FA2 Chapter 4-Partnership-Liquidation

Partnership Liquidation
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Fundamentals of Accounting 2
Chapter 4
Learning Objectives
 State the order of priority in the settlement f claims in cases of liquidation.
 Account for the liquidation of a partnership.
Liquidation
Liquidation is the termination of business operation or the winding up of affairs. It is a process by
which
1. Assets are converted into cash,
2. Liabilities are settled, and
3. Any remaining amount is distributed to the owners.
Liquidation may be either voluntary (e.g., per agreement of partners of a solvent partnership) or
involuntary (e.g., bankruptcy).
Conversion of non-cash assets into cash

The conversion of assets into cash is referred to as “realization” while the settlement of claims of
creditors and owners is referred to as “liquidation”. however, the term liquidation is used in a
broader sense to include the entire winding up process.
The winding up process starts with the conversion of non-cash assets into cash. As such, the
timing of the “realization” of non-cash assets determines the manner on which the “liquidation”
(i.e., payment of claims) is carried out.
Methods of Liquidation
Liquidation may be accomplished either through:
1. Lump-sum liquidation - all of the non-cash assets of the partnership are sold simultaneously
or within a very short period of time. The proceeds are then used to settle first all of the
liabilities, and any remaining amount is paid to the partners under a lump-sum payment (i.e.,
one-time or single payment).
Lump-sum liquidation is possible when there is a contracted buyer of all of the non-cash
assets of the partnership or the assets are sold on a “package deal” basis.
2. Installment liquidation - is most cases, it would take some time before all the assets of a
business are converted into cash. In such case, the partners’ claims are settled on an
installment basis as cash becomes available, but only after all partnership liabilities are fully
settled.
When financial statements are prepared during the liquidation process, all the assets of the
partnership are restated to their realizable values (i.e., estimated selling price less estimated
costs to sell) and all liabilities to their expected settlement amounts. The use of historical cost,
fair value, present value, or other measurement basis is appropriate only when the entity is
going concern.
Settlement of claims
The available cash of the partnership is used to settle claims using the following order of priority:
1. Outside creditors
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2. Inside creditors (e.g., payable to partners)

3. Owner’s capital balances
Right of offset
As shown above, a loan payable to a partner has a higher priority over the partner’s capital
balance. However, the legal right of offset allows a deficit in a partner’s capital account to be
offset by a loan payable to that partner.
Lump-sum liquidation vs. Installment liquidation

The following are the procedures in the accounting for lump-sum liquidation and installment
liquidation:
Lump-sum Installment
 All of the non-cash assets are converted to  Some of the non-cash assets are
cash . converted to cash.
 The total gain or loss on the sale is  The carrying amount of any unsold non-
allocated to the partners’ capital cash asset is considered as a loss. This is
balances based on their P/L ratios. allocated to the partners’ capital
balances based on their P/L ratios.
 Actual liquidation expenses are allocated  Actual and estimated future liquidation
to the partners’ capital balances based expenses are allocated to the partners’
on their P/L ratios. capital balances based on their P/L ratios.
 The liabilities to outside creditors are fully  The liabilities to outside creditors are
settled. partially or fully settled.
 The liabilities inside creditors are fully  The liabilities to inside creditors are partially
settled. or fully settled but only after the full
settlement of the liabilities to outside
creditors.
 Any remaining cash is distributed to the  If both the liabilities to outside and inside
owners in full settlement of their interests. creditors are fully settled, any remaining
cash less cash set aside for future
liquidation expenses is distributed to the
owners as partial settlement of their
interests.
Illustration 1: Lump-sum vs. Installment liquidation

Use the following information for the next two independent cases:
Fact pattern
On January 1, 20x1, the partners of ABC Co. decided to liquidate their partnership. The following
information was made available:
Cash 20,000
Accounts receivable 60,000
Inventory 120,000
Equipment 300,000
Total 500,000
Accounts payable 30,000

Payable to B 20,000
A, Capital (20%) 100,000
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B, Capital (30%) 150,000

C, Capital (50%) 200,000
Total 500,000
Case 1: Lump-sum liquidation

Information on the conversion of non-cash assets is as follows:
a. P50,000 was collected on the accounts receivable; the balance is uncollectible.
b. P70,000 was received for the entire inventory.
c. The equipment was sold for P250,000.
d. P2,000 liquidation expenses were paid.
Requirement:
Determine the amounts of cash distributed to the partners in the final settlement of their interests.
Solution:
Step 1: Compute for the gain or loss on the sale
a. Collection on accounts receivable 50,,000
b. Sale of inventory 70,000
c. Sale of equipment 250,000
d. Liquidation expenses (2,000)
net cash proceeds 368,000
Less: Carrying amount of non-cash assets
(60k accounts receivable + 120k inventory + 300k equipment) (480,000)
Total loss on sale (112,000)
Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset)
A(20%) B(30%) C(50%) Totals
Capital balances 100,000 150,000 200,000 450,000
Payable to B (right of offset) 20,000 20,000
Total 100,000 170,000 200,000 470,000
Allocation of loss
((112k x (20%; 30%; 50%)) (22,400) (33,600) (56,000) (112,000)
Amts. Received by the partners 77,600 136,400 144,000 358,000
To check the accuracy of our answer, let us identify if the total amount distributed to the
partners is equal to the amount of cash available for distribution to owners:
Beginning balance of cash 20,000

Net proceeds from the sale of non-cash assets 368,000
Less: Payment to outside creditors (30,000)
Cash available for distribution to partners 358,000
Notice that the cash available for distribution to partners of P358,000 is equal to the total
amount received by the partners.
The pertinent entries are as follows:

Jan. 1, 20x1 Cash 368,000
Loss on sale (inclusive of liquidation expenses) 112,000
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Receivables 60,000
Inventory 120,000
Equipment 300,000
To record the realization of non-cash assets)
Jan. 1, 20x1 A, Capital 22,400

B, Capital 33,600
C,Capital 56,000
Loss on sale 112,000
To close the loss on sale to the respective capital
balances of the partners
Jan. 1, 20x1 Accounts payable 30,000
Cash 30,000
To record the settlement of liabilities to outside
creditors
Jan. 1, 20x1 Payable to B 20,000
Cash 20,000
To record the settlement of liability to inside creditors
Jan. 1, 20x1 A, Capital 77,600

B, Capital 116,400
C,Capital 114,000
Cash 308,000
To record the settlement of the partner’s capital
balances
We can prepare a formal report on the liquidation through the statement of liquidation.
A statement of liquidation is a financial report that highlights the realization (receipts from asset
disposals) and the liquidation (settlement of creditors’ and partners’ claims) of a partnership.
Case 1: Installment liquidation

Use the fact pattern above but assume that the partnership will be liquidated over a prolonged
period of time. Distributions to the partners will be made as cash becomes available. Information
on the conversion of non-cash assets is as follows:
a. 75% of the accounts receivable was collected for only P30,000.
b. Half of the inventory was sold for P40,000.
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c. Equipment with carrying amount of P200,000 was sold for P120,000.

d. Actual liquidation expenses of P2,000 were paid.
e. Estimated future liquidation expenses totaled P1,000.
f. P9,000 cash was retained in the business for potential unrecorded liabilities and anticipated
expenses.
Requirement:
a. Determine the amounts of cash distributed to the partners from the partial realization of
partnership assets.
Solution:
Requirement (a)
Step 1: Compute for the gain or loss
a. Collection on accounts receivable 30,000

d. Actual liquidation expenses (2,000)
e. Estimated liquidation expenses (1,000)
f. Cash retained for future expenses (9,000)
Net cash proceeds 178,000
Total loss (302,000)
Notes:
 The procedure above is similar to the procedure used in lump-sum liquidation, with the
following additional concepts:
a. Expected future expenses are recognized immediately as losses to be allocated to
the partners’ capital balances.
b. Unsold non-cash assets are considered as losses to be allocated also to the partners’
capital balances
 To simplify our solution, the total gain or loss to be allocated to the partners’ capital balance
is computed simply by comparing the net proceeds and the carrying amount of all non-
cash assets, whether sold or not.
A(20%) B(30%) C(50%) Totals
Payable to B (right of offset) 20,000 20,000
Total 100,000 170,000 200,000 470,000
Allocation of loss
((302k x (20%; 30%; 50%)) (60,400) (90,600) (151,000) (302,000)
Amts. Received by the partners 39,600 79,400 49,000 168,000
Checking:
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Summary: Lump-sum and Installment Liquidation

Step # 1: Compute for the net proceeds. Deduct all expenses, whether paid or not, as well
as any cash retention for future costs.
Step # 2: Compute for the gain or loss by comparing the net proceeds with the total
carrying amount of non-cash assets, whether sold or not.
Step # 3: Allocate the gain or loss to the partners’ interests. Any residual amount in a
partner’s capital balance represents the settlement of his interest in the
partnership.
Marshalling of Assets
As mentioned earlier, one of the characteristics of a partnership is “unlimited liability”. This is
because the personal assets of the general partners are subject to the claims of partnership’s
creditors in case of partnership insolvency.
The legal doctrine of marshalling of assets is applied when the partnership and some of the
partners are insolvent. The following are the rules when applying this doctrine.
1. First, any available assets of the partnership are used to settle the partnership’s liabilities.
2. Second, in case the assets of the partnership are insufficient to pay all liabilities (i.e.,
insolvency), the solvent general partners are required to provide additional funds from their
personal assets.
The claims to the personal assets of a partners are ranked in the following order:
A. Those owing to personal creditors of the partner.
B. Those owing to partnership creditors.
C. Those owing to partners by way of contribution.
3. Third, in case some partners are insolvent (or limited partners0, their capital deficiency is offset
to the capital balances of the other partners. If after allocating the capital deficiency of an
insolvent (or limited) partner, a solvent partner’s capital balance results to a negative amount,
the solvent partner is required to provide additional contribution.
Illustration: Insolvency of partnership

Use the following information for the next two independent cases:
On January 1, 20x1, the partners of ABC Co. decided to liquidate their partnership. The following
Cash 20,000
Inventory 120,000
Equipment 300,000
Total 500,000

Payable to B 20,000
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A, Capital (20%) 100,000

B, Capital (30%) 150,000
C, Capital (50%) 200,000
Total 500,000
Case #1: all partners are personally solvent

All of the partners are personally solvent. Information on the conversion of noncash assets is as
follows:
A. P10,000 was collected on the accounts receivable; the balance is uncollectible.
B. P5,000 was received for the entire inventory.
C. The equipment was sold for P53,000.
D. P2,000 liquidation expenses were paid.
Requirement:
a. Determine the amounts of cash distributed to the partners in the final settlement of their
interests.
Solution:
Requirement (a)
d. Actual liquidation expenses (2,000)
net cash proceeds 66,000
Total loss (414,000)
A(20%) B(30%) C(50%) Totals
Payable to B 20,000 20,000
Total 100,000 170,000 200,000 470,000
Allocation of loss
((414k x (20%; 30%; 50%)) (82,800) (124,200) (207,000) (414,000)
Totals 17,200 45,800 (7,000) 56,000
Additional contribution of C 7,000 7,000
Amts. Received by the partners 17,200 45,800 - 63,000
Since C is personally liable, he is required to provide additional contribution to cover his capital
deficiency.
Checking:
Additional contribution by C 7,000
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Case #2: Some partners are personally insolvent

Use the same information, except that C is insolvent.
Requirement:
a. Determine the amounts of cash distributed to the partners in the final settlement of their
capital accounts.
Solution:
Requirement (a)
(see ‘Case #1’ above.)
A(20%) B(30%) C(50%) Totals
Payable to B 20,000 20,000
Total 100,000 170,000 200,000 470,000
Allocation of loss
((414k x (20%; 30%; 50%)) (82,800) (124,200) (207,000) (414,000)
Totals 17,200 45,800 (7,000) 56,000
Allocation of capital deficiency to the
other partners 7,000
((7k x (20%/ 50%;30%/50%)) (2,800) (4,200) 7,000
Amts. Received by the partners 14,400 41,600 - 56,000
Since C is personally insolvent. His capital deficiency is allocated to the other partners with
positive capital balances. The allocation is based on the solvent partners’ P/L ratios ((e.g.,
allocation to A:20% A’s interest ÷ (20% A’s interest + 30% B’s interest))
Checking:
Safe payments schedule and cash priority program

The computations presented earlier for installment liquidation may be presented in a formal
manner through either:
1. Safe payments schedule; or
2. Cash priority program
The basic purpose of these schedule is to prevent overpayments to partners during installment
liquidation.
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Safe payment schedule

The safe payment schedule shows how much cash can be “safely” paid to the partners during
installment liquidation, which avoids any overpayment.
The preparation of this schedule requires the application of the same concepts as those we
have applied earlier, namely:
A. Unsold non-cash assets are treated as loss; and

B. Expected future liquidation costs and potential unrecorded liabilities are recognized
immediately as losses.
The sum of (A) and (B) above is referred to as “maximum loss possible”
The safe payment schedule may be used as supporting information to a Statement of

Liquidation.
Illustration :Safe payment schedule

On January 1, 20x1, the partners of ABC Co. Decided to liquidate their partnership. The following
Cash 20,000
Inventory 120,000
Equipment 300,000
Total 500,000

Payable to B 20,000
A, Capital (20%) 100,000
B, Capital (30%) 150,000
C, Capital (50%) 200,000
Total 500,000
The partnership will be liquidated on an installment basis. Distribution to owners will be made as
cash becomes available.
January 20x1:
The following transactions occurred in January 20x1:
A. 75% of the accounts receivable was collected for only P30,000.
B. Half of the inventory was sold for P40,000.
C. Equipment with carrying amount of P200,000 was sold for P120,000.
D. P2,000 liquidation expenses were paid. Estimated future liquidation expenses totaled P1,000.
E. P9,000 cash was retained in the business for potential unrecorded liabilities and anticipated
expenses.
Requirement:
Prepare the safe payment schedule on Jan. 31, 20x1.
Solution:
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First, the actual loss on realization of assets is determined as follows:
Loss on collection of accounts receivable ((30k - (60k x 75%)) (15,000)

Loss on sale of inventory ((40k - (120k x 50%)) (20,000)
Loss on sale of equipment (120k - 200k) (80,000)
Actual liquidation expenses (2,000)
Actual loss on realization - Jan. 20x1 (117,000)
Next, the maximum loss possible is computed as follows:
Carrying amount of unsold non-cash assets

(60k x 25%) + (120k x 50%) + (300k - 200k) (175,000)
Estimated future liquidation costs (1,000)
Cash set aside for potential unrecorded liabilities (9,000)
Maximum loss possible (185,000)
Finally, the safe payment schedule is prepared as follows:
ABC Co.
January 31, 20x1
A(20%) B(30%) C(50%) Totals
Payable to B - 20,000 - 20,000
Capital balances before liquidation 100,000 150,000 200,000 450,000
Total interest - Jan. 1, 20x1 100,000 170,000 200,000 470,000
Allocation of loss on
Realization - Jan. 1, 20x1 (23,400) (35,100) (58,500) (117,000)
Total 76,600 134,900 141,500 353,000
Allocation of maximum
loss possible - Jan. 20x1 (37,000) (55,500) (92,500) (185,000)
First installment payment
to partners - Jan. 20x1 39,600 79,400 49,000 168,000
Notice that when preparing a safe payment schedule, the actual and estimated losses are
computed separately. The computations presented earlier, where we did not compute for these
losses separately, are just a simplification of the computation for distributions to the partners. If
you use the simplified method, you should be able to come up with the same amounts of
distributions to the partners.
The balance of cash is reconciled as follows:

Cash
Jan. 1, 20x1 20,000
Collection of accounts Payment for liquidation expenses
30,000
receivable 2,000
Sale of inventory 40,000 30,000 Payment to outside creditors
Sale of equipment 1st installment payment to
120,000
168,000 partners
10,000 Jan. 31, 20x1
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The ending balance of cash represents the P1,000 and P9,000 cash set aside for future costs.
February 20x1:
The following transactions occurred in February 20x1:
A. P10,000 was collected on the remaining accounts receivable; the balance was deemed
uncollectible.
B. The other half of the inventory was sold for P20,000.
C. The remaining items of equipment were sold for P30,000.
D. P10,000 liquidation expenses and previously unrecorded liabilities were paid.
F. The liquidation process ended on February 28, 20x1.
Requirement:
Prepare the safe payment schedule on Feb. 28, 20x1.
Solution:
On final settlement, there is no need to compute for the maximum loss possible.
Loss on collection of accounts receivable ((10k - (60k x 25%)) (5,000)

Loss on sale of inventory ((20k - (120k x 50%)) (40,000)
Loss on sale of equipment (30k - 100k) (70,000)
Actual liquidation expenses (10,000)
Actual loss on realization - Feb. 20x1 (125,000)
ABC Co.
February 28, 20x1
A(20%) B(30%) C(50%) Totals

Payable to B - 20,000 - 20,000
Capital balances before liquidation 100,000 150,000 200,000 450,000
Total interest - Jan. 1, 20x1 100,000 170,000 200,000 470,000
Allocation of loss on
Realization - Jan. 1, 20x1 (23,400) (35,100) (58,500) (117,000)
to partners - Jan. 20x1 (39,600) (79,400) (49,000) (168,000)
Total interest - Feb. 1, 20x1 37,000 55,500 92,500 185,000
Allocation of maximum
loss possible - Feb. 20x1 (25,000) (37,500) (62,500) (125,000)
to partners - Jan. 20x1 12,000 18,000 30,000 60,000
The balance of cash is recorded as follows:
Cash
Feb. 1, 20x1 10,000
Collection of accounts 10,000 10,000 Payment for liquidation expenses
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receivable
Sale of inventory 20,000
Sale of equipment 30,000 60,000 Final payment to partners
- Feb. 28, 20x1
The statement of liquidation in February is shown below:
Cash priority program

Another method of ensuring that there are no overpayments to the partners is by preparing a
“cash priority program” or “cash distribution program”. This schedule determines which partner
shall be paid first and which partner shall be paid last, after all the liabilities are settled. This
schedule can be prepared even prior to the sale of any asset.
The preparation of this schedule requires the application of the same concepts as hose we have
applied earlier, namely:
a. Unsold non-cash assets are treated as loss; and
b. Expected future liquidation costs and potential unrecorded liabilities are recognized
immediately as losses.
An additional procedure when preparing a cash priority program is to rank the partners in
accordance to their maximum loss absorption capacity. The partner with the highest maximum
loss absorption capacity shall be paid first. The partner with the lowest maximum loss absorption
capacity shall be paid last. The maximum loss absorption capacity is computed as follows:
Maximum loss absorption Total partner’s interest in the partnership

=
capacity Partner’s P/L percentage
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Illustration: Cash priority program

On January 1, 20x1, the partners of ABC Co. Decided to liquidate their partnership. The following
Cash 20,000
Inventory 120,000
Equipment 300,000
Total 500,000

Payable to B 20,000
A, Capital (20%) 100,000
B, Capital (30%) 150,000
C, Capital (50%) 200,000
Total 500,000
The partnership will be liquidated on an installment basis and distributions to the partners will be
made as cash becomes available.
 Even prior to the sale of any asset, we can determine the amount of minimum safe
payments to the partners (when or cash becomes available) by preparing a cash priority
program. This is prepared as follows:
First, the maximum loss absorption capacities (MLAC) of the partners are determined. This will be
the basis in ranking the partners according to their priority over cash payments.
A(20%) B(30%) C(50%)

Payable to B - 20,000 -
Capital balances before liquidation 100,000 150,000 200,000
Total interest in the partnership 100,000 170,000 200,000
Divide by: P/L percentage 20% 30% 50%
Maximum loss absorption capacity 500,000 566,667 400,000
Rank of payment 2nd 1st 3rd
Second, the partners’ MLAC are equalized. This will be the basis in preparing the cash priority
program.
A(20%) B(30%) C(50%)

Maximum loss absorption capacity 500,000 566,667 400,000
Difference between 1st and 2nd (66,667)
Balance 500,000 500,000 400,000
Difference between 1st, 2nd and 3rd (100,000) (100,000)
Equal balance of MLAC 400,000 400,000 400,000
Third, the cash priorities are computed by multiplying the differences above by the respective
partners’ P/L ratio.
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Cash priority program

A(20%) B(30%) C(50%)
1st priority (66,667 x 30%) 20,000
2nd priority (100k x 20% & 30%) 20,000 30,000
Totals 20,000 50,000
The cash priority program above means that when cash becomes available:
1. B is paid P20,000 first;
2. Next, A and B are paid P20,000 and P30,000, respectively; and
3. Any remaining cash will be distributed to all partners based on their P/L ratio.
 Application of the cash priority program

January 20x1:
The following transactions occurred in January 20x1:
a. 75% of the accounts receivable was collected for only P30,000.
b. Half of the inventory was sold for P40,000.
c. An equipment with carrying amount of P200,000 was sold for P120,000.
d. P2,000 liquidation expenses were paid.
e. Estimated future liquidation expenses totaled P1,000.
G. P9,000 cash was retained in the business for potential unrecorded liabilities and anticipated
expenses.
Requirement:
Determine the cash payments to the partners on January 31, 20x1 using cash priority program.
Solution:
The amount of cash available for distribution to the partners on January 31, 20x1 is computed as
follows:
d. Payment for liquidation expenses (2,000)
e. Cash set aside for estimated liquidation expenses (1,000)
f. Cash set retained for potential future costs (9,000)
Net proceeds 178,000
Add: Cash balance, beg. (see Balance Sheet above) 20,000
Less: Accounts payable (see Balance Sheet above) (30,000)
Using the cash priority program, the amounts of distributions to the partners on January 31, 20x1
are determined as follows:
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A(20%) B(30%) C(50%) Totals

Available cash - Jan. 31, 20x1 168,000
Allocation:
1st priority 20,000 (20,000)
2nd priority 20,000 30,000 (50,000)
Balance 98,000
Payment after priorities
((98k x (20%; 30% & 50%)) 19,600 29,400 49,000 (98,000)
1st installment payment 39,600 79,400 49,000 -
Notes:
 After A and B are allocated their cash priorities, any balance is allocated to the partners
based on their respective profit or loss ratios.
 The amounts computed above are equal to the amounts computed in the previous
illustrations for “safe payment schedule” and “Case #2: Installment liquidation”.
February 20x1:
The following transactions occurred in February 20x1:
a. P10,000 was collected on the remaining accounts receivable; the balance was deemed
uncollectible.
b. The other half of the inventory was sold for P20,000.
c. The remaining items included in the equipment account are sold for P30,000.
d. P10,000 liquidation expenses and previously unrecorded liabilities were paid.
H. The liquidation process ended on February 28, 20x1.
Requirements:
Determine the cash payments to the partners on February 28, 20x1 using cash priority program.
d. Payment for liquidation expenses (10,000)
Net proceeds 50,000
Add: Cash - Feb. 1, 20x1 (P1k and P9k cash set aside on Jan. 31) 10,000
Using the cash priority program, the amounts of distribution to the partners on February 28, 20x1
are determined as follows:
A(20%) B(30%) C(50%) Totals

Available cash - Jan. 31, 20x1 60,000
Allocation:
Payment after priorities
((60k x (20%; 30% & 50%)) 12,000 18,000 30,000 (60,000)
Final installment payment 12,000 18,000 30,000 -
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Summary:
 Liquidation is the termination of business operations or the winding up of affairs.
 Order of priority in the settlement of claims in cases of liquidation (1) Outside creditors; (2)
Inside creditors; and (3) Owners’ capital balances.
 In case of partnership insolvency, the rule of marshalling of assets is applied. Under this rule,
only the excess of a partner’s personal assets over his personal liabilities can be used to
settle partnership debt. Any capital deficiency of an insolvent partner is absorbed by the
solvent partners.
 Accounting procedures when computing for the settlement of the partners’ interests in
cases of liquidation:
Step # 1: Compute for the net proceeds. Deduct all expenses, whether paid or not, as
well as any cash retention for future costs.
Step # 2: Compute for the gain or loss by comparing the net proceeds with the total
carrying amount of non-cash assets, whether sold or not.
Step # 3: Allocate the gain or loss to the partners’ interests. Any residual amount in a
partner’s capital balance represents the settlement of his interest in the
partnership.
 Under the cash priority program, when all of the priorities are paid, any remaining cash
distribution is allocated to the partners based on their respective P/L ratios.
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Problem 1: MULTIPLE CHOICE

1. A and B decided to liquidate their partnership business. The statement of financial position
of the business shows the following information:
Assets Liabilities A, Capital (50%) B, Capital (50%)

100,000 20,000 40,000 40,000
The partners were able to convert all assets into P90,000 cash. How much did B receive
from the final settlement of his interest?
a. 30,000
b. 35,000
c. 28,000
d. 36,667
2. A and B decided to liquidate their partnership business. The statement of financial position
of the business shows the following information:
Assets Liabilities A, Capital (50%) B, Capital (50%)

200,000 80,000 70,000 50,000
The partners were able to convert all assets into P180,000 cash. How much did A and B
receive from the final settlement of their interest, respectively?
a. 50,000; 50,000
b. 60,000; 40,000
c. 70,000; 30,000
d. 56,667; 43,333
3. Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s

statement of financial position is shown below:
Cash 50,000
Noncash assets 1,200,000
Total 1,250,000
Payable to A 50,000
A, Capital (40%) 400,000
B, Capital (40%) 450,000
C, Capital (20%) 250,000
Total 1,250,000
Three-fourths (3/4) of the noncash assets were sold for P920,000. The partnership paid P5,000
transaction costs on the sale. How much cash did C receive from the settlement of the
partners’ interests?
a. 163,000
b. 186,000
c. 193,000
d. 206,000
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Assets Liabilities Equity
Cash Noncash A (20%) B (30%) C (50%_
20,000 480,000 30,000 100,000 170,000 200,000
Half of the noncash assets were sold for P370,000. The partnership paid P2,000 liquidation
expenses. How much cash did B receive from the settlement of the partners’ interests?
a. 163,400
b. 168,000
c. 139,600
d. 136,400
5. Use the following information for the next three questions:

Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s
Cash Noncash A (20%) B (30%) C (50%_
160,000 ? 90,000 200,000 370,000 480,000
All the noncash assets were sold for P870,000. The partnership paid P12,000 liquidation
expenses.
How much is the carrying amount of the noncash assets?

a. 740,000
b. 860,000
c. 980,000
d. 1,020,000
6. How much is the loss on the sale of noncash assets, including the effect of liquidation
expenses?
a. 98,000
b. 112,000
c. 120,000
d. 122,000
7. How much cash did A receive from the settlement of the partners’ interests?
a. 175,600
b. 183,400
c. 149,600
d. 128,400

Cash Noncash A (20%) B (30%) C (50%_
18
20,000 480,000 30,000 100,000 170,000 200,000
One-third of the noncash assets were sold for P70,000. The partnership paid P8,000
liquidation expenses. Partner C is insolvent. How much cash did A receive from the
settlement of the partners’ interests?
a. 12,400
b. 16,800
c. 13,600
d. 12,800
9. Use the following information for the next two questions:

Cash 50,000
Noncash assets 1,200,000
Total 1,250,000
Payable to A 50,000
A, Capital (50%) 540,000
B, Capital (30%) 360,000
C, Capital (20%) 200,000
Total 1,250,000
If a cash priority program is prepared, which partner is paid first and how much is the total
payments to that partner before all partners will share on the available cash based on their
profit or loss ratios?
a. A, P20,000
b. B, P90,000
c. B, P96,000
d. B, P60,000
10. Three-fourths (3/4) of the noncash assets were sold for P920,000. The partnership paid P5,000
transaction costs on the sale. How much did A receive from the settlement of the partners’
interests under the cash priority program?
a. 447,500
b. 386,500
c. 493,500
d. 306,500
19

FA2 Chapter 4-Partnership-Liquidation

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FA2 Chapter 4-Partnership-Liquidation

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Partnership Liquidation

Conversion of non-cash assets into cash

2. Inside creditors (e.g., payable to partners)

Lump-sum liquidation vs. Installment liquidation

Illustration 1: Lump-sum vs. Installment liquidation

Accounts payable 30,000

B, Capital (30%) 150,000

Case 1: Lump-sum liquidation

Beginning balance of cash 20,000

The pertinent entries are as follows:

Jan. 1, 20x1 A, Capital 22,400

Jan. 1, 20x1 A, Capital 77,600

Case 1: Installment liquidation

c. Equipment with carrying amount of P200,000 was sold for P120,000.

Step 1: Compute for the gain or loss

a. Collection on accounts receivable 30,000

Beginning balance of cash 20,000

Summary: Lump-sum and Installment Liquidation

Illustration: Insolvency of partnership

Accounts payable 30,000

A, Capital (20%) 100,000

Case #1: all partners are personally solvent

Less: Payment to outside creditors (30,000)

Case #2: Some partners are personally insolvent

Safe payments schedule and cash priority program

Safe payment schedule

A. Unsold non-cash assets are treated as loss; and

The safe payment schedule may be used as supporting information to a Statement of

Illustration :Safe payment schedule

Accounts payable 30,000

First, the actual loss on realization of assets is determined as follows:

Loss on collection of accounts receivable ((30k - (60k x 75%)) (15,000)

Next, the maximum loss possible is computed as follows:

Carrying amount of unsold non-cash assets

Finally, the safe payment schedule is prepared as follows:

The balance of cash is reconciled as follows:

Loss on collection of accounts receivable ((10k - (60k x 25%)) (5,000)

A(20%) B(30%) C(50%) Totals

The balance of cash is recorded as follows:

The statement of liquidation in February is shown below:

Cash priority program

Maximum loss absorption Total partner’s interest in the partnership

Illustration: Cash priority program

Accounts payable 30,000

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

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

Cash priority program

 Application of the cash priority program

A(20%) B(30%) C(50%) Totals

A(20%) B(30%) C(50%) Totals

 Liquidation is the termination of business operations or the winding up of affairs.

Problem 1: MULTIPLE CHOICE

Assets Liabilities A, Capital (50%) B, Capital (50%)

Assets Liabilities A, Capital (50%) B, Capital (50%)

3. Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s

4. Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s

5. Use the following information for the next three questions: