Partnership Liquidation

PARTNERSHIP LIQUIDATION
EMPV
LIQUIDATION
• Process of winding up of the affairs of the business and termination of business activities.
SOME REASONS WHY A PARTNERSHIP IS LIQUIDATED:

• Bankruptcy / Insolvency
• Once a partnership with a fixed term or a particular undertaking has terminated or accomplished.
• Court order and etc.
• Mutual agreement among the partners to close the business.
TYPES OF LIQUIDATION:
I. Lump sum liquidation ( Total Liquidation)
- Liquidation process is completed within a reasonably short period of time.
- No distributions are made to partners until the realization process is completed.
II. Installment liquidation ( Piecemeal liquidation)
- Liquidation process is done for a longer period of time because of difficulty converting the non-cash assets to cash.
– Distributions are made to some or all of the partners as it becomes available even before all the non-cash assets are realized.
TAKE NOTE! Our topic will only focus on Lump sum liquidation .
PROCEDURES IN THE LUMPSUM LIQUIDATION
The process of liquidation is summarized in the STATEMENT OF PARTNERSHIP LIQUIDATION. This statement serves as a basis for the journal
entries during the liquidation process.
The process of liquidation is done by:
1. Realization of non- cash assets and allocation of any gain or loss to the partners base on their profit or loss ratio.
- Realization of non-cash asset is the process of converting it to cash thru the means of selling it.
- The effect of the realization of non-cash assets to the partnership is it increases the cash balance and it either increase or decrease the capital balances of the
partners if there is a gain or loss on realization.
- A gain or loss on realization is allocated to the partners based on their p&l ratio, if the proceeds received is not equal to the book value of the non-cash
assets realized.
If the proceeds > book value of the non-cash assets, a gain is allocated to the partners based on their p&l ratio. This gain directly increases the capital
balances of the partners.
If the proceeds < book value of the non-cash assets, a loss is allocated to the partners based on their p&l ratio. This loss directly decreases the
capital balances of the partners.
During the process of realization, there are instances wherein certain expenses may be incurred which are called liquidation expenses. Example of these
liquidation expenses are sales commissions , shipping cost and other expenses relating to the disposal of the assets.The effect of these liquidation expenses in the
process of liquidation is it decreases the cash balance and at the same time decreases the partner’s capital balances. Liquidation expenses increases
the loss on realization and decreases the gain on realization.
II. Payment of liabilities to third parties (Partnership creditors)
- After realization of non-cash assets and elimination of capital deficiencies if there are any , the next step is the cash distribution. When it comes to
cash distribution it pertains to the settlement of the interests of the partnership creditors and also the interests of partners in the partnership
business. The order of priority when it comes to the cash distribution is the settlement first of the liabilities of the partnership to the partnership
creditors/ outside creditors ( other than partners).
III. Elimination of capital deficiencies.
- After realization of non-cash assets , there are instances wherein the capital balances of the partners after the distribution of gain or loss on
realization has a negative balance (capital deficiency). If this is the case, elimination of the capital deficiency must be done by applying these
concepts in order of priority:
a.) If the deficient partner has a loan balance (the partnership has a liability to the deficient partner), exercise the
offsetting of the loan balance to capital deficiency.
b.) If the deficient partner does not have a loan balance or the loan balance is not enough to cover to capital
deficiency, the deficient partner must be known whether he is solvent or insolvent.
à If the deficient partner is SOLVENT(has excess personal assets over personal liabilities) , he should have an additional investment to
partnership to cover his capital deficiency.
à If the deficient partner is INSOLVENT(has no excess personal assets over personal liabilities) , the remaining partners will absorb the
capital deficiency based on their profit or loss ratio.
IV. Payment of liabilities to partners
- After settlement of the liabilities of the partnership to third parties ,the partnership will now settle its liabilities to
the partners of the partnership.
V. Payment of capital accounts to partners

- After settlement of the liabilities of the partnership to partners ,the partnership will now settle the capital interest of
the partners. Take note that the final distribution of cash to partners is based on partner’s capital balances.
*The status whether a partner is solvent, or insolvent is sometimes not explicitly stated in the problem. The personal assets
and personal liabilities of a partner is given and is used to know whether a partner is solvent or not. If the personal assets
of a partner is greater than his personal liabilities, a partner is said to be solvent but if the personal assets are less than
personal liabilities, the partner is insolvent
ILLUSTRATIVE PROBLEM:
Shown below are the balances of the accounts of the partnership before the liquidation process.
ABC Partnership
Statement of Financial Position
November 1, 2019
ASSETS LIABILITIES & EQUITY

Cash P 150,000 Accounts payable 100,000
Accounts receivable 200,000 A, loan 50,000
Office equipment 1,000,000 A, Capital (30%) 150,000
Less: Accum. depreciation 350,000 B, Capital (20%) 250,000
C, Capital (50%) 450,000
Total assets 1,000,000 Total liabilities & equity 1,000,000

WHAT IF:
CASE 1 : Non- cash assets are sold at P 950,000 CASE 5 : Non- cash assets are sold at P 200,000. all
partners are solvent.
CASE 2 : Non- cash assets are sold at P 950,000 with
liquidation expenses of P 50,000. CASE 6 : Non- cash assets are sold at P 100,000. all
partners are solvent.
CASE 3 : Non- cash assets are sold at P 800,000
CASE 7 : Non- cash assets are sold at P 100,000. all
partners are insolvent.
CASE 4 : Non- cash assets are sold at P 800,000 with
liquidation expenses of P 50,000.
Because the proceeds from sale of non-cash assets is greater than to its book
C A S E I : N O N - C A S H A S S E T S A R E S O L D AT P value, there is a gain on realization of P 100,000 ( 950,000 – 850,000). Then
950,000 this gain will be allocated to the partners using their p&l ratio.
ABC Partnership
Statement of Partnership Liquidation
November 1, 2019
Cash Non-cash assets Liabilities to A,loan A, Capital ( 30%) B,Capital (20%) C,Capital (50%)
third parties
Balances before P 150,000 P 850,000 P 100,000 P 50,000 P 150,000 P 250,000 P 450,000
liquidation
Realization of assets 950,000 (850,000) 30,000 20,000 50,000
and division of gain
Balances 1,100,000 0 100,000 50,000 180,000 270,000 500,000
Payment of liabilities (100,000) (100,000)

to third parties
Balances 1,000,000 0 0 50,000 180,000 270,000 500,000

to partners
Balances 950,000 0 0 0 180,000 270,000 500,000
Payment of partners (950,000) (180,000) (270,000) (500,000)

In settlement of their
capital balances
Balances 0 0 0 0 0 0 0
ENTRIES IN THE BOOKS OF ABC PARTNERSHIP :
Realization of Non-cash assets & division of gains
Cash 950,000
Accumulated Depreciation 350,000
Accounts Receivable 200,000
Office equipment 1,000,000
A, Capital 30,000
B, Capital 20,000
C, Capital 50,000
Payment of liabilities to third parties
Accounts payable 100,000
Cash 100,000
Payment of liabilities to partners
A,loan 50,000
Cash 50,000
Payment of partners in settlement of their capital balances
A, Capital 180,000
B, Capital 270,000
C, Capital 500,000
Cash 950,000
FREQUENTLY ASKED QUESTIONS:
1. How much was the gain or loss on realization? 100,000 gain on realization
2. How much is the share of each partner in the allocation of gain or loss on realization?
A – 30,000 ( 100,000 X 30%)
B – 20,000 ( 100,000 X 20%)
C – 50,000 ( 100,000 X 50%)
1. How much cash is available for distribution to partners in settlement of their capital balances ? 950,000
2. How much should A, B and C receive in final settlement of their capital interest? A – 180,000 ; B- 270,000 ;
C – 500,000
3. How much did A receive from the settlement of his total interest in the partnership? 230,000 ( A, loan –
50,000 + A, Capital – 180,000 )
C A S E 2 : N O N - C A S H A S S E T S A R E S O L D AT P Because the net proceeds from sale of non-cash assets is greater than to its
book value, there is a gain on realization of P 50,000 ( 900,000 – 850,000).
9 5 0 , 0 0 0 W I T H L I Q U I DAT I O N E X P E N S E S O F P Then this gain will be allocated to the partners using their p&l ratio. The net
50,000. proceeds is computed by the selling price less liquidation expenses.
ABC Partnership
November 1, 2019
third parties
liquidation
Realization of assets 950,000 (850,000) 30,000 20,000 50,000
& division of gain
Payment of (50,000) (15,000) (10,000) (25,000)
liquidation expenses
Balances 1,050,000 0 100,000 50,000 165,000 260,000 475,000

to third parties
Balances 950,000 0 0 50,000 165,000 260,000 475,000

to partners
Balances 900,000 0 0 0 165,000 260,000 475,000

capital balances
Balances 0 0 0 0 0 0 0
Realization of Non-cash assets & division of gains
Cash 950,000
A, Capital 30,000
B, Capital 20,000
C, Capital 50,000
Payment of liquidation expenses
A, Capital 15,000
B, Capital 10,000
C, Capital 25,000
Cash 50,000
Cash 100,000
A,loan 50,000
Cash 50,000
A, Capital 165,000
B, Capital 260,000
C, Capital 475,000
Cash 900,000
1. How much was the gain or loss on realization? 50,000 gain on realization
A – 15,000 ( (100,000 – 50,000) X 30%)
B – 10,000 ( (100,000 – 50,000) X 20%)
C – 25,000 ( (100,000 – 50,000) X 50%)
C – 475,000
50,000 + A, Capital – 165,000 )
Because the proceeds from sale of non-cash assets is less than to its book value,
C A S E 3 : N O N - C A S H A S S E T S A R E S O L D AT P there is a loss on realization of P 50,000 ( 800,000 – 850,000). Then this loss
800,000 will be allocated to the partners using their p&l ratio.
ABC Partnership
November 1, 2019
third parties
liquidation
Realization of assets 800,000 (850,000) (15,000) (10,000) (25,000)
Balances 950,000 0 100,000 50,000 135,000 240,000 425,000

to third parties
Balances 850,000 0 0 50,000 135,000 240,000 425,000

to partners
Balances 800,000 0 0 0 135,000 240,000 425,000

capital balances
Balances 0 0 0 0 0 0 0
Realization of Non-cash assets & division of loss
Cash 800,000
A, Capital 15,000
B, Capital 10,000
C, Capital 25,000
Cash 100,000
A,loan 50,000
Cash 50,000
A, Capital 135,000
B, Capital 240,000
C, Capital 425,000
Cash 800,000
1. How much was the gain or loss on realization? 50,000 loss on realization
A – 15,000 ( 50,000 X 30%)
B – 10,000 ( 50,000 X 20%)
C – 25,000 ( 50,000 X 50%)
C – 425,000
50,000 + A, Capital – 135,000 )
C A S E 4 : N O N - C A S H A S S E T S A R E S O L D AT P Because the net proceeds from sale of non-cash assets is less than to its book
value, there is a loss on realization of P 100,000 ( 750,000 – 850,000). Then
8 0 0 , 0 0 0 W I T H L I Q U I DAT I O N E X P E N S E S O F P this loss will be allocated to the partners using their p&l ratio. The net proceeds
50,000. is computed by the selling price less liquidation expenses.
ABC Partnership
November 1, 2019
third parties
liquidation
& division of gain
Payment of (50,000) (15,000) (10,000) (25,000)
liquidation expenses
Balances 900,000 0 100,000 50,000 120,000 230,000 400,000

to third parties
Balances 800,000 0 0 50,000 120,000 230,000 400,000

to partners
Balances 750,000 0 0 0 120,000 230,000 400,000

capital balances
Balances 0 0 0 0 0 0 0
Cash 800,000
A, Capital 15,000
B, Capital 10,000
C, Capital 25,000
Payment of liquidation expenses
A, Capital 15,000
B, Capital 10,000
C, Capital 25,000
Cash 50,000
Cash 100,000
A,loan 50,000
Cash 50,000
A, Capital 120,000
B, Capital 230,000
C, Capital 400,000
Cash 750,000
A – 30,000 ( (50,000 + 50,000) X 30%)
B – 20,000 ( (50,000 + 50,000) X 20%)
C – 50,000 ( (50,000 + 50,000) X 50%)
C – 400,000
50,000 + A, Capital – 120,000 )
C A S E 5 : N O N - C A S H A S S E T S A R E S O L D AT P Because the proceeds from sale of non-cash assets is less than to its book value, there is
a loss on realization of P 650,000 ( 200,000 – 850,000). Then this loss will be
2 0 0 , 0 0 0 . A L L PA RT N E R S A R E S O LV E N T. allocated to the partners using their p&l ratio.
The rule if there is a capital deficiency is if the capital deficient partner has an existing
ABC Partnership loan which should be settled by the partnership, this loan must be used to offset to the
Statement of Partnership Liquidation negative balance only up to the amount that it can eliminate the negative balance in the
November 1, 2019 capital deficient partner’s capital balance.
third parties
liquidation
Balances 350,000 0 100,000 50,000 (45,000) 120,000 125,000
Elimination of capital (45,000) 45,000
deficiency – offset of
existing loan
Balances 350,000 0 100,000 5,000 0 120,000 125,000

to third parties
Balances 250,000 0 0 5,000 0 120,000 125,000
to partners
Balances 245,000 0 0 0 0 120,000 125,000
Payment of partners (245,000) (120,000) (125,000)
capital balances
Balances 0 0 0 0 0 0 0
Cash 200,000
A, Capital 195,000
B, Capital 130,000
C, Capital 325,000
Elimination of capital deficiency – offset of existing loan
A,loan 45,000
A, Capital 45,000
Cash 100,000
A,loan 5,000
Cash 5,000
B, Capital 120,000
C, Capital 125,000
Cash 245,000
A – 195,000 ( 650,000 X 30%)
B – 130,000 ( 650,000 X 20%)
C – 325,000 ( 650,000 X 50%)
1. How much cash is available for distribution to partners in settlement of their capital balances 245,000
2. How much should A, B and C receive in final settlement of their capital interest? A – 0 ; B- 120,000 ;
C – 125,000
5,000 + A, Capital – 0 )
Because the proceeds from sale of non-cash assets is less than to its book value, there is a loss on
C A S E 6 : N O N - C A S H A S S E T S A R E S O L D AT P realization of P 750,000 ( 100,000 – 850,000). Then this loss will be allocated to the partners using their
1 0 0 , 0 0 0 . A L L PA RT N E R S A R E S O LV E N T. p&l ratio.
The rule if there is a capital deficiency is if the capital deficient partner has an existing loan which should
be settled by the partnership, this loan must be used to offset to the negative balance only up to the
ABC Partnership amount that it can eliminate the negative balance in the capital deficient partner’s capital balance. But if
Statement of Partnership Liquidation the loan cannot fully absorb the capital deficiency, the remaining capital deficiency by an additional
investment to the partnership or absorption by the other partners
November 1, 2019
third parties
Balances before P 150,000 P 850,000 P 100,000 P 50,000 P 150,000 P 250, 000 P 450,000
liquidation
Balances 250,000 0 100,000 50,000 (75,000) 100,000 75,000
existing loan
Balances 250,000 0 100,000 0 (25,000) 100,000 75,000
Elimination of capital 25,000 25,000
deficiency – additional
investment
Balances 275,000 0 100,000 0 0 100,000 75,000
to third parties
Balances 175,000 0 0 0 100,000 75,000
Payment of partners (175,000) (100,000) (75,000)
capital balances
Balances 0 0 0 0 0 0 0
Cash 100,000
A, Capital 225,000
B, Capital 150,000
C, Capital 375,000
A,loan 50,000
A, Capital 50,000
Elimination of capital deficiency – additional investment
Cash 25,000
A, Capital 25,000
Cash 100,000
B, Capital 100,000
C, Capital 75,000
Cash 175,000
A – 225,000 ( 750,000 X 30%)
B –150 ,000 ( 750,000 X 20%)
C – 375,000 ( 750,000 X 50%)
2. How much should A, B and C receive in final settlement of their capital interest? A – 0 ; B- 100,000 ;
C – 75,000
3. How much did A receive from the settlement of his total interest in the partnership? 0 ( A, loan – 0 + A,
Capital – 0 )
Because the proceeds from sale of non-cash assets is less than to its book value, there is a loss on
C A S E 7 : N O N - C A S H A S S E T S A R E S O L D AT P realization of P 750,000 ( 100,000 – 850,000). Then this loss will be allocated to the partners using their
1 0 0 , 0 0 0 . A L L PA RT N E R S A R E I N S O LV E N T. p&l ratio.
The rule if there is a capital deficiency is if the capital deficient partner has an existing loan which should
be settled by the partnership, this loan must be used to offset to the negative balance only up to the
ABC Partnership amount that it can eliminate the negative balance in the capital deficient partner’s capital balance. But if
Statement of Partnership Liquidation the loan cannot fully absorb the capital deficiency, the remaining capital deficiency by an additional
investment to the partnership or absorption by the other partners
November 1, 2019
third parties
Balances before P 150,000 P 850,000 P 100,000 P 50,000 P 150,000 P 250, 000 P 450,000
liquidation
Balances 250,000 0 100,000 50,000 (75,000) 100,000 75,000
existing loan
Balances 250,000 0 100,000 0 (25,000) 100,000 75,000
Elimination of capital 25,000 (7,142.86) (17,857.14)
deficiency – absorption of
deficiency by other
partners (25,000 x 20%/70%) (25,000 x 50%/70%)
Balances 250,000 0 100,000 0 0 92,857.14 57,142.86
to third parties
Balances 150,000 0 0 0 0 92,857.14 57,142.86
Payment of partners (150,000) (92,857.14) (57,142.86)
capital balances
Balances 0 0 0 0 0 0 0
Cash 100,000
A, Capital 225,000
B, Capital 150,000
C, Capital 375,000
A,loan 50,000
A, Capital 50,000
Elimination of capital deficiency – absorption of deficiency by other partners
B,Capital 7,142.86
C, Capital 17,857.14
A, capital 25,000
Cash 100,000
B, Capital 92,857.14
C, Capital 57,142.86
Cash 150,000
A – 225,000 ( 750,000 X 30%)
B –150 ,000 ( 750,000 X 20%)
C – 375,000 ( 750,000 X 50%)
2. How much should A, B and C receive in final settlement of their capital interest? A – 0 ; B- 92,857.14
; C – 57,142.86
1. How much did A receive from the settlement of his total interest in the partnership? 0 ( A, loan – 0 + A,
Capital – 0 )

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PARTNERSHIP LIQUIDATION

SOME REASONS WHY A PARTNERSHIP IS LIQUIDATED:

The process of liquidation is done by:

III. Elimination of capital deficiencies.

V. Payment of capital accounts to partners

ASSETS LIABILITIES & EQUITY

Total assets 1,000,000 Total liabilities & equity 1,000,000

Payment of liabilities (100,000) (100,000)

Payment of liabilities (50,000) (50,000)

Payment of partners (950,000) (180,000) (270,000) (500,000)

Accumulated Depreciation 350,000

Accounts Receivable 200,000

Office equipment 1,000,000

Payment of liabilities to third parties

Accounts payable 100,000

Payment of liabilities to partners

Payment of partners in settlement of their capital balances

Payment of liabilities (100,000) (100,000)

Payment of liabilities (50,000) (50,000)

Payment of partners (900,000) (165,000) (260,000) (475,000)

Accumulated Depreciation 350,000

Accounts Receivable 200,000

Office equipment 1,000,000

Payment of liquidation expenses

Payment of liabilities to third parties

Accounts payable 100,000

Payment of liabilities to partners

Payment of partners in settlement of their capital balances

Payment of liabilities (100,000) (100,000)

Payment of liabilities (50,000) (50,000)

Payment of partners (800,000) (135,000) (240,000) (425,000)

Accumulated Depreciation 350,000

Accounts Receivable 200,000

Office equipment 1,000,000

Payment of liabilities to third parties

Accounts payable 100,000

Payment of liabilities to partners

Payment of partners in settlement of their capital balances

Payment of liabilities (100,000) (100,000)

Payment of liabilities (50,000) (50,000)

Payment of partners (750,000) (120,000) (230,000) (400,000)

Accumulated Depreciation 350,000

Accounts Receivable 200,000

Office equipment 1,000,000

Payment of liquidation expenses

Payment of liabilities to third parties

Accounts payable 100,000

Payment of liabilities to partners

Payment of partners in settlement of their capital balances

Payment of liabilities (100,000) (100,000)

Accumulated Depreciation 350,000

Accounts Receivable 200,000

Office equipment 1,000,000

Elimination of capital deficiency – offset of existing loan

Payment of liabilities to third parties

Accounts payable 100,000

Payment of liabilities to partners

Payment of partners in settlement of their capital balances