CHAPTER 4 - LIQUIDATION

• LIQUIDATION - is the 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.
• REALIZATION - the conversion of non-cash assets into cash.
• the assets of the partnership consist of the following:

  1. partnership property,
  2. additional contributions of the partners needed for the payment of all liabilities consistent with the discussions below.
• order of preference

  the assets of a general partnership shall be applied in the following order:

  1. first, those owing to outside creditors,
  2. second, those owing to inside creditors in the form of loans or advances for business expenses by the partners,
  3. third, those owing to the partners with respect to their capital contributions,
  4. lastly, those owing to the partners with respect to their share of the profits.
• RIGHT TO OFFSET - this privilege is the legal right of a partner to apply part or all of his loan account balance against his capital deficiency resulting from losses in the realization of the partnership assets.
• distribution of separate properties of an insolvent partner

  if a partner is insolvent, his personal properties shall be distributed as follows:

  1. first, those owing to separate creditors,
  2. second, those owing to partnership creditors,
  3. lastly, those owing to the partners by way of additional contributions when the assets of the partnership were insufficient to settle all obligations.
• LUMP-SUM METHOD - all non-cash assets 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.
• INSTALLMENT METHODS - realization of non-cash assets is accomplished over an extended period of time. when cash is available, creditors may be partially or fully paid. any excess may be distributed to the partners in accordance with a program of safe payments or a cash priority program. this process persists until all the non-cash assets are sold.
• True - a substantial loss on realization may yield for a partner a capital deficiency
• False - a substantial loss on realization may not yield for a partner a capital deficiency.
• partner's interest - the sum of his capital and loan accounts-in the partnership