PARTNERSHIP LIQUIDATION

Why LIQUID? liquid – means cash (kung marami ka bang pera?) Terms:
Liquidation  Capital deficiency (equity is negative) – the total amount of liabilities exceeds the total amount
- saan napunta yung budget/ pera na ginamit mo of assets.
- Kung saan tuluyan ng nagsasarado yung negosyo - Partners who have deficiencies must invest
2 kinds of assets in liquidation: * Solvent partner – asset is greater than his liabilities (can invest)
a. Cash * Insolvent partner – Asset is less than his liabilities (lubog sa utang; can’t invest)
b. Non-cash
A= L + E Lump- Sum method
STEPS IN LIQUIDATION Barros and Lorzano have decided to liquidate their partnership on Dec. 1, 2021. The
1. REALIZATION (converting its non-cash assets into cash) statement of financial position is shown below:
- conversion of non-cash into cash ABL Partnership
- Realization of all non-cash assets Statement of Financial Position
December 1, 2021
Assets
 GAIN ON REALIZATION = cash ↑ vs non-cash asset ↓ Cash 25,000
Entry: (profit sharing ratio) Accounts Receivable (net) 75,000
Gain on realization Inventories 100,000
A, capital Property and Equipment (net) 300,000
B, capital Total Assets 500,000
# Liabilities and Capital
Liabilities
 LOSS ON REALIZATION = cash ↓ vs non-cash asset ↑
Accounts Payable 240,000
Entry: Loan Payable-Barros 30,000
A, capital Total Liabilities 270,000
B, capital Capital:
Loss on realization Afable, Capital 120,000
# Barros,Capital 50,000
Lorzano, Capital 60,000
Total Capital 230,000
2. SETTLEMENT OF LIABILITIES (paying its creditors)
Total Liabilities and Capital 500,000
1) Outside creditors (not related to the parties)
a) Liquidation Expenses Additional information:
b) Salaries (profit sharing ratio)
c) Taxes a. The personal assets (excluding partnership capital and loan interests) and personal
d) Creditors liabilities of each partner as of Dec. 1, 2021, are presented below:
2) Inside Creditors (partner to partner) Afable Barros Lorzano
Personal assets 250,000 300,000 350,000
Personal liabilities (230,000) (240,000) (325,000)
3. DISTRIBUTION TO PARTNERS (distributing the remaining assets (usually cash) to the partners)
Personal net worth 20,000 60,000 25,000
2 Types of liquidation:
1) Lump- Sum method - an amount paid all at once (lahatan)- for small businesses
- All non-cash assets are realized and all liabilities are settled before a single final cash b. Afable, Barros, and Lorzano share profits and losses in the ratio 20:40:40,
distribution is made to the partners. respectively.
2) Installment Method – an amount paid gradually (unti- unti)
 Journal entries to record the foregoing transactions.
c. According to partnership agreement, interest will not accrue on partners’ loan #1
balances during the liquidation process. Cash 260,000
d. All of the non-cash assets were sold on Dec. 10, 2021 for P 260,000. A, Capital 43,000
B, capital 86,000
Required: L, Capital 86,000
Prepare a statement of liquidation. A/R 75,000
ABL Partnership Investment 100,000
Statement of Liquidation Property of Equip. 300,000
De. 1-31, 2021 #
#2
A/P 240,000
Cash Non-Cash Liabilities Loans A, Capital B, L,
Cash 240,000
asset Pay- B Capital capital #
Beg. Balance 25,000 475,000 240,000 30,000 120,000 50,000 60,000
Realization of 260,000 (475,000) - - (43,000) (86,000) (86,000) #3
non-cash asset Loans Payable – B 30,000
Balance 285,000 - 240,000 30,000 77,000 (36,000) (26,000) B, Capital 30,000
Settlement of (240,000) - (240,000) - - - - #
liabilities
Balances 45,000 - - 30,000 77,000 (36,000) (26,000) #4
Right of offset (30,000) - 30,000 - Cash 31,000
Balances 45,000 - - - 77,000 (6,000) (26,000) B, Capital 6,000
L, Capital 25,000
Investment of B 31,000 - - - - 6,000 25,000
#
&L
Balances 76,000 - - - 77,000 - (1,000) #5
Allocation of - - - - (333.333) (666.67) - A, Capital 333.33
capital B, capital 666.67
deficiency L, Capital 1,000
Balances 76,000 - - - 76,000.67 (666.67) - #
Investment of B 666.67 - - - - 666.67 -
Balances 76,000.67 - - - 76,000.67 - - #6
Payment to (76,000.67) - - - (76,000.67 - - Cash 666.67
partners B, Capital 666.67
#
Balances - - - - - - -
#7
A, Capital 76,666.67
Cash 76,666.67
#