Partnership Dissolution

a. Admission of a New Partner

- purchase of interest
- additional investment

b. Retirement/Withdrawal of Partner

c. Death of a Partner
Upon the death of a partner, check if there is testate (with will) or intestate (without will) succession.
Someone will inherit/be assigned to the capital interest of a partner. Dissolution will happen after the
successful transfer of the properties from the deceased partner to the legal heirs.

All applicable taxes imposed upon should be dealt with before undergoing dissolution.

The accounting method used for partnership dissolution via death of a partner will be the same as the
method used for retirement/withdrawal of a partner.

Upon waiting for the processing of the transfer, the partnership may credit the capital interest of the
deceased partner to an account called "payable to the estate" especially if no one may continue or inherit
the partner's interest. This liability may earn interest. Afterwards, the partnership may continue with the
dissolution.

d. Incorporation of Partnership
Resulting from the partners' interest on expansion and having limited liability.

Assets may be revalued and the capital balances should be updated. Upon updating, this will be
converted to a number of shares multiplied by the par value assigned to the corporation.

A B C
Updated Capital 100,000 150,000 200,000

Par Value 100 100 100

Assigned Shares 950 1,300 1,900
Share Capital 95,000 130,000 190,000
Share Premium 5,000 20,000 10,000

(The share premium is the excess amount from the difference between the updated capital and the share
capital computed by multiplying the assigned number of shares to the partner with the par value.)

Liquidation - Liquidation is the process of converting partnership assets into cash and distributing the cash
to creditors and partners.

In actual practice, the partnership will have to close their books and their TIN from the BIR as signs for
liquidation. The partnership will also have to close their business with the LGU, as also required by the BIR.
All taxes and duties must be complied accordingly before gaining certifications from the agencies. Then, the
partnership should inform the stakeholders and SEC.

Frequently, the sale of assets will not provide sufficient cash to pay both creditors and partners. The
creditors have priority on any distribution.
The basic rule is that no distribution is made to any partner until all possible losses and liquidation expenses
have been paid or provided for.

a. Lumpsum Distribution
The first step in the liquidation process is to sell noncash assets and allocate the resulting gain or loss to
the capital accounts of the partners in accordance with their profit and loss sharing ratio. This is a
process called "realization."

The second step is to satisfy the liabilities owing to creditors other than partners. (outside creditors)

The third step is to satisfy the liabilities owing to partners other than for capital and profits. These are
liabilities that are owed either to the partnership or to a specific partner,

Any deficiency (i.e., debit balance) in a solvent partner’s capital will require that partner to contribute cash
equal to the debit balance. If the deficient partner is insolvent, the debit balance must be absorbed by the
remaining partners (usually in accordance with their profit and loss sharing ratio).

Note, however, that in order to achieve an equitable distribution, a partner’s loan to the partnership will
first be used to offset a debit balance in his capital account. Therefore, under this so-called right to offset
doctrine, a partner’s loan to the partnership will have distribution priority only to the extent it exceeds a
debit balance in the partner’s capital account.

Loan Payable to A A Capital

100,000 (60,000)
(60,000) 60,000
40,000 0

10,000 (60,000)
(10,000) 10,000
0 (50,000)

The final step is to distribute any cash remaining to the partners for capital and finally for profits. The
capital contribution of the partner will be first to be distributed back. If there are any excess cash, the
remainder will be allocated based on their profit or loss ratio agreement.

Partnership Liquidation (whether lump sum or installment)

a. Realization of Noncash Assets:
- gain There is a gray area in accounting for partnership liquidation. In
- loss law, if the problem is silent, the partner with a capital deficiency
is considered solvent. In accounting, if the problem is silent, the
b. Payment to Outside Creditors partner is considered insolvent.
c. Eliminate the Capital Deficiency:
- right of offset (loan payable)
- if partner is solvent, the partner can A partner is solvent if its personal asset is more than the
make additional investment. personal liability. If the personal asset is lower than the personal
- if partner is insolvent, the other liability, then the partner is insolvent.
partners will absorb the deficiency.

d. Payment to Partners:
 e. Payment for Capital and Profits
- liability to partners
(cash priority program)
- capital contributions
- share in profits

A Capital Personal Assets 350,000

(60,000) Personal Liabilities 330,000
Right of Offset 10,000 (The partner is considered solvent.)
(50,000) Additional Inv. 20,000
Additional Inv. 20,000
Deficiency (30,000)
(The other partners will absorb, through P/L ratio.)

If there is no profit or loss ratio agreement, know who are the industrial partner/s and the capitalist
partner/s. Only those capitalist partners or partners who have capital balances are subject to receive
profit or loss. In the absence of this agreement, the capital balances should be used. The most ideal is
using the average capital balance. But it will still depend on the partners' agreement.

A Capital B Capital C Capital

Deficiency (30,000) (40,000)

If more than one partner has a capital deficiency, the priority goes to the partner who is considered nearly
to be insolvent or who is already insolvent.

For receivables of the partnership from the partners, right of offset may be used before allocating
remaining cash to bring back the capital contributions of the partners and allocate profits. This time, the
amount of the receivables will be deducted from the partner's capital balance.

A Capital B Capital C Capital

Deficiency (30,000) (40,000) (50,000)

If all of the partners have negative capital balances (capital deficient), all partners should not be
insolvent. One partner should stand as the general partner. If all partners are considered insolvent, this
will be a loss to the creditors.

Partnership Liquidation (installment)

The realization of noncash assets, payment to outside creditors, and payment to partners may be done in
installment basis. This is a more practical scenario for liquidation process.

Finding buyers for the noncash assets will take longer time than expected. Also, payment to outside
creditors may not always be in the full capacity of the partnership.

Problem 1: Assume the following data for QRS Partnership. The partnership has the following condensed
balance sheet just before liquidation on November 1, 2021. It reports the following balances:

Cash 24,000
Non-Cash Assets 84,000
108,000
 Liabilities 12,000
Q, Loans 2,400
Q, Capital (30%) 9,600
R, Capital (50%) 48,000
S, Capital (20%) 36,000
108,000

The percentages in the parentheses after the partner's capital balances represent their respective interests in
the profit and loss allocation. Prepare the statement of liquidation, assuming:

1. The noncash assets were realized at P 96,000. P 49,000

2. The noncash assets were realized at P 48,000. P 49,001
P 49,002
3. The noncash assets were realized at P 36,000. The personal
assets and liabilities of the partners on this date are as follows:

Personal Assets Personal Liabilities

Q 288,000 240,000
R 216,000 228,000
S 108,000 108,000

Case 1:
Cash Noncash Assets Liabilities Q, Loans
24,000 84,000 12,000 2,400
Realization - NCA 96,000 (84,000)
Balance 120,000 0 12,000 2,400
Payment to Creditor (12,000) (12,000)
Balance 108,000 0 0 2,400
Payment to Q, Loan (2,400) (2,400)
Balance 105,600 0 0 0
Payment to Partner (105,600)
Balance 0 0 0 0

Cash Q, Capital (30%) R, Capital (50%) S, Capital (20%)

9,600 48,000 36,000
Gain on Realization 3,600 6,000 2,400
Balance 105,600 13,200 54,000 38,400
Payment to Partner (105,600) (13,200) (54,000) (38,400)
Balance 0 0 0 0

(Journal Entries)
Cash 96,000 Q, Loan 2,400
Noncash A. 84,000 Q, Capital 13,200
Q, Capital 3,600 R, Capital 54,000
R, Capital 6,000 S, Capital 38,400
S, Capital 2,400 Cash 108,000
 Liabilities 12,000
Cash 12,000

Case 2:
Cash Noncash Assets Liabilities Q, Loans
24,000 84,000 12,000 2,400
Realization - NCA 48,000 (84,000)
Balance 72,000 0 12,000 2,400
Right of Offset (1,200)
Balance 72,000 0 12,000 1,200
Payment to Creditor (12,000) (12,000)
Balance 60,000 0 0 1,200
Payment to Partner (60,000) (1,200)
Balance 0 0 0 0

Q, Capital (30%) R, Capital (50%) S, Capital (20%)

9,600 48,000 36,000
Loss on Realization (10,800) (18,000) (7,200)
Balance (1,200) 30,000 28,800
Right of Offset 1,200
Balance 0 30,000 28,800
Payment to Partner (30,000) (28,800)
Balance 0 0 0

(Journal Entries)
Cash 48,000 Q, Loan 1,200
Q, Capital 10,800 R, Capital 30,000
R, Capital 18,000 S, Capital 28,800
S, Capital 7,200 Cash 60,000
Noncash A. 84,000
Q, Loan 1,200
Liabilities 12,000 Q, Capital 1,200
Cash 12,000

Case 3:
Cash Noncash Assets Liabilities Q, Loans
24,000 84,000 12,000 2,400
Realization - NCA 36,000 (84,000)
Balance 60,000 0 12,000 2,400
Payment to Creditor (12,000) (12,000)
Balance 48,000 0 0 2,400
Right of Offset (2,400)
Balance 48,000 0 0 0
Additional Inv. 2,400
Balance 50,400 0 0 0
Payment to Partner (50,400)
Balance 0 0 0 0
 Q, Capital (30%) R, Capital (50%) S, Capital (20%)
9,600 48,000 36,000
Loss on Realization (14,400) (24,000) (9,600)
Balance (4,800) 24,000 26,400
Right of Offset 2,400
Balance (2,400) 24,000 26,400
Additional Inv. 2,400
Balance 0 24,000 26,400
Payment to Partner (24,000) (26,400)
Balance 0 0 0

Personal Assets Personal Liabilities Net Assets

Q 288,000 240,000 (solvent) 48,000
R 216,000 228,000
S 108,000 108,000

(Journal Entries)
Cash 36,000 R, Capital 24,000
Q, Capital 14,400 S, Capital 26,400
R, Capital 24,000 Cash 50,400
S, Capital 9,600
Noncash A. 84,000 Cash 2,400
Q, Capital 2,400
Liabilities 12,000
Cash 12,000 Q, Loan 2,400
Q, Capital 2,400

Multiple Choice Problem: (Liquidation by Installment)

Problem A: On December 31, 2050, the Statement of Financial Position of NBA Partnership shows the
following data with profit or loss sharing of 2:3:5:

Cash 20,000,000
Other Noncash Assets 80,000,000
Receivable from N 10,000,000
110,000,000

Liabilities 50,000,000
Payable to B 5,000,000
Payable to A 15,000,000
N, Capital (20%) 30,000,000
B, Capital (30%) 20,000,000
A, Capital (50%) (10,000,000)
110,000,000

On January 1, 2051, the partnership decided to wind up its affairs. For the month ended January 31, 2051, the
following transactions occurred:
 a. Other non-cash assets with a book value of P 60,000,000 at a
loss of P 10,000,000.
b. Liquidation expenses amounting to P 3,000,000 were paid.

c. P 2,000,000 cash was withheld for future liquidation expenses.

d. 60% of liabilities to third person were paid.

For the month ended February 28, 2051, the following transactions occurred:

a. Remaining other non-cash assets were sold at a gain of P

5,000,000.
b. Liquidation expenses amounting to P 2,000,000 were paid.
c. The remaining liabilities to third persons were paid.

Cash Noncash Assets Receivable from N Liabilities

20,000,000 80,000,000 10,000,000 50,000,000
1st Realization-NCA 50,000,000 (60,000,000)
Balance 70,000,000 20,000,000 10,000,000 50,000,000
Liquidation Exp. (3,000,000)
Balance 67,000,000 20,000,000 10,000,000 50,000,000
Payment to Creditor (30,000,000) (30,000,000)
Balance 37,000,000 20,000,000 10,000,000 20,000,000
(15,000,000)
1st Payment - Part.

Balance 22,000,000 20,000,000 10,000,000 20,000,000

Right of Offset (10,000,000)
Balance 22,000,000* 20,000,000 0 20,000,000
2nd Realization-NCA 25,000,000 (20,000,000)
Balance 47,000,000 0 0 20,000,000
Liquidation Exp. (2,000,000)
Balance 45,000,000 0 0 20,000,000
Payment to Creditor (20,000,000) (20,000,000)
Balance 25,000,000 0 0 0
2nd Payment - Part. (25,000,000)
Balance 0 0 0 0

Payable to B Payable to A N, Capital (20%) B, Capital (30%)

5,000,000 15,000,000 30,000,000 20,000,000
Loss on Realization (2,000,000) (3,000,000)
Balance 5,000,000 15,000,000 28,000,000 17,000,000
Liquidation Exp. (600,000) (900,000)
Balance 5,000,000 15,000,000 27,400,000 16,100,000
Payment to B Loan (5,000,000)
1st Payment to Part. (8,000,000) (2,000,000)
Balance 0 15,000,000 19,400,000 14,100,000
Right of Offset (15,000,000) (10,000,000)
Balance 0 0 9,400,000 14,100,000
2nd Realization-NCA 1,000,000 1,500,000
Balance 0 0 10,400,000 15,600,000
Liquidation Exp. (400,000) (600,000)
Balance 0 0 10,000,000 15,000,000
2nd Payment - Part. (10,000,000) (15,000,000)
Balance 0 0 0 0

A, Capital (50%) Liquidation Expenses - expenses that are incurred in relation to

(10,000,000) the liquidation of the partnership. It may include commissions,
Loss on Realization (5,000,000) other third-party expenses. (a deduction from cash)
Balance (15,000,000)
Liquidation Exp. (1,500,000) 22,000,000* The amount of the possible losses during
Balance (16,500,000) the first installment. (unrealized NCA and
Payment to B Loan cash withheld for future liquidation)
1st Payment to Part.
Balance (16,500,000)
Right of Offset 15,000,000
Balance (1,500,000)
2nd Realization-NCA 2,500,000
Balance 1,000,000
Liquidation Exp. (1,000,000)
Balance 0
2nd Payment - Part.
Balance 0

Schedule of Safe Payments:

N (20%) B (30%) A (50%)
Capital Balance before Distribution 27,400,000 16,100,000 (16,500,000)
Loans to/from Partners (10,000,000) 5,000,000 15,000,000
Capital Interest 17,400,000 21,100,000 (1,500,000)
Restricted Interest: (Possible Losses)
Unrealized Portion of NCA (4,000,000) (6,000,000) (10,000,000)
Cash Withheld (400,000) (600,000) (1,000,000)
Balance 13,000,000 14,500,000 (12,500,000)
Capital Deficiency (Partner A) (5,000,000) (7,500,000) 12,500,000
Safe Payment 8,000,000 7,000,000 0

N (20%) B (30%) A (50%)

Restricted Interest: (Possible Losses)
Unrealized Portion of NCA (4,000,000) (6,000,000) (10,000,000)
Cash Withheld (400,000) (600,000) (1,000,000)
Maximum Possible Losses (4,400,000) (6,600,000) (11,000,000)

1. What is the amount received by N on January 31, 2051? P 8,000,000

2. Using the same data in number 1, what is the share of A to the P 11,000,000
maximum possible loss on January 31, 2051?
3. Using the same data in number 1, what is the total amount of P 22,000,000
cash withheld on January 31, 2051?
4. Using the same data in number 1, what is the amount received P 15,000,000
by B on February 28, 2051?
Cash Priority Program: (done before the liquidation process; to check who among the partners has the
priority of receiving cash over the other)

N (20%) B (30%) A (50%)

Capital Balance before Liquidation 30,000,000 20,000,000 (10,000,000)
Loans to/from Partners (10,000,000) 5,000,000 15,000,000
Capital Interest 20,000,000 25,000,000 5,000,000
Divide by: Profit or Loss Ratio 20% 30% 50%
Maximum Loss Absorption 100,000,000 83,333,333 10,000,000
(If the maximum loss absorption becomes the actual loss of the liquidation, the capital interest amount will be the partner's share
in the loss from the liquidation. This is also the total amount of loss in liquidation, if absorbed by the partner, it would make the
capital interest of the partner to 0, ensuring that the partner will not incur any capital deficiency.)

N (20%) B (30%) A (50%)

Maximum Loss Absorption 100,000,000 83,333,333 10,000,000
Priority 1 16,666,667
Cash Payment 3,333,333
Balance 83,333,333 83,333,333 10,000,000
Priority 2 73,333,333 73,333,333
Cash Payment 14,666,667 22,000,000
Balance 10,000,000 10,000,000 10,000,000

Total Cash Payments 18,000,000 22,000,000

(Total = 40,000,000)

If, for example, the total cash excess for distribution to partners exceeds P 40,000,000, the excess will be
allocated to the three partners based on their profit or loss ratio.

N (20%) B (30%) A (50%)

First Payment: (1/31/2051)
First Priority 3,333,333
Second Priority 4,666,667 7,000,000
8,000,000 7,000,000 0

Second Payment: (2/28/2051)

Second Priority 10,000,000 15,000,000
10,000,000 15,000,000 0

Multiple Choice Problem: (Liquidation by Lump Sum)

Problem B: On December 31, 2022, the Statement of Financial Position of UFC Partnership shows the
following data with profit or loss sharing of 2:3:5:

Cash 15,000,000
Other Noncash Assets 40,000,000
55,000,000

Liabilities 20,000,000
 U, Capital (20%) 15,000,000
F, Capital (30%) 12,500,000
C, Capital (50%) 7,500,000
55,000,000

On January 1, 2023, the partners decided to wind up the partnership affairs. During the winding up,
liquidation expenses amounted to P 2,000,000 were paid. Noncash assets with book value of P 30,000,000
were sold during January. 40% of liabilities were also paid during January. P 3,000,000 cash was withheld
during January for future liquidation expenses. On January 31, 2023, partner U received P 10,000,000.

U (20%) F (30%) C (50%)

15,000,000 12,500,000 7,500,000
Loss Absorbed (5,000,000) (7,500,000) (12,500,000) (25,000,000)
Payment to Partner 10,000,000 5,000,000 (5,000,000)

Cash 15,000,000 Cash Withheld 3,000,000

Realization - NCA 25,000,000 Unpaid Liabilities 12,000,000
Liquidation Expense (2,000,000) Total Cash Withheld 15,000,000
Payment to Creditor (8,000,000)
Payment to Partner (15,000,000)
Cash Withheld 15,000,000

Realization - NCA 25,000,000

The realization gain from the sale of noncash assets does not
include the liquidation expense paid by the partnership.

5. What is the amount received by F on January 31, 2023? P 5,000,000

6. Using the same data in number 5, what is the net proceeds P 25,000,000
from the sale of noncash assets during January 2023?

The amount of total cash withheld is not the same with the amount of the maximum possible loss. The total
cash withheld is computed through the addition of the unpaid liabilities and the cash withheld.

Multiple Choice Problem: (Liquidation by Lump Sum)

Problem C: Du30, De5 and 3llianes are partners in 3D Partnership. On January 1, 2011, the partners decided
to liquidate the partnership. The December 31, 2010 audited Statement of Financial Position of 3D
Partnership is summarized below. The following additional notes are provided:

Cash 2,000,000
Advances to Du30 3,000,000
Other Noncash Assets 15,000,000
20,000,000

Other Liabilities 5,000,000

Advances from De5 1,000,000
Advances from 3llianes 2,000,000
Du30, Capital (50%) 4,000,000
 De5, Capital (20%) 3,000,000
3llianes, Capital (30%) 5,000,000
20,000,000

a. The partners share profit or loss in the ratio of 5:2:3 to Du30,

De5 and 3llianes, respectively.
b. All partners are legally declared personally insolvent except
Du30 whose separate assets total P5M with separate liabilities
amounting to P 3M.
c. At the time of liquidation, all other assets are sold for P 8M.
d. Liquidation expenses amounting to P 1M were paid.

Du30 (50%) De5 (20%) 3llianes (30%) Total

4,000,000 3,000,000 5,000,000 12,000,000
Loan to/from Part. (3,000,000) 1,000,000 2,000,000 0
Capital Interest 1,000,000 4,000,000 7,000,000 12,000,000
Loss on Realization (3,500,000) (1,400,000) (2,100,000) (7,000,000)
Liquidation (500,000) (200,000) (300,000) (1,000,000)
Balance (3,000,000) 2,400,000 4,600,000 4,000,000
Additional Inv. 2,000,000 2,000,000
Balance (1,000,000) 2,400,000 4,600,000 6,000,000
Absorbed Deficiency 1,000,000 (400,000) (600,000) 0
Balance 0 2,000,000 4,000,000 6,000,000

7. What is the amount to be received by De5 at the end of P 2,000,000

liquidation process?

Multiple Choice Problem: (Liquidation by Lump Sum)

Problem D: Dona, Ella and Frey are partners in DEF Partnership with profit or loss sharing ratio of 6:1:3. Due
to disagreement, the partners decided to liquidate their business with pre-liquidation statement of financial
position presented below. The following additional notes are provided:

Cash 3,000,000
Other Noncash Assets 17,000,000
20,000,000

Liabilities 10,000,000
Dona, Capital (60%) 1,000,000
Ella, Capital (10%) 4,000,000
Frey, Capital (30%) 5,000,000
20,000,000

a. All partners are legally declared to be personally insolvent.

b. All noncash assets are sold during the liquidation process.
c. Liquidation expenses amounting to P 2M were paid.
d. Ella receives a total of P 2,500,000 at the end of liquidation.
 Dona (60%) Ella (10%) Frey (30%)
1,000,000 4,000,000 5,000,000
Loss Absorbed (9,000,000) (1,500,000) (4,500,000) (15,000,000)
Payment to Partner (8,000,000) 2,500,000 500,000

Cash 3,000,000
Realization - NCA (12,000,000)
Liquidation Expense (2,000,000)
Payment to Creditor (10,000,000)
Payment to Partner (3,000,000)
Cash Withheld 0

Realization - NCA 12,000,000

8. What is the amount received by Frey at the end of liquidation? P 500,000

9. Using the same data in number 8, what is the net proceeds P 12,000,000
from the sale of all noncash assets?

N (20%) B (30%) A (50%)

30,000,000 20,000,000 (10,000,000)
Loan to/from Partner (10,000,000) 5,000,000 15,000,000
Capital Interest 20,000,000 25,000,000 5,000,000
Loss on Realization (net of liq. exp.) (2,600,000) (3,900,000) (6,500,000)
Balance 17,400,000 21,100,000 (1,500,000)
Possible Loss (cash w.h. + unp. NCA) (4,400,000) (6,600,000) (11,000,000)
Balance 13,000,000 14,500,000 (12,500,000)
Absorbed Capital of A (5,000,000) (7,500,000) 12,500,000
Cash Payment (1st) 8,000,000 7,000,000 0