M1: Partnership Liquidation Installment Flashcards
Rationale of Installment
Partners will usually want to receive cash as it becomes available
Rather than wait until all non-cash assets have been realized (impractical)
May the liquidator be liable in case payments to partners cannot be recovered?
Yes, due to loss caused them by the inappropriate payment of cash
Who authorizes cash payment to partners?
Liquidator
The liquidator authorizes cash payment to partners _____ all possible losses are known.
BEFORE
What recourse may the liquidator do in case the partnership later incurred deficits after distributions are made?
He can demand the return of payments
Formal schedules to determine cash payment:
- Schedule of Cash/ Safe Payments (SPS)
- Cash Payment Priority Program (CPP)
Guidelines in Determining Safe Installment Payments
1. Distribute NO Cash
untill all liab and ACTUAL liquidation expenses have been paid
2. Distribute Cash
SPS
CPP
According to SPS, cash shall ONLY be paid to partners who have?
Capital balances sufficient to absorb their share of:
1. Maximum possible loss on NCA
2. Any capital deficiencies that may result to other partners as a result of #1
Maximum possible loss consists of:
- Amount of unrealized noncash assets
- Amount of cash WITHHELF as for payment of:
✔ unrecorded unpaid exp(liab)
✔ anticipated/ future liquidation exp
2 Assumptions when using Safe Payment Schedule:
- ALL possible losses
- As a result, partners with a potential capital deficit will be unable to pay - assumed personally insolvent
Payments may be made safely to partners who have? (SPS)
Full assurance that the money will not have to be returned to the partnership at some later date when future losses are realized.
When will each partners’ capital be sufficient to absorb an appropriate share of the maximum possible remaining loss?
When after distribution, capital + loan balances = P&L ratio
Criticisms to the SPS:
- Inefficient if numerous installment - SPS is prepared for each distribution until P&L are aligned
- Deficient as a planning device - does not provide the information that will help the partners project WHEN they can expect to receive.
This schedule informs the partners AT THE BEGINNING of the liquidation process WHEN they will receive cash in relation to others
Cash Payment Priority Program /
Cash Distribution Plan
Pre-distribution Plan
Formula for MAXIMUM LOSS ABSORBABLE
(Loss Absorption Abilities/Power/ Potential)
Total Interest (Equity) Balance Before Liquidation
/
P&L ratio
What particular step in the CPP reveals the order in which cash should be distributed as it becomes available?
Ranking the Partners
CPP Procedures
✔ Rank the partners according to maximum loss absorbable
✔ Distribute to highest ranking to = to next highest, until all partners have interest balances equal to P&L ratio
If the maximum absorbable loss will be attained, who will not receive any amount?
The partner with the lowest absoption abilities *(most vulnerable to partnership losses) *
What is determined in CPP?
Exact amount of cash payments on every period
Limitations of the CPP
- Operable only after outside creditors have been paid in full
- The program reflects only the order of cash distribution
- Sequence of CD of CPP = Sequence of CD of SPS
Format of SPS
⭐NAME
⭐SCHEDULE OF SAFE PAYMENTS
BALANCE B4 PAYMENT
✔Loan
✔Capital
_______
✔TOTAL INTEREST
✔(MPL Restriction)
_______
Distribute losses until a Partner will have a (+) Balance
✔PAYMENT TO PARTNERS = (+)
✔Apply to:
1. Loan
2. Capital
Format of Statement of Realization and Liquidation
⭐PARTNERSHIP NAME
⭐STATEMENT OF R&L
⭐Months Liquidated, Year
Balance B4 Liquidation
Month:
✔ Realization of NCA
✔ Payment of Expenses - Cash
✔ Payment of Liabilities - Cash&L
Balances b4 offset/payment
✔ Offset deficit vs. Loan
✔ Payment to Partners (refer to schedule)
Balances for the Month End
** Distribution of Losses
☑ Realization = +cash ; -NCA ; Distribute Loss on realization
☑ Payment = -Cash ; Distribute accdg to P&L
☑ Possible Deficit = Distribute accdg to P&L
☑ Offset vs. Loan = -loan ; offset capital
☑ carry over loans until offset/ payment
