06/01/2024

Property of Polytechnic University of the Philippines

Polytechnic University of the Philippines
College of Accountancy and Finance
Preview of the Chapter
PREVIEW OF THE CHAPTER
PARTNERSHIP
Introduction to LIQUIDATION
Partnership
Lump Sum Nature of Partnership Liquidation Accounting Procedures
Liquidation • Definition
in Lump-Sum Liquidation

• Causes of liquidation • Realization

• Accounting problems in partnership
liquidation
• Types of liquidation
• Lump-Sum
• Instalment (piece-meal)
• Distribution of gain or loss on
realization
• Payment to creditors
• Distribution of cash to partners

Leandro C. Fua, M BA, CPA

Faculty

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College of Accountancy and Finance

Dissolution of a Partnership Partnership Liquidation

• Is defined in Article 1825 of the Civil Code of the Philippines as the
change in the relation of the partners caused by any partner
ceasing to be associated in the carrying out of the business
• Dissolution refers to the termination of the life of an existing
partnership and may be followed by:
1. Formation of a New Partnership
2. Liquidation
• Refers to dissolution of the partnership leading to the termination
of the business activities carried on by the partnership
• and the winding up of partnership’s business affairs to going out of
business.
• Partnership dissolution with liquidation may be caused by any of the
following factors:
1. The accomplishment of the purpose for which the partnership was organized
2. The termination of the term/period covered by the partnership contract.
3. The bankruptcy of the firm.
4. A court order, for some reason, may likewise result in a partnership liquidation
5. The mutual agreement among the partners to close the business.

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Types of Liquidation
• Lump-sum liquidation or liquidation by totals.
• This is a type of liquidation whereby the distribution of cash to the partners
is done only after all the non-cash assets have been realized, the total
amount of gain or loss on realization is known, and all liabilities have been
paid.
• Liquidation by instalment or piece-meal liquidation
• This is a type of liquidation whereby assets are realized on a piecemeal
basis and cash is distributed to partners on a periodic basis as it becomes
available, that is, even before all non-assets are converted into cash.
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College of Accountancy and Finance
Statement of Liquidation
• The statement of liquidation is a prepared to summarize the liquidation
process.
• It is the basis of the journal entries made to record liquidation.
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Procedures In Lump-sum Liquidation
1. Conversion of non-cash assets to cash also called as realization of assets
• When realization of assets results in a loss, the loss is carried to the capital accounts of
the partners as a deduction.
• If a partner’s capital account results in a debit balance (called capital deficiency), the
deficiency can be eliminated by
• Making additional cash investment, if the deficient partner is solvent.
• Charging the deficiency as additional loss to the remaining partners, if the deficient
partner is insolvent.
3. Distribution or allocation of gain or loss on realization among the partners
according to their residual profit and loss ratios (salary and interest factors
disregarded) unless liquidation ratios are specified in the partnership
agreement.
4. Distribution of cash to creditors
5. Distribution of cash to partners. In this procedure, the provisions of the
marshalling of assets and the exercise of the right of offset are applied.
Definition of Terms
1. Dissolution — the termination of a partnership as a going concern; it is the
termination of the life of a partnership.
2. Winding up — the process of settling the business Or partnership affairs; it
is synonymous to liquidation.
3. Termination — the point in time when all partnership affairs are ended.
4. Liquidation — the interval of time between dissolution and termination of
partnership affairs; it is also the process of winding up a business which
normally consists of conversion of assets into cash, payment of liabilities
and distribution of remaining cash among the partners.
5. Realization — the process of converting non-cash assets into cash.
6. Gain on realization - the excess of the selling price over the cost or book
value of the assets disposed or sold through realization.
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Definition of Terms Marshalling of Assets
5. Loss on realization — the excess of the cost or book value over the selling • involves the order of creditors’ rights against the partnership’s assets and
price of the assets disposed or sold through realization. the personal assets of the individual partners.
6. Capital deficiency — the excess of a partner’s share on losses over his • The order in which claims against the partnership’s assets will be
capital.
marshalled is as follows:
7. Deficient partner - a partner with a debit balance in his capital account after 1. Partnership creditors other than partners
receiving his share on the loss on realization.
2. Partners’ claims other than capital and profits, such as loans payable and
8. Right of offset — the legal right to apply part or all of the amount owing to a accrued interest payable
partner on a loan balance against deficiency in his capital account resulting 3. Partners’ claim to capital or profits, to the extent of credit balances in capital
from losses in the process of liquidation. accounts.
9. Partner’s interest — the sum of a partner’s capital, loan balance and
advances to the partnership.

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College of Accountancy and Finance

Illustrative Problem – Lump Sum Liquidation Illustrative Problem – Lump Sum Liquidation
ABC Partnership
The other assets were sold for P 980,000 – Gain on realization
Other Asset is composed of:
Statement of Financial Postion
• Other Asset A: P560,000 ABC Partnership
December 1, 2021
• Other Asset B: P392,000 Statement of Liquidation
December 1 - 31, 2021
Assets Liabilities and Capital
Other Loan Capital
Cash ₱ 56,000 Liabilities ₱ 313,600 The other assets were sold for
Cash Assets Liabilities Partner B Partner C Partner A - 40% Partner B - 40% Partner C - 20%
Assets 952,000 Partner B Loan 14,000 1. P 980,000 – Gain on realization Balance before Liquidation 56,000 952,000 313,600 14,000 22,400 266,000 168,000 224,000
Partner C Loan 22,400 2. P 700,000 – Loss on realization Sale of Assets and distribution of gain 980,000 -952,000 11,200 11,200 5,600
Partner A - 40% 266,000 3. P 518,000 – Loss on realization, Capital
Partner B - 40% 168,000
Deficient and partner is solvent. Balances 1,036,000 0 313,600 14,000 22,400 277,200 179,200 229,600
Partner C - 20% 224,000
4. P 476,000 – Loss on realization, Capital Payment of Liabilities -313,600 -313,600

Total Assets ₱ 1,008,000 Total Liabilities and Capital ₱ 1,008,000 Deficient and partner is solvent. Additional
Balances 722,400 0 0 14,000 22,400 277,200 179,200 229,600
Cash before distribution to partners Payment to partners -722,400 -14,000 -22,400 -277,200 -179,200 -229,600
5. P 476,000 – Loss on realization, Capital
Deficient and partner is insolvent. Balances 0 0 0 0 0 0 0 0
6. P 476,000 – Loss on realization, Capital
Deficient and partner is solvent. Additional
Cash is made as 2nd distribution to partners

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Illustrative Problem – Lump Sum Liquidation Illustrative Problem – Lump Sum Liquidation
The other assets were sold for P 700,000 – Loss on realization The other assets were sold for P 518,000 – Loss on realization, Capital Deficient and partner is solvent.

ABC Partnership ABC Partnership

Statement of Liquidation Statement of Liquidation
December 1 - 31, 2021 December 1 - 31, 2021
Other Loan Capital Other Loan Capital
Cash Assets Liabilities Partner B Partner C Partner A - 40% Partner B - 40% Partner C - 20% Cash Assets Liabilities Partner B Partner C Partner A - 40% Partner B - 40% Partner C - 20%
Balance before Liquidation 56,000 952,000 313,600 14,000 22,400 266,000 168,000 224,000 Balance before Liquidation 56,000 952,000 313,600 14,000 22,400 266,000 168,000 224,000
Sale of Assets and distribution of loss 700,000 -952,000 -100,800 -100,800 -50,400 Sale of Assets and distribution of gain 518,000 -952,000 -173,600 -173,600 -86,800

Balances 756,000 0 313,600 14,000 22,400 165,200 67,200 173,600 Balances 574,000 0 313,600 14,000 22,400 92,400 -5,600 137,200
Payment of Liabilities -313,600 -313,600 Payment of Liabilities -313,600 -313,600

Balances 442,400 0 0 14,000 22,400 165,200 67,200 173,600 Balances 260,400 0 0 14,000 22,400 92,400 -5,600 137,200
Payment to partners -442,400 -14,000 -22,400 -165,200 -67,200 -173,600 Offsetting of Loan -5,600 5,600

Balances 0 0 0 0 0 0 0 0 Balances 260,400 0 0 8,400 22,400 92,400 0 137,200

Payment to partners -260,400 -8,400 -22,400 -92,400 -137,200

Balances 0 0 0 0 0 0 0 0

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College of Accountancy and Finance

Illustrative Problem – Lump Sum Liquidation Illustrative Problem – Lump Sum Liquidation
The other assets were sold for P 476,000 – Loss on realization, Capital Deficient and partner is solvent. Additional The other assets were sold for P 476,000 – Loss on realization, Capital Deficient and partner is insolvent.
Cash before distribution to partners
ABC Partnership ABC Partnership
Statement of Liquidation Statement of Liquidation
December 1 - 31, 2021 December 1 - 31, 2021
Other Loan Capital Other Loan Capital
Cash Assets Liabilities Partner B Partner C Partner A - 40% Partner B - 40% Partner C - 20% Cash Assets Liabilities Partner B Partner C Partner A - 40% Partner B - 40% Partner C - 20%
Balance before Liquidation 56,000 952,000 313,600 14,000 22,400 266,000 168,000 224,000 Balance before Liquidation 56,000 952,000 313,600 14,000 22,400 266,000 168,000 224,000
Sale of Assets and distribution of gain 476,000 -952,000 -190,400 -190,400 -95,200 Sale of Assets and distribution of gain 476,000 -952,000 -190,400 -190,400 -95,200

Balances 532,000 0 313,600 14,000 22,400 75,600 -22,400 128,800 Balances 532,000 0 313,600 14,000 22,400 75,600 -22,400 128,800
Payment of Liabilities -313,600 -313,600 Payment of Liabilities -313,600 -313,600

Balances 218,400 0 0 14,000 22,400 75,600 -22,400 128,800 Balances 218,400 0 0 14,000 22,400 75,600 -22,400 128,800
Offsetting of Loan -14,000 14,000 Offsetting of Loan -14,000 14,000

Balances 218,400 0 0 0 22,400 75,600 -8,400 128,800 Balances 218,400 0 0 0 22,400 75,600 -8,400 128,800
Additional Cash 8,400 8,400 Additional loss to partners for the
deficiency of Partner B -5,600 8,400 -2,800
Balances 226,800 0 0 0 22,400 75,600 0 128,800
Payment to partners -226,800 -22,400 -75,600 -128,800 Balances 218,400 0 0 0 22,400 70,000 0 126,000
Payment to partners -218,400 -22,400 -70,000 -126,000
Balances 0 0 0 0 0 0 0 0
Balances 0 0 0 0 0 0 0 0

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Illustrative Problem – Lump Sum Liquidation Illustrative Problem – Lump Sum Liquidation
The other assets were sold for P 476,000 – Loss on realization, Capital Deficient and partner is solvent. Additional The other assets were sold for P 476,000 – Loss on realization, Capital Deficient and partner is solvent. Additional
Cash is made as 2nd distribution to partners Cash is made as 2nd distribution to partners
ABC Partnership ABC Partnership
Statement of Liquidation Statement of Liquidation
December 1 - 31, 2021 December 1 - 31, 2021
Other Loan Capital
Cash Assets Liabilities Partner B Partner C Partner A - 40% Partner B - 40% Partner C - 20%
Balance before Liquidation 56,000 952,000 313,600 14,000 22,400 266,000 168,000 224,000
Partner A - 40% Partner B - 40%Partner C - 20%
Sale of Assets and distribution of gain 476,000 -952,000 -190,400 -190,400 -95,200 Capital balances before cash distribution 75,600 -8,400 128,800
Add loan balances 22,400
Balances 532,000 0 313,600 14,000 22,400 75,600 -22,400 128,800
Payment of Liabilities -313,600 -313,600 Total Partners Interest 75,600 -8,400 151,200
Restricted interest - possible loss of P1,200 to
Balances 218,400 0 0 14,000 22,400 75,600 -22,400 128,800 Partner A and Partner B in the ratio of 2:1 if
Offsetting of Loan -14,000 14,000
Partner B fails to pay his deficiency -5,600 8,400 -2,800
Balances 218,400 0 0 0 22,400 75,600 -8,400 128,800
Payment to partners per schedule -218,400 -22,400 -70,000 -126,000 Free interest - amounts to be paid to partners 70,000 0 148,400

Balances 0 0 0 0 0 5,600 -8,400 2,800 Payment to apply on

Additional Cash 8,400 8,400 Loan 22,400
Capital 70,000 126,000
Balances 8,400 0 0 0 0 5,600 0 2,800
Payment to partners per schedule -8,400 -5,600 -2,800
Cash Distribution 70,000 0 148,400
Balances 8,400 0 0 0 0 5,600 0 2,800

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College of Accountancy and Finance

Illustrative Problem – Lump Sum Liquidation

The other assets were sold for P 476,000 – Loss on realization, Capital Deficient and partner is solvent. Additional
Cash is made as 2nd distribution to partners
ABC Partnership
Statement of Liquidation
December 1 - 31, 2021
Other Loan Capital
Cash Assets Liabilities Partner B Partner C Partner A - 40% Partner B - 40% Partner C - 20%
Balance before Liquidation 56,000 952,000 313,600 14,000 22,400 266,000 168,000 224,000
Sale of Assets and distribution of gain 476,000 -952,000 -190,400 -190,400 -95,200

Balances 532,000 0 313,600 14,000 22,400 75,600 -22,400 128,800

Payment of Liabilities -313,600 -313,600

Balances 218,400 0 0 14,000 22,400 75,600 -22,400 128,800

Offsetting of Loan -14,000 14,000

Balances 218,400 0 0 0 22,400 75,600 -8,400 128,800

Payment to partners per schedule -218,400 -22,400 -70,000 -126,000

Balances 0 0 0 0 0 5,600 -8,400 2,800

Additional Cash 8,400 8,400

Balances 8,400 0 0 0 0 5,600 0 2,800

Payment to partners per schedule -8,400 -5,600 -2,800

Balances 8,400 0 0 0 0 5,600 0 2,800

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