PARTNERSHIP LIQUIDATION

A liquidation is the winding up of the partnership business. That is, it sells all of its noncash assets called
realization, pays its liabilities, and makes a final liquidating distribution to the remaining partners.
There are four basic steps to a partnership’s liquidation.
1. Any operating income or loss up to the date of the liquidation should be computed and allocated to the
partner’s capital accounts on the basis of their P&L ratio.
2. All noncash assets are sold and converted to cash. The gain (loss) realized on the sale of such assets is
allocated to the partners’ capital account on the basis of their P&L ratio.
3. Any creditors’ claims, including liquidation expenses or anticipated future claims, are satisfied through
the payment or reserve of cash.
4. The remaining unreserved cash is distributed to the remaining partners in accordance with the balance
in their capital accounts. Note that this is not necessarily the P&L ratio.

Two factors that may complicate the liquidation process are the existence of loans or advances between the
partnership and one or more of the partners, or the creation of a deficit in a partner’s capital account because of
the allocation of a loss. When loans exist between the partnership and a partner, the capital account and the
loan(s) are combined to give a net amount. This is often referred to as the right of offset. When a deficit exists,
the amount of the deficit is allocated to the remaining solvent partners’ capital accounts on the basis of their
relative P&L ratio. Note here that if the partner with capital deficit is personally solvent, he has a liability to the
remaining partners for the amount of the deficit.
There are two topics that appear with regularity on the CPA examination in regard to the liquidation of a
partnership. They are the statement of partnership liquidation and the determination a “safe payment” in an
installment liquidation.

a. Statement of Partnership Liquidation

The statement of partnership liquidation shows in detail all of the transactions associated with the
liquidation of the partnership. It should be noted here that the liquidation of a partnership can take one of two
forms: simple (lump-sum) or installment. A simple liquidation (illustrated below) is one in which all of the assets
are sold in bulk and all of the creditors’ claims are satisfied before a single liquidating distribution is made to the
partners. Because the assets are sold in bulk there is a tendency to realize greater losses than if the assets are
sold over a period time. As a result, many partnership liquidate on an installment basis. In an installment
liquidation the assets are sold over a period of time and the cash is distributed to the partners as it becomes
available.
Example: Statement of Partnership Liquidation - Simple Liquidation
Assume the following:
The capital balances are as given below.
The P&L ratio is 5:3:2 for A, B, and C, respectively.
Statement of Partnership Liquidation
Cash Other Assets Liabilities A B C
Balances P 50,000 P750,000 P450,000 P120,000 P170,000 P60,000
Sale of assets 400,000 ( 600,000) (100,000) ( 60,000) (40,000)
450,000 150,000 20,000 110,000 20,000
Payment of
liabilities (450,000) (450,000)
0 0
Sale of assets 100,000 ( 150,000) ( 25,000) ( 15,000) (10,000)
0 ( 5,000) 95,000 10,000
Distribution
of A’s deficit 5,000 ( 3,000) ( 2,000)
0 92,000 8,000
Final
distribution
of cash (100,000) ( 92,000) ( 8,000)

Notice that after the noncash assets have been sold and the creditors satisfied, a P5,000 deficit remains in
A’s capital account. The deficit is allocated to the remaining solvent partners on the basis of their relative P&L
ratios, in this case, 3:2. A is liable to the partnership for the P5,000. If A is personally solvent and repays the
P5,000, then P3,000 will go to B and P2,000 will go to C.
 If in the above example there had been liquidation expense or loans between the partnership and partners
these would have to be recognized in the statement prior to any distribution to partners.

b. Installment Method of Cash Distribution

There are two keys to preparing a statement of partnership liquidation under the installment method: the
determination of the available cash balance at any given point in time and the determination of which partner(s)
is(are) to receive the payment of that cash. The reason that the cash is not distributed in accordance with the
P&L ratio is twofold: first the final cash distribution is based upon the balance in each partner’s capital account,
not the P&L ratio, and second, there will be situations, as illustrated in the previous example, where one or more
partners will have deficit balances in their capital accounts. If this is the case, they should never receive a cash
distribution, even if the deficit does not arise until late in the liquidation process.
The determination of the available cash balance is generally very straightforward. The beginning cash
balance (cash on hand at the start of the liquidation process) is adjusted for the cash receipts from receivables,
sale of noncash assets, payment to creditors, and liquidation expenses incurred. A situation may occur where a
certain amount of cash is to be reserved for payment of future liabilities that may arise. If this is the case, this
cash should be treated as noncash asset which makes it unavailable for current distribution to the partners.
The determination of which partner(s) is(are) to receive the available cash is somewhat more difficult. There
are a number of ways to make this computation, all of which are equally correct in the eyes of the examiners.
This determination can be made at the beginning of the liquidation process or at the time of each payment. In
making this determination there are two key assumptions that must be made: (1) the individual partners are
assumed to be personally insolvent, and (2) the remaining noncash assets are deemed to be worthless (thus
creating a maximum possible amount of loss).
One method of determining the amount of the “safe payment” is the use of an Installment Cash Distribution
Schedule. This schedule is prepared by determining the amount of loss required to eliminate each partner’s
capital account. As noted above, all of the remaining noncash assets are to be considered worthless at the time
a safe payment is determined. Thus if we determine the amount of loss required to eliminate each partner’s
capital balance, we can determine the order in which the partners should receive the cash payments.
When preparing this schedule it is important to make sure that the proper capital balance is used. The
capital balance used must be inclusive of any loans or advances between the partnership and partners. Thus,
the capital balance at the beginning of the liquidation process is increased by any amount owed to the partner
by the partnership, and decreased by any amount owed to the partnership by the partner.

Example: Schedule of Possible Losses and Installment Cash Distribution

Assume the same data as used for the previous example.
A, capital B, capital C, capital Total
Capital balances P120,000 P170,000 P60,000 P350,000
Loss to eliminate A (120,000) ( 72,000) (48,000) 240,000
0 98,000 12,000
Additional loss
to eliminate C ( 18,000) (12,000) 30,000
80,000 0
Additional loss
to eliminate B ( 80,000) 80,000
0 P350,000

The total capital balance of P350,000 indicates that if the noncash assets are sold for P350,000 less than
their book value, then none of the partners will receive a cash distribution. The purpose of this schedule is to
determine how much of a loss each partner’s capital account can withstand based on that partner’s P&L ratio. In
this example A’s capital would be eliminated if the partnership incurred a P240,000 (P120,000/50%) loss, B’s
would be eliminated by a P566,667 (P170,000/30%) loss, and C’s by a P300,000 (P60,000/20%) loss. A is
assumed to be eliminated first because it would take the smallest amount of loss to eliminate his account Once A
is eliminated as a partner, the P&L ratios change to reflect the relative P&L ratio of the remaining partners, in
this case B and C. Based on the remaining capital balances and the relative P&L ratio, it would take a P163,333
(P98,000/60%) loss to eliminate B and a P30,000 (P12,000/40%) loss to eliminate C. Now that C is eliminated, B
will share all of the profits and losses as a sole partner (i.e., 100%). It will now take an P80,000 loss to eliminate
B’s capital. The resulting installment cash distribution schedule would appear as follows (this schedule assumes
that all creditors have already received full payment; thus, the cash amount represents available cash):
Installment Cash Distribution Schedule
Partner A B C
First P 80,000 100%
Next 30,000 60% 40%
Next 240,000 50% 30% 20%
Any other 50% 30% 20%
While the example shown in the previous page was not an installment liquidation, the Installment Cash
Distribution Schedule shown above could still be used to determine how the available cash of P100,000 is to be
distributed. This is illustrated below.
Partner A B C
First P 80,000 P 80,000
Next 20,000 12,000 P8,000
P 100,000 P92,000 P8,000

The above amounts can also be determined by simply computing the loss absorption capacity of each
partner. The loss absorption capacity pertain to the amount of loss a partner’s capital can absorbed. As already
explained above, A’s capital can only absorb P240,000 loss (P120,000/50%), whereas, B’s capital can absorb
P566,667 loss (P170,000/30%) and C’s capital can absorb up to P300,000 loss (P60,000/20%). In this case, B’s
capital has the highest loss absorption capacity in which the amount of cash to be paid to B before other
partners can share should be P80,000 (P566,667 - P300,000) x 30%, known as priority 1 or allocation 1. After
giving P80,000 to B his capital balance will have a loss absorption capacity equal that of C P300,000, (P170,000 -
P80,000 = P90,000/30%). The next available cash to be distributed known as priority 2 or allocation 2 can be
determined by simply getting the difference between the loss absorption capacity of B or C and that of A
multiply by B and C’s P&L ratio. In this case, B’s share under priority 2 is P18,000 (P300,000 - P240,000) x 30%
and C’s share is P12,000 (P300,000 - P240,000) x 20%. After giving P18,000 to B and P12,000 to C, their capital
balances will be P72,000 for B (P90,000 - P18,000) and P48,000 for C (P60,000 - P12,000). The partners capital
balances after priority 2 will have the same amount of loss absorption capacity in which case any additional cash
distributed can be made based on the partners’ P&L ratio, in this case, 50%;30%;20%.

ADDITIONAL ILLUSTRATIONS:
1. Partners A, B, and C decided to liquidate their partnership. A balance sheet was prepared on this date as follows:
ABC Partnership
Balance Sheet
As of March 1, 2018
Cash P 20,000 Accounts Payable P 25,000
Other Assets 180,000 Loan Payable, B 5,000
A, Capital 50,000
B, Capital 45,000
_______ C, Capital 75,000
P200,000 P200,000

Profits and losses are divided in the ratio of 2:3:1, respectively. The non- cash assets were sold for P68,000. All the
partners are solvent, except for B.

ABC Partnership
Statement of Partnership Liquidation
March 1, 2018
CAPITAL BALANCES
Other Loan
Cash Assets Liabilities Due to B A (2/6) B (3/6) C (1/6)
Balances before
liquidation P20,000 P180,000 P 25,000 P5,000 P50,000 P45,000 P75,000
Sale of assets at a
loss 68,000 (180,000) (37,333) (56,000) (18,667)
Balances after
sale 88,000 -- 25,000 5,000 12,667 (11,000) 56,333
Payment of
liabilities (25,000) (25,000)
Balances after
payment 63,000 -- -- 5,000 12,667 (11,000) 56,333
 Right of offset (5,000) 5,000
Balances after
right of offset 63,000 -- -- -- 12,667 (6,000) 56,333
Deficiency balance
of B absorbed
by A & C (4,000) 6,000 (2,000)
Balances P63,000 -- -- -- P8,667 -- P54,333
Payments to
partners (63,000) (8,667) (54,333)

Since B’s share in the loss on realization is greater than his capital balance, a capital deficiency results. The loan
payable to B is not sufficient to absorb the deficiency, and since he is insolvent, the other partners absorb the
deficiency balance as a loss. This will decrease the payment to be received by partners A and C.
2. On December 31, 2018, the balance sheet of XX, YY, and ZZ is as follows:
XYZ Partnership
Balance Sheet
December 31, 2018
Cash P 15,000 Liabilities P 50,000
Non- cash Assets 265,000 Loan Payable, YY 20,000
Loan Payable, ZZ 10,000
XX, Capital 48,000
YY, Capital 72,000
________ ZZ, Capital 80,000
P280,000 P280,000
Profits and losses were shared as follows: XX, 30%; YY, 30%; and ZZ, 40%. It was decided to
liquidate the business. The following is a summary of the realization and liquidation:
Book Value
Of Asset Cash Expenses Liabilities
__Month_ _Realized_ Collected _Paid__ Paid__
January P 50,000 P 20,000 P 1,000 P 24,000
February 80,000 60,000 3,000 ---
March 75,000 50,000 4,000 26,000
April 60,000 30,000 2,000 ---

Required: Prepare a Statement of Partnership Liquidation. When necessary, this statement should be
supplemented by supporting schedules. In the general ledger, the loan accounts are not to
be closed into the capital account.
CASH PRIORITY PROGRAM
BALANCES PAYMENTS

XX YY ZZ XX YY ZZ TOTAL
Total Interests 48,000 92,000 90,000
Divide by: P/L ratio 30% 30% 40%

Loss Absorption Bal. 160,000 306,667 225,000

st
1 Priority – YY (81,667) -- P24,500 -- P24,500

Balances P160,000 P225,000 P225,000

nd
2 Priority – YY, ZZ (65,000) (65,000) -- 19,500 26,000 45,500

Balances P160,000 P160,000 P160,000 30% 30% 40%

XYZ PARTNERSHIP
Statement of Partnership Liquidation
January 1 to April 30, 2018
CASH NON-CASH LIAB. L/P- YY L/P- ZZ XX,CAP. YY,CAP. ZZ,CAP.
Balances P 15,000 P 265,000 P50,000 P20,000 P10,000 P48,000 P72,000 P80,000
JANUARY
Sale at a loss 19,000 (50,000) ______ _______ _______ ( 9,300) ( 9,300) (12,400)
Balances P34,000 P 215,000 P50,000 P 20,000 P10,000 P38,700 P62,700 P 67,600
Payment of
liabilities ( 24,000) ________ (24,000) _______ _______ _______ ______ _______
Balances P10,000 P 215,000 P26,000 P 20,000 P10,000 P38,700 P62,700 P 67,600
FEBRUARY
Sale at a loss 57,000 ( 80,000) _______ _______ _______ ( 6,900) ( 6,900) ( 9,200)
Balances P67,000 P 135,000 P26,000 P 20,000 P10,000 P31,800 P55,800 P 58,400
Distribution to
partners (41,000) _______ _______ (20,000) ( 9,429) _______ (11,571) _______
Balances P26,000 P 135,000 P26,000 --- P 571 P31,800 P44,229 P 58,400
MARCH
Sale at a loss 46,000 ( 75,000) _______ _______ _______ ( 8,700) ( 8,700) (11,600)
Balances P72,000 P 60,000 P26,000 --- P 571 P23,100 P35,529 P 46,800
Payment of
Liabilities (26,000) ________ (P26,000) --- _______ _______ _______ _______
Balances P 46,000 P 60,000 --- --- P 571 P23,100 P35,529 P46,800
Distribution to
Partners (46,000) ________ ________ _______ ( 571) ( 5,100) (17,529) (22,800)
Balances --- P60,000 --- --- --- P18,000 P8,000 P24,000
APRIL
Sale at a loss 28,000 ( 60,000) ________ _______ _______ ( 9,600) ( 9,600) (12,800)
Balances P 28,000 --- --- --- P 8,400 P 8,400 P11,200
Payments to
Partners ( 28,000) --- --- --- --- ( 8,400) ( 8,400) (11,200)

SCHEDULE OF CASH DISTRIBUTION

Total XX, Cap. YY, Loan YY, Cap. ZZ, Loan ZZ, Cap.
FEBRUARY
Payment to partners P41,000
1st priority (full) ( 24,500) P 20,000 P 4,500
2nd priority (partial) ( 16,500) 7,071 P 9,429
Cash distribution in February P 20,000 P 11,571 P 9,429
MARCH
Payment to partners P46,000
2nd priority (balance) (29,000) P 12,429 P 571 P 16,000
3rd priority (17,000) P 5,100 5,100 6,800
Cash distribution in March P 5,100 P 17,529 P 571 P 22,800

The supporting computation in the preceding example is the Cash Priority Program, which can be prepared before
the start of the liquidation process. It is then, supported by the Schedule of Cash Distribution for a clearer
presentation of how the distribution to the partners were arrived at. Another supporting computation that may be
used is the Schedule of Safe Payments. This schedule is done on a monthly basis with the same purpose in mind.
And that is to determine the proper distribution of cash among the partners. Using the same example, we are now
going to prepare a Schedule of Safe Payments:

SCHEDULE OF SAFE PAYMENTS

FEBRUARY XX YY ZZ__
Total Interests* P31,800 P75,800 P68,400
Less: Possible Loss** ( 40,500) ( 40,500) ( 54,000)
Balances P( 8,700) P35,300 P14,400
Absorption of Deficit 8,700 ( 3,729) ( 4,971)
Payments P31,571 P 9,429
MARCH
Total Interests P23,100 P35,529 P47,371
Less: Possible Loss ( 18,000) ( 18,000) ( 24,000)
Payments P 5,100 P17,529 P23,371

* TOTAL INTERESTS = CAPITAL + PAYABLE TO PARTNER -- RECEIVABLE FROM PARTNER.

** POSSIBLE LOSS = NON-CASH ASSET BALANCE+CASH WITHHELD FOR FUTURE EXPENSES.
DISCUSSION PROBLEMS

Problem 1
Hans, Sam and Mia are partners who share profits and losses in the ratio of
35:25:40 to Hans, Sam and Mia respectively. The statement of Financial
Position of the partnership as of December 31, 2017 is given as follows:

Assets Liabilities and Equity

Cash P 120,000 Liabilities P1,050,000
Noncash Assets 1,650,000 Loan from Hans 41,400
Hans, Capital 257,700
Sam, Capital 90,000
Mia, Capital 330,900

On January 10, 2018, the partners decided to liquidate. In the first month
of liquidation, Non-cash assets with a book value of P1,000,000 was sold for
P975,000. The partnership also paid P20,000 liquidating expenses and
withheld P10,000 cash. P300,000 of the liabilities remain unpaid.
Determine how much will Hans receive in the first cash distribution.
A. 52,350 C. 12,100
B. 48,900 D. 2,900
Determine the ending capital of Mia after the first cash distribution.
A. 312,900 C. 264,000
B. 310,000 D. 260,000

Problem 2
The assets and equities of the TAI, NIH and KID, partnership at the end of
its fiscal year on October 31, 2017 are as follows:
Cash 45,000 Liabilities 150,000
Receivables 60,000 Loan from KID 30,000
Inventory 120,000 TAI, capital (30%) 135,000
Plant Assets 210,000 NIH, capital (50%) 90,000
Loan to NIH 15,000 KID, capital (20%) 45,000
TOTAL 450,000 TOTAL 450,000

From the above statement, assume that the partnership is to be liquidated

based on the following independent situations:

a. Assume that NIH is personally insolvent and the other partners are
solvent and the non-cash assets were all sold for P200,000.
Determine the amount of cash that TAI will receive.
A. 78,000 C. 57,000
B. 66,000 D. 45,000

b. Assume that in the first sale of non-cash assets, the partnership

incurred P40,000 in liquidating expenses, P300,000 of the non-cash assets
were sold for P200,000, P100,000 of the liabilities was paid by the
partnership, sufficient amount of cash was withheld for the remaining
unpaid liabilities. The partnership also estimates to incur additional
liquidating expenses of P15,000, P20,000 of the available cash was
therefore not distributed to the partners.
Determine the amount of cash that TAI will receive.
A. 60,000 C. 30,000
B. 51,000 D. 12,000
c. Assume that in the first installment sale, TAI receives 54,000 after
P250,000 of the non-cash assets were sold for P215,000. The partnership
also incurred liquidating expenses of P25,000.
Determine the amount of cash KID is to receive.
A. 54,0000 C. 18,000
B. 21,000 D. 0

Determine the amount of cash that was withheld for future liquidating
expenses.
A. 100,000 C. 10,000
B. 70,000 D. 0

Determine the capital balance of TAI immediately after the cash

distribution.
A. 117,000 C. 72,000
B. 99,000 D. 63,000

Problem 3
WAH, AHH and LAM are partners in a company that is being liquidated. They
share profits and losses in the ratio of 55:20:25, respectively. Their
capital balances right before liquidation is P108,000, P62,000 and P56,000,
respectively. The partnership just sold equipment with a historical cost and
accumulated depreciation of P25,000 and P18,000, respectively for P10,000.

What is the balance of WAH’s capital account after the transaction is

completed?
A. 106,350 C. 109,650
B. 108,000 D. 110,000

Problem 4
MA, GU and LO are liquidating their partnership. The partners capital
balances before liquidation is P147,000, P260,000 and P285,000 to MA, GU and
LO, each, respectively and the partners share profit and losses in a 35:25:40
ratio, respectively. In addition, the partnership has a P28,000 note payable
to MA and a P15,000 note receivable from LO.

When liquidation begins, what is the loss absorption power with respect to
MA?
A. 80,000 C. 420,000
B. 340,000 D. 500,000

Problem 5
Jo, Lee and Bee are partners who share profits and losses in the ratio of
35:25:40 to Jo, Lee and Bee respectively. The statement of Financial
Position of the partnership on December 31, 2017 is as follows:
ASSETS LIABILITIES AND CAPITAL
Cash P8,000 Liabilities P18,000
Noncash assets 110,000 Loan from Lee 2,000
Jo, Capital 32,700
Lee, Capital 23,500
Bee, Capital 41,800

On January 1, 2018, the partners decided to liquidate. For the month of

January, some assets were sold for a loss of P2,000. Liabilities of P15,000
were paid. Payment to Partners Jo, Lee and Bee from the initial sale of
assets were P150, P2,250 and P4,600 respectively. Cash withheld for possible
liquidation expenses and unrecognized liabilities amounted to P1,250.
What was the book/carrying value of the noncash assets sold in January?
A. 28,250 C. 20,250
B. 26,250 D. 18,250

Problem 6
Mah, Dah and Lih have capital balances of P600,000, P1,000,000 and P360,000
each respectively and they share profits in the respective ratio of 4:2:1.
Dah received P520,000 as a result of liquidating the partnership. The
partnership also incurred P10,000 liquidation expenses and withheld P2,000
for the unpaid liabilities of the partnership.

How much will Lih receive?

A. 240,000 C. 120,000
B. 150,000 D. 0

What is the loss on realization?

A. 1,680,000 C. 1,320,000
B. 1,670,000 D. 1,310,000

Problem 7
The Al, Joyce and Rich partnership’s condensed financial position prior to
liquidation of the partnership reflected the following balances:
Assets Liabilities and Capital
Cash P24,000 Liabilities P70,000
Noncash assets 360,000 Loan payable to Al 30,000
Al, Capital (50) 90,000
Joyce, Capital (30) 140,000
Rich, Capital (20) 54,000

Assuming assets with a book value of P140,000 were sold for P100,000 and that
all available cash was distributed, what amount should the remaining assets
be sold in order for Joyce to receive a total of P158,000 cash after
liquidation?
A. 374,000 C. 320,000
B. 350,000 D. 296,000

Problem 8
A partnership is in the process of liquidation since only one of the partners
(ME) is solvent. Capital balances at the time of liquidation were as
follows. Profits and losses are divided on a 4:2:2:2 basis, respectively.
MA, Capital 60,000
SA, Capital 67,000
YA, Capital 17,000
ME, Capital 96,000

MA’s creditors filed a P25,000 claim against the partnership’s assets. At

that time, the partnership held assets reported at P360,000 and liabilities
of P120,000.

If the assets could be sold for P228,000, what is the minimum amount that
MA’s creditors would have received?
A. 38,720 C. 2,500
B. 36,000 D. 0

Problem 9
Partners WAG, MAG, PANG, and GAP, shares profits at the ratio 5:3:1:1. On
June 30, relevant partners’ accounts follow:

Advances Loans Capital

Dr. Cr. Cr.
WAG 20,000 160,000
MAG 40,000 120,000
PANG 18,000 60,000
GAP 10,000 100,000

On this day, cash of P72,000 is declared as available for distribution to

partners as profits.

Who among the partners will benefit from the P72,000 cash distribution?
A. PANG and GAP C. WAG and MAG
B. MAG and GAP D. All equally

Problem 10
DON, BEH and SAD partnership became insolvent and the partnership is being
liquidated as soon as feasible. In this respect the following information
for the partners has been marshaled:
Capital Personal Personal
Balances Assets Liabilities
DON 70,000 80,000 40,000
BEH (60,000) 30,000 50,000
SAD (30,000) 70,000 30,000
Total (20,000

Assume that residual profits and losses are shared equally among the three
partners, based on this information, what is the maximum amount that DON can
expect to receive from the partnership liquidation?
A. 20,000 C. 70,000
B. 40,000 D. 110,000