PARTNERSHIP LIQUIDATION
3 Steps in Winding Up
Legal Provisions on Liquidation:
 Hierarchy of payment of
partnership liabilities:
1. Creditors other than partners
2. Payable to Partners
3. Partners’ Capital Balances
4. Partners’ Share in Profits
 Partnership creditors have priority
over partnership properties
 When a partner becomes insolvent,
hierarchy for claims:
a) Personal Creditors
b) Partnership Creditors
c) Other Partners
Limited Partner
 Only liable up to the extent of his
capital contribution in the
partnership
 If there’s a loan, it has a priority in
payment of it like outside
liabilities
 If capital is deficient—no
additional investment nor right of
offset
 Deficiency will be absorbed by
other partners
Advance Program of Cash Distribution
 It will show how the cash will be
distributed to the partners as it
becomes available
Accounting Principles
2 Types of Liquidation
1) Simple Liquidation/Lump Sum
Liquidation
 Realization is done over a
short period of time
 Cash distribution is made
immediately
2) Liquidation by Installment
 Liquidation is carried over
extended period of time
 Realization and cash
distribution are made on
installment basis
Steps in Preparing Liquidation by Installment
1) Record the sale—distribute gain/loss
2) Charge liquidation expenses, if any
3) Payment of liabilities—remaining
liabilities, cash should be set aside
4) Cash available but insufficient—schedule
of safe payment
5) Repeat the steps until final sale
Rules in Safe Payment
 Start with partners’ interest before
cash distribution
 Compute restricted interest
 Balance represents free interest
 Free interest must be equal to cash
available for distribution
Steps in Preparing Simple Liquidation 1) Convert assets to cash
1) Adjust books—close nominal accounts 2) Discharge Liabilities
3) Distribute to partners
and balance sheet should be prepared
2) Assets sold—Gain/Loss closed to
Partners’ capital accounts
3) Deficiency capital, if any, elimination
suggested order:
 Absorption of deficiency by the other
partner/s
 Right of offset
 Additional Investment
4) Payment of Liabilities
5) Distribution of remaining cash to
partners
Terms 3 Factors to Consider
 Restricted Interest 1) Total partners’ interest
 Used to absorb future 2) Profit & loss ratio
losses can’t be recovered 3) Loss absorption balance
immediately  Maximum amount of
 Free interest partnership loss that
 Can be recovered could be absorbed
immediately based on interest
 Partners’ interest  Highest loss absorption
 Sum of the partners’ loan should be given priority
and capital in cash distribution.
 PARTNERSHIP DISSOLUTION: CHANGE IN PARTNERS’ EQUITY
Legal Provisions on Dissolution:
Article 1828 of the New Civil Code
2 Kinds of Dissolution
1. With
Liquidation
Conditions affecting Dissolution
 By the acts of the partner
 By operation of Law
 By Judicial Decree
Requirement:
 Unanimous consent of all the
existing partners before a new
partner may be admitted.
Implied Goodwill or Bonus
 Advisable to use bonus method
 TAC=TAPE & ACN=CCN
 No goodwill/bonus
 TAC<APE & ACN=TCCN
 Goodwill for new partner
 TAC>(<)TAPE & ACN=CCN
 Goodwill/Asset
Reval./Impairment
 TAC=TAPE & ACN<CCN
 Bonus for the new
partner
 TAC=APE & ACN>CCN
 Bonus for the current
partner
 Admission of a New Partner
Accounting for Dissolution
1. Revalue the properties of the
partnership
2. Correct prior period errors
3. Update the partners’ capital
accounts
4. If not provided in the Articles,
determine from the partners
Revised Profit and Loss Ratio
 No agreement THEN it is assumed that a
purchase of profit at the percent of
transfer
 Interest is accompanied by a purchase in
the profit share
 With Agreement
 Withdrawal of a partner
Evaluation of Goodwill and Bonus Method
 Death or Incapacity of a Partner
a) Adheres to the cost principle in
valuing assets
b) PAS 38 recognizes goodwill only
as a result of an acquisition made
by a reporting entity
c) Goodwill is to be amortized; and
there’s a revision in the P&L ratio
as a result of dissolution THEN
partner having a higher profit
and loss ratio will absorb a higher
 Incorporation of a Partnership
amount of impairment loss from
goodwill
Cause of Dissolution
 By purchase:
 New Partner will buy the interest from anyone
or all of the partners
 Current partners may buy or sell interest with
one another
 Assets of the partnership not affected -Personal
Transaction
 Total assets & total equity before = after
 Goodwill, Bonus & Asset Revaluation
 Expressed
 By investment:
 Transaction between new partner and
partnership
 Contribution is received by the partnership
 Total investments not the same as total agreed
equity, may be adjusted by:
 Revaluation of properties
 Recognition of goodwill
 Recognition of bonus
 If retirement during the year, only profit share of
the retired partner
 Purchase by the remaining partners
 Purchase by outsider
 If no takers, the interest may be paid out of the
partnership funds
 If the equity of the deceased not immediately
paid THEN “Payable to Partner’s Estate”
 Possible the deceased partner’s equity may
transfer to a heir subject to some specific in
Articles of Co-Partnership
 Business requires more funds
 PARTNERSHIP: OPERATION AND DIVISION OF PROFIT AND LOSS

Legal Provisions on Division of Methods of Dividing Profit/Loss Principles of Recognition and Measurement
Profit/Loss
 Arbitrary Ratio Adjusting Entries Change in Profit and Loss Agreement
1. Articles of Co-Partnership
 Capital Ratio
(Partners’ Agreement) Closing Entries
1. Initial/Capital  Prior period errors or Asset
2. If agreement is only on profit—
2. Beginning Recording of Profit Sales Revaluation = Original Ratios
same applies to loss
3. Ending  Distribution of Profit = New Ratios
3. Absence of agreement—
4. Average (Fair&Equitable) Partners’ Equity
Partners’ contribution
 Interest on Investments
4. Industrial partner ONLY shares
 Salaries Capital of Partners Statement of Changes in Partners’ Equity
in profit UNLESS there is
specific agreement regarding  Combination of: Interest,
losses Salary, Balance Fixed Fluctuating Balance Sheet Share in Assets
 Bonus
Financial Statements
NIRC Factors for a Fair & Equitable Advantages:
Income Statement
Distribution Method
-30% Tax  Limited Liability
Profit Loss
-General Professional -Render Equal Time  More Capital
-Skills or Entrepreneurial ability -Salaries Bonus-NI after
Partnerships are exempted
-Bonus salaries and bonus
-Net Profit AFTER TAX—profit
-Interest Notes:
distribution
B= B(NI-S-B)
-Net income, if silent, AFTER  TAC=Total Actual
 Given regardless of result of Bonus Agreement Contributions
operation When Business is
 NI before bonus  TAPE=Total Agreed
Taxable
 If total salaries withdrawn is Partners’ Equity
General Rule:  NI after bonus
less than total salaries agreed B= B(NIAT-S-B)  ACN=Actual
-INTEREST and SALARY are part  Not applicable
then credit DRAWING contribution
of distribution and not deductible if loss
ACCOUNT Bonus-NI-Salaries,  TCCN=Total capital
expenses  Treated as
 If salaries withdrawn regularly credit of new partner
distribution of Bonus, Tax
= Temporary account instead of  Asset Revaluation only
profit
Drawing Account B= B(NI-S-B-T) affects current
T= 30%(NI-S-B) partners