ACCOUNTING FOR PARTNERSHIPS Liquidation Learning Objectives: after studying this chapter, you should be able to: Define liquidation, Distinguish dissolution from liquidation, Understand and apply the rules in settling accounts after dissolution. Explain the concept of right of offset, Detail the treatment of capital deficiency, Differentiate lump-sum method from installment method of liquidation. Show the procedures in lump-sum liquidation, Prepare a statement of liquidation. Prepare entries for lump-sum liquidation. State the procedureé in installment liquidation, Determine cash distribution to cash priority program. 12. Prepare a statement of liquidation, 13. Prepare entries for installment liquidation. ES een ousune Partners using schedule of safe payments ora The partnership of Detoya, Pozon and Diaz (DPD & Co.) flourished because of their bloneering efforts to establish their firm as the alternative professional firm after the Front-running Ayala establishment. Their clientele list now includes the new entrants into the East Asean Growth Area, 40% of the top 500 Philippine corporations, 60% of the Fext $00 and innumerable Middle East accounts among others. Their service revenues have reached historic highs despite the currency turmoil affecting the region. The firm is Tow employing 1,520 professionals from varied disciplines. Everything is on the uptrend, All these years, Gloria Detoya, Bartolome Pozon and Elisa Diaz have been working very hard. During one of the top-level management ‘meetings, the three founding partners made known their plans of taking an early retirement. The members of the managenient committee were dumbfounded by the news. The three felt that they had enough of the World's troubles and just wanted to indulge in their hard-earned fortune. DPD wishes to Scanned with CamScannerding submissi dissolve and terminate the business of the firm. The partners Pen 8 OM of study by a technical committee did not vote upon this motion. The request of the three founding partners is both sincere and UrBeNt. what are the options? What will happen to the unfinished engagements? Is it nec Thee fo firm to dissolve and liquidate just to accommodate the request of the Big Three? In case g liquidation, how will the firm’s assets be distributed? Perhaps the firm may just agre, that the founding partners retire and give them a settlement price with a considerabj, bonus. Whatever the decision will be, the firm will have to endure the loss of its the, partners who believed and lived by hardwork, discipline and professionalism. DEFINITION The liquidation of a partnership is the winding up of its business activities characterize by sale of all non-cash assets, settlement of all liabilities and distribution of the remaining cash to the partners. The conversion of non-cash assets into cash is referre to as realization. This may either result to a gain or loss on realization and shall be divided in the profit and loss ratio of the partners. In some cases, a Substantial loss on realization may yield for a partner a capital deficiency, which is the excess of a partner's share in losses over the partner's capital credit balance. This deficiency will certainly affect the partner’s interest—the sum of his capital and loan accounts—in the partnership. RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION ’ The following rules are subject to revisions by the agreement of the partners, either in their original partnership agreement or in a dissolution agreement (Civil Code of the Philippines, Article 1839). Assets of the Partnership The assets of the partnership consist of the following: 1. partnership property, 2. additional contributions of the partners needed for the payment of all liabilities consistent with the discussions below. Order of Preference The assets of a general partnership shall be applied in the following order: 1, First, those owing to outside creditors, 2. Second, those owing to inside creditors in the for m of I 4s for business expenses by the partners, loans or advance: 174 | Partnership and Corporation Accounting Scanned with CamScanner3, Third, those owit Ng to the partners with respect to their capital contributions, 4, Lastly, those owi ‘ing to the partners with respect to their share of the profits. id fe ‘i ‘The eee Mancer aa above Bives the partner with the loan account the option to exercis set. This privilege is the legal right of a partner to apply part or all of his loan account balance against his capital deficis i jency resulting from losses in the realization of the partnership assets. pi y Z ' illustration. Winston Apalisoc, Beatriz Onate and Emerita Geron are partners in a prawn export business. Ini ially, Winston Apalisoc contributed P300,000; Beatriz Onate, p200,000 and Emerita Geron, P100,000. On the date of dissolution, the remaining assets of the partnership amounted to P1,000,000. The partnership has outstanding obligations with Neo Aglugub, P140,000; Placido Tuddao, P100,000 and loans payable to winston Apalisoc, P40,000. The accounts of the Apalisoc, Onate and Geron partnership shall be settled as follows: 1. First, Neo Aglugub and Placido Tuddao who are outside creditors shall be paid the total sum of P240,000; thus, leaving a balance of P760,000 (P1,000,000 - 240,000) in partnership assets; 2. Second, Winston Apalisoc who is an inside creditor shall be paid his loan to the partnership of P40,000; balance at P720,000 (P760,000 - P40,000); 3. Third, the total contributions of Apalisoc, Onate and Geron to the initial partnership capital in the amount of P600,000 will be paid; balance of assets at P120,000 (P720,000 - P600,000); 4. Lastly, the balance of P120,000 shall be distributed to the partners in the ratio of their capital contributions since there was no mention of an agreement governing the division of profits or losses. Therefore, Winston Apalisoc shall be entitled to 3/6 of P120,000 of P60,000; Beatriz Onate, 2/6 or P40,000 and Emerita Geron, 1/6 or P20,000. Insufficient Partnership Assets In cases when the partnership assets are insufficient to settle all outside liabilities, the partners should make additional. contributions in the partnership. Any partner who contributed in excess of his share in this liability has a right to collect the supposed additional contributions from the other partners. llustration, Assume in the illustration above that the outstanding obligations of the partnership, all accruing to outside creditors, amounted to P2,120,000. The partnership assets of P1,000,000 will be insufficient to fully settle these liabilities. The unpaid balance will be P120,000. Therefore, the partners should contribute sufficient assets to cover the deficiency or loss. In the absence of an agreement, the basis of the additional contributions shall be the ratio of their capital contributions. Liquidation | 175 Scanned with CamScannerrties in the amount his separate hese contributions en Geron, P20/F, sum of money iS Proper) 120,000. Thy Emerita Geron of the fy) Mee amount that she has paid i 60,000 and from Beaty, As a result, Winston Apalisoc is stil liable from P60,000; Beatriz Onate, P40,000, and Emerita be used to settle the remaining liabilities of P- considered as partnership assets. In the event of Pay! ° amount 120,000, she will have the right to recover Te excess of her share of the liability from Winston Apalls0cy Onate, P40,000. s and Partners’ Separate Creditors ‘ori ver those of th riority in payments © . aa properties. On the other hang, ct to the separate or persona} e 6—the Cardenas, Go and Preference of Partnership Creditors The creditors of the partnership shall y partners’ separate creditors as regards the partnership the creditors of the partners are preferred with respe' properties of the partners. This will be illustrated in Cas Balocating partnership later in the chapter. Distribution of Separate Properties of an Insolvent Partner Ifa partner is insolvent, his personal properties shall be distributed as follows: 1. First, those owing to separate creditors, 2. Second, those owing to partnership creditors, 3. Lastly, those owing to the partners by way of additional contributions when the assets of the partnership were insufficient to settle all obligations. lustration. Assuming that because of the total partnership liabilities amounting to 1,120,000, Emerita Geron is still personally liable to partnership creditors in the amount of P20,000. Her separate properties in the amount of P90,000 shall first be applied to settle her personal obligations of P80,000 to Patrocinio Abad and the balance of P10,000 to pay one-half of her liability of P20,000 to the cre: This is in consonance with the rule that separate creditors creditors as regards separate properties of a partner, ditors of the partnership. are preferred over partnership tobe able to fully understand the liquidation of partnerships The use of a statement of liquidation wi ill greatly aid the ti the events and transactions associated Boe oindl - iquidatin, ize With the liquidation 18 partner summa of the partnership. 176 | Partnership and Corporation Accounting Scanned with CamScannermeTHODS OF PARTNERSHIP UQUIDATION rhe following methods may be used when a partnership is liquidated: 4, Lump-sum method Under this method, 0d, all non-cash assets are realized and the related gains or losses distributed and ; all iabiliti ; ; distributions made tothe parte are paid before a single final cash 2. Installment method Under this i ude athe fealization of non-cash assets is accomplished over an time. When cash is available, creditors may be partially or lly paid. 5 fully paid. Any excess may be distributed to the partners in accordance with 3 program of safe payments or a cash priorit i il priority program. This il all the non-cash assets are sold. eh asaeariee ENTRIES RELATED TO LIQUIDATION The steps in the liquidation of a partnership will need the following pro-forma entries: 1, Sale of Non-Cash Assets a. At Book Value Cash me Non-Cash Assets ‘ x b. Above Book Value Cash vo Non-Cash Assets 0 Gain on Realization xx ¢. Below Book Value Cash Loss on Realization Non-Cash Assets x xx 2, Distribution of Gain or Loss on Realization based on Partners’ P/L Ratio a. Distribution of Gain on Realization Gain on Realization wx Elizabeth Figueroa, Capital Carmelita Mercado, Capital Lovell Abello, Capital xx Xx Liquidation | 177 Scanned with CamScannerb. Distribution of Loss on Realization ; x Elizabeth Figueroa, Capital e Carmelita Mercado, Capital wl ; Lovell Abello, Capital x Loss on Realization 3. Payment of Liabilities x Liabilities Py Cash 4. Exercise of Right of Offset Elizabeth Figueroa, Loan xx ee Elizabeth Figueroa, Capital 5. Additional Investment by Deficient Partner Cash xx % Elizabeth Figueroa, Capital 6. Deficiency Absorbed by Solvent Partner Carmelita Mercado, Capital x Elizabeth Figueroa, Capital xx 7. Distribution of Cash to Partners Elizabeth Figueroa, Capital Carmelita Mercado, Capital 1% Lovell Abello, Capital es Cash ex LUMP-SUM LIQUIDATION Under this method, all non-cash assets are realized ai single final cash distribution is made to the partners followed in lump-sum liquidation: nd all liabilities are settled before 2 The procedures below may be 1, Realization of non-cash assets and distributi ir . among the partners based on their pr ion Of gain or loss on realization ofit and loss ratio. 2. Payment of liabilities, 3. Elimination of partners’ ca realization a partner incurs loss exceeds his capital cre Of the following methods, i pital deficienci = opal detiency fa nh steibution of tos of a .e,, i ; dit), this deficiency muct pene 5 share OF realization Must. imi, the order of priority, | °° *liminated by using one 178 | Partnership and Corporation Accountin 1g Scanned with CamScanner2. Ifthe deficient partner has a loan balance, then exercise the right of offset. b. If the deficient partner is solvent, then he should invest cash to eliminate is deficiency. c. If the deficient partner is insolvent, then the other partners should absorb his deficiency. 4, Payments to partners, in the order of priority: a. Loan accounts b. Capital accounts illustration. Joel Feliciano, Evelyn Tria and Nick Marasigan are partners in a public relations firm and share profits and losses in the ratio of 2:2:1, respectively. They decided to liquidate their business on Dec. 31, 2016. The following is the condensed statement of financial position prepared prior to liquidation: Feliciano, Tria and Marasigan Statement of Financial Position . Dec. 31, 2016 Assets Cash P. 200,000 Non-Cash Assets 3,400,000 Total Assets 3,600,000 Liabilities and Capital Liabilities 1,120,000 Evelyn Tria, Loan 50,000 Nick Marasigan, Loan 80,000 Joel Feliciano, Capital 950,000 Evelyn Tria, Capital 600,000 Nick Marasigan, Capital 800,000 Total Liabilities and Capital 3,600,000 The above given details will be applicable for Cases 1 to 5. Only two categories for both ‘Assets—Cash and Non-Cash Assets, and Liabilities—Liabilities and Loans, are used to avoid excessive details in our illustrations. To avoid omissions in postings to the statement of liquidation, the equality of the accounting equation should be verified after every step in the liquidation process. Case 1. Loss on Realization Fully Absorbed by Partners’ Capital Balances Assume that the non-cash assets are sold at P2,500,000 with a resulting loss on realization of P900,000 which was distributed in the ratio 4:4:2. The capital balance of ent to fully absorb the share in the loss. The payment of cash to each partner was sufficit .d the final distribution of the remaining cash to the partners Partnership creditors an‘ Liquidation | 179 Scanned with CamScannerScanned with CamScanner ——— — {oo0'0zs)—(00'0vz) (0006s) (00008) (000'0s) (000‘08s‘T) SuauUed . 0) suawiAeg Q00'TSd —— ODD'HPZd_——000'DESd ~—000'0Bd o00'0sd 000‘08s‘td saoueyeg woe eee Oe ee ein ae (00‘ozt't) (o00’0zt't) 2549p151NO yo quawideg QO0'07Sd —— 000'OFZd o00'06sd o00'08d 000'0Sd 000'02T'Td 000‘002‘%d saouejeg (ooo'ost) (000088) —(000'09e) (00‘00r'e) _000'00S'2 159850] jouonnqussiq pue siassy yse)-UON Jo ajes Oo0'00ed = 000'008d o00'0s6d 000'08d o00'osd Qo0'OZE'Td 000'00r'Ed + 000007 d vonepinby aiojaq saouejeg 02 ‘yor saSequaried 1\d leude> eude ue0} ue01 siassy ‘uesiseseyy “ feu 1yse9-UoN, ysed 9t0z ‘te 220 uonepinbr) Jo uawayers uedisesey pue eu ‘ou T-paunsiy soauejeg jeyde ssourseg Aq poquosgy Ajinj uo}e71|eay Uo $507 180 | Partnership and Corporation AccountingF ize esented no problem. A statement of liquidation (refer to Figure 4-1) will summariz ne steps involved in the liquidation. The entries pertinent to this case follow: 1, Sale of Non-Cash Assets Cash 2,500,000 Loss on Realization ‘900,000 Non-Cash Assets, 3,400,000 Distribution of Loss on Realization based on Partners’ P/L Ratio Joel Feliciano, Capital 360,000 Evelyn Tria, Capital 360,000 Nick Marasigan, Capital 180,000 Loss on Realization ‘ 900,000 Payment of Liabilities Liabilities 1,120,000 Cash 1,120,000 3. Distribution of Cash to Partners Evelyn Tria, Loan 50,000 Nick Marasigan, Loan 80,000 Joel Feliciano, Capital 590,000 Evelyn Tria, Capital 240,000 Nick Marasigan, Capital 620,000 Cash 1,580,000 (ase 2. Loss on Realization Resulting to a Capital Deficiency with Right of Offset me that the non-cash assets are sold at P1,850,000 with a resulting loss on 1n of P1,550,000 which was distributed in the ratio 4:4:2, The capital balance of center Evelyn Tria was insufficient to fully absorb her share in the loss and thus, ‘ed 2 capital deficiency of P20,000. Instead of making an additional investment, 2 opted to exercise her right of offset. A portion of her loan to the partnership was 22plied to her deficient capital. Outside creditors were paid and a final distribution of "remaining cash to the partners was made. A statement of liquidation (see Figure 4- < will summarize the steps involved in the liquidation, . ‘6 entries are shown below: 1. Sale of Non-Cash Assets Cash 1,850,000 Loss on Realization 1,550,000 Non-Cash Assets 3,400,000 Liquidation | 181 Scanned with CamScanner(00°06) {ooo’oee) (00008) (o00'0e) {o00‘o¢6) suaued . 0} sjuawiAeg 000'06td ovo'oeed —_000'08d o00'0ed o00'086d saouejeg 000'02 : (000'02) Aouaroyag say asuede ueoy S,2UL J029SHO 000'060d (o00'0z)4 000'0tEd 000'08d 000'0Sd 000°086d saouejeg (o00'ozt't) (oo0'ozt't) jo quawAed ooo'osva —_(000'0z)d_—_—O00'KEE ~—OO'OBd~—0DD'0SA_——00'0ZT'Td 000‘0s0'ed seauejeg {ooo'ore) {o00'0z9) (o00'0z9) (o00'00r'e) —o00'0S8'T 188807 : Jouonnquisig pue siassy 4yse9-UON Jo ajes 000'008d © 000'009d-——OD'0SEd © D00'0Bd ©~—==00D'0Sd = OOD'UZT'Td + 00'0OP'Ed —o00'00z uonepinbry asoyaq saouejeg Oz «Ov ‘%0v soBeqwaniad 1\d reude> jeudey reudep eo ~ eo} siassy ‘uedserew “OU ‘ouesijay — “‘ueaisesew eu sanigen —_yse9-uoN sey gtoz ‘te 22a uonepinbr jo wawarers ue8jsexew pue e1ss ‘ouedtia4 79540 40 243!y YUM AruapYyag jeydeD e 0} BuNINseY UONeZ!eay UO sso] Z-pyaunsig 182 | Partnership and Corporation ‘Accounting Scanned with CamScannerDistribution of Loss on Realization based on Partners’ P/L Ratio Joel Feliciano, Capital 620,000 Evelyn Tria, Capital 620,000 Nick Marasigan, Capital 310,000 Loss on Realizat 1,550,000 2, Payment of Liabilities Liabilities 1,120,000 Cash 1,120,000 3, Exercise of Right of Offset Evelyn Tria, Loan 20,000 Evelyn Tria, Capital 20,000 4, Distribution of Cash to Partners Evelyn Tria, Loan 30,000 Nick Marasigan, Loan * 80,000 Joel Feliciano, Capital 330,000 Nick Marasigan, Capital 490,000 Cash 930,000 Case 3. Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent Partner Assume that the non-cash assets are sold at P1,700,000 with a resulting loss on realization of P1,700,000 which was distributed in the ratio 4:4:2. The capital balance of partner Evelyn Tria was again insufficient to fully absorb her share in the loss and thus, incurred a capital deficiency of P80,000. Tria exercised her right of offset but it was not enough to cover her losses; she has no recourse but to invest additional cash of P30,000 to fully eliminate her deficiency.’ A statement of liquidation (see Figure 4-3) will summarize the steps involved in the liquidation. The entries to illustrate the steps in liquidation are given below: 1, Sale of Non-Cash Assets Cash 1,700,000 Loss on Realization 1,700,000 Non-Cash Assets 3,400,000 Distribution of Loss on Realization based on Partners’ P/L Ratio Joel Feliciano, Capital 680,000 Evelyn Tria, Capital 680,000 Nick Marasigan, Capital 340,000 Loss on Realization 1,700,000 Liquidation | 109 Scanned with CamScanner6 UNUNOI>y YorD10d/05 pun diysiauyiog | ¥8T Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent Partner Figure 4-3 Feliciano, Tria and Marasigan Statement of Liquidation Dec. 31, 2016 Cash Non-Cash __ Liabilities Tria, Marasigan, Tria, Marasigan, Assets Loan Loan Capital Capital Capital P\L Percentages 40% 40% 20% Balances before Liquidation P 200,000 P3,400,000 P1,120,000 —«-PS0,000 = PBO,000-—«P950,000—P600,000 800,000 Sale of Non-Cash Assets and Dist. of Losses? 1,700,000 _ (3,400,000) (680,000) (680,000) _(340,000) Balances 1,900,000 P1,120,000 —P50,000 —»PB0,000-—P270,000 —P(80,000) 460,000 Payment of Liabilities to Outsiders? (1,120,000) (1,120,000) Balances 780,000 P50,000 P80,000 -P270,000 = P(80,000)-P460,000 Right of Offset by Tria? eee (50,000) 50,000 Balances 780,000 P80,000 —P270,000 —-P(30,000) 460,000 Additional Investments by Tria* 30,000 30,000 Balances 810,000 P80,000 —-P270,000 460,000 Payments to Partners? (810,000) (80,000)__ (270,000) (460,000) Scanned with CamScanner2, Payment of Liabilities Liabilities 1,120,000 Cash 1,120,000 3, Exercise of Right of Offset Evelyn Tria, Loan, 50,000 Evelyn Tria, Capital 50,000 4, Additional Investment by Deficient Partner Cash 30,000 Evelyn Tria, Capital 30,000 5. Distribution of Cash to Partners Nick Marasigan, Loan 80,000 Joel Feliciano, Capital 270,000 Nick Marasigan, Capital 460,000 Cash 810,000 Case 4. Loss on Realization Resulting to a Capital Deficiency to a Personally Insolvent Partner Assume the same facts as in case 3 except that Evelyn Tria is-personally insolvent and is unable to make additional investments for her remaining deficiency of P30,000. In this case, Joel Feliciano and Nick Marasigan have to absorb this deficiency as additional loss to them in the ratio of 4:2. A statement of liquidation (see Figure 4-4) will summarize the steps involved in the liquidation. The entries to summarize the results of the liquidation process follow: Entry nos. 1 to 3 is the same as those in Case 3. 4. Deficiency Absorbed by Solvent Partners - Joel Feliciano, Capital 20,000 Nick Marasigan, Capital 10,000 Evelyn Tria, Capital 30,000 5. Distribution of Cash to Partners, Nick Marasigan, Loan 80,000 Joel Feliciano, Capital 250,000 Nick Marasigan, Capital 450,000 Cash 780,000 Liguidatign 1188 Scanned with CamScanner(000'0Sr) (000‘0sz) (000'08) {oo0‘osz) ssuouned 0) sjuawAeg 000'0std o00'0Szd —_000'08d o00'08zd saouejeg {000'0) 000'0E (000'02) Tz ‘uessereyw : pue oue1j94 07 Sasso} |euonppy 000'09td (000'0€)4 000'0L7d 000'08d 000‘082d saouejeg BO SS eS ee —re 000'0S (o00'0s) AL Aq 4@5}10 40.1431 Qo0'O9vd =—* (OD0'OR)d = O00'OLZd_—_—ODO'UBd 000'0sd 000'082d saouejeg {o00'ozt't) (o00'0zt'T) zS48p1S1NO joquawheg oo0'osrd —(000'08)d_——O00'OLZd_~—_—000'08d 000'0Sd 000'0zT'Td 000'006‘Td saoueeg (oo0'ove) ~~ (000'089)—(000'089) (000'00v'e) 000'002'T 158550] JO ‘sig pue siassy 'yse9-uoN Jo ajes Q00'odd ~——«-000'009d_~—=DND'USGd ©=—=— 00008 000'0Sd O00'OZT'Td O00'00P'Ed + 000'007 d uonepinbl aiojaq saauejeg 02 Ov ‘OP saBequaaiad 1\d vende eudes ede ue0y 201 siassy ‘uediseeyy feu ‘oueyay — ‘uediserew feu sanuiqen —_-yse9-UON yse9 gt0z ‘Te 220 uonepinbr) jo wuawayers ueSiseseyy pue eu) ‘oue!ni}94 p-pasniig Jaupied quanjosul Ajjeuosiad e 04 Aauarayad [ewdeD e oF TuNINsay Uo}3e7|/29y UO S507 Scanned with CamScanner 186 | Partnership and Corporation Accountingcase 5. Partnership Insolvent but Partners Personally Solvent sulting loss on realization ‘ter full realization of the ettle all the liabilities Tria were insufficient 5 of P50,000 assume that the non-cash assets are sold at P900,000 with a re of P2,500,000 distributed in the ratio 4:4:2. The cash balance at non-cash assets in the amount of P1,100,000 was not enough to s to outsiders. Also, the capital balances of Joel Feliciano and Evelyn to fully absorb their share in the loss and thus, incurred capital deficiencie: and P400,000, respectively. Tria exercised her right of offset but it was not enough to cover her losses; she has no recourse but to invest additional cash of P350,000 to fully eliminate her deficiency. Feliciano also invested P50,000. From these investments, the partnership was able to pay in full the outside creditors. The balance of P380,000 is paid to Marasigan for his loan and capital account balances of P80,000 and P300,000, respectively. A statement of liquidation (see Figure 4-5) will summarize the steps involved in the liquidation. The pertinent entries for this case illustration are shown below: 1. Sale of Non-Cash Assets Cash 900,000 Loss on Realization 2,500,000 Non-Cash Assets 3,400,000 Distribution of Loss on Realization based on Partners’ P/L Ratio Joel Feliciano, Capital 1,000,000 Evelyn Tria, Capital 1,000,000 Nick Marasigan, Capital 500,000 Loss on Realization ' 2,500,000 2. Partial Payment of Liabilities Liabilities 41,100,000 Cash 1,100,000 3, Exercise of Right of Offset Evelyn Tria, Loan 50,000 Evelyn Tria, Capital 50,000 4, Additional Investment by Partners Cash 400,000 Joel Feliciano, Capital 50,000 Evelyn Tria, Capital 350,000 5, Full Payment of Liabilities Liabilities 20,000 Cash 20,000 Liquidation | 187 Scanned with CamScanner(o00'o8) (coo'ose) suouneg 0} sjuawiheg (000'0z) (ooo'0z) = (un) sannigen jo yuauiteg 000'00€d 000'08d 000'0zd 000‘00rd saouejeg o00'0se 0000S : 000'00r -S]UaW}SAAU} leuonppy Ooo'ooed ——(000'OSE)d — (Q00'0S)d 000d 000'0%4 0d saouejeg 0000s (0000s) CHL Aq 12540 Jo 1YaIy 00'00Ed (o00'00v)d _(000'0S)4 000'08d 000'0Sd 000'0%d Od saouejeg {o00‘00t't) (o00‘00r'T) (lensed) sanmiqen yo yuawAeg Ooo'o0ed —__(G00'0Or)d —_(OO0'OS)d ~—_—000'08d o00'0sd o00'ozt'ta o00'00t'Ta seouejeg : (000'00r'e) —000'006 152850] jo ‘SIG pue syassy YSeD-UON Jo ajes o00'0sd O00'0zt'Td —000'00r'Ed + 000'00Z d uonep! a10jaq saauejeg safequaniad 1\d {o00'00s) —_(000'000°T) (000°000'T) Q00'008d ——000'009d = 000'0S6d +~—000 od 600 ‘%00 600 reyde>, teude> teudep ueoy ueoy syessy ‘uedisexeW ven ‘oueyay — “uesisexew “eu en —-Ysea-uoN, ysed 9t0z ‘te 280 uonepinbr jo juawiayers ue8isesey) pue ely ‘ouernijay qanjos Ajjeuosiad siauied Inq wuanjosul diysioued —_ S—Y BUNBLY Scanned with CamScanner 188 | Partnership and Corporation Accounting6, Distribution of Cash to Partners Nick Marasigan, Loan , a 80,000 lick Marasigan, Capital 300,000 ; Cash 380,000 case 6. Partnership Insolvent and Partners Personally Insolvent Loida Cardenas, Aristotle Go and Renante Balocating are partners who are sharing profits or losses in the ratio of 4:3:2, respectively. They decided to liquidate their pusiness on Nov. 1, 2016, because of constant credit problems. The partnership and partners Go and Balocating are currently unable to meet their financial obligations. The partnership’s condensed balance sheet and the personal status of the partners are as follows: Cardenas, Go and Balocating Statement of Financial Position Nov. 1, 2016 Assets Liabilities and Capital Cash 2 P 5,000 Liabilities 370,000 Non-Cash Assets 605,000 Loida Cardenas, Capital 100,000 Aristotle Go, Capital mo 60,000 . Renante Balocating, Capital 80,000 Total Assets P610,000_ ‘Total Liabilities and Capital P610,000 Personal Status of Partners {Excluding Interests in the Partnership) Partner Personal Assets _ Personal Liabilities Loida Cardenas 310,000 P200,000 Aristotle Go 94,500 119,000 Renante Balocating 40,000 50,000 The non-cash asseté are sold for P335,000, resulting to a loss on realization of P270,000. The cash generated from the realization of all non-cash assets is inadequate for the full payment of the liabilities. The partnership is insolvent and will depend on its solvent partners for relief. After the distribution of loss on realization, Aristotle Go is deficient by P30,000. He can not make additional investments since he is personally insolvent—his current personal deficit is p24,S00 (P94,500 minus P119,000). The two other partners absorbed the deficiency, even if Cardenas has her own deficiency. This is possible because Cardenas is Still personally solvent. In the case of Balocating, he is made to share in the loss due to insolvency of Go though he i already personally insolvent becausein the partnership his Capital balance is still a positive P20,000- Liquidation | 189 Scanned with CamScanneris necessary from the Solven, and the P10,000 balance i, 000 al investment Of pao, 1g received can NOW be used 5 e, an additio on ag liabilities Caio rtalbe used to pay the Oe Balocatini RiemiG ve capital account. The P10,000 locating can later claim his pay off fi piomal ereditors. cardenas and Ba pay off his perso ‘oney after he has satisfied hig capital deficiency supposed additional investment due to caP! vent in the future. The statement of personal liabilities. This is if Go becomes sol ; liquidation is as follows: nt ip Insolvent and Partners Personally Insolve! Figure4-6 — Partnershi Cardenas, Go and Balocating Statement of Liquidation Nov. 1, 2016 na Go, Balocatin Non-Cash Liabilities Cardenas, °, ating, ri Assets Capital Capital Capital P\L Ratio —e_ 3 Balances before Liquidation P 5,000 605,000 P370,000 + P100,000 + P60,000—_—P80,000 Sale of Non-Cash Assets and Dist. of Losses! 335,000 __(605,000) (120,000) (90,000) _ (60,000) Balances 340,000 370,000 (20,000) . (30,000) 20,000 Payment of ; Usbilities? (partial) (340,000) (340,000) Balances ~P-0- 30,000 (20,000) —P(30,000) 20,000 Additional Losses to Cardenas & Balocating?, spi a! : (20,000) __30,000__(10,000 Balances P-0- 30,000 P(40,0 aneeel (40,000) 10,000 Investments by Cardenast s, 40,000 40,000 arn ae 10,000 —_ lances 40,000 30,000 Payment of . 10,000 Liabilities® (full) (30,000) (30,000) Balances P10,000 7. —00 Payment to 10,000 Balocating! (10,000) (10,000) me a Cardenas Go a Personal Assets = een Less: Personal Liabilities vec P. 94,500 40,000 Excess (Deficit) ; 00,000 119,000 50,000 ‘Amount recovered from liquidation store 124,500) mesa) of the partnership Loss to Personal Creditors 1 None P_24,500 None 190 | P | Portnership and Corporation Accounting Scanned with CamScannerane related entries follow: 1, Sale of Non-Cash Assets Cash Loss on Realization ae Non-Cash A 70,000 on 605,000 satriburt _ Distribution of Loss on Realization based on Partners’ P/L Ratio Loida Cardenas, Capital Aristotle Go, Capital aa Renante Balocating, Capital 60,000 Loss on Realization 270,000 2, Partial Payment of Liabilities Liabilities 340,000 Cash 340,000 3. Additional Losses to Partners with Positive Capital Balances Loida Cardenas, Capital 20,000 Renahte Balocating, Capital 10,000 Aristotle Go, Capital 30,000 4. Additional Investment by Partner Cash 40,000 Loida Cardenas, Capital 40/000) 5, Full Payment of Liabilities Liabilities ume 30,000 Cash ° 6. Distribution of Cash to Partner Renante Balocating, Capital 30,000 10,000 Cash INSTALLMENT LIQUIDATION of non-cash assets is accomplished over an extended f selling some assets, paying the creditors, paying the additional assets and making additional continue until all the non-cash assets ributed to partnership creditors and Under this method, realization period of time. It is a process of Se°1n8 | remaining cash to the partners: ne a Payments to the partners. The Hae have been realized and all availa Partners. Liquidation | 191 Scanned with CamScanner(ooo'er) UD UNIIEYSUY YeUIS-AINT Toooat) (o00vey 900'8ta oo0'red o00'zvd saouejeg 00%» o00'%y AUaUASAAYy - Aint (000°%b)d 000'8Td 000‘rzd Od saouejeg, (000‘06) {o00‘0zt) (o00‘otz) (a “u2s) 940UJeg 0} 1UALUT|e ISU - aUNE (000'%v)d 000'80Td 000'vyTd o00'otzd saouejeg “000°0€ (o00'0€) sS2U0W\ AQ 15H 40 Yay (000'2)4 000'80Td 000'rrTd 000'0&d 000‘0Tzd saouejeg (o00'%zz) (000'2zz) {000'96z) (o00'0s6) 000'0TZ #598507 JO "3S1Q pue S33SSY YseD-UON Jo aes - auNT 000'0Std ovo'oeed o00'ovbd o00'0ed o00‘oséa -0-d saouejeg (00002) (o00‘09T) {o00‘08t) (v"4as) sSvauyeg 0} uaUUI}e ISU - AEYY oo0'ostd ooo'osed 000‘0094 ooo'oed o00'os6d o00'08Td saouejeg (000'sev) {000'ser) 2S2n[IGeN Jo JUaWAeg - Ae ooo'osté ooo'osed o00'009d ooo'oed o00'serd o00'os6d 000'ST9d seoueleg (000’00€) 000'00E rsiassy Yse2-WON Jo ajes - AW. oo0'osté ooo'osed 000'0094 oo0'0ed 000'serd Ooo'osz'td —_o00’sTed uonepinbry 210399 seaueleg eude jeude> lendep ue07 sissy “sauow ‘Sau “equiep ‘saul gen yse)-UON yse> 902 ‘TE Ainr 03 T ACW uonepinbr] jo uawarers SaUOW pue sajin ‘equieg uopepinbyy uau]}eysuL £-pasnsig Scanned with CamScanner 194 | Partnership and Corporation Accounting>, payment of Liabilities Liabilities, 435,000 Gsh 435,000 , May Distribution of Cash to Partners Christine Gamba, Capital Reaneal Nancy Mulles, Capital 20,000 Cash 180,000 4, Sale of Non-Cash Assets and Distribution of Loss on Realization Gash 210,000 Christine Gamba, Capital 296,000 Nancy Mulles, Capital 222,000 Ma. Victoria Mones, Capital 222,000 Non-Cash Assets 950,000, 5, Exercise of Right of Offset Ma, Victoria Mones, Loan 30,000 Ma. Victoria Mones, Capital 30,000 6. June Distribution of Cash to Partners Christine Gamba, Capital 120,000 Nancy Mulles, Capital 90,000 Cash 210,000 7. Additional Investment by a Partner Cash 42,000 Ma. Victoria Mones, Capital 42,000 8. July Distribution of Cash to Partners Christine Gamba, Capital 24,000 Nancy Mulles, Capital 18,000 ne Cash ” CASH PRIORITY PROGRAM The use of safe payment schedules in support of the illustration in Figure 4-7 is a reliable method of computing the amount of safe payments to partners for it prevents eae payments to any partner. However, the approach is inefficient if numerous installment Uistibutions are to be made to partners. Let’s take the sea A the previous Section, The partnership made two payments and for each, a ule of Bo payments ismade, The procedure of preparing safe payment ere cl Sone oe as there is cash to be distributed and until the capital balances 2F© 2 ligned with the P/L rati Liquidation | 195 Scanned with CamScanneri ith the introduction of an alternative devic, ene Sar which is prepared at the start of the em rtners project when they can expect to be included jy repared, any amount of cash received from the id immediately to partnership creditors ang This program is illustrated in Figure 4.3 This repetitious procedur called the cash priority progra i i ill help the pal liquidation process will hel the cash distribution. If the program is prep: realization of partnership assets may be pai later, the partners as specified in the program. Illustration. Cecille Laguna, Ma. Concepcion Manalo and Rosemarie Espanol divide profits 60%, 25% and 15% respectively. A balance sheet on June 30, 2016, just beforg partnership liquidation, showed the following balances: Laguna, Manalo and Espanol Statement of Financial Position June 30, 2016 Assets Liabilities and Capital Cash P 50,000 Liabilities . P 350,000 Non-Cash Assets 925,000 Cecille Laguna, Capital 450,000 Ma, Concepcion Manalo, 100,000 Capital Rosemarie Espanol, Capital 75,000 Total Assets P975,000_ Total Liabilities and Capital 975,000 Certain assets are sold in July at book value of P500,000 and available cash is distributed to appropriate parties. Remaining assets are sold in August for P150,000 and cash is distributed in final settlement. . Loss absorption balances re} without reducing their equity or loss absorption balance shi relatively low loss absorption Present the maximum loss that the partners can absorb below zero. The partner with the biggest capital exposure ‘ould be prioritized in a cash distribution, A partner with 3 balance can be wiped out by a material realization loss. Scanned with CamScanner'000'SZZd = 000'ST#+ 000'0TZdaee "000’STd = %ST X 000'00Td !000'09d = %09 x 000'00TE ««. “000'0STd = %09x000'0Std + %ST ST %09 IVEY T\d UO paseq ..,000'S7Zd 4o s539x9 ul squnowly II) Auollg 000'Std “Od 000'0Tz4 000'00rd —_000'00rd . —_000°00rd ‘#s000'STd ‘*#000'09 (000'00t) (000’00T) Joueds3 pue eunge] 0) :4| Aquoug 000'00Sd ___000'00rd _—_000'00Sd +000'0STd (o00'osz) eunge7 OL :| Aquoud *—ooo'o0sd —_—000'00hd ~——a00'0SZd saouejeg uondiosqy $507 %ST HST %09 NEY SSO} PUR WYO, 2Aq apg 000'szd Qoo'ootd —__a00'osrd sysexaquy exo sveueg 5 ~ saouejeg Ue0) :ppy 000'SLd 000'00Td o00'0std seouejeg jeude) joueds3 —ojeuew —euneq Joueds3 ojeue eungey 01 suawikeg Auld yse> . 9t0z ‘og aunt wesolg AWOL yse> joueds3 pue ojeuew ‘eundey wies3oig Aond ysey— 8 P aUNBLY Liquidation | 197 Scanned with CamScannerwould be to make the highest los, in of the prograr difference will be the basis for the preparatio he E next highest. The cash priority payment, The next step in the absorption balance equal to the ‘tepartner coraputatin of the eashpronty PAYMENTS giference In Me loss absorption g the excess 0 ner, The above procedure jg can be obtained by multiplyint Me part balances by the profit and loss ratio of the respective Pores are equal If the ls, continued until the loss absorption balances ae Histributed to the partners in thei i dy equal, cash ma’ . absorption balances are already ti this illustration follow: profit and loss ratio. The entries related For the month of July, 2026 1, Sale of Non-Cash Assets 500,000 Cash 500,000 Non-Cash Assets 2. Payment of Liabi Liabilities 350,000 can 350,000 3. Distribution of Cash to Partners Cecille Laguna, Capital 190,000 Rosemarie Espanol, Capital 10,000 Cash 200,000 Computation: : . Laguna Espanol Total Priority |: To Laguna 150,000 P150,000 Priority II; 60:15 ratio 50,000 Laguna: P50,000 x 60/75 40,000 Espanol: P50,000x15/75 P1000 P190,000 P10,000 ° P200,000 The initial cash balance is P50,000 and this is increased by the P500,000 proceeds from the sale of non-cash assets. The balance after settlement of liabilities of P350,000 is P200,000. This emount is now available for distribution. Based on the cash priority Program in Figure 4-8, Laguna should be given P150,000 being the first priority. The cash for allocation in priority I! is P75,000. For this month, ee available after the P150,000 allocation to Laguna. only P50,000 is availa When cash is insufficient to fully satisfy the cash requir te ae ei be aba nea capa ee nl eae pals Ps case, the P50,000 will be allocated in the ratio of the suppose? for Laguna and 15/75 for 60,000 and P15,000 for a total of P75,000. The rati 60/5 for Espanol. The ratio only considered the ee nee the! 5 sin 198 | Partnershi "ship and Corporation Accounting Scanned with CamScannerze = Only Ones included in priority iI. Meanwhile, the balance of P25,000 in priority I! pe alloceted next mont " For the month of August, 2016+ 1 Sele of Non-Cash Assets Cash 150,000 Loss on Realization 273,000 Non-Cash Assets 425,000 Distribution of Loss on Realization based on Partners’ P/l Ratio Cecitle Laguna, Capital 165,000 Ma. Concepcion Manalo, Capital 68,750 Rosemarie Espancl, Capital 41,250 Loss on Realization 27200 2. Distribution of Cash to Partners Cecile Leguns, Capital 95,000 Ma. Concepcion Manalo, Capital 31.250 Rosemarie Espanol, Capital 23,750 a 350,000 Computation: — Espanol Total Priotny ls Balance of 925,000 aa 20.000 5,000 Jo al cannes int of 202515 Bed) Leguna: 7125000 x60% 75,000 Manalo: P125,000x25% 731,250 Espanol: P125,000x 15 31.250 Last month, the balance in priority Il is P25,000. This will be satisfied since there is sufficient cash for distribution this month. After satisfaction of the first two priorities, ‘any excess cash will be distributed in the profit and loss ratio of the partners since there isno more priority to satisfy other than the last priority. Cash payments may be made in the profit and loss ratio only when installment payments have caused the ratio of the partners’ capital account balances to be the same as the profit and loss ratio. The mathematical basis for payments in accordance with the Previous statement—profit and loss ratio, will be proven’in Figure 4-9 by using the figures in the Laguna, Manalo and Espanol partnership. Liquidation | 199 Scanned with CamScannerof loss on Fealizatig, i istribution Est, subtract the July payments to the partners, the di y HI, from the capita and the August payments to the partners to fully satisfy priorhy & the capi balances before liquidation. The result ofthese series of subtractions will Bet oa balances after the satisfaction of the first two priorities in the am h a P31,250 and P18,750 for Laguna, Manalo and Espanol in that order. Th ee Of these balances is P125,000. The ratio of each capital balance to the total capital balances iy then be computed—Laguna, P75,000/P125,000 or 60%; Manalo, P31,250/ P125,000 o 25% and Espanol, P18,750/P125,000 or 15%. Observe that the capital ratio yielded thy same ratio as that in priority Ill of the cash priority program. This piece of information may prove very useful in handling cash priority programs. Figure 4-9 Laguna, Manalo, Espanol, Total Capital + Capital Capital Balances before Liquidation P4S0,000 ° P100,000 75,000 625,000 July - Sale of Non-Cash Assets, No gain or loss Balances 450,000 100,000 P75,000 625,000 July - Payments to Partners (190,000) (10,000) (200,000) Balances "~~ P260,000 P1000 B65,000Pa25,0007 June - Sale of Non-Cash Assets and Dist. of Losses (165,000) (68,750) (41,250) (275,000) Balances ~~ P35,000 31,250 pa.750 pip. 0007 August - Payments to Partners, Balance of Priority II (20,000) ; (5,000) (25,000) Balances after 1st Two Priorities 275,000 P5250 pk psp Ratio of Capital Balances 60% 25% 159% 100% Scanned with CamScanner