative method to determine how cash can be safely allocated to partners if it becomes available.
  • The schedule of safe payment and cash priority program will produce the same amount of cash distribution to partners