Illustration 1: Lump sum

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 20,000.00
Accounts receivable 60,000.00
Inventory 120,000.00
Equipment 300,000.00
Total 500,000.00

Accounts Payable 30,000.00

Payable to B 20,000.00
A. Capital (20%) 100,000.00
B. Capital (30%) 150,000.00
C. Capital (50%) 200,000.00
Total 500,000.00

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 50,000.00

b) Sale of inventory 70,000.00
c) Sale of equipment 250,000.00
d) Liquidation expenses (2,000.00)
Net cash proceeds 368,000.00
Less: carrying amount of non-cash assets
(60K Accounts receivable + 120k inventory + 300k Equipment) (480,000.00)
Total loss on sale (112,000.00)
Step 2: Allocate the gain or loss to the partners' capital balances
(include their right of offset)

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

Capital balances 100,000.00 150,000.00 200,000.00
Payable to B (right of offset) 20,000.00
Total 100,000.00 170,000.00 200,000.00
Allocation of Loss (22,400.00) (33,600.00) (56,000.00)
Amounts received by partners 77,600.00 136,400.00 144,000.00

To check the accuracy of our answer.

Beginning Cash balance 20,000.00

Net proceeds from the sale of non-cash assets 368,000.00
Less: Payment to outside creditors (30,000.00)
Cash available for distribution to partners 358,000.00

Notice that the cash available for distribution to partners of P358,000

is equal to the total amount received by the partners.
 Total
450,000.00
20,000.00
470,000.00
(112,000.00)
358,000.00
 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 20,000.00
Accounts receivable 60,000.00
Inventory 120,000.00
Equipment 300,000.00
Total 500,000.00

Accounts Payable 30,000.00

Payable to B 20,000.00
A. Capital (20%) 100,000.00
B. Capital (30%) 150,000.00
C. Capital (50%) 200,000.00
Total 500,000.00

Case #2: Installment liquidation

Use the fact pattern abouve but assumen that the partnerhship will be liquidated over
a prolonged period of time. Distributions to the partners will be made as cash becomes available.
I 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
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: Determine the amounts of cash distributed to the partners from the partial realization of partnership

Solution:

Step 1: Compute for the gain or loss on the sale.

a) Collection on accounts receivable 30,000.00
b) Sale of inventory 40,000.00
c) Sale of equipment 120,000.00
d) Liquidation expenses (2,000.00)
e) Estimated liquidation expenses (1,000.00)
f) Cash retained for future expenses (9,000.00)
Net cash proceeds 178,000.00
Less: carrying amount of non-cash assets
(60K Accounts receivable + 120k inventory + 300k Equipment) (480,000.00)
Total loss on sale (302,000.00)

Step 2: Allocate the gain or loss to the partners' capital balances

(include their right of offset)

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

Capital balances 100,000.00 150,000.00 200,000.00
Payable to B (right of offset) 20,000.00
Total 100,000.00 170,000.00 200,000.00
Allocation of Loss (60,400.00) (90,600.00) (151,000.00)
Amounts received by partners 39,600.00 79,400.00 49,000.00

To check the accuracy of our answer.

Beginning Cash balance 20,000.00

Net proceeds from the sale of non-cash assets 178,000.00
Less: Payment to outside creditors (30,000.00)
Cash available for distribution to partners 168,000.00
omes available.

anticipated expenses.

e partial realization of partnership assets.

 Total
450,000.00
20,000.00
470,000.00
(302,000.00)
168,000.00
The pertinent entries are as follows:

January 1, 20X1 Cash 368,000.00

Loss on sale 112,000.00
Receivables 60,000.00
Inventory 120,000.00
Equipment 300,000.00
to record the realization of non-cash assets

January 1, 20X1 A. Capital 22,400.00

B. Capital 33,600.00
C. Capital 56,000.00
Loss on sale 112,000.00
to close the loss on sale to the respective
capital balances of the partners

January 1, 20X1 Accounts payable 30,000.00

Cash 30,000.00
to record the settlement of liabilities
outside creditors

January 1, 20X1 Payable to B 20,000.00

Cash 20,000.00
to record the settlement of liabilities
inside creditors

January 1, 20X1 A. Capital 77,600.00

B. Capital 116,400.00
C. Capital 114,000.00
Cash 308,000.00
to close the loss on sale to the respective
capital balances of the partners
 ABC Co.
Statement of Liquidation
January 1, 20X1

Assets Liabilities
Accounts
Cash Non-Cash Payable
Balances before liquidation 20,000.00 480,000.00 30,000.00
1. Conversion of non-cash assets
and distribution of loss 368,000.00 (480,000.00)
Totals 388,000.00 - 30,000.00
2. Payments to outside creditors (30,000.00) (30,000.00)
Totals 358,000.00 - -
3. Payments to inside creditors (20,000.00)
Totals 338,000.00 - -
4. Payments to partners (338,000.00)
Totals - - -
 C Co.
of Liquidation
ry 1, 20X1

Equity

Payable to B A. Capital (20%) B. Capital (30%) C. Capital (50%)

20,000.00 100,000.00 150,000.00 200,000.00

(22,400.00) (33,600.00) (56,000.00)

20,000.00 77,600.00 116,400.00 144,000.00

20,000.00 77,600.00 116,400.00 144,000.00

(20,000.00)
- 77,600.00 116,400.00 144,000.00
(77,600.00) (116,400.00) (144,000.00)
- - - -