Installment Liquidation Lecture Notes

INSTALLMENT LIQUIDATION
Initial Disposal of Non-cash Assets
1. Sale of non-cash assets and distribution of gain or loss on realization according to their profit and loss ratio.
2. Payments of liquidation expenses and unrecorded liabilities if any.
3. Payment of partnership liabilities
4. Payment to partners
Succeeding Sale of Non-Cash Assets
1. Sale of non-cash assets and distribution of gain or loss on realization according. to their profit and loss ratio.
3. Payment of partnership liabilities (unpaid balance)
4. Payment to partners
Final Sale of Non-cash Assets
1. Sale of non-cash assets and distribution of gain or loss on realization according to their profit and loss ratio.
3. In case of capital deficiency:
a. Solvent partner/s
1) Apply right of offset
2) Additional investment
b. Insolvent partner/s
1) Apply right of offset
2) Absorption of loss by solvent partners
4. Final CASH settlement to partners

COMPUTATION OF SAFE PAYMENTS
1.
Compute the Total Partners Interest (Capital + Loan Balance)
2.
Distribution of possible loss to partners:
3.
a.
Total amount of unsold non-cash assets;
b.
Cash withheld to pay for liquidation expenses and any possible unrecorded liabilities;
Additional loss to partners to eliminate any capital deficiency.
Sample Problem
The following is the balance sheet of John and Paul on June 1, 2006:
Assets
Cash
Other Assets
P 50,000
P 550,000
Total
P 600,000
Liabilities and Partners Capital

Liabilities
P 150,000
John, Loan
50,000
John, Capital
225,000
Paul, Capital
175,000
P 600,000
The partners share net income and net losses as follows: John, 60%; Paul, 40%. In June, other, assets with a
carrying amount of P 220,000 realized P 180,000, creditors were paid in full, and available cash was
distributed to partners. In July, other assets with a carrying amount P 100,000 realized P 120,000, and
liquidation cost of
P5,000 were paid. In August , the remaining other assets realized P 200,000, and final
settlement was made between the partners.
Prepare the necessary journal entries and Statement of Liquidation as of June 1, 2006.
Answer
JP PARTNERSHIP
Statement of Liquidation
June 1, 2006
Cash
Balances before realization P50,000
Other
Assets
Liabilitie John
s
Loan
John
Paul,
Capital(60
Capital
%)
(40%)
P550,000 P150,00 P50,00 P225,000 P175,000

0
0
June Installment
Realization of assets and
distribution of loss
180,000
(220000)
(24,000)
(16,000)
Balances
P230,000 P330,000 P150,00 P50,00 P201,000 P159,000

0
0
Payment of Liabilities
(150,000)
Balances
P80,000
(150,000
)
P330,000
P50,00 P201,000 P159,000

0
Payment to partnersSchedule 1
(80,000)
Balances
July Installment
(50,000 (3,000)
)
P330,000
120,000
(100,000)
(27,000)
P198,000 P132,000
12,000
8,000

distribution of gain
Balances
P120,000 P230,000 0
Payment of liquidation
expenses
(5,000)
Balances
P115,000 P230,000 0
Payment to partnersSchedule 2
(115,000)
Balances
P230,000 0
August Installment
200,000
(230,000)
P210,000 P140,000
(3,000)
P207,000 P138,000
(69,000)
(2,000)
(46,000)
P138,000 P92,000
(18,000)
(12,000)

distribution of loss
Balances
P200,000 0
Final cash settlement to

partners
(200,000)
P120,000 P80,000
(120,000) (80,000)
=====================================================
=======
Schedule 1
Computation of Safe Payment
John
Paul,
Capital(60
Capital (40%)
%)
Capital balances
Loan Balance
P201,000
P159,000
50,000
Total Partners Interest
P251,000
P159,000
Possible loss- P330,000
(198,000)
(132,000)
Balances
P53,000
P27,000
Loan
Capital
P50,000
3,000
P27,000
Schedule 2
Computation of Safe Payment
John
Paul,
Capital(60
Capital (40%)
%)
Capital balances
P207,000
P138,000
Possible loss- P230,000
(138,000)
(92,000)
Balances
P69,000
P46,000
Capital
P69,000
JOURNAL ENTRIES
Cash
180,000
Gain or Loss on Realization
40,000
Other assets
220,000
Realization of other assets

John Capital
24,000
Paul Capital
16,000
40,000
Distribution of loss to partners

Liabilities
150,000
Cash
150,000
Payment of Liabilities
John Loan
50,000
John Capital
3,000
Paul Capital
27,000
Cash
80,000
Payment to partners
Cash
120,000
Other assets
100,000
20,000

John Capital
20,000
12,000
P46,000
Paul Capital
8,000
Distribution of gain to partners

John Capital
3,000
Paul Capital
2,000
Cash
5,000
Payment of liquidation expenses

John Capital
69,000
Paul Capital
46,000
Cash
115,000
Payment to partners
Cash
200,000
30,000
Other assets
230,000

John Capital
18,000
Paul Capital
12,000
30,000
Distribution of loss to partners

John Capital
120,000
Paul Capital
80,000
Cash
Final Payment to partners
200,000

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INSTALLMENT LIQUIDATION

Initial Disposal of Non-cash Assets

4. Final CASH settlement to partners

Compute the Total Partners Interest (Capital + Loan Balance)

Distribution of possible loss to partners:

Total amount of unsold non-cash assets;

Additional loss to partners to eliminate any capital deficiency.

Liabilities and Partners Capital

Balances before realization P50,000

P550,000 P150,00 P50,00 P225,000 P175,000

P230,000 P330,000 P150,00 P50,00 P201,000 P159,000

P50,00 P201,000 P159,000

Realization of assets and

Realization of assets and

Final cash settlement to

Total Partners Interest

Possible loss- P330,000

Possible loss- P230,000

Gain or Loss on Realization

Realization of other assets

Gain or Loss on Realization

Distribution of loss to partners

Gain or Loss on Realization

Realization of other assets

Distribution of gain to partners

Payment of liquidation expenses

Gain or Loss on Realization

Realization of other assets

Gain or Loss on Realization

Distribution of loss to partners

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