BC111

Partnership and Corporation

Topic Outline

I. Definition

 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.

II. Rules in settling accounts after dissolution

 The assets of the partnership consist of the following:

1. Partnership property
2. Additional contributions of the partners

 The assets of a general partnership shall be applied in the following

order:
1. Outside creditors
2. Inside creditors (loans or advances by the partners)
3. Capital contributions
4. Share in profits

 Right of offset
- The legal right of a partner to apply part or all of his loan
account (loan receivable) balance against his capital
deficiency resulting from losses in the realization of the
partnership assets.

 Preference of Partnership creditors

- The creditors of the partnership shall have priority in
payments over those of the partner’s separate creditors as
regards the partnership properties.

 Distribution of separate properties of an insolvent partner (order of

preference):
1. Separate creditors of the partner
2. Partnership creditors
3. Those owing to the partners by way of additional
contributions when the assets of the partnership were
insufficient to settle all obligations.

III. Methods of Partnership liquidation

 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.
 - Steps in Lump-sum liquidation

1. Realization of non-cash assets and distribution of

gain or loss on realization among partners based on
their profit or loss ratio.
2. Payment of liabilities.
3. Elimination of partners’ capital deficiency (if
there’s a capital deficiency):
a. If the deficient partner has a loan balance,
then exercise right of offset.
b. If the deficient partner is solvent, then he
should invest cash to eliminate his deficiency.
c. If the deficient partner is solvent, then the
other partners should absorb his deficiency.
4. Payments to partners, in the order of priority:
a. Loan accounts
b. Capital accounts

 Installment method
- 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.

- Steps in Installment liquidation

1. Realization of non-cash assets and distribution of

gain or loss on realization among partners based on
their profit or loss ratio.
2. Payment of liquidation expenses and adjustment for
unrecorded liabilities; both of these items will be
distributed among the partners in their profit or
loss ratio.
3. Payment of liabilities.
4. Distribution of available cash based on:
a. Schedule of safe payments
b. Cash priority program