GLOBAL RECIPROCAL COLLEGES

College of Accountancy
First Semester A.Y. 2023 – 2024

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

ACCOUNTING FOR SPECIAL TRANSACTIONS ML M. DELA CRUZ, CPA, CTT

AFAR-01D
PARTNERSHIP LIQUIDATION

Dissolution With Liquidation

Partnership dissolution calling for the winding up of business affairs is called liquidation. Partners can
only engage in activities leading to final settlement of business affairs.

A partnership is liquidated when its business operations are completely terminated or ended. 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. The mutual agreement among the partners to close the business.

Unlimited Liability of Each Partner

In partnership liquidation, the assets and liabilities of the partnership are directly intertwined with those of
the individual partners’ personal assets and liabilities because of the unlimited liability of each partner. The
priorities for creditors’ claims against the assets available to pay the partnership liabilities involve two
concepts:
a. Marshaling of assets; and
b. Right of offset.

Marshaling of Assets
Marshaling of assets involves the order of creditors’ rights against the partnership’s assets and the personal
assets of the individual partners.

Order of Claims
Against the partnership’s assets Against personal assets of the individual partners
1. Partnership outside creditors 1. Personal creditors of individual partners
2. Partners’ claims other than capital and profits 2. Partnership creditors on unpaid partnership
3. Partners’ claims to capital or profits liabilities regardless of a partner’s capital
balance in the partnership

Right of Offset
Right of offset involves offsetting a deficit in a partner’s capital (debit balance in the capital account of a
partner) against the partnership loan payable to that partner.

Types of Liquidation

Lump-sum Liquidation or Liquidation by Installment Liquidation of Piece-meal

Totals Liquidation
This is a type of liquidation whereby the This is a type of liquidation whereby assets are
distribution of cash to the partners is done only realized on a piecemeal basis and cash is
after all the non-cash assets have been realized, distributed to partners on a periodic basis as it
the total amount of gain or loss on realization is becomes available, that is, even before all non-
known and all liabilities have been paid. cash assets are converted into cash.

Procedures in Lump-Sum Liquidation

1. The partnership books should be adjusted and balances of nominal accounts are closed to the
partners’ capital account.

2. Advances and withdrawals are likewise closed to capital accounts since cash settlement shall be
based on the partners’ capital account balances.

3. Partners may then proceed to realization of the non-cash assets. Allocation of gain or loss on
realization shall be based according to their profit and loss ratio unless liquidation ratios are
specified in the partnership agreement.

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4. Distribution of cash to creditors and partners.

When the allocation of gain or loss on realization results in a partner’s debit balance in their capital accounts
(called capital deficiency) such amount can be offset against any loan balance of the partner to the
partnership.

Cash can be distributed to partners before or after the elimination of the deficiency. Regardless, capital
deficiency is eliminated by:
a. If the deficient partner is solvent, making additional cash investment (up to the extent of his/her
solvency. If the problem is silent, assume no limit as to solvency capacity).
b. If the deficient partner is insolvent, charging the deficiency as additional loss to the other partners
in accordance to the absorbing partners’ profit and loss ratio.

Partners’ Personal Status

a. Solvent partner – when the personal assets exceed personal liabilities.
b. Insolvent partner – when the personal assets are less than personal liabilities.

The personal status of partners is sometimes provided in the problem to indicate that a partner is solvent
or insolvent.

✓ If the problem does not state the extent how solvent a partner is, assume there is no limit.
✓ If the problem is silent, apply prudence, assume a partner is insolvent—as a general rule. Some
problem, though silent, may imply that a partner is not insolvent.

Statement of Liquidation
The statement of liquidation is a statement prepared to summarize the liquidation process. It presents in
working paper form the effect of the liquidation on the statement of financial position. It shows the
conversion of assets into cash, the allocation of gain or loss on realization, and the distribution of cash to
creditors and partners.

Nature of Installment Liquidation

Under installment liquidation, non-cash assets are realized on an extended period of time. Cash realized is
immediately distributed to partners after fully satisfying creditors’ claims of after setting aside sufficient
cash for these liabilities.

In installment liquidation, it is necessary that each cash distribution to partners be considered as if it were
the last, therefore:
✓ Remaining unsold assets must be treated as a complete loss.
✓ Debit balances in capital and potential capital deficiencies are assumed uncollectible.

Procedures in Installment Liquidation

The liquidation procedures shall be the same as in lump-sum liquidation except that:
1. Cash is distributed to partners even before fully realizing non-cash assets and determining total
gain or loss on realization.

2. Restricted interest (interest that is not distributable to partners yet) shall consist of:
a. Remaining unsold assets.
b. Cash withheld (for possible expenses).
c. Debit balances in capital.

Program of Cash Distribution

Partners may desire to determine in advance as to whom cash distributions shall be made as cash may
become available. This procedure requires the preparation of a program called Cash Priority Program,
Cash Pre-distribution Plan or Program of Priorities. The program is prepared prior to liquidation, that
is, before cash becomes available for distribution.

Steps:
1. Determine total partners’ interest; that is, capital balances before liquidation plus loans by
partners to the partnership less advances by the partnership to the partners and other adjustments.

2. Divide total partners’ interest by their profit and loss ratio to get each partner’s loss
absorption capacity. The loss absorption capacity is the maximum amount of loss that a partner
may absorb and may eliminate any partner in any cash distribution. A partner, therefore, with the
highest loss absorption balance has the first priority on cash distributions.

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3. Once the loss absorption balances are determined, allocations may now be made, starting
with Allocation I wherein the highest loss absorption balance is reduced to the next
highest level. Each reduction in the loss absorption balance requires payment to partners computed
by multiplying the amount of reduction by the partners’ profit and loss ratio.

4. After the partners’ loss absorption balances are made equal, cash distributions are made in the
profit and loss ratio.

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PRACTICAL ADVANCED FINANCIAL ACCOUNTING

Part 1: Discussion Problems

Problem 1D-1
On January 1, 2023, the partnership of Chot, Tim and Yeng decided to liquidate their partnership affairs.
The partners share profit or loss in 2:3:5 ratio, respectively. The partnership’s condensed balance sheet as
of December 31, 2022 is as follows:

ASSETS LIABILITIES AND CAPITAL

Cash ₱036,000 Accounts payable ₱0018,000
Trade accounts receivable 108,000 Loans payable 36,000
Inventory 216,000 Tim, loans 36,000
Furniture and fixtures, net 120,000 Chot, capital 180,000
Equipment, net 420,000 Tim, capital 270,000
Yeng, capital 360,000
Total assets ₱900,000 Total liabilities and capital ₱900,000

During the liquidation, the following information transpired:

a. ₱18,000 of the trade accounts receivable is considered uncollectible.
b. The merchandise inventory was sold in its entirety for ₱126,000.
c. The furniture and fixtures and equipment were sold for a bundle price of ₱450,000.
d. ₱3,600 liquidation expenses were paid.

1. The total loss on realization is

a. ₱237,600 c. ₱165,600
b. ₱201,600 d. ₱129,600

2. How much is the total cash received by Tim?

a. ₱139,680 c. ₱259,200
b. ₱209,520 d. ₱245,520

Problem 1D-2
Alucard, Bane, Chou and Diggie share profits in the ratio of 2:1:1:1. The partnership cannot meet its
obligations to creditors and dissolution is authorized on October 1, 2023. A balance sheet for the partnership
on this date shows balances as follows:

Assets Liabilities and Capital

Cash ₱090,000 Liabilities ₱265,000
Other assets 400,000 Diggie, loan 25,000
Alucard, capital 50,000
Bane, capital 50,000
Chou, capital 50,000
Diggie, capital 50,000
Total assets ₱490,000 Total liabilities and capital ₱490,000

The personal status of partners on this date is determined to be as follows:

Partners Personal assets Personal liabilities

Alucard ₱250,000 ₱150,000
Bane ₱100,000 ₱150,000
Chou ₱150,000 ₱125,000
Diggie ₱200,000 ₱250,000

The other assets of the partnership are sold and realized at ₱120,000. Additional contributions by
appropriate parties in meeting the claims of firm creditors were made.

3. The amount that will be paid to the personal creditors of Alucard would be
a. ₱150,000 c. ₱222,500
b. ₱165,000 d. ₱250,000

4. The amount that will be paid to the personal creditors of Bane would be
a. ₱100,000 c. ₱150,000
b. ₱142,000 d. ₱180,000

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5. The amount that will be paid to the personal creditors of Diggie would be
a. ₱200,000 c. ₱235,000
b. ₱217,500 d. ₱250,000

Problem 1D-3
On January 1, 2023, the partners of recently founded Liberty Inc. decided to wind up its affairs and
liquidate. The following information was made available:

Cash ₱05,000 Accrued expenses ₱037,500

Accounts receivable 15,000 Roby, capital 12,500
Merchandise inventory 30,000 Salamida, capital 25,000
Machineries, net 75,000 Torres, capital 50,000

The partnership suffered a ₱110,000 loss on realization of the non-cash assets. The personal net assets
and profit or loss share of the partners are: Roby (2/10), ₱20,000; Salamida (3/10), ₱10,000; and Torres
(5/10), (₱30,000).

6. How much additional contributions shall be made by the partners in order to settle all of the partnership
liabilities?
a. ₱27,500 b. ₱37,500 c. ₱22,500 d. ₱12,500

7. The total additional contribution of Salamida amounted to

a. ₱11,500 b. ₱1,500 c. ₱1,000 d. ₱10,000

Problem 1D-4
Gibbs, Iglehart and Nyman Partnership began the process of liquidation with the following statement of
financial position:

Cash, ₱120,000; Non-cash assets, ₱3,255,000; Liabilities, ₱1,125,000; Gibbs, capital, ₱600,000;
Iglehart, capital, ₱675,000; Nyman, capital, unknown.

Gibbs, Iglehard and Nyman share profits and losses in a ratio of 30:20:50. Liquidation expenses are
expected to be ₱90,000. After the liquidation expenses had been paid and the non-cash assets sold, Nyman
had a deficit of ₱60,000.

8. For what amount were the non-cash assets sold?

a. ₱1,275,000 c. ₱1,185,000
b. ₱1,980,000 d. ₱1,095,000

Problem 1D-5
Evans, Felch and Gonzales are partners in a wholesale business. They agreed to share profit and loss
equally. On January 1, 2023, the ledger shows the following accounts:

Capital Drawings
Evans.............................................................. ₱18,750 ₱11,250
Felch............................................................... 15,000 7,500
Gonzales.......................................................... 56,250 3,750

Most of their clients are severely affected by the COVID-19 pandemic and were having some difficulty
paying their outstanding dues. Because of this failure, the partnership loses heavily and is compelled to
liquidate. After exhausting the partnership assets, including those arising from an operating income of
₱13,500 in 2023, they still owe ₱15,750 to creditors on December 31, 2023. Evans has no personal assets
but the others are well off.

9. The partnership liquidation loss

a. ₱00,000 c. ₱83,250
b. ₱30,000 d. ₱96,750

10. The amount to be received by Gonzales as a result of the liquidation

a. ₱02,456.25 c. ₱21,375
b. ₱14,625.00 d. ₱29,250

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INSTALLMENT LIQUIDATION
Problem 1D-6
The December 31, 2023 ledger balances of Nirvana Partnership whose members, Cobain, Grohl and
Novoselic, share profits and losses, 40%, 30%, 30%, respectively, appear as follows:

Cash ₱010,000
Accounts receivable 297,000
Allowance for uncollectible accounts ₱67,000
Accounts payable 30,000
Grohl, loan 25,000
Novoselic, loan 12,500
Cobain, capital 72,250
Grohl, capital 62,750
Novoselic, capital 37,500

At this date, the partnership decided to liquidate and transactions as a result of liquidation were as follows:

January February March April

Book value of assets sold ₱60,000 ₱35,000 ₱75,000 ₱60,000
Proceeds from sale 52,500 30,000 50,000 25,000
Payment of liquidation expenses 2,500 3,750 5,000 25,000
Payment to creditors 30,000 — — —
Cash withheld 10,000 5,000 12,500 —

11. The amount to be received by Grohl for the month of January?

a. ₱0,000 c. ₱20,000
b. ₱9,000 d. ₱25,000

12. The amount to be received by Novoselic for the month of February?

a. ₱0,000 c. ₱09,375
b. ₱2,375 d. ₱12,500

13. The amount to be received by Cobain for the month of March?

a. ₱00,000 c. ₱44,000
b. ₱15,000 d. ₱72,250

14. The amount to be received by Grohl for the month of April?

a. ₱0,000 c. ₱5,000
b. ₱3,750 d. ₱6,250

15. The partner most vulnerable to partnership losses on liquidation is:

a. Cobain b. Grohl c. Novoselic d. None

16. The second payment to any partner under a cash priority program:
a. To Grohl, ₱33,562.50 c. To Novoselic, ₱33,562.50
b. To Cobain, ₱5,583.30 d. To Cobain, ₱5,583.30 and to Grohl,
₱4,187.50

Problem 1D-7
Kate, CJ and Chip are partners. On January 2, 2023, their capital balances and profit and loss ratio are as
follows:

Capital P&L Ratio

Kate................................................................ ₱250,000 60%
CJ................................................................... ₱500,000 25%
Chip................................................................ ₱600,000 15%

Chip withdrew ₱100,000 during 2023. Net loss on December 31, 2023 amounted to ₱200,000. Hence, the
partners decided to liquidate the partnership. It is uncertain how much of the assets will ultimately yield
but favorable realization is expected. It is, therefore, agreed to distribute cash as it becomes available.
There are unpaid liabilities of ₱50,000 and cash on hand of ₱7,000.

17. The amount of non-cash assets before liquidation is:

a. ₱1,043,000 c. ₱1,093,000
b. ₱1,050,000 d. ₱1,100,000

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18. The amount to be realized by the partnership on the sale of its assets so that Kate will receive a total
of ₱190,000 in the final settlement of her interest is:
a. ₱60,000 c. ₱1,033,000
B. ₱93,000 d. ₱1,193,000

19. Assuming that Chip received a total of ₱330,000, the amount of CJ would have received at this point
is:
a. ₱00,000 c. ₱050,000
b. ₱20,000 d. ₱216,667

Problem 1D-8
Bill, Kobe and Chamberlain share profits and losses 50%, 30%, 20%, respectively. Their partnership’s
balance sheet on January 1, 2023, before liquidation shows the following:

Assets Liabilities and Capital

Cash ₱060,000 Accounts payable ₱125,000
Other assets 325,000 Loan from Kobe 50,000
Loan to Chamberlain 10,000 Bill, capital 85,000
Kobe, capital 85,000
Chamberlain, capital 50,000
Total ₱395,000 Total ₱395,000

The partnership decided to liquidate as soon as possible after January 1, 2023, and all cash on hand except
for ₱5,000 contingency balance is to be distributed at the end of each month until the liquidation is
completed.

20. If in the first month realization and distribution, the partnership pays liquidation expenses of ₱2,500
and Kobe receives ₱30,000. Compute the cash proceeds from the initial of other assets.
a. ₱80,000 c. ₱100,000
b. ₱90,000 d. ₱102,500

Problem 1D-9
A balance sheet for the partnership Xander, Yannick and Zia show the following balances before liquidation:

Cash.................................................................................................... ₱090,000
Accounts receivable.............................................................................. 267,750
Merchandise inventory.......................................................................... 178,500
Trade accounts payable........................................................................ 120,000
Non-trade accounts payable.................................................................. 30,000
Xander, capital..................................................................................... 165,000
Yannick, capital.................................................................................... 116,250
Zia, capital........................................................................................... 105,000

Certain non-cash assets were realized at ₱240,000 on the first installment of the liquidation. Liquidation
expenses of ₱7,500 are paid, and additional liquidation expenses are anticipated. Of the total trade accounts
payable, ₱40,500 were paid. Sufficient cash is retained to ensure the payment to creditors before making
payment to partners. Xander, Yannick and Zia share profits or losses in 2:1:1 ratio.

On the first payment to partners, Xander receives ₱46,875.

21. The total cash payment to partners in the first installment amounted to:
a. ₱187,500 c. ₱93,750
b. ₱150,000 d. ₱75,000

22. The amount of cash withheld for anticipated liquidation expenses and unpaid liabilities amounted to:
a. ₱015,000 c. ₱124,500
b. ₱109,500 d. ₱132,000

Problem 1D-10
Partners Steven, Torrio and Usher have capital balances of ₱10,000, ₱22,500, and ₱7,500, respectively.
Prior to liquidation, total remaining assets are carried in the books at ₱40,000, the liabilities having been
paid. Among these remaining assets is an equipment with a fair value of ₱8,750. The partners share profits
and losses equally. Torrio covets the equipment and is willing to accept it for ₱8,750 in lieu of cash. The
other partners have no desire on specific assets, only cash in liquidation.

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23. How much cash, in addition to the equipment, would be first distributed to Torrio before any other
partners received anything?
a. ₱03,750.00 c. ₱41,666.75
b. ₱12,500.00 d. ₱75,000.00

Part 2: Theoretical

1. It refers to the process of realizing the partnership’s non-cash assets and distributing the total cash to
the partnership’s creditors and the excess, if any, to the partners.
a. Formation c. Dissolution
b. Operation d. Liquidation

2. Statement 1. Under lump-sum liquidation, no cash is distributed until the realization process is
completed while under installment liquidation, distributions are made as soon as cash becomes
available.
Statement 2. All of the non-cash assets are converted into cash under lump-sum liquidation while
under installment liquidation only some of the non-cash assets are converted.
Statement 3. The liabilities to creditors are both fully settled under two types of partnership
liquidation.

Which of the following statements is/are correct?

a. Only statements 1 and 3 are correct. c. Only statements 2 and 3 are correct.
b. Only statements 1 and 2 are correct. d. All of the statements are correct.

3. In the liquidation of general partnership, which of the following credits shall be paid first?
a. Those owing to third persons.
b. Those owing to partners other than capital and profits.
c. Those owing to partners for their capital contribution.
d. Those owing to partners for their share in profits.

4. Which of the following statements is true regarding the marshalling of assets?

a. The doctrine of marshalling of assets shall be applied if the partnership is solvent but one or
more of the partners are insolvent.
b. The excess of partner’s personal assets over personal liabilities can be used to settle partnership
debt.
c. Any capital deficiency of an insolvent partner is considered as a loss of the partnership.
d. Solvent partners are liable only up to the extent of his contributed net assets.

5. Statement 1. The maximum loss possible is the sum of unsold non-cash assets and expected future
liquidation costs and potential unrecorded liabilities.
Statement 2. Partner’s total interest in the partnership when capitalized by partner’s profit and loss
percentage is equal to maximum loss absorption capacity.

Which of the following statements is true?

a. Only statement 1 is true. c. Both statements are true.
b. Only statement 2 is true. d. Both statements are false.

“Life is a circle. The end of one journey is the beginning of the next.”
— Joseph M. Marshall III

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