Chapter 14: Partnership Liquidation

What is liquidation?

It is the process of ending the business by converting assets to cash, paying liabilities, and distributing remaining cash to partners.

What are the 3 steps in liquidation?

1. Realization (sell assets)
2. Settlement of liabilities
3. Distribution to partners
   Tagalog: Ibenta → bayaran utang → hatiin pera.

Difference between realization and liquidation?

Realization = converting assets to cash
Liquidation = entire winding-up process

What is lump-sum liquidation?

All assets are sold at once, then all payments are made in one final distribution.
Tagalog: Isang bagsakan—benta lahat, bayad lahat, hati agad.

What is installment liquidation?

Assets are sold gradually, and payments are made step-by-step as cash becomes available.

What is the order of settlement of claims?

1. Outside creditors
2. Inside creditors (partners’ loans)
3. Partners’ capital

How do you compute total gain or loss in liquidation?

Net cash proceeds – carrying amount of non-cash assets
Tagalog: Benta – book value = gain or loss

What is included in net cash proceeds?

Cash from sale of assets
LESS liquidation expenses
Tagalog: Cash na nakuha minus gastos sa liquidation

How is loss/gain distributed?

Based on profit and loss ratio

Steps in lump-sum liquidation?

1. Compute total loss/gain
2. Allocate to partners
3. Pay liabilities
4. Distribute remaining cash

What is the rule for unsold assets in installment liquidation?

Treat them as loss (lugi)

What expenses must be recognized immediately?

Future liquidation expenses
Possible liabilities

Basic formula for cash available to partners

Beginning cash
Net proceeds
– Payments to creditors

What happens if a partner has a capital deficiency?

If solvent → must contribute cash
If insolvent → deficiency is absorbed by other partners
Tagalog: Pag may kulang:
→ kaya magbayad = magdagdag
→ hindi kaya = hatiin ng iba

How is deficiency allocated to other partners?

Based on remaining partners’ P/L ratio

What is marshalling of assets?

A rule for prioritizing claims when both partnership and partners are insolvent
Tagalog: Rules kung paano babayaran utang kapag kulang lahat

Order of claims on personal assets of partner

1. Personal creditors
2. Partnership creditors
3. Other partners

What is a safe payment schedule?

A schedule that ensures partners are not overpaid
Tagalog: Para siguradong walang sobra ang bayad

What is maximum possible loss?

Unsold assets + future expenses

What is cash priority program?

A ranking of partners on who gets paid first
Tagalog: Listahan kung sino mauuna sa bayad

Ultimate flow of liquidation problems?

1. Compute loss
2. Allocate loss
3. Adjust capital
4. Pay creditors
5. Distribute remaining cash