Chapter 16

Partnerships:
Liquidation
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 16-1

Understand and explain

terms associated with
partnership liquidations.

16-2
 Overview of Partnership Liquidations

 The Uniform Partnership Act of 1997

includes seven sections which deal
specifically with the dissolution and winding
up of a partnership.
 Creditors have first claim to the partnership’s
assets.
 After the creditors are fully satisfied, any
remaining assets are distributed to the partners
based on the balances in their capital accounts.

16-3
 Overview of Partnership Liquidations

 Disassociation
 The legal description of the withdrawal of a
partner, including the following:
1. A partner’s death.
2. A partner’s voluntary withdrawal.
3. A judicial determination.
 Not all dissociations result in a partnership
liquidation.

16-4
 Overview of Partnership Liquidations

 Dissolution
 The dissolving of a partnership
 Events that cause dissolution and winding up:
1. In a partnership at will, a partner’s express notice
to leave the partnership.
2. In a partnership for a definite term or specific
undertaking:
a) When after a partner’s death or wrongful dissociation, at
least half of the remaining partners decide to wind up the
partnership business.
b) When all of the partners agree to wind up the business .
c) When the term or specific undertaking has expired or
been completed.
16-5
 Overview of Partnership Liquidations

 Events that cause dissolution and

winding up:
 An event that makes it unlawful to carry on a
substantial part of the partnership business.
 A judicial determination.
 On dissolution, the partnership begins the
winding up of the partnership’s business.

16-6
 Overview of Partnership Liquidations

 Winding up and liquidation begins after

the dissolution of the partnership.
 The partnership continues for the limited
purpose of winding up the business and
completing work in process.
 Winding up process includes the transactions
necessary to liquidate the partnership.
 Some partnerships change to the liquidation
basis of accounting once they no longer consider
the business to be a going concern.

16-7
 Overview of Partnership Liquidations

 Loans to/from partners

 According to the UPA 1997, liabilities to partners
for loans the partners made to the partnership
generally have the same status as liabilities to
the partnerships’ third party creditors.
 These loans have no priority for payment.
 Receivables from partners for loans or other
advances made by the partnership to partners
have the same status as other assets of the
partnership.

16-8
 Overview of Partnership Liquidations

 Deficits in partners’ capital accounts

 Generally, a partner with a deficit in his or her
capital account must make a contribution to the
partnership to remedy that capital deficit.
 Liquidating distributions, in cash, are made to
each partner with a capital credit balance.
 If a partner fails to remedy his or her capital
deficit, all other partners must contribute, in the
proportion to which those partners share
partnership losses, the additional amount
necessary to pay the partnership’s obligations.
16-9
 Overview of Partnership Liquidations

 Statement of partnership realization and

liquidation
 May be prepared to guide and summarize the
partnership liquidation process.
 Often called a “statement of liquidation.”
 It presents, in worksheet form, the effects of the
liquidation on the partnership balance sheet
accounts.

16-10
 Practice Quiz Question #1

The difference between disassociation and

dissolution is:
a. Dissolution relates to adding a powder to a
liquid.
b. Disassociation relates to the withdrawal of
a partner and dissolution relates to the
winding up of a partnership.
c. Dissolution relates to the dissolving of a
partner’s personal assets.
d. Dissolution relates to the withdrawal of a
partner and disassociation relates to the
winding up of a partnership.
16-11
 Practice Quiz Question #1 Solution

The difference between disassociation and

dissolution is:
a. Dissolution relates to adding a powder to a
liquid.
b. Disassociation relates to the withdrawal of
a partner and dissolution relates to the
winding up of a partnership.
c. Dissolution relates to the dissolving of a
partner’s personal assets.
d. Dissolution relates to the withdrawal of a
partner and disassociation relates to the
winding up of a partnership.
16-12
Learning Objective 16-2

Make calculations related to

lump-sum partnership
liquidations.

16-13
 The Liquidation Process

1. Non-cash assets
converted to cash.
2. Creditors paid to
the extent possible.
3. Remaining funds
(if any) distributed
to partners.

16-14
 Group Exercise 1: Lump-sum Liquidation
Partners Larry, Curly, and Moe share profits and losses in the ratio of 3:2:1,
respectively. The partners voted to liquidate the partnership when its assets,
liabilities, and capital were as follows:
Cash $ 7,000 Liabilities $24,000
Non-cash assets 90,000 Loan, Larry 5,000
Loan, Moe 10,000
Capital, Larry 22,000
Capital, Curly 27,000
__________ Capital, Moe 9,000
Total Assets $97,000 Total Liabilities & Equity $97,000
Assume that all the noncash assets were sold for $42,000 and that all cash
was distributed to outside creditors and partners.

REQUIRED
Prepare a statement of realization and liquidation.

16-15
 Group Exercise 1: Lump-sum Liquidation
Partners Larry, Curly, and Moe share profits and losses in the ratio of 3:2:1,
respectively. The partners voted to liquidate the partnership when its assets,
liabilities, and capital were as follows:
Cash $ 7,000 Liabilities $24,000
Non-cash assets 90,000 Loan, Larry 5,000
Loan, Moe 10,000
Capital, Larry 22,000
Capital, Curly 27,000
__________ Capital, Moe 9,000
Total Assets $97,000 Total Liabilities & Equity $97,000
Assume that all the noncash assets were sold for $42,000 and that all cash
was distributed to outside creditors and partners.

Priorities
• What to do with the loss on sale of non-cash assets?
• Pay outside debt.
• Pay inside debt.
• Distribute remainder to partners 16-16
 Group Exercise 1: Solution
Larry, Curly, and Moe
Statement of Realization and Liquidation
Assets = Outside + Partners' Loans + Partners' Capital
Cash + Noncash= Liabilities + Larry + Moe + Larry + Curly + Moe
Beginning Balance 7,000) 90,000) 24,000) 5,000) 10,000) 22,000) 27,000) 9,000)

Proceeds $42,000)
 Book Value (90,000)
Loss $(48,000)

Larry (3/6) Curly (2/6) Moe (1/6)

($24,000) ($16,000) ($8,000)
16-17
 Group Exercise 1: Solution
Larry, Curly, and Moe
Statement of Realization and Liquidation
Assets = Outside + Partners' Loans + Partners' Capital
Cash + Noncash= Liabilities + Larry + Moe + Larry + Curly + Moe
Beginning Balance 7,000) 90,000) 24,000) 5,000) 10,000) 22,000) 27,000) 9,000)
Asset sale & loss
42,000) (90,000) (24,000) (16,000) (8,000)
allocation

16-18
 Group Exercise 1: Solution
Larry, Curly, and Moe
Statement of Realization and Liquidation
Assets = Outside + Partners' Loans + Partners' Capital
Cash + Noncash= Liabilities + Larry + Moe + Larry + Curly + Moe
Beginning Balance 7,000) 90,000) 24,000) 5,000) 10,000) 22,000) 27,000) 9,000)
Asset sale & loss
42,000) (90,000) (24,000) (16,000) (8,000)
allocation
Subtotal 49,000) 0 24,000) 5,000) 10,000) (2,000) 11,000) 1,000)

16-19
 Group Exercise 1: Solution
Larry, Curly, and Moe
Statement of Realization and Liquidation
Assets = Outside + Partners' Loans + Partners' Capital
Cash + Noncash= Liabilities + Larry + Moe + Larry + Curly + Moe
Beginning Balance 7,000) 90,000) 24,000) 5,000) 10,000) 22,000) 27,000) 9,000)
Asset sale & loss
42,000) (90,000) (24,000) (16,000) (8,000)
allocation
Subtotal 49,000) 0 24,000) 5,000) 10,000) (2,000) 11,000) 1,000)
Right to setoff (2,000) 2,000)
49,000) 0 24,000) 3,000) 10,000) 0) 11,000) 1,000)

16-20
 Group Exercise 1: Solution
Larry, Curly, and Moe
Statement of Realization and Liquidation
Assets = Outside + Partners' Loans + Partners' Capital
Cash + Noncash= Liabilities + Larry + Moe + Larry + Curly + Moe
Beginning Balance 7,000) 90,000) 24,000) 5,000) 10,000) 22,000) 27,000) 9,000)
Asset sale & loss
42,000) (90,000) (24,000) (16,000) (8,000)
allocation
Subtotal 49,000) 0 24,000) 5,000) 10,000) (2,000) 11,000) 1,000)
Right to setoff (2,000) 2,000)
49,000) 0 24,000) 3,000) 10,000) 0) 11,000) 1,000)
Outside Distributions
Outside Loans (24,000) (24,000)

16-21
 Group Exercise 1: Solution
Larry, Curly, and Moe
Statement of Realization and Liquidation
Assets = Outside + Partners' Loans + Partners' Capital
Cash + Noncash= Liabilities + Larry + Moe + Larry + Curly + Moe
Beginning Balance 7,000) 90,000) 24,000) 5,000) 10,000) 22,000) 27,000) 9,000)
Asset sale & loss
42,000) (90,000) (24,000) (16,000) (8,000)
allocation
Subtotal 49,000) 0 24,000) 5,000) 10,000) (2,000) 11,000) 1,000)
Right to setoff (2,000) 2,000)
49,000) 0 24,000) 3,000) 10,000) 0) 11,000) 1,000)
Outside Distributions
Outside Loans (24,000) (24,000)
Partners' Loans (13,000) (3,000) (10,000)

16-22
 Group Exercise 1: Solution
Larry, Curly, and Moe
Statement of Realization and Liquidation
Assets = Outside + Partners' Loans + Partners' Capital
Cash + Noncash= Liabilities + Larry + Moe + Larry + Curly + Moe
Beginning Balance 7,000) 90,000) 24,000) 5,000) 10,000) 22,000) 27,000) 9,000)
Asset sale & loss
42,000) (90,000) (24,000) (16,000) (8,000)
allocation
Subtotal 49,000) 0 24,000) 5,000) 10,000) (2,000) 11,000) 1,000)
Right to setoff (2,000) 2,000)
49,000) 0 24,000) 3,000) 10,000) 0) 11,000) 1,000)
Outside Distributions
Outside Loans (24,000) (24,000)
Partners' Loans (13,000) (3,000) (10,000)
Partners' Capital (12,000) (11,000) (1,000)
Ending Balance 0) 0) 0) 0) 0) 0) 0) 0)

16-23
 Sharing of Gains & Losses During Liquidation

 Gains and losses incurred on the

realization of noncash assets
during liquidation are
 allocated among the partners in the
profit-and-loss sharing ratio (such as
4:3:1).
 unless agreed to otherwise by the
partners.

16-24
 Consequences of a Partner Being Personally
Insolvent
 A partner having a capital
account deficit may be able to
eliminate the deficit by
 capital contribution.
 setoff (against loans to the
partnership).
 A deficit that cannot be
eliminated is allocated to
 the remaining partners who have
positive capital balances (using their
P/L sharing ratio).

16-25
 Consequences of a Partner Being Personally
Insolvent
 A partner that winds up
absorbing some or all of
another partner’s capital
deficit has
 legal recourse against that
partner
 because that partner has
broken the terms of the
partnership agreement.

16-26
 Sharing Profits and Losses: In The Ratio of Capital
Balances

 Sharing profits and losses in the ratio of

capital balances
 is one of the most important safeguards used in
partnership agreements.
 results in no partner ever having a capital
account deficit balance until the losses incurred
in liquidation exceed the total partnership
capital.
 Thus, all partners go into a deficit position
simultaneously.

16-27
 The Rule of Setoff

A deficit balance in a partner’s capital

account can be eliminated to the extent that
such partner has a loan to the partnership.

Note Payable Capital,

to Jones Jones
Balances before setoff $30,000) $(11,000)
Apply rule of setoff (11,000) 11,000)
Balances after setoff $19,000) $0)

16-28
 How to Know You’ve Done it Right?

If you allocate losses correctly, the

remaining cash balances at the end should
be exactly enough to pay back partners’
capital balances.

Capital
=

16-29
 Group Exercise 2: Lump-sum Liquidation—
Insolvent
Partners Huey, Dewey, and Louie share profits and losses in the ratio of
3:3:2, respectively. The partners voted to liquidate the partnership when its
assets, liabilities, and capital were as follows:
Cash $ 2,000 Liabilities $35,000
NR from Louie 4,000 Loan, Dewey 17,000
Non-cash assets 82,000 Capital, Huey 11,000
Capital, Dewey 13,000
__________ Capital, Louie 12,000
Total Assets $88,000 Total Liabilities & Equity $88,000
• All the noncash assets of $82,000 were sold for $46,000.
• Louie was personally insolvent and unable to contribute any cash.
• Huey and Dewey were both personally solvent and able to eliminate any
deficits in their capital accounts through setoff or contribution.
• All cash was distributed to outside creditors and partners.
REQUIRED
Prepare a statement of realization and liquidation.
16-30
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

16-31
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)

Proceeds $46,000)
 Book Value (82,000)
Loss $(36,000)

Huey (3/8) Dewey (3/8) Louie (2/8)

($13,500) ($13,500) ($9,000)
16-32
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

16-33
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

16-34
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

Write off Louie (500) (500) 1,000)

16-35
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

Write off Louie (500) (500) 1,000)

Subtotal 48,000) 0) 35,000) 17,000) (3,000) (1,000) 0)

16-36
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

Write off Louie (500) (500) 1,000)

Subtotal 48,000) 0) 35,000) 17,000) (3,000) (1,000) 0)

Right to setoff (1,000) 1,000)

16-37
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

Write off Louie (500) (500) 1,000)

Subtotal 48,000) 0) 35,000) 17,000) (3,000) (1,000) 0)

Right to setoff (1,000) 1,000)
Huey contribution 3,000) 3,000)

16-38
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

Write off Louie (500) (500) 1,000)

Subtotal 48,000) 0) 35,000) 17,000) (3,000) (1,000) 0)

Right to setoff (1,000) 1,000)
Huey contribution 3,000) 3,000)

Subtotal 51,000) 0) 35,000) 16,000) 0) 0) 0)

16-39
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

Write off Louie (500) (500) 1,000)

Subtotal 48,000) 0) 35,000) 17,000) (3,000) (1,000) 0)

Right to setoff (1,000) 1,000)
Huey contribution 3,000) 3,000)

51,000) 0) 35,000) 16,000) 0) 0) 0)

Outside Distributions

Outside Loans (35,000) (35,000)

16-40
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

Write off Louie (500) (500) 1,000)

Subtotal 48,000) 0) 35,000) 17,000) (3,000) (1,000) 0)

Right to setoff (1,000) 1,000)
Huey contribution 3,000) 3,000)

51,000) 0) 35,000) 16,000) 0) 0) 0)

Outside Distributions

Outside Loans (35,000) (35,000)

Partners' Loans (16,000) (16,000)

16-41
 Group Exercise 2: Solution
Huey, Dewey, and Louie
Statement of Realization and Liquidation
Assets = Outside + Part Loan + Partners' Capital
Cash + Noncash = Liabilities + Dewey + Huey + Dewey + Louie

Beginning Balance 2,000) 86,000 35,000) 17,000) 11,000) 13,000) 12,000)

NR Write-off (4,000) (4,000)
Asset sale & loss allocation 46,000) (82,000) (13,500) (13,500) (9,000)

Subtotal 48,000) 0) 35,000) 17,000) (2,500) (500) (1,000)

Write off Louie (500) (500) 1,000)

Subtotal 48,000) 0) 35,000) 17,000) (3,000) (1,000) 0)

Right to setoff (1,000) 1,000)
Huey contribution 3,000) 3,000)

51,000) 0) 35,000) 16,000) 0) 0) 0)

Outside Distributions

Outside Loans (35,000) (35,000)

Partners' Loans (16,000) (16,000)
Ending Balance 0) 0) 0) 0) 0) 0) 0)
16-42
Practice Quiz Question #2

Which of the following statements is true

about a lump-sum partnership liquidation?
a. Lump-sum liquidations take place over an
extended period of time.
b. Lump-sum liquidations can only take place
when the partnership has two partners.
c. Lump-sum liquidations relate mainly to
corporations.
d. Lump-sum liquidations take place all at
once or over a short period of time .

16-43
Practice Quiz Question #2 Solution

Which of the following statements is true

about a lump-sum partnership liquidation?
a. Lump-sum liquidations take place over an
extended period of time.
b. Lump-sum liquidations can only take place
when the partnership has two partners.
c. Lump-sum liquidations relate mainly to
corporations.
d. Lump-sum liquidations take place all at
once or over a short period of time .

16-44
Learning Objective 16-3

Make calculations related to

installment partnership
liquidations.

16-45
 Installment Liquidations: Priority In Distributing
Cash

 What is an installment liquidation?

 Assets are sold over time.
 Cash is distributed throughout the liquidation
process.
 Who gets priority in each round?
 No cash distributions are made to partners
until outside creditors have been paid in full.
 This holds true for both:
 Lump-sum liquidations.
 Installment liquidations.

16-46
 The Statement of Realization and Liquidation

 The statement of realization and

liquidation
 is an historical statement.
 portrays what actually happened in the past
(during the liquidation process).
 is usually prepared in a lump-sum liquidation
(or as a “look back” at an installment
liquidation).

16-47
 The Schedule of Safe Payments

 The schedule of safe payments

 is a pro forma (what if) statement for
installment liquidations.
 portrays what could happen in the
future—on a worst-case basis.
 Must prepare a new schedule for
each $ distribution

16-48
 Cash Distribution Plan

 The cash distribution plan

 is a pro forma (what if) statement for
installment liquidations.
 is only prepared once at the beginning
of the winding up process.

16-49
 Installment Liquidations: “Inside” versus
“Outside” Loans
 Some people seem to have a “fixation” on “equality”
between “inside” and “outside” debt.
 Strictly speaking, the UPA of 1997 says they are equal.
 In practice, partners frequently need to subordinate their debt
to existing “outside” debt.
 We will assume subordination in all in-class examples.
 It makes sense to make payments in the following order:
 Outside debt
 Inside debt
 Capital
 However, this order can result in inequities.
 Partner gets payment for loan and spends it.
 Partner can’t make up deficit balance.
 Other partners have to cover the deficit.
 The legal doctrine of setoff effectively treats loans as
additional capital investments to avoid inequities.
16-50
 Thoughts on Installment Liquidations

 Don’t sell everything at once … BE PATIENT!

 You can’t just start handing out cash!
 You need a plan to ensure FAIRNESS!
 Two types of “plans” for distributing cash:
1. Cash Distribution Plan
(beginning of the process)
2. Schedule of Safe Payments
(with each distribution)
 Ensures that no one gets too much cash too soon.
16-51
 Group Exercise 3: Distributing Available $ to
Partners
The partnership of Snap, Crackle, and Pop is in the process of being liquidated.
The trial balance immediately after the sale of a portion of the noncash assets
and full payment to outside creditors is as follows:
Cash $27,000
NR from Crackle 13,000
Non-cash assets 42,000
Loan, Snap $12,000
Capital, Snap 10,000
Capital, Crackle 19,000
Capital, Pop __________ 41,000
Totals $82,000 $82,000
Snap wants the available cash distributed to her to pay off her loan—she cites
Section 807 of the UPA, which states that partners’ loans have priority over
partners’ capital. Pop wants the cash distributed to him because he has the
largest capital investment. Crackle believes that it should be distributed
equally, which is how profits and losses are shared.
REQUIRED
1. Evaluate the position of each partner.
2. Who should receive the $27,000 available cash?
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets having a
book value of $30,000 are sold for $9,000, who receives the $9,000? 16-52
 Group Exercise 3: Solution
PART 1

 Snap quotes the UPA properly but does not consider the rule
of setoff, which essentially treats a partner’s loan as a capital
contribution in determining how cash should be distributed
to partners.
 Pop’s position indirectly states that he is most able to bear
losses and the cash should be distributed considering this
ability. This general approach is used in distributing cash to
partners.
 Crackle’s position is without merit. The distribution of cash in
liquidation is not related to the manner of sharing profits and
losses.
16-53
 Schedule of Safe Payments

 No cash to partners until AFTER all outside

creditors are paid in full.
 Before any cash goes to the partners, consider
two hypothetical worst-case scenarios.
 All non-cash assets worthless (distribute losses)
 Assume partners absorb any deficits

 Cash only goes to partners with positive

balances.
 It means they have enough excess invested to absorb
even the worst possible scenarios!

16-54
 Group Exercise 3 Continued: Schedule of Safe
Payments
The partnership of Snap, Crackle, and Pop is in the process of being
liquidated. The trial balance immediately after the sale of a portion of the
noncash assets and full payment to outside creditors is as follows:
Cash $27,000
NR from Crackle 13,000
Non-cash assets 42,000
Loan, Snap $12,000
Capital, Snap 10,000
Capital, Crackle 19,000
Capital, Pop __________ 41,000
Totals $82,000 $82,000
Snap wants the available cash distributed to her to pay off her loan—she
cites Section 807 of the UPA, which states that partners’ loans have priority
over partners’ capital. Pop wants the cash distributed to him because he has
the largest capital investment. Crackle believes that it should be distributed
equally, which is how profits and losses are shared.
REQUIRED
1. Evaluate the position of each partner.
2. Who should receive the $27,000 available cash?
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets having
a book value of $30,000 are sold for $9,000, who receives the $9,000? 16-55
 Group Exercise 3: Solution
PART 2

 The two worst-case assumptions are needed to determine

who gets the cash. A schedule of safe payments follows:
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance 12,000)
Preliquidation capital balance 10,000) 19,000) 41,000)
Preliquidation loan from partnership (13,000)
22,000) 6,000) 41,000)

16-56
 Group Exercise 3: Solution
PART 2

 The two worst-case assumptions are needed to determine

who gets the cash. A schedule of safe payments follows:
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance 12,000)
Preliquidation capital balance 10,000) 19,000) 41,000)
Preliquidation loan from partnership (13,000)
22,000) 6,000) 41,000)
First worst-case assumption:
Assume full loss of all non-cash assets (14,000) (14,000) (14,000)
Subtotal 8,000) (8,000) 27,000)

16-57
 Group Exercise 3: Solution
PART 2

 The two worst-case assumptions are needed to determine

who gets the cash. A schedule of safe payments follows:
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance 12,000)
Preliquidation capital balance 10,000) 19,000) 41,000)
Preliquidation loan from partnership (13,000)
22,000) 6,000) 41,000)
First worst-case assumption:
Assume full loss of all non-cash assets (14,000) (14,000) (14,000)
Subtotal 8,000) (8,000) 27,000)
Second worst-case assumption:
Assume Crackle's deficit is absorbed by
other partners (4,000) 8,000) (4,000)

16-58
 Group Exercise 3: Solution
Loan, Snap 4,000
PART 2 Capital, Pop 23,000
Cash 27,000

 The two worst-case assumptions are needed to determine

who gets the cash. A schedule of safe payments follows:
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance 12,000)
Preliquidation capital balance 10,000) 19,000) 41,000)
Preliquidation loan from partnership (13,000)
22,000) 6,000) 41,000)
First worst-case assumption:
Assume full loss of all non-cash assets (14,000) (14,000) (14,000)
Subtotal 8,000) (8,000) 27,000)
Second worst-case assumption:
Assume Crackle's deficit is absorbed by
other partners (4,000) 8,000) (4,000)
Cash to be distributed to Snap and Pop 4,000) 0) 23,000)
16-59
 Group Exercise 3: Solution
PART 3

Snap Snap Crackle Pop

Loan Capital Capital Capital
Beginning Balances $12,000) $10,000) $19,000) $41,000)

First Cash Distribution (4,000) (23,000)

Updated Balances $ 8,000) $10,000) $19,000) $18,000)

16-60
 Group Exercise 3 Continued: Schedule of Safe
Payments
The partnership of Snap, Crackle, and Pop is in the process of being
liquidated. The trial balance immediately after the sale of a portion of the
noncash assets and full payment to outside creditors is as follows:
Cash $ 0
NR from Crackle 13,000
Non-cash assets 42,000 Proceeds $9,000)
Loan, Snap $ 8,000  Book Value (30,000)
Capital, Snap 10,000
Capital, Crackle 19,000 Loss $(21,000)
Capital, Pop __________ 18,000
Totals $55,000 $55,000
Snap wants the available cash distributed to her to pay off her loan—she
cites Section 807 of the UPA, which states that partners’ loans have priority
over partners’ capital. Pop wants the cash distributed to him because he has
the largest capital investment. Crackle believes that it should be distributed
equally, which is how profits and losses are shared.
REQUIRED
1. Evaluate the position of each partner.
2. Who should receive the $27,000 available cash?
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets
having a book value of $30,000 are sold for $9,000, who receives the $9,000?
16-61
 Group Exercise 3: Solution
PART 3

Snap Snap Crackle Pop

Loan Capital Capital Capital
Beginning Balances $12,000) $10,000) $19,000) $41,000)

First Cash Distribution (4,000) (23,000)

Updated Balances $ 8,000) $10,000) $19,000) $18,000)

16-62
 Group Exercise 3: Solution
PART 3

Snap Snap Crackle Pop

Loan Capital Capital Capital
Beginning Balances $12,000) $10,000) $19,000) $41,000)

First Cash Distribution (4,000) (23,000)

Updated Balances $ 8,000) $10,000) $19,000) $18,000)

Allocation of loss on sale (7,000) (7,000) (7,000)

Updated Balances $ 8,000) $ 3,000) $12,000) $11,000)

16-63
 Group Exercise 3 Continued: Schedule of Safe
Payments
The partnership of Snap, Crackle, and Pop is in the process of being
liquidated. The trial balance immediately after the sale of a portion of the
noncash assets and full payment to outside creditors is as follows:
Cash $ 9,000
NR from Crackle 13,000
Non-cash assets 12,000
Loan, Snap $ 8,000
Capital, Snap 3,000
Capital, Crackle 12,000
Capital, Pop __________ 11,000
Totals $34,000 $34,000
Snap wants the available cash distributed to her to pay off her loan—she
cites Section 807 of the UPA, which states that partners’ loans have priority
over partners’ capital. Pop wants the cash distributed to him because he has
the largest capital investment. Crackle believes that it should be distributed
equally, which is how profits and losses are shared.
REQUIRED
1. Evaluate the position of each partner.
2. Who should receive the $27,000 available cash?
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets
having a book value of $30,000 are sold for $9,000, who receives the $9,000?
16-64
 Group Exercise 3: Solution
PART 3
Schedule of Safe Payments to Partners
 Beginning Balances are after the above cash distribution of $27,000 and
after the $21,000 loss on the sale of noncash assets for $9,000.
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance 8,000)
Preliquidation capital balance 3,000) 12,000) 11,000)
Preliquidation loan from partnership (13,000)
11,000) (1,000) 11,000)

16-65
 Group Exercise 3: Solution
PART 3
Schedule of Safe Payments to Partners
 Beginning Balances are after the above cash distribution of $27,000 and
after the $21,000 loss on the sale of noncash assets for $9,000.
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance 8,000)
Preliquidation capital balance 3,000) 12,000) 11,000)
Preliquidation loan from partnership (13,000)
11,000) (1,000) 11,000)
First worst-case assumption:
Assume full loss of all non-cash assets (4,000) (4,000) (4,000)
Subtotal 7,000) (5,000) 7,000)

16-66
 Group Exercise 3: Solution
PART 3
Schedule of Safe Payments to Partners
 Beginning Balances are after the above cash distribution of $27,000 and
after the $21,000 loss on the sale of noncash assets for $9,000.
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance 8,000)
Preliquidation capital balance 3,000) 12,000) 11,000)
Preliquidation loan from partnership (13,000)
11,000) (1,000) 11,000)
First worst-case assumption:
Assume full loss of all non-cash assets (4,000) (4,000) (4,000)
Subtotal 7,000) (5,000) 7,000)
Second worst-case assumption:
Assume Crackle's deficit is absorbed by other
partners (2,500) 5,000) (2,500)

16-67
 Group Exercise 3: Solution
Loan, Snap 4,500
PART 3 Capital, Pop 4,500
Cash 9,000
Schedule of Safe Payments to Partners
 Beginning Balances are after the above cash distribution of $27,000 and
after the $21,000 loss on the sale of noncash assets for $9,000.
Schedule of Safe Payments to Partners
Partner
Snap Crackle Pop
Preliquidation loan balance 8,000)
Preliquidation capital balance 3,000) 12,000) 11,000)
Preliquidation loan from partnership (13,000)
11,000) (1,000) 11,000)
First worst-case assumption:
Assume full loss of all non-cash assets (4,000) (4,000) (4,000)
Subtotal 7,000) (5,000) 7,000)
Second worst-case assumption:
Assume Crackle's deficit is absorbed by other
partners (2,500) 5,000) (2,500)
Cash to be distributed to Snap and Pop 4,500) 0) 4,500)

16-68
 Installment Liquidations: Different Strokes For
Different Folks
 The amount to be distributed to each
partner at any point in time can be
determined by preparing either of the
following items:
 Schedules of safe payments at each cash
distribution date.
 Will have to be done several times.
 A cash distribution plan at the beginning of the
liquidation process.
 Need be done only once.

16-69
 Installment Liquidations

 The effect of distributing cash to partners

based on either
(a) schedules of safe payments or
(b) cash distribution plans
is to bring the capital balances into the
profit-and-loss sharing ratio.

16-70
 Installment Liquidations: Loss Absorption
Potential
 Conceptually, the first cash distribution
to partners goes to that partner who
has the highest loss absorption
potential (LAP).
 This is not necessarily the partner who has the
highest capital balance.

16-71
 Installment Liquidations: Loss Absorption
Potential—Calculating

 The loss absorption potential (LAP) of

each partner is calculated by
 dividing the partner’s capital balance by his or
her profit-and-loss sharing percentage.

Capital balance, Jones $80,000

= $400,000
Jones’ P/L sharing percentage 20%
Loss
Absorption
Potential

16-72
 Installment Liquidations: Loss Absorption
Potential—Loans “To”
 In calculating a partner’s loss absorption
potential, a partner’s loan to the partnership
is added to the partner’s capital balance.

Capital balance, Jones $80,000

PLUS
Note payable to Jones 10,000
Total $90,000
= $450,000
Jones’ P/L sharing percentage 20%
Loss
Absorption
Potential
16-73
 Installment Liquidations: Loss Absorption
Potential—Loans “From”
 In calculating a partner’s loss absorption
potential, a partner’s loan from the
partnership is subtracted from the partner’s
capital balance.
Capital balance, Jones $80,000
MINUS
Note payable from Jones (5,000)
Total $75,000
= $375,000
Jones’ P/L sharing percentage 20%
Loss
Absorption
Potential
16-74
 Installment Liquidations: Loss Absorption
Potential—Implications

 Consequences of Having the Highest Loss

Absorption Potential:
He or she will be:
 The first partner to receive cash.
 The partner that could suffer the greatest inequity
in relation to his or her capital balance.

It is NOT a good thing to have

the highest loss absorption potential.

16-75
 Group Practice: Loss Absorption Potential
The partnership of Snap, Crackle, and Pop is in the process of being
liquidated. The trial balance immediately after the sale of a portion of the
noncash assets and full payment to outside creditors is as follows:
Cash $27,000
NR from Crackle 13,000
Non-cash assets 42,000
Loan, Snap $12,000
Capital, Snap 10,000
Capital, Crackle 19,000
Capital, Pop __________ 41,000
Totals $82,000 $82,000

REQUIRED
 Calculate the loss absorption potential for Snap, Crackle, and Pop.

16-76
 Group Practice: Loss Absorption Potential

Snap Crackle Pop

Capital $10,000) $19,000) $41,000)

Loan to (from) partnership 12,000) (13,000) 0)

$22,000) $ 6,000) $41,000)

Profit/loss sharing ratio 1/3 1/3 1/3

Loss absorption potential $66,000) $18,000) $123,000)

Based on these calculations, who should receive cash first?

Pop!
16-77
Practice Quiz Question #3

In liquidation, cash distributions to

partners are determined based on:
a. Who has the highest capital balance.
b. How profits and losses are shared.
c. Partners’ loans to the partnership
having priority over partners’ capital
balances.
d. The marshalling of assets principle.
e. The rule of setoff.
f. None of the above.

16-78
Practice Quiz Question #3 Solution

In liquidation, cash distributions to

partners are determined based on:
a. Who has the highest capital balance.
b. How profits and losses are shared.
c. Partners’ loans to the partnership
having priority over partners’ capital
balances.
d. The marshalling of assets principle.
e. The rule of setoff.
f. None of the above.

16-79
 Group Exercise 3 Continued: Cash Distribution
Plan
The partnership of Snap, Crackle, and Pop is in the process of being
liquidated. The trial balance immediately after the sale of a portion of the
noncash assets and full payment to outside creditors is as follows:
Cash $27,000
NR from Crackle 13,000
Non-cash assets 42,000
Loan, Snap 12,000
Capital, Snap 10,000
Capital, Crackle 19,000
Capital, Pop __________ 41,000
Totals $82,000 $82,000
Snap wants the available cash distributed to her to pay off her loan—she
cites Section 807 of the UPA, which states that partners’ loans have priority
over partners’ capital. Pop wants the cash distributed to him because he has
the largest capital investment. Crackle believes that it should be distributed
equally, which is how profits and losses are shared.
REQUIRED
1. Evaluate the position of each partner.
2. Who should receive the $27,000 available cash?
3. Optional: If subsequent to the cash distribution of $27,000, noncash assets
having a book value of $30,000 are sold for $9,000, who receives the $9,000?
16-80
 Cash Distribution Plan: Snap, Crackle, and Pop

Cash Distribution Plan

Loss Absorption Potential Snap Snap Crackle Pop
Snap Crackle Pop Loan Capital Capital Capital
12,000 10,000 6,000 41,000 )
Loss absorption potential 66,000 18,000 123,000
Cash distributed to Pop 57,000 x 1/3 = 19,000)
66,000 18,000 66,000 12,000 10,000 6,000 22,000)
Cash distributed to Pop/ Snap 48,000 48,000 12,000 4,000 16,000)
18,000 18,000 18,000 0 6,000 6,000 6,000)

16-81
 Cash Distribution Plan: Snap, Crackle, and Pop

Cash Distribution Plan

Loss Absorption Potential Snap Snap Crackle Pop
Snap Crackle Pop Loan Capital Capital Capital
12,000 10,000 6,000 41,000 )
Loss absorption potential 66,000 18,000 123,000
Cash distributed to Pop 57,000 x 1/3 = 19,000)
66,000 18,000 66,000 12,000 10,000 6,000 22,000)
Cash distributed to Pop/ Snap 48,000 48,000 12,000 4,000 16,000)
18,000 18,000 18,000 0 6,000 6,000 6,000)

16-82
 Cash Distribution Plan: Snap, Crackle, and Pop

Cash Distribution Plan

Loss Absorption Potential Snap Snap Crackle Pop
Snap Crackle Pop Loan Capital Capital Capital
12,000 10,000 6,000 41,000 )
Loss absorption potential 66,000 18,000 123,000
Cash distributed to Pop 57,000 x 1/3 = 19,000)
66,000 18,000 66,000 12,000 10,000 6,000 22,000)
Cash distributed to Pop/ Snap 48,000 48,000 12,000 4,000 16,000)
18,000 18,000 18,000 0 6,000 6,000 6,000)

16-83
 Cash Distribution Plan: Snap, Crackle, and Pop

Cash Distribution Plan

Loss Absorption Potential Snap Snap Crackle Pop
Snap Crackle Pop Loan Capital Capital Capital
12,000 10,000 6,000 41,000 )
Loss absorption potential 66,000 18,000 123,000
Cash distributed to Pop 57,000 x 1/3 = 19,000)
66,000 18,000 66,000 12,000 10,000 6,000 22,000)
Cash distributed to Pop/ Snap 48,000 48,000 12,000 4,000 16,000)
18,000 18,000 18,000 0 6,000 6,000 6,000)

16-84
 Cash Distribution Plan: Snap, Crackle, and Pop

Cash Distribution Plan

Loss Absorption Potential Snap Snap Crackle Pop
Snap Crackle Pop Loan Capital Capital Capital
12,000 10,000 6,000 41,000 )
Loss absorption potential 66,000 18,000 123,000
Cash distributed to Pop 57,000 19,000)
66,000 18,000 66,000 12,000 10,000 6,000 22,000)
Cash distributed to Pop/ Snap 48,000 48,000 x 1/3 = 16,000)
18,000 18,000 18,000 0 6,000 6,000 6,000)

16-85
 Cash Distribution Plan: Snap, Crackle, and Pop

Cash Distribution Plan

Loss Absorption Potential Snap Snap Crackle Pop
Snap Crackle Pop Loan Capital Capital Capital
12,000 10,000 6,000 41,000 )
Loss absorption potential 66,000 18,000 123,000
Cash distributed to Pop 57,000 19,000)
66,000 18,000 66,000 12,000 10,000 6,000 22,000)
Cash distributed to Pop/ Snap 48,000 x 1/3 = 48,000 12,000 4,000 16,000)
18,000 18,000 18,000 0 6,000 6,000 6,000)

16-86
 Cash Distribution Plan: Snap, Crackle, and Pop
First $27,000 Distribution Next $9,000 Distribution Loan, Snap 4,000
Snap Pop $ 27,000) Snap Pop $ 9,000) Capital, Pop 23,000
Cash 27,000
$19,000 (19,000) $4,500 $4,500 (9,000)
8,000) $ 0) Loan, Snap 4,500
$4,000 4,000 (8,000) Capital, Pop 4,500
Cash 9,000
$4,000 $23,000 $ 0)

Cash Distribution Plan

Loss Absorption Potential Snap Snap Crackle Pop
Snap Crackle Pop Loan Capital Capital Capital
12,000 10,000 6,000 41,000 )
Loss absorption potential 66,000 18,000 123,000
Cash distributed to Pop 57,000 19,000)
66,000 18,000 66,000 12,000 10,000 6,000 22,000)
Cash distributed to Pop/ Snap 48,000 48,000 12,000 4,000 16,000)
18,000 18,000 18,000 0 6,000 6,000 6,000)
Priorities:
 The first $19,000 goes to Pop.
 The next $32,000 is shared by Pop and Snap.
 The rest is shared by Snap, Crackle, and Pop.
16-87
 Group Exercise 4: Installment Liquidation
Partners Potter, Granger, and Weasley share profits and losses in the ratio
2:1:1, respectively. The partners voted to liquidate the partnership when
its assets, liabilities, and capital were as follows:
Cash $ 25,000
NR from Potter 15,000
Other assets 210,000
Liabilities $ 70,000
Loan, Granger 18,000
Capital, Potter 44,000
Capital, Granger 10,000
Capital, Weasley __________ 108,000
Totals $250,000 $250,000
The partnership will be liquidated over a long period of time. Cash will be
distributed to the partners as it becomes available. The first sale of
noncash assets having a book value of $110,000 realized $80,000.

REQUIRED
 Determine how the available cash should be distributed to the partners after this
first sale.
16-88
Group Exercise 4: Schedule of Safe Payments
Step 1: Sale of Non-cash Assets
Proceeds 80,000)
 Book Value, non-cash assets sold (110,000)
Realized loss (30,000)

Remaining non-cash assets 100,000)

Step 2: Payment of Outside Liabilities

Original cash on hand 25,000)
+ Sale proceeds 80,000)
Total cash available for debt payment 105,000)
 Payment of outside liabilities (70,000)

Cash available for distribution to partners 35,000)

16-89
 Group Exercise 4: Schedule of Safe Payments

Step 3: Update Capital Balances

Potter Granger Weasley
Original balance 44,000) 10,000) 108,000)
 Loss allocation from asset sale (15,000) (7,500) (7,500)

Updated Balance 29,000) 2,500) 100,500)

16-90
 Group Exercise 4: Installment Liquidation
Partners Potter, Granger, and Weasley share profits and losses in the ratio
2:1:1, respectively. The partners voted to liquidate the partnership when
its assets, liabilities, and capital were as follows:
Cash $ 35,000
NR from Potter 15,000
Other assets 100,000
Liabilities $ 0
Loan, Granger 18,000
Capital, Potter 29,000
Capital, Granger 2,500
Capital, Weasley __________ 100,500
Totals $150,000 $150,000
The partnership will be liquidated over a long period of time. Cash will be
distributed to the partners as it becomes available.

REQUIRED
 Determine how the available cash should be distributed to the partners after this
first sale.
16-91
 Group Exercise 4: Schedule of Safe Payments
Schedule of Safe Payments to Partners
Potter Granger Weasley
Loan to partnership 18,000)
Pre-distribution capital balance 29,000) 2,500) 100,500)
Loan from partnership (15,000)
Equivalent Capital 14,000) 20,500) 100,500)

Remember, we have $100,000 of non-cash assets left.

16-92
 Group Exercise 4: Schedule of Safe Payments
Schedule of Safe Payments to Partners
Potter Granger Weasley
Loan to partnership 18,000)
Pre-distribution capital balance 29,000) 2,500) 100,500)
Loan from partnership (15,000)
Equivalent Capital 14,000) 20,500) 100,500)
First worst-case assumption:
Assume full loss of all non-cash assets (50,000) (25,000) (25,000)
Subtotal (36,000) (4,500) 75,500)

16-93
 Group Exercise 4: Schedule of Safe Payments
Schedule of Safe Payments to Partners
Potter Granger Weasley
Loan to partnership 18,000)
Pre-distribution capital balance 29,000) 2,500) 100,500)
Loan from partnership (15,000)
Equivalent Capital 14,000) 20,500) 100,500)
First worst-case assumption:
Assume full loss of all non-cash assets (50,000) (25,000) (25,000)
Subtotal (36,000) (4,500) 75,500)
Second worst-case assumption:
Assume deficits are absorbed by Weasley 36,000) 4,500) (40,500))

16-94
 Group Exercise 4: Schedule of Safe Payments
Schedule of Safe Payments to Partners
Potter Granger Weasley
Loan to partnership 18,000)
Pre-distribution capital balance 29,000) 2,500) 100,500)
Loan from partnership (15,000)
Equivalent Capital 14,000) 20,500) 100,500)
First worst-case assumption:
Assume full loss of all non-cash assets (50,000) (25,000) (25,000)
Subtotal (36,000) (4,500) 75,500)
Second worst-case assumption:
Assume deficits are absorbed by Weasley 36,000) 4,500) (40,500))

Cash to be distributed to Weasley 0) 0) 35,000)

Capital, Weasley 35,000
Cash 35,000 16-95
 Group Exercise 4: Installment Liquidation
Partners Potter, Granger, and Weasley share profits and losses in the ratio
2:1:1, respectively. The partners voted to liquidate the partnership when
its assets, liabilities, and capital were as follows:
Cash $ 25,000
NR from Potter 15,000
Other assets 210,000
Liabilities $ 70,000
Loan, Granger 18,000
Capital, Potter 44,000
Capital, Granger 10,000
Capital, Weasley __________ 108,000
Totals $250,000 $250,000
The partnership will be liquidated over a long period of time. Cash will be
distributed to the partners as it becomes available. As of this date no assets
have been liquidated.

REQUIRED
1. Compute the Loss Absorption Potential for each partner as of the day the
partners decided to liquidate the partnership.

16-96
 Group Practice: Loss Absorption Potential

Potter Granger Weasley

Capital $44,000) $10,000) $108,000)

Loan to (from) partnership (15,000) 18,000) 0)

$
$29,000) $28,000) 108,000)

Profit/loss sharing ratio 50% 25% 25%

Loss absorption potential $58,000) $112,000) $432,000)

Based on these calculations, who should receive cash first?

Weasley!
16-97
 Group Exercise 4: Installment Liquidation
Partners Potter, Granger, and Weasley share profits and losses in the ratio
2:1:1, respectively. The partners voted to liquidate the partnership when
its assets, liabilities, and capital were as follows:
Cash $ 25,000
NR from Potter 15,000
Other assets 210,000
Liabilities $ 70,000
Loan, Granger 18,000
Capital, Potter 44,000
Capital, Granger 10,000
Capital, Weasley __________ 108,000
Totals $250,000 $250,000
The partnership will be liquidated over a long period of time. Cash will be
distributed to the partners as it becomes available. As of this date no assets
have been liquidated.

REQUIRED
2. Prepare a Cash Distribution Plan as of the day the partners decided to liquidate
the firm. This plan should show how cash will be distributed to the partners as
it becomes available (after all outside liabilities have been paid).
16-98
 Group Exercise 4: Cash Distribution Plan

Cash Distribution Plan

50% 25% 25%
Loss Absorption Potential Granger Potter Granger Weasley
Potter Granger Weasley Loan Capital Capital Capital
18,000 29,000 10,000 108,000 )
Loss absorption potential 58,000 112,000 432,000
Cash distributed to Weasley 320,000 x .25 = 80,000)
58,000 112,000 112,000 18,000 29,000 10,000 28,000)
Cash distributed to Weasley
54,000 54,000 13,500 13,500)
and Granger
58,000 58,000 58,000 4,500 29,000 10,000 14,500)

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 Group Exercise 4: Cash Distribution Plan

Cash Distribution Plan

50% 25% 25%
Loss Absorption Potential Granger Potter Granger Weasley
Potter Granger Weasley Loan Capital Capital Capital
18,000 29,000 10,000 108,000 )
Loss absorption potential 58,000 112,000 432,000
Cash distributed to Weasley 320,000 x .25 = 80,000)
58,000 112,000 112,000 18,000 29,000 10,000 28,000)
Cash distributed to Weasley
54,000 54,000 13,500 13,500)
and Granger
58,000 58,000 58,000 4,500 29,000 10,000 14,500)

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 Group Exercise 4: Cash Distribution Plan

Cash Distribution Plan

50% 25% 25%
Loss Absorption Potential Granger Potter Granger Weasley
Potter Granger Weasley Loan Capital Capital Capital
18,000 29,000 10,000 108,000 )
Loss absorption potential 58,000 112,000 432,000
Cash distributed to Weasley 320,000 x .25 = 80,000)
58,000 112,000 112,000 18,000 29,000 10,000 28,000)
Cash distributed to Weasley
54,000 54,000 13,500 13,500)
and Granger
58,000 58,000 58,000 4,500 29,000 10,000 14,500)

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 Group Exercise 4: Cash Distribution Plan

Cash Distribution Plan

50% 25% 25%
Loss Absorption Potential Granger Potter Granger Weasley
Potter Granger Weasley Loan Capital Capital Capital
18,000 29,000 10,000 108,000 )
Loss absorption potential 58,000 112,000 432,000
Cash distributed to Weasley 320,000 80,000)
58,000 112,000 112,000 18,000 29,000 10,000 28,000)
Cash distributed to Weasley
54,000 54,000 13,500 13,500)
and Granger
58,000 58,000 58,000 4,500 29,000 10,000 14,500)

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 Group Exercise 4: Cash Distribution Plan

Cash Distribution Plan

50% 25% 25%
Loss Absorption Potential Granger Potter Granger Weasley
Potter Granger Weasley Loan Capital Capital Capital
18,000 29,000 10,000 108,000 )
Loss absorption potential 58,000 112,000 432,000
Cash distributed to Weasley 320,000 80,000)
58,000 112,000 112,000 18,000 29,000 10,000 28,000)
Cash distributed to Weasley
54,000 54,000 x .25 = 13,500)
and Granger
58,000 58,000 58,000 4,500 29,000 10,000 14,500)

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 Group Exercise 4: Cash Distribution Plan

Cash Distribution Plan

50% 25% 25%
Loss Absorption Potential Granger Potter Granger Weasley
Potter Granger Weasley Loan Capital Capital Capital
18,000 29,000 10,000 108,000 )
Loss absorption potential 58,000 112,000 432,000
Cash distributed to Weasley 320,000 80,000)
58,000 112,000 112,000 18,000 29,000 10,000 28,000)
Cash distributed to Weasley
54,000 x .25 = 13,500 13,500)
and Granger
58,000 58,000 58,000 4,500 29,000 10,000 14,500)

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 Group Exercise 4: Cash Distribution Plan
First $35,000 Distribution Capital, Weasley 35,000
Potter Granger Weasley $ 35,000) Cash 35,000
0) 0 $35,000 (35,000)
$ 0)

Cash Distribution Plan

50% 25% 25%
Loss Absorption Potential Granger Potter Granger Weasley
Potter Granger Weasley Loan Capital Capital Capital
18,000 29,000 10,000 108,000 )
Loss absorption potential 58,000 112,000 432,000
Cash distributed to Weasley 320,000 80,000)
58,000 112,000 112,000 18,000 29,000 10,000 28,000)
Cash distributed to Weasley
54,000 54,000 13,500 13,500)
and Granger
58,000 58,000 58,000 4,500 29,000 10,000 14,500)
Priorities:
 The first $80,000 goes to Weasley.
 The next $27,000 is shared by Granger and Weasley.
 The rest is shared by Potter, Granger, and Weasley.
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 Practice Quiz Question #4
Which of the following is NOT true about the
schedule of safe payments and cash distribution
plans?
a. Cash distribution plans are prepared multiple
times during the liquidation as cash comes in.
b. Cash distribution plans are prepared at the
beginning of the liquidation.
c. Schedules of safe payments are prepared
multiple times during the liquidation as cash
comes in.
d. The allocation of assets to partners is the
same under the cash distribution plan and
schedule of safe payments.
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 Practice Quiz Question #4 Solution
Which of the following is NOT true about the
schedule of safe payments and cash distribution
plans?
a. Cash distribution plans are prepared multiple
times during the liquidation as cash comes in.
b. Cash distribution plans are prepared at the
beginning of the liquidation.
c. Schedules of safe payments are prepared
multiple times during the liquidation as cash
comes in.
d. The allocation of assets to partners is the
same under the cash distribution plan and
schedule of safe payments.
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Conclusion

The End

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