PIECEMEAL LIQUIDATION

1
PIECEMEAL LIQUIDATION

• Different from a dissolution
• Assets and liabilities realised over time and not
  straight away per dissolution scenario
• Other factors complicate the situation
• Periodic withdrawals of cash
• Profit sharing ratios differ from capital
• Profit sharing ratios differ from each other

2
PIECEMEAL LIQUIDATION METHODS

• Surplus capital method
• Called so because one works out the sequence of
  cash distribution based on the surplus capital of
  each partner relative to one another
• Loss absorption capacity method
• Called so because it works out the cash
  distributions based on who absorbs the
  losses/profits and what are assumed to be
  worthless assets
• Both methods arrive at the same final numbers.
  They just use different routes to get there

3
PIECEMEAL LIQUIDATION OTHER

• Aspects common to both
• Both ensure that all liabilities are paid off
  first
• Both are concerned with cash realised, although
  only the loss absorption capacity method is
  concerned with profits/losses on realisations
• All items must be transferred to the capital
  accounts beforehand
• Some curveballs
• Expenses, goodwill and reserves

4
THE SURPLUS CAPITAL METHOD

• The goal of this method is to rank the sequence
  of capital paid
• Thats why we have the first two phases of this
  method. We have to determine a sequence of who
  gets what amount when which is then applied in
  the third phase
• This method automatically spreads losses and
  gains unlike the loss absorption capacity method

5
SURPLUS CAPITAL METHODOLOGY

• YOU CANNOT HOPE TO ROTE LEARN THIS! YOU MUST
  RATHER LEARN TO APPLY IT!
• Methodology
• Get the numbers
• Work out the profit sharing ratio if have to
  (youll need it)
• Transfer all reserves to their capital accounts
• Prepare two tables now
• One which will rank the capital
• Another which will work out the ranking per the
  method described in the next slide

6
SURPLUS CAPITAL METHODOLOGY

• Methodology for the second table
• Line up the partners capital accounts and amounts
  as per step 3) on previous slide
• Divide those amounts by their ratios
• Stop and determine whose factor is the lowest
• Block off the other amounts that arent the
  lowest these wont be used
• Take the value selected per Step c) and multiply
  it by each partners ratio again (This sounds
  strange but youre trying to work out what their
  capital should be relative to each other).
• Those numbers represent the LAST DISTRIBUTION per
  the first table

7
SURPLUS CAPITAL METHODOLOGY

• Take those numbers for the partners and subtract
  them from their original capital amounts. You
  should notice that the partner with the lowest
  ratio is then eliminated
• Now repeat steps a) to g) again until there is
  only one amount left

8
SURPLUS CAPITAL METHODOLOGY

• Now that you have the rankings, create a third
  table with columns for cash, all liabilities and
  each of the partners. Put the totals in the first
  two
• Note that we may also have to split
  realisations
• Use the first cash realisation to pay off the
  liabilities entirely
• Pay out per the sequence
• After each sequence, pay the next sequence after
  that per the second table
• Pay out everyone until no more cash can be
  realised

9
LOSS ABSORPTION CAPACITY METHOD

• The goal of this method is to allocate the gains
  and losses from assets sold and then provide for
  the other items potentially not being realised
  i.e assume that they're worthless (even if
  they're likely not)
• In this method you'd concurrently prepare two
  schedules
• One with the actual split of monies distributed
• Another as the liquidation schedule
• The headings for both would consist of 'Bank',
  'Liabilities', 'Assets', 'General Reserve or
  Goodwill' and the partner names

10
LOSS ABSORPTION CAPACITY METHOD

• Methodology
• Prepare a table with the above as headings
• Put down the balances for each category
• While realising assets put the cash amount
  received in the cash column but in the assets
  column put in the carrying value of the assets
  that were sold
• The difference between those two values is the
  loss or gain - which has to be split in the
  profit sharing ratio to the partners
• Pay out all of the creditors first from the cash

11
LOSS ABSORPTION CAPACITY METHOD

• After all creditors are paid for, the remaining
  cash from the realisations to that point will
  need to be allocated to the partners
• Balance off the totals, then begin workings in
  the second 'liquidation schedule
• In the liquidation schedule assume the total
  assets remaining are worthless and allocate the
  value as if it was a dead loss to each of the
  partners in their profit sharing ratios
• Take that assumed dead loss off of their
  remaining capital balances

12
LOSS ABSORPTION CAPACITY METHOD

• If one of the partners capital balances goes
  negative, reallocate that value to the others
  capital accounts through their profit sharing
  ratios relative to one another. (Remember the
  Murrary vs Garner ruling as it can change this
  method here)
• The net values left in this second liquidation
  schedule can be moved back into the first - they
  are deemed to be cash distributions that can be
  made
• Repeat steps 7) to 11) until the last
  distribution/realisation
• When the last assets are realised, you can
  immediately transfer the cash per the profit
  sharing ratios
• Note that you will likely have to jump between
  steps in some cases