PARTNERSHIP DISSOLUTION WITH LIQUIDATION

Dissolution with Liquidation

1. 1. A partnership is liquidated when its business operations are completely

terminated or ended.

1. 2. It may be caused by any of the following factors:

a. a. The purpose for which the partnership was organized has been
accomplished.
b. b. The term/period covered by the partnership contract has
terminated.
c. c. The firm became bankrupt.
d. d. The partners mutually agree to close the business.

a. 3. Partnership assets are sold.

a. 4. Partnership creditors are paid.

a. 5. Remaining assets are distributed to the partners as a return of their

investments.

a. 6. The purpose of accounting during this period is to have an equitable

distribution of partnership assets to creditors and partners.

Definition of Terms

a. 1. Dissolution the termination of the life of the partnership.

a. 2. Liquidation the process of winding up a business which normally

consists of conversion of assets into cash, payment of liabilities and distribution
of remaining among the partners.

a. 3. Realization the process of converting non-cash assets into cash.

a. 4. Receiver the person assigned to take care of liquidation.

a. 5. Gain on realization the excess of the selling price over the carrying
amount of the assets sold through realization.

a. 6. Loss on realization the excess of the carrying amount over the selling
price of the assets sold through realization.
 a. 7. Capital deficiency the excess of a partners share on losses over his
capital balance.

a. 8. Deficient partner a partner with a debit balance in his capital account.

a. 9. Right of offset the legal right to apply part or all of the amount owing to
a partner on a loan balance against a deficiency in his capital account resulting
from losses in the process of liquidation.

a. 10. Partners interest the sum of a partners capital, loan balance net of
advances to the partnership.

a. 11. Solvent partner personal assets of the partner exceed his personal
liabilities.

a. 12. Insolvent partner personal assets of the partner are less than his
personal liabilities.

a. 13. Statement of Liquidation an accounting statement summarizing the

winding up of the business affairs of the partnership.

Types of Liquidation

a. 1. Lump-sum liquidation This is a process 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
made.

a. 2. Installment method This is a process whereby assets are realized on a

piecemeal basis and cash is distributed to partners on a periodic basis as it
becomes available even before converting all assets into cash.

Procedures in Lump Sum Liquidation

a. 1. Finish the accounting cycle.

a. a. Adjust the books.
b. b. Determine the net income and close the net income to partners
capital accounts.
c. c. Close all nominal accounts.

a. 2. Sell non-cash assets and distribute gain or loss on realization among

partners using profit and loss ratio.
 b. a. Any difference between the selling price and carrying amount of
the sold assets shall be recorded in an account called Gain or Loss on
Realization.
c. b. The Gain or Loss on Realization account shall be closed to the
partners capital accounts using profit and loss ratio.
d. c. Gain on realization increases the capital balance of a partner while
a loss on realization decreases the capital balance of a partner.

a. 3. If partners capital balance results in a debit balance (deficient balance),

the following may happen:
b. a. If a partner has a loan balance exercise the right of offset (apply
the loan balance against the debit balance).

a. b. If there is no loan or if capital balance still results in a debit

balance:

If partner is solvent deficient partner pays.

If partner is insolvent deficient partner is unable to pay;

the remaining partners will absorb the deficiency. The absorption
of deficiency will be based on residual profit and loss.

a. 4. Cash is to be distributed in the following order of priority:

a. a. Those owing to partnership creditors.

b. b. Those owing to partners with respect to loans.
c. c. Those owing to partners with respect to capital.

Note that the final distribution of cash to partners is made based on the
partners capital balances and not on any ratio.

a. 5. When cash is not sufficient to pay creditors, the solvent general partners
shall contribute the difference using their loss ratio.

Pro-forma Entries

Realization of Cash xxx

asset at a gain Allowance for bad xxx
debts
Accumulated xxx
depreciation
 Gain or loss on xxx
realization
Asset xxx

Realization of Cash xxx

asset at a loss Allowance for bad xxx
debts
Accumulated xxx
depreciation
Gain or loss on xxx
realization
Asset xxx

Close gain or loss Gain or loss on xxx

realization
on realization A, Capital xxx
B, Capital xxx
OR xxx
A, Capital xxx
B, Capital xxx
Gain or loss on xxx
realization

Note: Gain or loss

on realization is
closed to partners
capital accounts
using profit and
loss ratio.

Payment of Liabilities xxx

partnership debts Cash xxx

Payment of Liability Partner xxx

partners loan Cash xxx
Return of A, Capital xxx
partners capital B, Capital xxx
Cash xxx
Note: Return of
capital is based on
partners final
capital balances.

Right of offset Liability Partner xxx

A, Capital xxx

Payment of Cash xxx

deficient partner A, Capital xxx

Absorption of B, Capital xxx

deficiency C, Capital xxx
A, Capital xxx

Pro-forma Statement of Liquidation (Lump-Sum Method)

Name of Partnership
Statement of Liquidation
Date Covered by the Liquidation
Cash Non-cash Liabilities Loans A, Capital B, Capital C, Capital
assets Payable,
Partner A
Balances
before
realization
Realization
of non-cash
assets and
distribution
of gain or
loss on
realization
Balances
Payment of
liabilities
Balances

Payment of
partners
loan
Balances

Return of
partners
capital

Special Notes

a. 1. Make sure that the balances before liquidation show equality of debits
and credits. This will always be true after each liquidation transaction.

a. 2. Maintain two columns for the debits one for cash and one for non-cash
assets.

a. 3. Maintain separate columns for liabilities to outside creditors and liabilities

to partners.

a. 4. Gain on realization increases capital while loss on realization decreases

capital.

a. 5. Figures in parentheses represent reduction in the account.

a. 6. Double rule all columns when all columns are brought to zero balance.

SAMPLE PROBLEM:

Assume that partners Andy, Bel and Candy decided to liquidate the partnership on
May 1, 2011. The statement of financial position is provided below:

The partners divide profit or loss in the ratio of 3:5:2 respectively.

ASSETS LIABILITIES &

PARTNERS
EQUITY
Cash P 40,000 Accounts P 125,000
 Payable
Other Assets 460,000 Andy, Capital 100,000
Bel ,Capital 125,000
Candy, Capital 150,000
Total Assets P 500,000 Total Equities P 500,000

Required:
A. A. Other assets were sold for P510,000.
B. B. Other assets were sold for P400,000.
C. C. Other assets were sold for P100,000. Deficient partner is
solvent
D. D. Other assets were sold for P100,000. Deficient partner is
insolvent

A. Other assets were sold for P510,000

ABC Partnership
Statement of Liquidation
May 1, 2011

CAPITA
L
Cash Other Liabilit Andy BeL Candy
Assets ies (30%) 50% 20%
Balance 40,000 460,00 125,00 100,00 125,00 150,00
s before 0 0 0 0 0
realizati
on
Sale of 510,00 - 15,000 25,000 10,000
non- 0 460,00
cash 0
assets
and
distributi
on of
gain
Balance 550,00 0 125,00 115,00 150,00 160,00
 s 0 0 0 0 0
Payment - -
of 125,00 125,00
liabilities 0 0
Balance 425,00 0 0 115,00 150,00 160,00
s 0 0 0 0
Payment - - - -
to 425,00 115,00 150,00 160,00
partners 0 0 0 0

NOTE:
Asset realization P510,000
Less,Cost of Asset 460,000
Gain on Realization P 50,000
========
The P50,000 gain was distributed to partners according to their profit and
loss of 30:50:20

JOURNAL ENTRIES
May 1 Cash 510,000
Other Assets 460,000
Gain or Loss 50,000
on Realization
Sale of non-cash
assets

1 Gain or Loss on 50,000

Realization
Andy, capital 15,000
Bel, capital 25,000
Candy, 10,000
capital
Distribution of
gain to partners
 1 Accounts 125,000
payable
Cash 125,000
Payment of
liabilities

1 Andy, capital 115,00

Bel, capital 150,000
Candy, capital 160,000
Cash 425,000
Final cash
settlement to
partners

B. Other assets were sold for P400,000

ABC Partnership
Statement of Liquidation
May 1, 2011
CAPITAL

Cash Other Liabilities Andy (30%) BeL 50% Candy 20%

Assets
Balances 40,000 460,000 125,000 100,000 125,000 150,000
before
realization
Sales of non- 400,000 (460,000) (18,000) (30,000) (12,000)
cash assets
and dist. Of
gain
Balances 440,000 0 125,000 82,000 95,000 138,000
Payment of (125,000) (125,000)
liabilities
Balances 315,000 0 0 82,000 95,000 138,000
Payment to (315,000) (82,000) (95,000) (138,000)
partners

================================================
NOTE:
Asset realization P400,000
Less,Cost of Asset 460,000
Loss on Realization P 60,000
========
The P60,000 loss was distributed to partners according to their profit and
loss of 30:50:20

JOURNAL ENTRIES
May 1 Cash 400,000
Gain or Loss on 60,000
Realization
Other Assets 460,000
Sale of non-cash
assets

1
Andy, capital 18,000
Bel, capital 30,000
Candy, capital 12,000
Gain or Loss 60,000
on Realization
Distribution of loss
to partners

1 Accounts payable 125,000

Cash 125,000
Payment of
liabilities

1 Andy, capital 82,000

Bel, capital 95,000
Candy, capital 138,000
Cash 425,000
Final cash
settlement to
partners
 C. C. Other assets were sold for P100,000. Deficient partners are solvent.

ABC Partnership
Statement of Liquidation
May 1, 2011

CAPITAL
Cash Other Liabilities Andy BeL 50% Candy
Assets (30%) 20%
Balances 40,000 460,000 125,000 100,000 125,000 150,000
before
realization
Sales of 100,000 (460,000)
non-cash (108,000) (180,000) (72,000)
assets and
distribution
of loss
Balances 140,000 0 125,000 78,000
(8,000) (55,000)
Payment of
liabilities (125,000) (125,000)
Balances 15,000 0 0 78,000
(8,000) (55,000)
Additional 63,000 8,000 55,000
investment
Balances 78,000 0 0 0 0 78,000
Payment to
Candy (78,000) (78,000)

NOTE 1:
Asset realization P100,000
Less,Cost of Asset 460,000
Loss on Realization P 360,000
 ========
The P360,000 loss was distributed to partners according to their profit and
loss of 30:50:20

Note 2 After sharing the loss on realization, Andy and Bel incurred capital
deficiencies of P8,000 and P55,000 respectively. Since the partners are
solvent (have capacity to pay their deficiencies), the partners made
additional cash investments of P8,000 and P55,000.

JOURNAL ENTRIES
May 1 Cash 100,000
Gain or Loss on 360,000
Realization
Other Assets 460,000
Sale of non-cash
assets

1 Andy, capital 108,000

Bel, capital 180,000
Candy, capital 72,000
Gain or Loss 360,000
on Realization
Distribution of loss
to partners

1 Accounts payable 125,000

Cash 125,000
Payment of
liabilities

1 Cash 63,000
Andy, capital 8,000
Bel, capital 55,000
Additional
investment by
deficient partners

1 Candy, capital 78,000

 Cash 78,000
Final cash
settlement to
partner

C. D. Other assets were sold for P100,000. Deficient partner is insolvent

ABC Partnership
Statement of Liquidation
May 1, 2011

CAPITAL
Cash Other Liabilities Andy BeL 50% Candy
Assets (30%) 20%
Balances 40,000 460,000 125,000 100,000 125,000 150,000
before
realization
Sales of 100,000
non-cash (460,000) (108,000) (180,000) (72,000)
assets and
distribution
of gain
Balances 140,000 0 125,000 78,000
(8,000) (55,000)
Payment of
liabilities (125,000) (125,000)
Balances 15,000 0 0 78,000
 (8,000) (55,000)
Absorption -63,000
of loss 8,000 55,000
Balances 15,000 15,000
Paymnet to
Candy (15,000) (15,000)

NOTE 1:
Asset realization P100,000
Less,Cost of Asset 460,000
Loss on Realization P 360,000
========
The P360,000 loss was distributed to partners according to their profit and
loss of 30:50:20

Note 2 After sharing the loss on realization, Andy and Bel incurred capital
deficiencies of P8,000 and P55,000 respectively. Since the partners are
insolvent (no capacity to pay their capital deficiencies) , Candy absorbed the
deficiencies of Andy and Bel.

JOURNAL ENTRIES
May 1 Cash 100,000
Gain or Loss on 360,000
Realization
Other Assets 460,000
Sale of non-cash
assets

1 Andy, capital 108,000

Bel, capital 180,000
Candy, capital 72,000
Gain or Loss 360,000
on Realization
 Distribution of loss
to partners

1 Accounts payable 125,000

Cash 125,000
Payment of
liabilities

1 Candy, capital 63,000

Andy, capital 8,000
Bel, capital 55,000
Solvent partner
absorbs the def. of
insolvent partners

1 Candy, capital 15,000

Cash 15,000
Final cash
settlement to
partner

Classroom Exercises Lump Sum Liquidation

 DLS Partnership has the following statement of financial position:

DLS PARTNERSHIP
Statement of Financial Position
December 31, 2014
Assets
Cash P40,000
Furniture and fixtures P250,000
Less: Acc. depreciation 50,000 200,000
Total Assets P240,000
Liabilities
Accounts Payable P70,000
Loans Payable Diane 20,000
Loans Payable Lily 10,000 P100,000
Partners Equity
Diane, Capital P40,000
Lily, Capital 50,000
Sue, Capital 50,000 140,000
Total Equities P240,000

P&L ratio is 5:3:2.

Prepare a statement of liquidation and journal entries under the following independent
cases:
a. 1. Case 1 Furniture and fixtures is sold for P140,000.
b. 2. Case 2 Furniture and fixtures is sold for P110,000.
c. 3. Case 3 Furniture and fixtures is sold for P70,000.

October 2014