PARTNERSIP: LIQUIDATION

It is the interval of time between dissolution and termination of partnership

affairs; it is also the process of winding up a business.

 Conversion of Assets into Cash

- Non-cast assets or assets other than cash. To convert, it should be sell above or below book value.
 Payment of Liabilities
- After the conversion of assets, it needs to pay the liabilities of the partnership.
 Distribution of remaining cash among the partners
- Applied first on LOAN and then on CAPITAL

Note: The final distribution of cash to partners is made based on partner’s capital balances and not
on any ratio.

Causes of Liquidation
1. 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. The mutual agreement among the partners to close the business.

Types of Liquidation
1. Lump sum Liquidation or Liquidation by Totals
2. Liquidation by Installment or Piece-meal Liquidation

Accounting Procedures
 Lump Sum Liquidation
1. Sale of Non-cash assets and Distribution of gain or loss.
2. Distribution of Cash to Creditors and Partners.
- In case of Capital Deficiency after distribution of loss on realization:
* Offset against Loan Balance
* Make additional Cash Investment, if solvent.
* Charging the Deficiency as additional loss to the remaining partners, if insolvent.

ILLUSTRATION:
Presented below the Statement of Financial Position of ABC Partnership as of December 31, 2020.
ASSETS LIABILITIES & CAPITAL
Cash 8,000 Liabilities 44,800
Other Assets 136,000 B, Loan 2,000
144,000 C, Loan 3,200
A, Capital 38,000

Capital Interest B, Capital 24,000

= Capital + Loan C, Capital 32,000
144,000
Case:
Other assets were sold for: Note:
If ang loan naa sa asset, it means
(1) P 140,000 receivables siya ng partnership sa
(2) P 100,000 partner. Ibabawas ito sa capital
(3) P 74,000 balances pagkukunin na ang
(4) P 68,000. Deficient partner was solvent. interest.
(5) P 68,000. Deficient partner was insolvent.
Profit and loss ratio is 4:4:2 to A, B and C, respectively.
 Solution:
Case (1) P 140,000

ABC Partnership
Statement of Liquidation
December 31, 2020

Cash Other Assets Liabilities B, Loan C, Loan A, Capital B, Capital C, Capital

8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Other 140,000 (136,000) - - - (4,000 x 4/10) (4,000 x 4/10) (4,000 x 2/10)
Assets 1,600 1,600 800
Balances 148,000 - 44,800 2,000 3,200 39,600 25,600 32,800
Payment of (44,800) (44,800)
Liabilities
Balances 103,200 - - 2,000 3,200 39,600 25,600 32,800
Distribution to 103,200 - - 2,000 3,200 39,600 25,600 32,800
Partners

Journal Entry:
Sales of Other Assets Distribution to Partners
Cash 140,000 A, Capital 39,600
Other Assets 136,000 B, Capital 25,600
A, Capital 1,600 C, Capital 32,800
B, Capital 1,600 B, Loan 2,000
C, Capital 800 C, Loan 3,200
Cash 103,200

Payment of Liabilities
Liabilities 44,800
Cash 44,800

Case (2) P 100,000

ABC Partnership
Statement of Liquidation
December 31, 2020

Cash Other Assets Liabilities B, Loan C, Loan A, Capital B, Capital C, Capital

8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Other 100,000 (136,000) - - - (36,000 x 4/10) (36,000 x 4/10) (36,000 x 2/10)

Assets (14,400) (14,400) (7,200)

Balances 108,000 - 44,800 2,000 3,200 23,600 9,600 24,800
Payment of (44,800) (44,800)
Liabilities
Balances 63,200 - - 2,000 3,200 23,600 9,600 24,800
Distribution to 63,200 - - 2,000 3,200 23,600 9,600 24,800
Partners

Journal Entry:

Distribution to Partners
A, Capital 23,600
B, Capital 9,600
C, Capital 24,800
B, Loan 2,000
 Sales of Other Assets
Cash 100,000 Payment of Liabilities
A, Capital 14,400 Liabilities 44,800
B, Capital 14,400 Cash 44,800
C, Capital 7,200
Other Assets 136,000

Case (3) P 74,000

ABC Partnership
Statement of Liquidation
December 31, 2020

Cash Other Assets Liabilities B, Loan C, Loan A, Capital B, Capital C, Capital

8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Other 74,000 (136,000) - - - (62,000 x 4/10) (62,000 x 4/10) (62,000 x 2/10)

Assets (24,800) (24,800) (12,400)

Balances 82,000 - 44,800 2,000 3,200 13,200 (800) 19,600
Elimination of (800) 800
Cap. Deficiency
Balances 82,000 - 44,800 1,200 3,200 13,200 - 19,600
Payment of (44,800) (44,800)
Liabilities
Balances 37,200 - - 1,200 3,200 13,200 - 19,600
Distribution to 37,200 - - 1,200 3,200 13,200 - 19,600
Partners

Journal Entry:
Sales of Other Assets Eliminate Capital Deficiency
Cash 74,000 B, Loan 800
A, Capital 24,800 B, Capital 800
B, Capital 24,800
C, Capital 12,400
Distribution to Partners
Other Assets 136,000
A, Capital 13,200
B, Capital -
C, Capital 19,600
Payment of Liabilities
B, Loan 1,200
Liabilities 44,800
C, Loan 3,200
Cash 44,800
Cash 37,200

Case (4) P 68,000. Deficient partner was solvent.

 ABC Partnership
Statement of Liquidation
December 31, 2020

Cash Other Assets Liabilities B, Loan C, Loan A, Capital B, Capital C, Capital

8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Other 68,000 (136,000) - - - (68,000 x 4/10) (68,000 x 4/10) (68,000 x 2/10)

Assets (27,200) (27,200) (13,600)

Balances 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,400
Right of Offset (2,000) 2,000
Balances 76,000 - 44,800 - 3,200 10,800 (1,200) 18,400
Additional Cash 1,200 - 1,200
Investment
Balances 77,200 - 44,800 - 3,200 10,800 - 18,400
Payment of (44,800) (44,800)
Liabilities
Balances 32,400 - - - 3,200 10,800 - 18,400
Distribution to 32,400 - - - 3,200 10,800 - 18,400
Partners

Journal Entry:
Sales of Other Assets Eliminate Capital Deficiency
Cash 68,000 B, Loan 2,000
A, Capital 27,200 B, Capital 2,000
B, Capital 27,200
C, Capital 13,600 Cash 1,200
Other Assets 136,000 B, Capital 1,200

Payment of Liabilities Distribution to Partners

Liabilities 44,800 A, Capital 10,800
Cash 44,800 C, Capital 18,400
C, Loan 3,200
Cash 32,400

Case (5) P 68,000. Deficient partner was insolvent.

 ABC Partnership
Statement of Liquidation
December 31, 2020

Cash Other Assets Liabilities B, Loan C, Loan A, Capital B, Capital C, Capital

8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Other 68,000 (136,000) - - - (68,000 x 4/10) (68,000 x 4/10) (68,000 x 2/10)

Assets (27,200) (27,200) (13,600)

Balances 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,400
Right of Offset (2,000) 2,000
Balances 76,000 - 44,800 - 3,200 10,800 (1,200) 18,400
Absorbed by - (800) 1,200 (400)
Remaining
Partners
Balances 76,000 - 44,800 - 3,200 10,000 - 18,000
Payment of (44,800) (44,800)
Liabilities
Balances 31,200 - - - 3,200 10,000 - 18,000
Distribution to 31,200 - - - 3,200 10,000 - 18,000
Partners

Journal Entry:
Eliminate Capital Deficiency
Sales of Other Assets B, Loan 2,000
Cash 68,000 B, Capital 2,000
A, Capital 27,200
B, Capital 27,200 A, Capital (1,200 x 4/6) 800
C, Capital 13,600 C, Capital (1,200 x 2/6) 400
Other Assets 136,000 B, Capital 1,200

Payment of Liabilities
Liabilities 44,800 Distribution to Partners
Cash 44,800 A, Capital 10,000
C, Capital 18,000
C, Loan 3,200
Cash 31,200

 Liquidation by Installment
It means that non-cash assets are converted into cash one at a time or on a piecemeal
basis.
  Approaches of Cash Distribution
1. Theoretical Loss Approach
- After the first installment or first realization of non-cast assets kinukuha natin yung capital
balances ng mga partners then the remaining unsold non-cash assets will be considered as the
theoretical loss and that loss will be distributed to the partners.
* Schedule of Safe Payments - this procedure anticipates any possible losses before finally
distributing the available cash.
2. Loss Absorption Ability Approach
* Cash Priority Program - this procedure is used when partner’s desire to determine whom among
them will received the cash first.

Accounting Procedures
 Installment Liquidation
1. Sale of Non-cash assets and Distribution of gain or loss.
2. Distribution of Cash to Creditors.
- In case of Capital Deficiency after distribution of loss on realization:
* Offset against Loan Balance
* Make additional Cash Investment, if solvent.
* Charging the Deficiency as additional loss to the remaining partners, if insolvent.
3. Prepare the Schedule of Safe Payment

ILLUSTRATION:
Presented below the Statement of Financial Position of ABC Partnership as of December 31, 2020.
ASSETS LIABILITIES & CAPITAL
Cash 8,000 Liabilities 44,800
Other Assets 136,000 B, Loan 2,000
144,000 C, Loan 3,200
A, Capital 38,000
B, Capital 24,000
C, Capital 32,000
144,000
Case:
Other assets were sold:
1st Installment – Non-Cash Asset 50,000 for 40,000
2nd Installment – Non-Cash Asset 60,000 for 55,000
3rd Installment – remaining Non-Cash Asset for 24,000
Profit and loss ratio is 4:4:2 to A, B and C, respectively.

 Theoretical Loss Approach - Schedule of Safe Payments

 ABC Partnership
Statement of Liquidation
December 31, 2020

Cash Other Assets Liabilities B, Loan C, Loan A, Capital B, Capital C, Capital

8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
1st Installment 40,000 (50,000) - - - (10,000 x 4/10) (10,000 x 4/10) (10,000 x 2/10)
(4,000) (4,000) (2,000)
Balances 48,000 86,000 44,800 2,000 3,200 34,000 20,000 30,000
Payment of (44,800) (44,800)
Liabilities
Balances after 3,200 86,000 - 2,000 3,200 34,000 20,000 30,000
1st Realization
Distribution to (3,200) (3,200)
Partners
Balances before - 86,000 2,000 3,200 34,000 20,000 26,800
2nd Realization
2nd Installment 55,000 (60,000) (5,000 x 4/10) (10,000 x 4/10) (10,000 x 2/10)
(2,000) (2,000) (1,000)
Balances 55,000 26,000 - 2,000 3,200 32,000 18,000 25,800
Distribution to (55,000) (21,600) (9,600) (23,800)
Partners
Balances before - 26,000 - 2,000 3,200 10,400 8,400 2,000
3rd Realization
3rd Installment 24,000 (26,000) (2,000 x 4/10) (2,000 x 4/10) (2,000 x 2/10)
(800) (800) (400)
Balances 24,000 - - 2,000 3,200 9,600 7,600 1,600
Distribution to 24,000 - - 2,000 3,200 9,600 7,600 1,600
Partners

ABC Partnership
Schedule of Safe Payment
1st Installment

Total A B C
Balances after 1st Note:
Realization If the loan is
Capital 84,200 34,000 20,000 30,000 receivables of the
Loan 5,200 2,000 3,200 partnership to the
Total 89,200 34,000 22,000 32,200 partners, it will be
Less: Theoretical Loss (86,000) (34,400) (34,400) (17,200) deducted from their
Cash balance for 3,200 (400) (12,400) 16,000 capital balances.
Distribution
Deficiency Absorbed 400 12,400 (12,800)
by C
- - 3,200

Total A B C
Balances after 2nd
Realization
Capital (32k+18k+25,800) 75,800 32,000 18,000 25,800
Loan (2,000+3,200) 5,200 2,000 3,200
Total 81,000 32,000 20,000 29,000
Less: Theoretical Loss (26,000) (10,400) (10,400) (5,200)
Cash balance for 55,000 21,600 9,600 23,800
Distribution
  Cash Priority Program

ABC Partnership
Cash Priority Program

Loss Absorption Ability Cash Payments

Balances before A B C Total A B C

Realization
Capital 38,000 24,000 32,000 40% 40% 20%
Loan 2,000 3,200
Total Partner’s 38,000 26,000 35,200
Interest
Divided by Profit 40% 40% 20%
and Loss Ratio
Loss Absorption 95,000 65,000 176,000
Ability
Excess of C over A (81,000) (81,000 x 20%) 16,200
16,200
95,000 65,000 95,000
Excess of C and A (30,000) (30,000) (12k + 6k from C) (30,000 x 40%) (30,000 x

over B 18,000 12,000 20%)

6,000
65,000 65,000 65,000 34,200 12,000 - 22,200

1st Priority 16,200

Cash Available - 3,200 3,200
1st Realization

Cash Available – 55,000 13,000

2nd Realization
(55,000 – 13,000)
42,000
2nd Priority (18,000) 12,000 6,000
24,000 (24,000x40) (24,000x40) (24,000x20)
9,600 9,600 4,800
21,600 9,600 23,800

Note: Balances before realization

Total Partner’s Interest

= Raw Capital balance + Loan

Loss Absorption Ability

= Total Partner’s Interest ÷ Profit and Loss Ratio
ABC Partnership
Statement of Liquidation
December 31, 2020
 Cash Other Liabilities B, Loan C, Loan A, Capital B, Capital C, Capital
Assets
8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
1st Installment 40,000 (50,000) - - - (10,000 x 4/10) (10,000 x 4/10) (10,000 x 2/10)
(4,000) (4,000) (2,000)
Balances 48,000 86,000 44,800 2,000 3,200 34,000 20,000 30,000
Payment of (44,800) (44,800)
Liabilities
Balances after 3,200 86,000 - 2,000 3,200 34,000 20,000 30,000
1st Realization
Distribution to (3,200) (3,200)
Partners
Balances before - 86,000 2,000 3,200 34,000 20,000 26,800
2nd Realization
2nd Installment 55,000 (60,000) (5,000 x 4/10) (10,000 x 4/10) (10,000 x 2/10)
(2,000) (2,000) (1,000)
Balances 55,000 26,000 - 2,000 3,200 32,000 18,000 25,800
Distribution to (55,000) (21,600) (9,600) (23,800)
Partners
Balances before - 26,000 - 2,000 3,200 10,400 8,400 2,000
3rd Realization
3rd Installment 24,000 (26,000) (2,000 x 4/10) (2,000 x 4/10) (2,000 x 2/10)
(800) (800) (400)
Balances 24,000 - - 2,000 3,200 9,600 7,600 1,600
Distribution to 24,000 - - 2,000 3,200 9,600 7,600 1,600
Partners