Partnership and Corporation

Accounting

Partnership Liquidation

Chapter 4

JIMELYN H. EVANGELISTA, CPA, MBA

1
Learning Objectives:
After studying the chapter, you should be able to:
1. Distinguish dissolution from
liquidation;
2. Understand the rules in settling
accounts after dissolution;
3. Differentiate lumpsum method from
installment method;
2
Learning Objectives:
4. State the procedures in installment
liquidation;
5. Prepare statement of liquidation;
6. Prepare entries to account for lump-sum
and installment liquidation
7. Compute cash distribution to partners
using schedule of safe payment and a
cash priority program.
3
LIQUIDATION - Definition

 The winding up of the partnership

business characterized by sale of
all non-cash assets, settlement of
liabilities and distribution of the
remaining cash to the partners.

4
Dissolution vs. Liquidation
 Dissolution brings to end the
association of individuals for their
original purpose but does not mean
the termination of business nor an
interruption in its operation.
 The new set of partners shall prepare
a new article of partnership while the
business operation continues.

5
Dissolution vs. Liquidation
 Liquidation,on the other hand, means
the final conclusion of a partnership,
which calls for the winding up of the
business affairs.

 Thus,a partnership may be

dissolved but not liquidated, but
liquidation is always preceded by
dissolution.
6
Rules in Settling Accounts after
Dissolution (during Liquidation)
Assets of the Partnership:

1. Partnership property, and

2. Additional contributions of the

partners needed for the payment of
all liabilities (consistent with the
following discussions)

7
Rules in Settling Accounts after
Dissolution
The assets of a general partnership shall be
applied in the ff. order:
1. Those owing to outside creditors,
2. Those owing to inside creditors in the
form of loans or advances for business
expenses by the partners,
3. Those owing to the partners with respect
to their capital contributions,
4. Lastly, those owing to the partners with
respect to their share in the profits.
8
Right of Offset
 The legal right of a partner to apply
part or all his loan account balance
against his capital deficiency
resulting from losses in the
realization of the partnership assets.

9
Illustration 1:
A, B and C are partners in a prawn export
business. Initially, A contributed P30,000;
B, P20,000 and C, P10,000. On the date
of dissolution, the remaining assets of the
partnership amounted to P100,000. The
partnership has outstanding obligations
with X, P14,000; Y, P10,000 and loans
payable to A, P4,000.

How will the accounts of A, B and C be settled?

10
Rules in Settling Accounts after
Dissolution
The assets of a general partnership shall be
applied in the ff. order:
1. outside creditors: X & Y = P24,000
2. inside creditors: A, Loan = P4,000
3. capital contributions:
A, B & C = P60,000
4. Lastly, share in the profits:
A: 3/6 x 12,000 = P6,000
B: 2/6 x 12,000 = P4,000
C: 1/6 x 12,000 = P2,000 11
Insufficient Partnership Assets
 In cases when partnership assets are
insufficient to settle all outside liabilities,
the partners should make additional
contributions

 Any partner who contributed in excess of

his share in this liability has a right to
collect the supposed additional
contributions from other partners.

12
Illustration 2
A, B and C are partners in a prawn export
business. Initially, A contributed P30,000;
B, P20,000 and C, P10,000. On the date
of dissolution, the remaining assets of the
partnership amounted to P100,000. The
partnership has outstanding obligations
with X, P62,000; Y, P50,000.

How will the accounts be settled?

13
Rules in Settling Accounts after
Dissolution
Assets – Liabilities :
100,000 – 112,000 = (12,000)

As a result, the partners are still liable from their

personal properties in the amount of
A: 3/6 x 12,000 = P6,000
B: 2/6 x 12,000 = P4,000
C: 1/6 x 12,000 = P2,000

These contributions will be used to settle the

remaining liabilities to X & Y = P12,000
14
Preference of Partnership Creditors
and Partners’ Separate Creditors
 With respect to Partnership Properties
 Partnership Creditors

 With respect to Partners’ Separate or

Personal Properties
 Partners’ Separate/Personal Creditors

15
Distribution of Separate Properties
of an Insolvent Partner
if the partner is insolvent, his properties shall be
distributed as follows:
1. those owing to separate creditors;
2. those owing to partnership creditors;
3. Lastly, those owing to the partners by way of
additional contributions when the assets of the
partnership were insufficient

16
Illustration 3
A, B and C are partners in a prawn export
business. Initially, A contributed P30,000; B,
P20,000 and C, P10,000. On the date of
dissolution, the remaining assets of the
partnership amounted to P100,000. The
partnership has outstanding obligations with X,
P62,000; Y, P50,000. Assume that, C has a
separate properties 9,000, but he has personal
obligations of P8,000.

How will the accounts be settled?

17
Rules in Settling Accounts after
Dissolution
As a result, the partners are still liable from their
personal properties in the amount of
A: 3/6 x 12,000 = P6,000
B: 2/6 x 12,000 = P4,000
C: 1/6 x 12,000 = P2,000
But, C can only pay one-half of his liability to
the partnership creditors
(P9,000 – 8,000 = 1,000)
The remaining P1,000 shall be absorbed by
A: 3/5 x P1,000 = P600
B: 2/5 x P1,000 = 400
18
Statement of Liquidation
 The procedures in liquidation after the
adjustments and closing of books will be
dependent on the said rules.

 The use of a statement of liquidation will

greatly aid the liquidating partner
summarize the events and transactions
associated with the liquidation of the
partnership

19
Methods of Partnership Liquidation

 Lump-sum method
 All non-cash assets are realized and
the related gains or losses are distributed
and all liabilities are paid before a final
cash distribution is made to the partners.

20
Methods of Partnership Liquidation

 Installment method
 Realization of non-cash assets is
accomplished over an extended period of
time. When cash is available, creditors
may be partially or fully paid. Any excess
may be distributed to the partners in
accordance with a program of safe
payments or cash priority program
21
Entries Related to
Liquidation

22
 Steps in liquidation Accounting entries
(transaction)
Sale of non-cash assets Dr. Cash
(above book value) Dr. Accum. Dep
Cr Non-cash Assets
Cr. Gain on Realization
Sale of non-cash assets Dr. Cash
(below book value) Dr. Accum. Dep
Dr. Loss on Realization
Cr. Non-cash Assets
Gain on realization to be Dr. Gain on Realization
shared among the partners Cr. Partner, Capital
according to the profit- Cr. Partner, Capital
sharing ratio 23
 Transactions
Loss on realization to be
shared among the partners
according to the profit-
sharing ratio
Payment of liabilities
Exercise of Right of Offset
Additional Investment by
Deficient Partner
Accounting entries
Dr. Partner, Capital
Partner, Capital
Cr. Loss on Realization
Dr. Liabilities/Payables
Cr. Cash
Dr. Partner, Loan
Cr. Partner, Capital
Dr. Cash
Cr. Partner, Capital
24
 Transactions Accounting entries
Deficiency absorbed by Dr. Capital (solvent partner)
Solvent Partner Cr. Capital (deficient partner)

Distribution of Cash to Dr. Partner, Capital

Partners Dr. Partner, Capital
Cr. Cash

25
Lump-sum Liquidation

All non-cash assets are realized

and all liabilities are settled
before a single cash distribution
is made to partners.
26
Procedures of Liquidation
1. Realization of non-cash assets and
distribution of gain or loss among the
partners based on P/L ratio.
2. Payment of liabilities (outside creditors)
3. Elimination of partners’ capital deficiency
by using one of the following, in the order
of priority:
a. If the deficient partner has a loan
balance, exercise the right of offset
27
Procedures of Liquidation
b. If the deficient partner is solvent, the
partner should invest cash;
c. If the deficient partner is insolvent, the
other partner/s should absorb the
deficiency.
4. Payment to partners, in order of priority:
a. Loan accounts
b. Capital accounts
28
Lump-sum Liquidation

Example
Case 1: J, E and N are partners sharing profits and losses in the
ratio 2:2:1, respectively. They decided to liquidated their business on
December 31, 2021. The condensed statement of financial position prior to
liquidation follows:
Assets
Cash 20,000
Non-Cash Assets 340,000
Total Assets 360,000
Liabilities and Capital
Liabilities 112,000
E, Loan 5,000
N, Loan 8,000
J, Capital 95,000
E, Capital 60,000
N, Capital 80,000
Total Liabilities & Capital 360,000
Case 1: Assume that the non-cash assets are sold at P250,000.

Required: Prepare a statement of liquidation and the pertinent entries.

Assets
Cash 20,000
Non-Cash Assets 340,000
Total Assets 360,000
Liabilities and Capital
Liabilities 112,000
E, Loan 5,000
N, Loan 8,000
J, Capital 95,000
E, Capital 60,000
N, Capital 80,000
Total Liabilities & Capital 360,000
 J, E and N Partnership
Statement of Liquidation
December 31, 2021

Cash Non- Liabiliti E, N, J, E, N,

Cash es Loan Loan Capital Capital Capital

P/L % 40% 40% 20%

Balance 20,000 340,000 112,000 5,000 8,000 95,000 60,000 80,000

Sale 250,000 (340,000) (36,000) (36,000) (18,000)

Balance 270,000 112,000 5,000 8,000 59,000 24,000 62,000

Payment (112,000) (112,000)

Balance 158,000 5,000 8,000 59,000 24,000 62,000

Payment (158,000) (5,000) (8,000) (59,000) (24,000) (62,000)

to
partners
The pertinent entries to this case:
Debit Credit
Cash 250,000
Loss on Realization 90,000
Non Cash Assets 340,000

J, Capital 36,000
E, Capital 36,000
N, Capital 18,000
Loss on Realization 90,000

Liabilities 112,000
Cash 112,000
The pertinent entries to this case:

Debit Credit
E, Loan 5,000
N, Loan 8,000
J, Capital 59,000
E, Capital 24,000
N, Capital 62,000
Cash 158,000
Lump-sum Liquidation

Example 2
Case 2: Assume that the non-cash assets are sold at P185,000.

Required: Prepare a statement of liquidation and the pertinent entries.

Assets
Cash 20,000
Non-Cash Assets 340,000
Total Assets 360,000
Liabilities and Capital
Liabilities 112,000
E, Loan 5,000
N, Loan 8,000
J, Capital 95,000
E, Capital 60,000
N, Capital 80,000
Total Liabilities & Capital 360,000
 Statement of Liquidation

Cash Non- Liabiliti E, N, J, E, N,

Cash es Loan Loan Capital Capital Capital

P/L % 40% 40% 20%

Balance 20,000 340,000 112,000 5,000 8,000 95,000 60,000 80,000

Sale 185,000 (340,000) (62,000) (62,000) (31,000)

Balance 205,000 112,000 5,000 8,000 33,000 (2,000) 49,000

Payment (112,000) (112,000)

Balance 93,000 5,000 8,000 33,000 (2,000) 49,000

Offset (2,000) 2,000

Balance 93,000 3,000 8,000 33,000 49,000

Payment
to (93,000) (3,000) (8,000) (33,000) (49,000)
partners
Case 3: Assume that the non-cash assets are sold at P170,000; and any
deficient partner is personally solvent.

Required: Prepare a statement of liquidation and the pertinent entries.

Assets
Cash 20,000
Non-Cash Assets 340,000
Total Assets 360,000
Liabilities and Capital
Liabilities 112,000
E, Loan 5,000
N, Loan 8,000
J, Capital 95,000
E, Capital 60,000
N, Capital 80,000
Total Liabilities & Capital 360,000
 Statement of Liquidation

Cash Non- Liabiliti E, N, J, E, N,

Cash es Loan Loan Capital Capital Capital

P/L % 40% 40% 20%

Balance 20,000 340,000 112,000 5,000 8,000 95,000 60,000 80,000

Sale 170,000 (340,000) (68,000) (68,000) (34,000)

Balance 190,000 112,000 5,000 8,000 27,000 (8,000) 46,000

Payment (112,000) (112,000)

Balance 78,000 5,000 8,000 27,000 (8,000) 46,000

Offset (5,000) 5,000

Balance 78,000 8,000 27,000 (3,000) 46,000

Add’l inv. 3,000 3,000

Balance 81,000 8,000 27,000 46,000

Payment (81,000) (8,000) (27,000) (46,000)

Case 4: Assume same facts as in Case 3 except that E is personally
insolvent and unable to make additional investment.

Required: Prepare a statement of liquidation and the pertinent entries.

Assets
Cash 20,000
Non-Cash Assets 340,000
Total Assets 360,000
Liabilities and Capital
Liabilities 112,000
E, Loan 5,000
N, Loan 8,000
J, Capital 95,000
E, Capital 60,000
N, Capital 80,000
Total Liabilities & Capital 360,000
 Statement of Liquidation

Cash Non- Liabiliti E, N, J, E, N,

Cash es Loan Loan Capital Capital Capital

P/L % 40% 40% 20%

Balance 20,000 340,000 112,000 5,000 8,000 95,000 60,000 80,000

Sale 170,000 (340,000) (68,000) (68,000) (34,000)

Balance 190,000 112,000 5,000 8,000 27,000 (8,000) 46,000

Payment (112,000) (112,000)

Balance 78,000 5,000 8,000 27,000 (8,000) 46,000

Offset (5,000) 5,000

Balance 78,000 8,000 27,000 (3,000) 46,000

Add’l
(2,000) 3,000 (1,000)
Losses
Balance 78,000 8,000 25,000 45,000

Payment (78,000) (8,000) (25,000) (45,000)

Case 5: Assume that the non-cash assets are sold at P90,000 but the
partners are personally solvent.

Required: Prepare a statement of liquidation and the pertinent entries.

Assets
Cash 20,000
Non-Cash Assets 340,000
Total Assets 360,000
Liabilities and Capital
Liabilities 112,000
E, Loan 5,000
N, Loan 8,000
J, Capital 95,000
E, Capital 60,000
N, Capital 80,000
Total Liabilities & Capital 360,000
 Statement of Liquidation
Cash Non- Liabiliti E, N, J, E, N,
Cash es Loan Loan Capital Capital Capital

P/L % 40% 40% 20%

Balance 20,000 340,000 112,000 5,000 8,000 95,000 60,000 80,000

Sale 90,000 (340,000) (100,00 (100,000) (50,000)

0)
Balance 110,000 112,000 5,000 8,000 (5,000) (40,000) 30,000

Payment (110,000) (110,000)

Balance 0 2,000 5,000 8,000 (5,000) (40,000) 30,000

Offset (5,000) 5,000

Balance 0 2,000 8,000 (5,000) (35,000) 30,000

Add’l Inv 40,000 5,000 35,000

Balance 40,000 2,000 8,0000 30,000

Payment (2,000) (2,000)

Payment (38,000) (8,000) (30,000)

 Installment Liquidation

Realization of non-cash assets is accomplished

over an extended period of time. When cash is
available, creditors may be partially or fully paid.
Any excess cash may be distributed to the
partners in accordance with a program of safe
payments or cash priority program
Procedures in Installment Liquidation
1. Realization of non-cash assets and
distribution of gain or loss among the
partners based on P/L ratio;
2. Payment of liquidation expenses & adj.
for unrecorded liabilities and distributing
among the partners;
3. Payment of liabilities to outsiders;
4. Distribution of available cash based on a
schedule of safe payments or a cash
priority program. 45
Case 1: The balance sheet of C, B and A, partners sharing profits in the
ratio of 4:3:3, respectively, showed the following balances on April 30, 2021:
Assets
Cash 31,500
Non-Cash Assets 125,000
Total Assets 156,500
Liabilities and Capital
Liabilities 43,500
A, Loan 3,000
C, Capital 60,000
B, Capital 35,000
A, Capital 15,000
Total Liabilities & Capital 156,500
In May, part of the assets are sold at book value, P30,000. In June the
remaining assets are sold for P21,000. Assume that available cash is
distributed to the proper parties at the end of May and June. Assume
further that partners are solvent.
 C, B and A Partnership
Schedule of Safe Payment
May 31, 2021

C B A
Capital Balances before 60,000 35,000 15,000
distribution of cash
Loan Balance 3,000
Partners’ Total Interest 60,000 36,000 18,000
Restricted Interest – (38,000) (28,500) (28,500)
possible loss on NCA
Balances 22,000 6,500 (10,500)
Restricted Interest – (6,000) (4,500) 10,500
additional loss from
deficient partner
Free Interests - 16,000 2,000 0
Payment to partners
 C, B and A Partnership
Schedule of Safe Payment
June 30, 2021

C B A
Capital Balances before 14,400 10,800 (7,200)
distribution of Cash
Loan Balance 3,000
Partners’ Total Interest 14,400 10,800 (4,200)
Restricted Interest – (2,400) (1,800) 4,200
additional loss if A is
unable to pay for
his/her deficiency
Free Interests – 12,000 9,000 0
amounts to be paid to
partners
 C, B and A Partnership
Statement of Liquidation

Cash Non- Liabiliti A, Loan C, B, A,

Cash es Capital Capital Capital
P/L % 40% 30% 30%

Balance 31,500 125,000 43,500 3,000 60,000 35,000 15,000

May - Sale 30,000 (30,000)

Balance 61,500 95,000 43,500 3,000 60,000 35,000 15,000

Payment (43,500) (43,500)

Balance 18,000 95,000 3,000 60,000 35,000 15,000

May-Installment (18,000) (16,000) (2,000)

Balances 0 95,000 3,000 44,000 33,000 15,000

June - Sale 21,000 (95,000) (29,600) (22,200) (22,200)

Balances 21,000 3,000 14,400 10,800 (7,200)

Right of offset (3,000) 3,000

14,400 10,800 (4,200)

 C, B and A Partnership
Statement of Liquidation

Cash Non- Liabiliti A, Loan C, B, A,

Cash es Capital Capital Capital
P/L % 40% 30% 30%
Balances 0 95,000 3,000 44,000 33,000 15,000

June - Sale 21,000 (95,000) (29,600) (22,200) (22,200)

Balances 21,000 3,000 14,400 10,800 (7,200)

Right of offset (3,000) 3,000

Balances 21,000 14,400 10,800 (4,200)

June Installment (21,000) (12,000) (9,000)

Balances 0 2,400 1,800 (4,200)

July - Investment 4,200 4,200

Balances 4,200 2,400 1,800

July – Final (4,200) (2,400) (1,800)

payment
 Cash Priority Program
C B A C B A Total
Capital Balances 60,000 35,000 15,000

Loan Balance 3,000

Partners’ Total 60,000 35,000 18,000

Interest
Divided by P/LR 40% 30% 30%

Loss Absorption 150,000 116,667 60,000

Balance
Priority I: to C (33,333) - - 13,333 13,333

116,667 116,667 60,000

Priority II: to C & B (56,667) (56,667) - 22,667 17,000 39,667

60,000 60,000 60,000 36,000 17,000 - 53,000

Priority III: Amount 21,000

in excess of
40% 30% 30%
P53,000 – P/L ratio 51
Cash Priority Program

May C B A
Priority I 13,333
Priority II 2,667 2,000
(18,000 – 13,333)
Total 16,000 2,000
C: 4,667 x 22,667/39,667
B: 4,667 x 17,000/39,667

52
Cash Priority Program

June C B A
Priority I
Priority II 12,000 9,000
Total 12,000 9,000
C: 21,000 x 22,667/39,667
B: 21,000 x 17,000/39,667

53
Cash Priority Program

July C B A
Priority I
Priority II 2,400 1,800
Total 2,400 1,800
C: 4,200 x 22,667/39,667
B: 4,200 x 17,000/39,667

54
 Cash Priority Program

July C B A
Priority I
Priority II (39,667-25,667) 8,000 6,000
C: 14,000 x 22,667/39,667
B: 14,000 x 17,000/39,667
Priority III P/L Ratio 2,800 2,100 2,100

Total 10,800 8,100 2,100

Assuming: cash available for distribution in July P21,000

55
End of Chapter 4

Thank you!

Do you have any questions?

email@:jhevangelista@bpsu.edu.ph