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Lecture Notes on Liquidation

Lecture Notes on Liquidation



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Published by bum_24
accounting lectures. enjoy! :)
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Published by: bum_24 on Nov 22, 2008
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Prior to liquidation:
1.Determine the net income or loss and distribute the same to partners according to their profit and loss ratio. Close Partners’ Drawing account to Partners’ capital2.Revalue the assets of the partnership and distribute the increase/decrease to partners’ capital account..
– refers to the winding up of the affairs of the partnership. This leads to sale of all non-cash into cash and payment to creditors and to partners.
Types of Liquidation
1.Lump-sum liquidation – all assets are converted into cash, then payments are made first to creditors, then to partners.2.Installment Liquidation – assets are sold on a piece-meal fashion and available cash are distributed first to creditors then to partners .
1.Realization – conversion of non-cash assets into cash.2.Gain on realization - selling price of the assets exceeds its carrying value.3.Loss on Realization – selling price of the assets is less than its carrying value.4.Capital deficiency - debit balance in partners’ capital due to excessive share in loss on realization.5.Deficient partner – a partner with capital deficiency.6.Right of offset – part or full amount of the solvent or insolvent partner’s loan is being applied to his capital deficiency.7.Absorption of loss – the solvent partner absorbs the deficiency of the insolvent partner/s.
Steps applied in lump-sum liquidation:
1.Sale of non-cash assets and distribution of gain or loss to partners according to their existing profit and loss ratio.2.Payment of existing obligations to creditors.3.In case of capital deficiency:a. Solvent partner -apply right of offset-additional investment. b. Insolvent partner:-apply right of offset
-absorption of loss.4.Payment to partners:a.loan b.capital
Assume that partners Andy, Bel and Candy decided to liquidate the partnership on May 1, 2005. A balance sheet was prepared as follows:ASSETSLIABILITIES & PARTNERS EQUITYCashP 40,000Accounts PayableP 125,000Other Assets460,000Andy, Capital100,000Bel ,Capital125,000Candy, Capital150,000Total AssetsP 500,000Total EquitiesP 500,000The partners divide profit or loss in the ratio of 3:5:2 respectively.
A.Other assets were sold for P510,000.B.Other assets were sold for P400,000.C.Other assets were sold for P100,000. Deficient partner is solventD.Other assets were sold for P100,000. Deficient partner is insolvent
A. Other assets were sold for P520,000
ABC PartnershipStatement of LiquidationMay 1, 2005CAPITAL
CashOtheAssetsLiabilitiesAndy(30%)BeL 50%Candy20%
Balances before realization40,000460,000125,000100,000125,000150,000
Sales of non-cash assets and dist. Of gain510,000(460,000)15,00025,00010,000Balances550,0000125,000115,000150,000160,000Payment of liabilities(125,000)(125,000)Balances425,00000115,000150,000160,000Payment to partners(425,000)(115,000)(150,000)(160,000)
=================================================JOURNAL ENTRIES
May 1Cash510,000Other Assets460,000Gain or Loss on Realization50,000Sale of non-cash assets1Gain or Loss on Realization50,000Andy, capital15,000Bel, capital25,000Candy, capital10,000Distribution of gain to partners1Accounts payable125,000Cash125,000Payment of liabilities1Andy, capital115,00Bel, capital150,000Candy, capital160,000Cash425,000Final cash settlement to partners

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