The Liquidation of the partnership
What is the meaning of Liquidation ?
The liquidation means winding up partnership’s activities- Why??
The partnership may be liquidated for one of the Following reasons:
1) Partners agree to terminate the business.
2) Liquidation by a court order: the co. is bankrupted (can’t pay theliabilities).
3) Finishing (achieving) the purpose of the Co.
Regardless of the reason of liquidation, the process of the liquidationstarts by appointing a Liquidator, who has the responsibility of:
- selling assets ,
- paying the liabilities and
- paying the rights of the partners ( their loans and capital balances).
What are the steps of liquidation process??
The steps of the liquidation are:
1) Selling non-cash assets :
The result of selling assets may be gain or loss, that should be allocated to thepartners' capital according to the profit and loss ratio.
2)Paying the liabilities :
The liquidator pays the liabilities outside creditors in the following order:
A) Preferred Liabilities:
They include the following( according to Egyptian law) :
1- The Liquidation expenses and fees.
2-Taxes and duties due to the government.
3- Unpaid salaries with maximum 6 months :
If the unpaid salaries exceed 6 months (8 months for example), So, 6 monthsonly should be paid as preferred liabilities and the excess over 6 months, should beconsidered as ordinary liability and to be paid later with the other ordinaryliabilities.
4- Unpaid rent expense with maximum amount of 2 years:
Any unpaid rent over 2 years should be considered as ordinary liability.
B)The ordinary liabilities:
Such as AP, NP, Creditors, accrued salaries exceeds 6 months andaccrued rent exceeds 2 years etc….
3) Paying the partners’ rights:
They include:
a- The partners’ loans.
b- The partners’ capital.
To implement the liquidation process ,the liquidator shouldprepare ‘The Statement of liquidation’ How???
Example 1
A, B and Care partners in a general partnership. They share netincome on a ratio of 5:3:2. They agree to liquidate the business. Thebalance sheet at the date of liquidation is as follows:
If you know that:
1- the selling price for other non-cash assets and thecollected amount from AR were 142,000.
2-The liquidation expenses and liquidator fees are 20000.
Required:
Prepare the liquidation statement.
To prepare the liquidation statement we have to calculate thefollowing:
1) Cash : = 8000
2) Non-cash assets:
= The assets except cash.
=( 10000 AR +30000 Inventory + 50000 Cars +42000 Buildings)
= 132000
3) Liabilities:
= (25000 AP + 16000 NP = 41000
4) The partners’ loans:
Ahmed’s loan = 6000
5)The partners’ capital:
A 25000 , B 42000 and C 26000.
Then we prepare the statement as follows:
C'scapital C'scapital
2 2
B 'scapital B 'scapital
33
A 'scapital A 'scapital
55
A’sLoan A’sLoan
LiabilitiesLiabilities
Non-cashassetsNon-cashassets
CashCash
Title Title
26,00026,000
2,000 2,000
42,00042,000
3,000 3,000
25,00025,000
5,000 5,000
60006000
4100041000
132,000(132,000) 132,000(132,000)
8,000142,000 8,000142,000
Balances before liquidationBalances before liquidation
1) Selling of assets1) Selling of assets
280000280000
(4000) (4000)
4500045000
(6000)(6000)
3000030000
(10000)(10000)
60006000
4100041000
--------------------
150000150000
(20000)(20000)
BalancesBalances
2) Paying the Liquid. fees2) Paying the Liquid. fees
2400024000
3900039000
2000020000
60006000
41000 41000
(41000)(41000)
--
130000130000
(41000)(41000)
BalancesBalances
3) Paying liabilities3) Paying liabilities
2400024000
3900039000
2000020000
60006000
(6000)(6000)
--------------
--
8900089000
(6000)(6000)
BalancesBalances
4 ) Paying the loan of A4 ) Paying the loan of A
24000 24000
(24000)(24000)
39000 39000
(39000)(39000)
20000 20000
(20000)(20000)
------------
--
--
83000 83000
(83000)(83000)
BalancesBalances
4 ) Paying the P’ capital4 ) Paying the P’ capital
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How do you prepare the liquidation statement ?? How do you prepare the liquidation statement ?? We apply the following steps to prepare the statement:
(1) Selling Non-cash assets:
+ Cash
by selling
price142000
- Non-cashassets
(closed)
by B.V.132000
The difference is
gain
10000 ( we increase the capitalbalances by the ratio 5:3:2)
+ Capital A
(10000 x 5/10)=
5000
Capital B+
(10000 x 3/10)
=
3000
+ Capital C
(10000 x2/10(
=
2000
(2) Paying the
liquidation fees :
- Cash 20000
- The capitalbalances
by ratio 5:3:2
- Capital A
20000 x (5/10) = 10000
Capital B -
20000 x (3/10) =
6000
- Capital C
20000 x (2/10)=
4000
(3) Paying Liabilities:
- Cash
by the paid amount
41000
- Liabilities
(closed)
by 41000
(4) Paying the loan of the partner:
- Cash
by the paid amount
6000
- Partner’s loan
(closed)
by 6000
(5) Paying the capital balances of partners:
- Cash
by thebalance
83000
We decrease the capital balances by thebalance of each partner
- Capital A
20000
- Capital B
39000
- Capital C
24000