M02 CILO14 WK07to12 Partnership Liquidation

MODULE 02 CILO 14 WEEK 07 TO 12
PARTNERSHIP LIQUIDATION
Liquidation of a partnership means winding up the business towards to termination
by selling the assets, paying the liabilities, and distributing the remaining cash to
partners.
There are two types of partnership liquidation. One is simple liquidation where all the
non-cash assets of the partnership are sold and all the liabilities paid followed by a
single liquidating distribution to the partners. The other one is installment
liquidation which involves a series of realization of non-cash assets, payment of
liabilities, and distributing the available cash to the partners. This process continues
until all the non-cash assets have been sold and all cash has been distributed to the
creditors and to the partners. Realization is the process of selling or converting the
non-cash assets into cash. The books of the partnership should be adjusted and
closed, and a statement of financial position should be prepared.
Accounting for partnership liquidation involves the following procedures:

1. Non-cash assets are sold or converted to cash. Any resulting gain or loss from
the sale should be adjusted to the partners’ capital accounts in accordance
with their profit and loss ratio.
2. Payment of liabilities
3. Where a partner’s capital is deficient, the following may be applied:
a. Exercise the right of offset (apply the loan balance against the debit balance)
if the deficient partner has a loan balance.
b. Require additional investment from the deficient partner if such partner has
no loan balance.
c. Consider the deficiency of the partner as an additional loss to be absorbed
by the other partners if the deficient partner is insolvent or a limited
partner. A partner is considered as insolvent when his personal assets are
not sufficient to pay his creditors.
4. Cash is to be distributed in the following order of priority:
a. First, to outside partnership creditors.
b. Second, to partners for loan accounts.
c. Third, to partners for capital accounts.
When cash is not sufficient to pay creditors, the solvent general partners shall
contribute the difference using their loss ratio. The final distribution of cash to
partners is made based on the partners’ capital balances and not based on the profit
and loss ratio.
Illustration A:
YZ Partnership
Statement of Financial Position
Date
Assets Liabilities & Equity
Cash 20,000 Payables 50,000

Y, Capital (50%) 75,000
Non-Cash 180,000 Z, Capital (50%) 75,000
Total 200,000 Total 200,000
The following are the transactions pertaining to the liquidation of YZ Partnership,

together with their respective journal entries:
1. Non-cash assets are sold for P180,000
Account Title DR CR
Cash 180,000
Non-Cash Assets 180,000
2. Liabilities are paid

Account Title DR CR
Payable 50,000
Cash 50,000
3. Remaining cash is distributed between Y and Z

Account Title DR CR
Y, Capital 75,000
Z, Capital 75,000
Cash 150,000
A Statement of Partnership Liquidation shall also be prepared.

YZ Partnership
Date
Cash Non-Cash Payables Y, Capital Z, Capital
Assets
Balances
before
Liquidation 20,000 180,000 50,000 75,000 75,000
Sale of Non-
Cash Assets 180,000 (180,000)
---------- ---------- ---------- ---------- ----------
Balances
after
Realization 200,000 50,000 75,000 75,000
Payment of
Liabilities (50,000) (50,000)
---------- ---------- ---------- ---------- ----------
Balances
after
payment of
liabilities 150,000 75,000 75,000
Distribution
of remaining
Cash to the
partners (150,000) (75,000) (75.000)
======== ======== ======== ======== ========
Illustration B:
YZ Partnership
Date

Y, Capital (50%) 75,000
Total 200,000 Total 200,000


Account Title DR CR
Cash 200,000
Y, Capital 10,000
Z, Capital 10,000

Account Title DR CR
Payable 50,000
Cash 50,000

Account Title DR CR
Y, Capital 85,000
Z, Capital 85,000
Cash 170,000
A Statement of Partnership Liquidation shall also be

prepared.
YZ Partnership
Date
Assets
Balances
before
Liquidation 20,000 180,000 50,000 75,000 75,000
Sale of Non-
Cash Assets 200,000 (180,000) 10,000 10.000
---------- ---------- ---------- ---------- ----------
Balances
after
Realization 220,000 50,000 85,000 85,000
Payment of
Liabilities (50,000) (50,000)
---------- ---------- ---------- ---------- ----------
Balances
after
payment of
liabilities 170,000 85,000 85,000
Distribution
of remaining
Cash to the
partners (170,000) (85,000) (85.000)
======== ======== ======== ======== ========
Illustration C:
YZ Partnership
Date

Y, Capital (50%) 75,000
Total 200,000 Total 200,000


Account Title DR CR
Cash 160,000
Y, Capital 10,000
Z, Capital 10,000

Account Title DR CR
Payable 50,000
Cash 50,000

Account Title DR CR
Y, Capital 65,000
Z, Capital 65,000
Cash 130,000
prepared.
YZ Partnership
Date
Assets
Balances
before
Liquidation 20,000 180,000 50,000 75,000 75,000
Sale of Non-
Cash Assets 160,000 (180,000) (10,000) (10.000)
---------- ---------- ---------- ---------- ----------
Balances
after
Realization 180,000 50,000 65,000 65,000
Payment of
Liabilities (50,000) (50,000)
---------- ---------- ---------- ---------- ----------
Balances
after
payment of
liabilities 130,000 65,000 65,000
Distribution
of remaining
Cash to the
partners (130,000) (65,000) (65.000)
======== ======== ======== ======== ========
Illustration D:
YZ Partnership
Date

Y, Capital (50%) 25,000
Total 100,000 Total 100,000
Both Y and Z are solvent and are not limited partners.


Account Title DR CR
Cash 10,000
Y, Capital 35,000
Z, Capital 35,000
2. Partners make an additional investment
Account Title DR CR
Cash 20,000
Y, Capital 10,000
Z, Capital 10,000
Account Title DR CR
Payable 50,000
Cash 50,000
Account Title DR CR
Y, Capital 65,000
Z, Capital 65,000
Cash 130,000
prepared.
YZ Partnership
Date
Assets
Balances
before
Liquidation 20,000 80,000 50,000 25,000 25,000
Sale of Non-
Cash Assets 10,000 (80,000) (35,000) (35.000)
---------- ---------- ---------- ---------- ----------
Balances
after
Realization 30,000 50,000 (10,000) (10,000)
Additional
investment
from
partners 20,000 10,000 10,000
---------- ---------- ---------- ---------- ----------
Balances
after
additional
investment 50,000 50,000
Payment of
Liabilities (50,000) (50,000)
======== ======== ======== ======== ========
Illustration E:
YZ Partnership
Date

Loan from Z 10,000
Y, Capital (50%) 25,000
Total 100,000 Total 100,000
Only Y is solvent and both are not limited partners.


Account Title DR CR
Cash 10,000
Y, Capital 35,000
Z, Capital 35,000
2. Z exercises the right of offset
Account Title DR CR
Loan from Z 10,000
Z, Capital 10,000
3. Y makes an additional investment
Account Title DR CR
Cash 10,000
Y, Capital 10,000
Account Title DR CR
Payable 40,000
Cash 40,000
prepared.
YZ Partnership
Date
Cash Non-Cash Payables Loan Y, Capital Z, Capital
Assets from Z
Balances
before
Liquidation 20,000 80,000 40,000 10,000 25,000 25,000
Sale of
Non-Cash 10,000 (80,000) (35,000) (35.000)
Assets
---------- ---------- ---------- ---------- ---------- ----------
Balances
after
Realization 30,000 40,000 10,000 (10,000) (10,000)
Z’s Right of
Offset (10,000) 10,000
---------- ---------- ---------- ---------- ---------- ----------
Balances
after
Offsetting 30,000 40,000 (10,000)
Additional
investment
of Y 10,000 10,000
---------- ---------- ---------- ---------- ---------- ----------
Balances
after
additional
investment
of Y 40,000 40,000
Payment of
Liabilities (40,000) (40,000)
======== ======== ======== ======== ======== ========
Illustration F:
YZ Partnership
Date

Y, Capital (50%) 25,000
Total 100,000 Total 100,000
Only Y is solvent and both are not limited partners.


Account Title DR CR
Cash 10,000
Y, Capital 35,000
Z, Capital 35,000
2. Y absorbs the deficiency of Z
Account Title DR CR
Y, Capital 10,000
Z, Capital 10,000
3. Y makes an additional investment
Account Title DR CR
Cash 20,000
Y, Capital 20,000
Account Title DR CR
Payable 50,000
Cash 50,000
prepared.
YZ Partnership
Date
Assets
Balances
before
Liquidation 20,000 80,000 50,000 25,000 25,000
Sale of Non-
Cash Assets 10,000 (80,000) (35,000) (35.000)
---------- ---------- ---------- ---------- ----------
Balances
after
Realization 30,000 50,000 (10,000) (10,000)
Y absorbs
Z’s
deficiency (10,000) 10,000
Y makes an
additional
Balances
after
absorbing
deficiency
and making
additional
---------- ---------- ---------- ---------- ----------
Payment of
Liabilities (50,000) (50,000)
======== ======== ======== ======== ========
For a more extensive read on the above-mentioned topics, the following references are
recommended:
1. Manuel, Zenaida Vera-Cruz, Partnership and Corporation Accounting, International
edition, 2017;
2. Millan, Zeus Vernon B., Financial Accounting & Reporting – Fundamentals, 2 nd edition,
2019;
3. Retrievable from:
https://kupdf.net/download/partnership-accounting-manalo_5a7d0a03e2b6f52949062159_pdf
Disclaimer: This module is for class discussion purposes only, and not for publication.
The illustration problems were adapted from the sources & references.
REFERENCES
Manuel, Zenaida Vera-Cruz, Partnership and Corporation Accounting,
International edition, 2017;
Millan, Zeus Vernon B. Millan, Financial Accounting & Reporting –
Fundamentals, 2nd edition, 2019
Retrievable from:
https://kupdf.net/download/partnership-accounting-manalo_5a7d0a03e2b6f52949062159_pdf

M02 CILO14 WK07to12 Partnership Liquidation

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MODULE 02 CILO 14 WEEK 07 TO 12

Accounting for partnership liquidation involves the following procedures:

Cash 20,000 Payables 50,000

Total 200,000 Total 200,000

The following are the transactions pertaining to the liquidation of YZ Partnership,

1. Non-cash assets are sold for P180,000

2. Liabilities are paid

3. Remaining cash is distributed between Y and Z

A Statement of Partnership Liquidation shall also be prepared.

Cash 20,000 Payables 50,000

Total 200,000 Total 200,000

The following are the transactions pertaining to the liquidation of YZ Partnership,

1. Non-cash assets are sold for P200,000

2. Liabilities are paid

3. Remaining cash is distributed between Y and Z

A Statement of Partnership Liquidation shall also be

Cash 20,000 Payables 50,000

Total 200,000 Total 200,000

The following are the transactions pertaining to the liquidation of YZ Partnership,

1. Non-cash assets are sold for P160,000

2. Liabilities are paid

3. Remaining cash is distributed between Y and Z

Cash 20,000 Payables 50,000

Total 100,000 Total 100,000

Both Y and Z are solvent and are not limited partners.

The following are the transactions pertaining to the liquidation of YZ Partnership,

1. Non-cash assets are sold for P10,000

Cash 20,000 Payables 40,000

Total 100,000 Total 100,000

Only Y is solvent and both are not limited partners.

The following are the transactions pertaining to the liquidation of YZ Partnership,

1. Non-cash assets are sold for P10,000

Cash 20,000 Payables 50,000

Total 100,000 Total 100,000

Only Y is solvent and both are not limited partners.

The following are the transactions pertaining to the liquidation of YZ Partnership,

1. Non-cash assets are sold for P10,000

International edition, 2017;

Millan, Zeus Vernon B. Millan, Financial Accounting & Reporting –

Fundamentals, 2nd edition, 2019

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