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Liquidation by Installment

The document discusses liquidation by installment of a partnership. It defines dissolution as when a partner ceases being associated with the business. Liquidation refers to terminating business activities and winding up affairs. The installment liquidation process determines each partner's loss absorption capacity by dividing total partner interest by profit/loss ratios. Cash is then distributed based on these ratios once all loss is absorbed.

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Kristia Anagap
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78 views

Liquidation by Installment

The document discusses liquidation by installment of a partnership. It defines dissolution as when a partner ceases being associated with the business. Liquidation refers to terminating business activities and winding up affairs. The installment liquidation process determines each partner's loss absorption capacity by dividing total partner interest by profit/loss ratios. Cash is then distributed based on these ratios once all loss is absorbed.

Uploaded by

Kristia Anagap
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 DOCX, PDF, TXT or read online on Scribd
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• Liquidation by Installment

• Dissolution of a Partnership
• Is defined in Article 1825 of the Civil
Code of the Philippines as the change
in the relation of the partners caused by
any partner ceasing to be associated in
the carrying out of the business.

• Dissolution refers to the termination of


the life of an existing partnership and
may be followed by:
1. Formation of a New Partnership
2. Liquidation
• Partnership Liquidation
• Refers to dissolution of the partnership
leading to the termination of the
business activities carried on by the
partnership
• And the winding up of partnership’s
business affairs going out of business
• Installment Liquidation

• Cash Priority Program


• The program is prepared prior to liquidation,
that is, before cash becomes available for
distribution.

– 1. Determine total partners’ interest


– 2. Divide the total partners’ interest by
their profit and loss ratio to get each
partner’s loss absorption capacity.
– 3. Once the absorption balances are
determined, allocations may now be
made, starting with Allocation I wherein
the highest loss absorption balance is
reduced to the next highest.
– 4. After the partners’ loss absorption
balances are made equal, cash
distributions are made in the profit and
loss ratio.
• Illustration:
• The partners of ABE & Co. share
profits and losses as follows: A, 50%;
B, 20%; C, 20%; D, 10%. On March
31 2008, they agree to liquidate their
partnership. Prior to the liquidation, the
partnership statement of financial
position is shown on the next slide:

• Step 1.
• Step 2

• Step 3-4
• Schedule of Safe Payments
• Restricted interest, in the
Accompanying Schedule to
Determine Amounts to be Paid to
Partners, shall consist of:

• Remaining unsold assets


(Theoretical Loss Approach)
• Cash withheld (for possible
expenses)
• Debit balances in capital

• The unsold noncash assets are treated


as “theoretical loss” or “total loss” and is
charged against the combined capital and
loan balances of the partners based on
profit/loss sharing ratio.
• A partner whose combined capital and
loan balances could not fully absorbed his
share of theoretical loss will develop a
capital deficiency and he is assumed to be
personally insolvent. His capital deficiency
will be absorbed by the other partners with
capital credit balances as an “additional
loss” based on P/L ratio.

• Cash is distributed to a partner only if


he has an excess credit balance in his
partnership interest (i.e, capital account or
capital and loan accounts combined) after
absorption of his share of maximum possible
loss

• Schedule of Safe Payments

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