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PIECEMEAL LIQUIDATION

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Assets and liabilities realised over time and not straight away per dissolution scenario ... Called so because one works out the sequence of cash distribution ... – PowerPoint PPT presentation

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Title: 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
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