M1: Partnership Liquidation Installment

Question 1

Rationale of Installment

Answer 1

Partners will usually want to receive cash as it becomes available

Rather than wait until all non-cash assets have been realized (impractical)

Question 2

May the liquidator be liable in case payments to partners cannot be recovered?

Answer 2

Yes, due to loss caused them by the inappropriate payment of cash

Question 3

Who authorizes cash payment to partners?

Answer 3

Liquidator

Question 4

The liquidator authorizes cash payment to partners _____ all possible losses are known.

Answer 4

BEFORE

Question 5

What recourse may the liquidator do in case the partnership later incurred deficits after distributions are made?

Answer 5

He can demand the return of payments

Question 6

Formal schedules to determine cash payment:

Answer 6

1. Schedule of Cash/ Safe Payments (SPS)
2. Cash Payment Priority Program (CPP)

Question 7

Guidelines in Determining Safe Installment Payments

Answer 7

1. Distribute NO Cash
untill all liab and ACTUAL liquidation expenses have been paid
2. Distribute Cash
SPS
CPP

Question 8

According to SPS, cash shall ONLY be paid to partners who have?

Answer 8

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

Question 9

Maximum possible loss consists of:

Answer 9

1. Amount of unrealized noncash assets
2. Amount of cash WITHHELF as for payment of:
   ✔ unrecorded unpaid exp(liab)
   ✔ anticipated/ future liquidation exp

Question 10

2 Assumptions when using Safe Payment Schedule:

Answer 10

1. ALL possible losses
2. As a result, partners with a potential capital deficit will be unable to pay - assumed personally insolvent

Question 11

Payments may be made safely to partners who have? (SPS)

Answer 11

Full assurance that the money will not have to be returned to the partnership at some later date when future losses are realized.

Question 12

When will each partners’ capital be sufficient to absorb an appropriate share of the maximum possible remaining loss?

Answer 12

When after distribution, capital + loan balances = P&L ratio

Question 13

Criticisms to the SPS:

Answer 13

1. Inefficient if numerous installment - SPS is prepared for each distribution until P&L are aligned
2. Deficient as a planning device - does not provide the information that will help the partners project WHEN they can expect to receive.

Question 14

This schedule informs the partners AT THE BEGINNING of the liquidation process WHEN they will receive cash in relation to others

Answer 14

Cash Payment Priority Program /
Cash Distribution Plan
Pre-distribution Plan

Question 15

Formula for MAXIMUM LOSS ABSORBABLE

(Loss Absorption Abilities/Power/ Potential)

Answer 15

Total Interest (Equity) Balance Before Liquidation
/
P&L ratio

Question 16

What particular step in the CPP reveals the order in which cash should be distributed as it becomes available?

Answer 16

Ranking the Partners

Question 17

CPP Procedures

Answer 17

✔ 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

Question 18

If the maximum absorbable loss will be attained, who will not receive any amount?

Answer 18

The partner with the lowest absoption abilities *(most vulnerable to partnership losses) *

Question 19

What is determined in CPP?

Answer 19

Exact amount of cash payments on every period

Question 20

Limitations of the CPP

Answer 20

1. Operable only after outside creditors have been paid in full
2. The program reflects only the order of cash distribution
3. Sequence of CD of CPP = Sequence of CD of SPS

Question 21

Format of SPS

Answer 21

⭐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

Question 22

Format of Statement of Realization and Liquidation

Answer 22

⭐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