ACCOUNTING FOR SPECIAL TRANSACTIONS
(Roverson D. Mortega)
PARTNERSHIP LIQUIDATION
LIQUIDATION
➢ The event on which the partnership winds up
all the operations of the business → convert all
the partnership assets into cash → distribute to
creditors of the partnership → then balance, if
any, to capital.
➢ Partnership is terminated and liquidated if:
1. All the partners agree to terminate.
2. A court order to terminate.
3. Becomes bankrupt.
4. Was declared illegal.
TYPES OF LIQUIDATION
1. Lump-Sum Liquidation
➢ Also called liquidation by totals.
➢ All assets are realized at once.
➢ All liabilities are settled at once.
➢ No distributions are made to partners and
creditors until all non-cash assets are sold.
2. Installment Liquidation
➢ Also called liquidation by piece meal.
➢ There are several distributions, oftentimes at
the end of the month even if there are still non-
cash assets not yet realized.
➢ Schedule of Safe Payments – is made to assure
the safe distribution of cash to the partners.
➢ Cash Priority Program – tool that will help the
determination of safe payments to partners.
ACCOUNTING FOR PARTNERSHIP LIQUIDATION
➢ Realization – process of converting non-cash
assets into cash.
➢ Selling Price < Carrying Value → Loss on
Realization
➢ Selling Price > Carrying Value → Gain on
Realization
➢ Liquidation Expenses – expenses incurred
during the liquidation process.
➢ Total Loss on Liquidation = Loss on Realization +
Liquidation Expenses
➢ Marshalling of Assets – provision that calls for
the contribution of personal assets. Such
personal liability depends on the legal doctrine
of marshalling of assets. This doctrine is applied
when the partnership and one or more
partners are insolvent. The order of priority
concerning the availability of assets for each
class of creditors is as follows:
1. Partnership Assets
• Partnership Creditors (outside)
• Inside Creditors
• Partner’s Capital
2. Personal Assets
• Personal Creditors
• Partnership Creditors
• Amount owed to other partners
in a way of additional
contribution to erase deficit
balance in capital.
➢ Right of Offset – 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
1. Update partners’ capital by distributing
undistributed P/L and closing debit or credit
balance in drawing account to the capital
account.
2. Realization of NCA and distribution of gain/loss
on realization to the capital account using P/L
sharing ratio.
3. Payment of liquidation expenses and
distribution of such expenses to the capital
account using P/L sharing ratio.
4. Payment of liabilities – outside creditors.
5. Exercising right of offset when necessary.
6. Eliminate capital deficiency by:
A. Additional contribution from the
deficient partner when SOLVENT.
B. If INSOLVENT → remaining partners
with credit balance will absorb the
deficiency based on their relative P/L.
• Solvent → Assets > Liabilities
• Insolvent → Assets < Liabilities
• Problem is Silent → INSOLVENT.
 7. Payment of Partners’ Loan, if any. CASH PRIORITY PROGRAM OR CASH DISTRIBUTION
8. Payment of Partners’ capital balances. PLAN

Procedure:
➢ If the Articles of Co-Partnership specify another
ratio to be used in liquidation, use the agreed 1. Determine the Loss Absorption Balance of each
liquidation ratio instead of P/L ratio in partner → Total Interest ÷ P/L Ratio.
distributing gains and losses. ➢ Total Interest is the sum of partner’s
➢ Statement of Liquidation – a tool to facilitate capital and credit balance of loan or
liquidation process and serves as a basis of drawing or difference between capital
journal entries. It presents a working paper and debit balance of loan or drawing.
that shows realization of NCA, allocation of ➢ Loss Absorption Balance is the amount
gain/loss on realization, and distribution of cash of loss required to eliminate each
to creditors and partners. partner’s capital account.
➢ The partner with the highest Loss
Absorption Balance is given the first
INSTALLMENT LIQUIDATION priority in cash distribution.
➢ Priority 1: To get the amount to be paid
➢ Some cash may become available to partners
to the partner with the highest LAB, get
even before all NCA are converted into cash.
the difference between the highest and
➢ If partners decide to distribute cash as they
the second highest and multiply the
become available, how much cash can be safely
amount by the P/L ratio.
distributed to each?
2. Repeat the procedure until the loss absorption
Periodic Schedule of Safe Payments balances are equal. Priority 2:
3. Once equal, any cash available may now be
➢ Prepared every time there is cash available for distributed according to their P/L ratio.
payment.
➢ Schedule begins with the total equity of each
partner at the time of distribution → Capital
Balances Before Distribution + Loan Balances
(Cr) – Loan Balances (Dr)
➢ Unsold NCA are assumed to be worthless.
➢ Unsold NCA and Cash Withheld for Future
Liquidation Expenses → treated as theoretical
losses or restricted interests → allocated to all
the partners as possible losses using P/L ratio.
➢ After distribution of possible losses, if there is a
deficient partner → allocate the deficiency to
the remaining partners with positive equity
using P/L ratio.
➢ After the absorption of the deficiency →
amount shown for each partner with equity
balance is the cash to be received.

Reference/s: Accounting for Special Transactions 2020

by Rante, Liz, Ruado, and Binaluyo