1. The Liquidation of the partnership

2. 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 the liabilities). 3) Finishing (achieving) the purpose of the Co. Regardless of the reason of liquidation, the process of the liquidation starts 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).

3. 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 the partners' 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 months only should be paid as preferred liabilities and the excess over 6 months, should be considered as ordinary liability and to be paid later with the other ordinary liabilities. 4- Unpaid rent expense with maximum amount of 2 years: Any unpaid rent over 2 years should be considered as ordinary liability.

4. B)The ordinary liabilities: Such as AP, NP, Creditors, accrued salaries exceeds 6 months and accrued 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 should prepare ‘The Statement of liquidation’ How ???

5. Example 1 A, B and Care partners in a general partnership. They share net income on a ratio of 5:3:2. They agree to liquidate the business. The balance sheet at the date of liquidation is as follows:

6. If you know that: 1- the selling price for other non-cash assets and the collected amount from AR were 142,000. 2-The liquidation expenses and liquidator fees are 20000. Required: Prepare the liquidation statement.

7. To prepare the liquidation statement we have to calculate the following: 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:

8. C's capital C's capital 2 B 's capital B 's capital3 A 's capital A 's capital5 A’s Loan A’s Loan Liabilit ies Non-cash assets Cash Title Title 26,000 2,000 2,00042,000 3,000 3,00025,000 5,000 5,000600041000 132,000 (132,000) 132,000 (132,000) 8,000 142,000 8,000 142,000 Balances before liquidation 1) Selling of assets 280000 (4000) (4000)45000(6000)30000(10000)600041000----------150000(20000)Balances 2) Paying the Liquid. fees 2400039000200006000 41000 41000(41000)-130000(41000)Balances 3) Paying liabilities 2400039000200006000(6000)--------89000(6000)Balances 4 ) Paying the loan of A 24000 24000(24000) 39000 39000(39000) 20000 20000(20000)-------- 83000 83000(83000)Balances 4 ) Paying the P’ capital --------- --------- - ------------------------- --------

9. How do you prepare the liquidation statement ?? How do you prepare the liquidation statement ?? We apply the following steps to prepare the statement:

10. (1) Selling Non-cash assets: + Cash by selling price 142000 - Non-cash assets (closed) by B.V. 132000 The difference is gain 10000 ( we increase the capital balances 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

11. (2) Paying the liquidation fees : - Cash 20000 - The capital balances 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

12. (3) Paying Liabilities: - Cash by the paid amount 41000 - Liabilities (closed) by 41000

13. (4) Paying the loan of the partner: - Cash by the paid amount 6000 - Partner’s loan (closed) by 6000

14. (5) Paying the capital balances of partners: - Cash by the balance 83000 We decrease the capital balances by the balance of each partner - Capital A 20000 - Capital B 39000 - Capital C 24000