COURSE AFAR 2: ADVANCED FINANCIAL ACCOUNTING AND REPORTING 1

This module is prepared by professor Venus L. Catacutan. She’s an

associate professor in the College of Business and Accountancy-
DEVELOPER AND THEIR Accountancy department at Tarlac State University . Being a Certified
BACKGROUND Accountant, in addition to her teaching profession, shes’ likewise involve
in public practice which brings to this module some experiences on
specialized accounting concerns of different industries.

This course is designed to provide fundamental knowledge to students

concerning accounting for special transactions and advanced financial
reporting issues likely to be encountered in practice. It deals with the sthe
study of fundamental valuation accounting theory as applied to special
income and expense recognition methods and expanded business
COURSE DESCRIPTION operations. The course includes specialized problems in partnership
accounting, revenue from contract with customers (PFRS 15) and
accounting for domestic branches. The other topics deal with accounting
for the effect of changes in foreign exchange rates and other similar
current issues. Likewise discussed are debt restructuring and accounting
for financially distressed corporations.
1. Partnership Formation
2. Partnership Operations
3. Partnership Dissolutions
4. Partnership Liquidation (lump-Sum and Installment method)
5. Corporate Liquidation
6. Revenue Recognition- contract with customers (PFRS 15)
7. Revenue Recognition- contract with customers (Construction
Contract)
COURSE OUTLINE 8. Renenue Recognition- contract with customers ( Franchise and
Consignment)
9. Home Office, Branch, and Agency Accounting (General
Procedures)
10. Home Office, Branch, and Agency Accounting (Special
Procedures)
11. Foreign Currency Transactions
12. Hedging and Derivatives (FOREX)
13. Foreign Currency Translation
CHAPTER # 4
PARTNERSHIP LIQUIDATION
TITLE
This module covers the detailed discussion on Partnership dissolution. It
provides information regarding the nature, concept and the effects of
dissolution on the operation of the partnership. It gives facts, figures and
I. RATIONALE
other relevant data concerning the accounting procedures in dissolving a
partnership which are relevant for accounting students in the event of
encountering the same accounting concern in the practice of profession.
The last topic concerning accounting for partnership is liquidation of
partnership.The expected learning to be achieved by the student are
properly disclosed in the learning objectives stated below. The user of
this module should possess knowledge on the concept of partnership in
general, and accounting for partnership formation, operation and
dissolution to appreciate the content of this module. (preparatory
activities)
INSTRUCTION TO THE USERS The developmental activities section provides the comprehensive and
vital information concerning accounting for partnership liquidation on a
lumpsum and installment basis For assessment of learning,closure
activities like theoretical questions and problem solving with different
degree in terms of difficulty were provided. For evaluation , see the
evaluation section for details, and lastly for activities and preparation to
be undertaken for next topic this module provides the student/s the
details.

At the end of the chapter, the student shall be able to:

II. LEARNING OBJECTIVES
✓ Explain the nature of liquidation
 ✓ Identify the distinctions between dissolution and liquidation
✓ Determine the different accounting problems concerning
liquidation
✓ Identify and understand the different methods of liquidation and
to differentiate one from another
✓ Record the different activities concerning liquidation proceedings
✓ Prepare and interpret the statement of partnership liquidation
✓ Prepare and understand schedules supporting the liquidation
process

III. CONTENT
In liquidating a partnership several factors and steps are taken into
considerations thus, a user or student must:
1. have a knowledge on nature, scope and concept of partnership in
A. PREPARATORY ACTIVITIES general
2. be familiar with the legal and accounting considerations relating to
formation, operation and dissolution of a partnership.
3. have an advance reading regarding this topic.

B. DEVELOPMENTAL ACTIVITIES

LIQUIDATION
As discussed in the previous chapter, dissolution of a partnership does not necessarily mean the formal termination
of the business operation. A partnership is said to be dissolved when the original association for purpose of carrying
business activities is terminated. However, when the partners finally decide to end or terminate the business
operations, the partnership business will lead to liquidation.
Liquidation means winding up affairs of the partnership by realizing its non-cash assets until cash becomes
sufficient to settle its liabilities and distributing the remaining cash and other assets to the partners.
All matters concerning liquidation process must be agreed upon by all the partners and should be incorporated in the
articles of co-partnership.

PROCEDURES IN PARTNERSHIP LIQUIDATION

When partnership needs to be liquidated, the profit or loss needs to be determined and distributed to partners, the
books of accounts need to be adjusted and closed.
Upon liquidation, non-cash assets are to be realized. Gains or losses on realization of asset including liquidation
expenses are charged to the capital accounts of the partners. Available cash is used for the settlement of obligations
to creditors. Finally, after all obligations are settled, the remaining cash is to be distributed to the partners as
settlement of their interest in the partnership.
Article 1389 of the New Civil Code of the Philippines provides the following provisions concerning partnership
liquidation.
1. The assets of the partnership are:
a. The partnership property,
b. The contribution of the partners necessary for the payment of all liabilities specified below.
2. Payment of the liabilities of the partnership should be made in the following order:
a. First, those owing to outside creditors.
b. Second, that owing to partners for loan accounts or other than their capital. Balances and shares in
the profit.
c. Third, those owing to partners for their capital contributions.
d. Lastly, those owing to partners for their share in the profits.
The rule indicating priority of partner’s loan account over the partner’s capital account gives the partners the
option to exercise his right of offset. When partners’ capital account shows a debit balance, the said partner
has a loan receivable from the partnership, the partner is given the legal right to apply part of his entire loan
against his capital deficiency, this legal doctrine is called the right of offset.
3. When the partnership assets are not enough to settle the claims off all outside creditors, solvent partners
should make additional contributions to the partnership. Any contributions in excess of his share in the
liability can be eventually recovered by the solvent partner by way of collecting the additional contributions
from the other partners.
4. Partners’ creditors have priority over the partnership properties, in the same manner that the partners’
personal creditors have priority over the partners’ personal properties.
5. If a partner becomes insolvent, his personal properties shall be distributed as follows:
a. First, those owing to personal creditors
b. Second, those owing to partnership creditors
c. Lastly, those owing to the partners for contribution made when the assets of the partnership were
insufficient to settle all obligations.
 6. In case the partnership is insolvent, an industrial partner is liable to pay the partnership creditors out of his
personal properties since he is a general partner. A limited partner, on the other hand is liable only to the
extent of his contribution in the partnership (Article 1843).

DEFINITION OF TERMS
1. Realization – is the process of converting or selling non-cash assets into cash.
2. Gain or Loss on Realization – a gain is recognized when the total cash proceeds from the sale on non-
cash assets is greater than the book value of asset sold. On the other hand, a loss is recognized when the
total cash proceeds from the sale on non-cash assets is less than the book value of asset sold.
3. Capital Deficiency – it refers to the debit balance of capital debit balance in the partner’s capital account
resulting from the recognition of loss on realization on non-cash assets. It is the obligation of the deficient
partner to make additional investment to absorb his deficiency.
4. Right of Offset – legal right to apply a part or all of an amount owing to partner on a loan balance against
his capital deficiency resulting from losses on the realization of the partnership assets.
5. Partner’s Interest – it is the total of a partner’s loan to the partnership and his capital account balance.
6. Partner’s Free Interest – it is the interest of the partner that can be paid anytime and is not subject in any
restrictions.
7. Partner’s Restricted Interest - it is the interest of the partner that should be retained by the partnership to
absorb possible future partnership losses.
8. Theoretical Loss – pertains to the anticipated or assumed losses of the partnership arising from the
possible failure of the partnership to realize or dispose of part or all of the remaining non-cash assets and
the inability of the partners to settle their capital deficiency.
9. Loss Absorption Balance – it represents the maximum possible loss that the partner can absorb.
10. Solvent Partner – A partner whose personal assets exceed his personal liabilities.
11. Insolvent Partner – a partner whose personal assets are less than his personal liabilities.
12. Cash Withheld – cash set aside in a separate fund to insure payments of anticipated liquidation expenses
which may be incurred, and unrecorded liabilities which may be discovered.

METHODS OF PARTNERSHIP LIQUIDATION

When a partnership is to be liquidated by selling non-ash assets, the following methods may be used:
1. Lump-sum Liquidation or Total Liquidation
2. Installment liquidation or Piece-meal liquidation

PRO-FORMA ENTRIES RELATED TO LIQUIDATION

The following are the pro;-forma entries in the liquidation process.
1. Sale of non-cash assets
Cash xx
Non-cash Assets xx
To record sale at book value.

Cash xx
Non-cash Assets xx
Partner, Capital xx
Partner, Capital xx
To record sale of non-cash asset with the gain distributed
to partners’ capital.

Cash xx
Partner, Capital xx
Partner, Capital xx
Non-cash Assets xx
To record sale of non-cash asset with the loss distributed to
partners’ capital.

2. Payment of Liabilities
Liabilities xx
Cash xx
To record payment of liabilities

3. Exercise of right of offset

Loan payable to partner xx
Partner, Capital xx
To offset partner’s deficiency against loan owed to him.
 4. Additional investment by deficient partner
Partner, Capital xx
Cash xx
To record additional investment by deficient partner.

5. Absorption of Deficiency by the solvent partner

Solvent Partner, Capital xx
Deficient Partner, Capital xx
To record absorption of deficiency by the solvent partner

6. Distribution of cash to partners

Partner, Capital xx
Partner, Capital xx
Cash xx
To record distribution of remaining cash to partners

LUMP-SUM LIQUIDATION

A lump-sum liquidation of a partnership is one in which all non-cash assets are converted into cash over a short
period of time and all liabilities to outside creditors are paid, and a single lump-sum payment is made to the partners
for their total interest.

The following accounting procedures are used in lump-sum liquidation:

1. The following to be adjusted and the nominal accounts are closed.
2. Realization of non-cash asset and the distribution of gain or loss on realization among the partners based
on their profit or loss ratio.
3. Payment of expense. Certain costs and expenses may be incurred during the liquidation process to facilitate
the immediate realization of non-cash assets. Payment of these expenses should be allocated to the
partners based on their profit or loss ratio.
4. Elimination of partners’ capital deficiency by using one or more of the flowing methods:
a. If the deficient partner has a loan account balance, exercise the right of offset.
b. If the deficient partner is solvent, require him to make additional investment to eliminate deficiency.
c. If the deficient partner is insolvent, then the other partner will absorb his deficiency.
5. Payment of liabilities or claims owing to outside creditors.
6. Payment of partners’ interest, in order of priority:

a. Loan accounts
b. Capital accounts

STATEMENT OF LIQUIDATION
The statement of liquidation is a report that shows the complete liquidation process. It serves as a guide in recording
all activities in relation to the liquidation of the partnership.

Illustration: Assume that A, B, and C decided to liquidate their partnership. The statement of financial position as of
July 31, 2020 is given below: the partners share profits and losses in the ratio of 4:4:2 to A, B and C, respectively.
A, B and C Partnership
Statement of Financial Position
July 31, 2020

ASSETS LIABILITIES and EQUITY

Cash P16,000 Liabilities P89,600
Non-cash Assets 272,000 B, Loan 4,000
C, Loan 6,400
A, Capital 76,000
B, Capital 48,000
C, Capital 64,000
TOTAL P288,000 TOTAL P288,000

CASE 1: Gain on realization, Increase in partners’ capital

Assume that the non-cash assets were sold for P300,000.

 A, B and C Partnership
Statement of Liquidation
July 31, 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
Balances P 16,000 P272,000 P 89,600 P 4,000 P 6,400 P 76,000 P 48,000 P 64,000
Realization 300,000 (272,000) 11,200 11,200 5,000 5,600
of Non-cash
Assets
Balances 316,000 - 89,600 4,000 6,400 87,200 59,200 69,600
Payment of (89,600) (89,600)
Liabilities
Balances 226,400 - 4,000 6,400 87,200 59,200 69,600
Payment to (226,400) (4,000) (6,400) (87,200) (59,200) (69,600)
partners

Analysis:
1. A gain on realization is recognized since the non-cash assets were sold for P300,000 which is P28,000
more than book value.
2. The gain resulted to an increase in partners’ capital accounts and was distributed based on their profit or
loss ratio.
3. The payment of liabilities decreases cash and close out the liability account.
4. Finally, the remaining cash was distributed to the partners, thereby completely terminating partnership.
5. Take note that the figures in the parenthesis for each liquidation transaction represent reduction in account.
6. Double rule when all columns are brought to zero.

The entries to record the liquidation process are:

Cash P300,000
Non-cash Assets P 272,000
A, Capital 11,200
B, Capital 11,200
C, Capital 5,600
To record sale of non-cash asset with the gain distributed to partners’
capital.

Liabilities P89,600
Cash P89,600
To record payment of liabilities

B, Loan P4,000
C, Loan 6,400
A, Capital 87,200
B, Capital 59,200
C, Capital 69,600
Cash P226,400
To record the final distribution of cash to the partners.

CASE 2: Loss on realization is fully absorbed by partners’ capital balances

Assume that the non-cash assets were sold for P200,000.

A, B and C Partnership
Statement of Liquidation
July 31, 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
Balances P 16,000 P272,000 P 89,600 P 4,000 P 6,400 P 76,000 P 48,000 P 64,000
Realization 200,000 (272,000) (28,800) (28,800) (14,400)
 of Non-cash
Assets
Balances 216,000 - 89,600 4,000 6,400 47,200 19,200 49,600
Payment of (89,600) (89,600)
Liabilities
Balances 126,400 - 4,000 6,400 47,200 19,200 49,600
Payment to (126,400) (4,000) (6,400) (47,200) (19,200) (49,600)
partners

Analysis:
1. A loss on realization is recognized since the non-cash assets were sold for P200,000 which is P72,000 less
than book value.
2. The loss resulted to a decrease in partners’ capital accounts and was distributed based on their profit or loss
ratio.

The entries to record the liquidation process are:

Cash P200,000
A, Capital 28,800
B, Capital 28,800
C, Capital 14,400
Non-cash Assets P 272,000
To record sale of non-cash asset with the loss distributed to partners’
capital.

Liabilities P89,600
Cash P89,600
To record payment of liabilities

B, Loan P4,000
C, Loan 6,400
A, Capital 47,200
B, Capital 19,200
C, Capital 49,600
Cash P126,400
To record the final distribution of cash to the partners.

CASE 3: Loss on realization resulting to a capital deficiency of a partner with a loan balance.
Assume that the non-cash assets were sold for P148,000.

A, B and C Partnership
Statement of Liquidation
July 31, 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
Balances P P272,000 P 89,600 P 4,000 P 6,400 P 76,000 P 48,000 P 64,000
16,000
Realization 148,000 (272,000) (49,600) (49,600) (24,800)
of Non-cash
Assets
Balances 164,000 - 89,600 4,000 6,400 26,400 (1,600) 39,200
Right of (1,600) 1,600
offset by B
Balances 164,000 - 89,600 2,400 6,400 26,400 39,200
Payment of (89,600) (89,600)
Liabilities
Balances 74,400 - 2,400 6,400 26,400 39,200
Payment to (74,400) (2,400) (6,400) (26,400) (39,200)
 partners

Analysis:
1. A loss on realization is recognized since the non-cash assets were sold for P148,000 which is P124,000
less than book value.
2. The loss resulted to a decrease in partners’ capital accounts and was distributed based on their profit or loss
ratio.
3. The distribution of loss on realization resulted to a debit balance in the capital of B. (Capital Deficiency)
4. The right of offset was exercised since B has a loan receivable from the partnership. The loan represents
liability of the partnership to B.
5. The remaining cash was distributed to the partners, thereby completely terminating partnership.

The entries to record the liquidation process are:

Cash P148,000
A, Capital 49,600
B, Capital 49,600
C, Capital 24,800
Non-cash Assets P 272,000
To record sale of non-cash asset with the loss distributed to partners’
capital.

B, Loan P1,600
B, Capital P1,600
To record the exercise of right of offset by B

Liabilities P89,6000
Cash P89,6000
To record payment of liabilities

B, Loan P2,400
C, Loan 6,400
A, Capital 26,400
C, Capital 39,200
Cash P74,400
To record the final distribution of cash to the partners.

CASE 4: Loss on realization resulting to a capital deficiency of a partner with a loan balance who is
personally solvent.

Assume that the non-cash assets were sold for P130,000.

A, B and C Partnership
Statement of Liquidation
July 31, 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
Balances P P272,000 P 89,600 P 4,000 P 6,400 P 76,000 P 48,000 P 64,000
16,000
Realization 130,000 (272,000) (56,800) (56,800) (18,400)
of Non-cash
Assets
Balances 146,000 - 89,600 4,000 6,400 19,200 (8,800) 35,600
Right of (4,000) 4,000
offset by B
Balances 146,000 - 89,600 6,400 19,200 (4,800) 35,600
 Additional 4,800 4,800
Investment
by B
Balances 150,800 89,600 6,400 19,200 35,600
Payment of (89,600) (89,600)
Liabilities
Balances 61,200 - 6,400 19,200 35,600
Payment to (61,200) (6,400) (19,200) (35,600)
partners

Analysis:
1. A loss on realization is recognized since the non-cash assets were sold for P148,000 which is P124,000
less than book value.
2. The loss resulted to a decrease in partners’ capital accounts and was distributed based on their profit or loss
ratio.
3. The distribution of loss on realization resulted to a debit balance in the capital of B. (Capital Deficiency)
4. After exercising his right of offset, B still deficient by P4,800 because his loan account balance of P4,000 is
not enough to cover the deficiency amounting of P8,800.
5. Since B is solvent, he cancels his deficiency by making a sufficient additional cash investment to the
partnership.

The entries to record the liquidation process are:

Cash P130,000
A, Capital 56,800
B, Capital 56,800
C, Capital 28,400
Non-cash Assets P 272,000
To record sale of non-cash asset with the loss distributed to partners’
capital.

B, Loan P4,000
B, Capital P4,000
To record the exercise of right of offset by B

Cash P4,800
B, Capital P4,800
To record additional investment by B to fully close out his capital
deficiency.

Liabilities P89,6000
Cash P89,6000
To record payment of liabilities

C, Loan 6,400
A, Capital 19,200
C, Capital 35,600
Cash P61,200
To record the final distribution of cash to the partners.

CASE 5: Loss on realization resulting to a capital deficiency of a partner with a loan balance who is
personally insolvent.

Assume that the non-cash assets were sold for P130,000.

A, B and C Partnership
Statement of Liquidation
July 31, 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
 Balances P P272,000 P 89,600 P 4,000 P 6,400 P 76,000 P 48,000 P 64,000
16,000
Realization 130,000 (272,000) (56,800) (56,800) (18,400)
of Non-cash
Assets
Balances 146,000 - 89,600 4,000 6,400 19,200 (8,800) 35,600
Right of (4,000) 4,000
offset by B
Balances 146,000 - 89,600 6,400 19,200 (4,800) 35,600
Additional (3,200) 4,800 (1,600)
losses to A
&C
Balances 146,000 89,600 6,400 16,000 34,000
Payment of (89,600) (89,600)
Liabilities
Balances 56,400 - 6,400 16,000 34,000
Payment to (56,400) (6,400) (16,000) (34,000)
partners

Analysis:
1. The process is the same as in Case 4 except that the deficient partner is personally insolvent
2. In this case, partner A & C will absorb the deficiency as additional losses to them.
3. The additional loss is allocated between A & C using the ratio 4:2. The respective share of the partners on
the deficiency is computed as follows

A P 4,800 x 4/6 = P3,200

B 4,800 x 2/6 = 1,600

The entries to record the liquidation process are:

Cash P130,000
A, Capital 56,800
B, Capital 56,800
C, Capital 28,400
Non-cash Assets P 272,000
To record sale of non-cash asset with the loss distributed to partners’
capital.

B, Loan P4,000
B, Capital P4,000
To record the exercise of right of offset by B

A, Capital P3,200
C, Capital 1,600
B, Capital P4,800
To record additional losses of Partner A & C

Liabilities P89,6000
Cash P89,6000
To record payment of liabilities

C, Loan P 6,400
A, Capital 16,000
C, Capital 34,000
Cash P56,400
To record the final distribution of cash to the partners.

CASE 6: Loss on realization where the partnership is insolvent but the partners are personally solvent.
Assume that the non-cash assets were sold at a loss of P200,000.

A, B and C Partnership
Statement of Liquidation
July 31, 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
Balances P P272,000 P 89,600 P 4,000 P 6,400 P 76,000 P 48,000 P 64,000
16,000
Realization 72,000 (272,000) (80,000) (80,000) (40,000)
of Non-cash
Assets
Balances 88,000 - 89,600 4,000 6,400 (4,000) (32,000) 24,000
Right of (4,000) 4,000
offset by B
Balances 88,000 - 89,600 6,400 (4,000) (28,000) 24,000
Additional 32,000 4000 28,000
Investment
by A & B
Balances 120,000 89,600 6,400 19,200 24,000
Payment of (89,600) (89,600)
Liabilities
Balances 30,400 - 6,400 19,200 24,000
Payment to (30,400) (6,400) (24,000)
partners

Analysis:
1. Since non-cash asset were sold at a loss of P200,000 this result to a decrease in the capital balances of the
partners.
2. After exercising his right of offset, but it is not enough to cover the deficiency. B should make an additional
investment to fully eliminate his deficiency.
3. A also cancels his deficiency by making a sufficient additional cash investment to the partnership.

The entries to record the liquidation process are:

Cash P72,000
A, Capital 80,000
B, Capital 80,000
C, Capital 40,000
Non-cash Assets P 272,000
To record sale of non-cash asset with the loss distributed to partners’
capital.

B, Loan P4,000
B, Capital P4,000
To record the exercise of right of offset by B

Cash P32,000
A, Capital P4,000
B, Capital 28,000
To record additional investment by A & B to fully close out his capital
deficiency.

Liabilities P89,6000
Cash P89,6000
To record payment of liabilities

C, Loan P 6,400
 C, Capital 24,000
Cash P30,400
To record the final distribution of cash to the partners.

INSTALLMENT LIQUIDATION
Realization of non-cash asset under this method is accomplished over an extended period of time. It is a process
whereby assets are realized on piece-meal basis. Cash is periodically distributed to partners as it becomes available.
This is because instalment payment may be made to partners only after anticipating all the liabilities, possible losses
and liquidating expenses. The procedures to follow in the liquidating process is the same as the procedures
discussed in lump-sum liquidation, except that cash distributed on instalment basis and it depends upon its
availability after possible losses have been apportioned to partners or in accordance with an advance distribution
plan.
To avoid errors in making payments and any liabilities arising from such errors, payments should be made only to the
partners who have credit balances after dividing the possible losses among the partners. One of the tools to
guarantee that substantial care is followed in distributing the available cash to the partners is the schedule of safe
payments.

SCHEDULE OF SAFE PAYMENTS

It is a schedule prepared periodically to support statement of partnership liquidation. It indicates how much cash
available for distribution to the partners. As previously mentioned, cash will be distributed only to the partners with
credit balances after distributing all possible losses among the partners. All possible losses consist of the following:

a) Total value of unsold non-cash assets

b) Cash withheld to pay anticipated liquidation expenses and liabilities that may arise
c) Additional possible losses due to inability of the other deficient partner to settle their deficiency.

Take note that payment to partners based on periodic computation of safe payments brings, at some point of the
liquidation process, the partners’ capital balances to the profit and loss ratio. The absence of any deficiency after
distributing possible loss indicates that the ratios of the capital balance are proportion to the profit or loss ratio.
Schedule of safe payments in the subsequent period are no longer necessary because all subsequent payments can
be based solely on the profit and loss ratio. Meaning each partner’s capital is enough to absorb his share of the
maximum anticipated possible loss.

The basic format of the schedule of safe payment appears as follows:

Partnership Name
Schedule of Safe Payments
Date
Partner A Partner B Partner C Total
Total Interest xxx xxx xxx xxx
Less: Restricted Interest xxx xxx xxx xxx
for possible losses
Free Interest / Payment to xxx xxx xxx xxx
Partners

Illustration: Assume that A, B and C decided to liquidate their partnership. The partners share a P&L ratio of 4:4:2.
The statement of financial position as of April 30,2020 is given below:
A, B and C Partnership
Statement of Financial Position
April 30, 2020

ASSETS LIABILITIES and EQUITY

Cash P16,000 Liabilities P89,600
Non-cash Assets 272,000 B, Loan 4,000
C, Loan 6,400
A, Capital 76,000
B, Capital 48,000
C, Capital 64,000
TOTAL P288,000 TOTAL P288,000
Additional Information:
Date Book Value Cash realized Loss Cash Withheld
May 2020 P120,000 P90,000 P30,000 P5,000
June 2020 100,000 60,000 40,000 2,000
July 2020 52,000 30,000 22,000
Total P272,000 P180,000 P92,000 P7,000

A, B and C Partnership
Statement of Liquidation
May 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
Balances P 16,000 P272,000 P 89,600 P 4,000 P 6,400 P 76,000 P 48,000 P 64,000
May
instalment:
Sale of NCA (12,000) (12,000) (6,000)
and 90,000 (120,000)
distribution
of loss
Balances 106,000 152,000 89,600 4,000 6,400 64,000 36,000 58,000
after Sale
Payment of (89,600) (89,600)
Liabilities 16,400
Balances 16,200 152,000 - 4,000 6,400 64,000 36,000 58,000
Payment to
partners (11,400) (6,400) (5,000)
(Schedule
A)
Balances 5,000 152,000 0- 4,000 0 64,000 36,000 53,000

To determine how the available cash of P16,400 is to be distributed to the partners, a schedule of safe payments is
to be prepared. The following procedures may be followed in the preparation of the schedule of safe payments to
partners.

1. Determine the total interest of each partner by adding the total capital and the loan extended to the
partnership.
A B C Total
40% 40% 20% 100%
Capital Balances P64,000 P36,000 P58,000 P 158,000
Add: Loan Balances 4,000 6,400 10,400
Partners’ Interest P64,000 P40,000 P64,400 P168,400

2. Compute the total possible loss of the partnership to be absorbed by each partner; this represents the
restrictedinterest of each partner. After satisfying all anticipated possible losses, the balance represents
the free interest or the cash available for distribution to each partner.

Total unsold non-cash assets P152,000

Add: Cash withheld 5,000
Total possible loss P157,000

Possible losses absorbed by the different partners:

A P157,000 x 4/10 = P62,800

B P157,000 x 4/10 = 62,800
C P157,000 x 2/10 = 31,400
Total P157,000

3. If the partner/s become deficient after the distribution of partner’s share from possible losses, the remaining
solvent partner will absorb his capital deficiency based on their profit or loss ratio.
 Additional losses to be absorbed by A & C

A P22,800 x 4/6 = P15,200

C 22,800 x 4/6 = 7,600
Total 2/6 P22,800

Based on the above procedure, a schedule of safe payments is shown next:

A, B and C Partnership
Schedule of Safe Payments
May 2020
Schedule A A B C Total
40% 40% 20%
Total Interest P64,000 P40,000 P64,400 P168,400
Less: Restricted interest – all possible 62,800 62,800 31,400 157,000
losses
Balances 1,200 (22,800) 33,000 11,400
Additional possible loss to A & C (15,200) 22,800 (7,600)
Balances (14,000) 0 25,400 11,400
Additional possible loss to C 14,000 (14,000)
Balances 0 0 11,400 11,400
Free interest/ payment to partners 0 0 (11,400) (11,400)

Based on the above schedule, A and B shall not receive payment in May because their total interest is not enough to
absorb their share in possible losses of the partnership. B’s capital deficiency was absorbed by A and C. However,
after the absorption of additional loss from B, A became deficient. His deficiency will again be charges as an
additional loss for C, the remaining solvent partner. Take note that an additional investment by the deficient partner is
not required in the preparation of schedule of safe payment. After the distribution of all possible losses, the cash
available for distribution is P11,400 which is to be paid to Partner C as the first instalment payment.
After the cash payment to C, the remaining cash available of the partnership amounting to P5,000 is reserved for the
anticipated future liquidation expenses and other liabilities.

After the distribution of the first instalment payment to partner C, the liquidation process is simply repeated. The
process shown below:

A, B and C Partnership
Statement of Liquidation
June 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
Balances 5,000 152,000 0- 4,000 0 64,000 36,000 53,000
June
instalment:
Sale of NCA
and 60,000 (100,000) (16,000) (16,000) (8,000)
distribution
of loss
Balances 65,000 52,000 0 4,000 0 48,000 20,000 45,000
after Sale
Payment to
partners (63,000) (2,400) (26,400) (34,200)
(Schedule
B)
Balances 2,000 52,000 0- 1,600 0 21,600 20,000 10,800

The cash available for distribution for 2nd instalment is P63,000, therefore, a schedule of safe payments should be
prepared to properly distribute the available cash.
 A, B and C Partnership
Schedule of Safe Payments
June 2020
Schedule B A B C Total
40% 40% 20%
Total Interest P48,000 P24,000 P45,000 P117,000
Less: Restricted interest – all possible 21,600 21,600 10,800 54,000
losses 52,000 + 2,000
Balances 26,400 2,400 34,200 63,000
Free interest/ payment to partners (26,400) (2,400) (34,200) (63,000)

It can be observed that the total partners’ interests are continuously restricted for possible losses. Since there is no
assumed deficit on partner’s capital, the capital balances after distribution of all possible losses represents the safe
cash distribution to partners.
After this second payment, the partners’ capital balances are in proportion to their profit and loss ratio, therefore any
further instalment payments can be safely made without preparing a schedule of safe payments.

The schedule below shows the complete illustration of the liquidation of the partnership of A, B, and C from May July
2020.

A, B and C Partnership
Statement of Liquidation
May 2020

Particulars Cash Non- Liabilities B, Loan C, Loan A, B, C,

cash Capital Capital Capital
Assets 40% 40% 20%
Balances P P272,000 P 89,600 P 4,000 P 6,400 P 76,000 P 48,000 P 64,000
16,000
May
instalment:
Sale of NCA (12,000) (12,000) (6,000)
and 90,000 (120,000)
distribution
of loss
Balances 106,000 152,000 89,600 4,000 6,400 64,000 36,000 58,000
after Sale
Payment of (89,600) (89,600)
Liabilities
Balances 16,200 152,000 - 4,000 6,400 64,000 36,000 58,000
Payment to
partners (11,400) (6,400) (5,000)
(Schedule
A)
Balances 5,000 152,000 0- 4,000 0 64,000 36,000 53,000
June
instalment:
Sale of NCA
and 60,000 (100,000) (16,000) (16,000) (8,000)
distribution
of loss
Balances 65,000 52,000 0 4,000 0 48,000 20,000 45,000
after Sale
Payment to
partners (63,000) (2,400) (26,400) (34,200)
(Schedule
B)
Balances 2,000 52,000 0- 1,600 0 21,600 20,000 10,800
July
instalment:
Sale of NCA
and 30,000 (52,000) (8,800) (8,800) (4,400)
distribution
of loss
 Balances 32,000 0 0 1,600 0 12,800 11,200 6,400
after Sale
Final
Payment to (32,000) (1,600) (12,800) 11,200 (6,400)
partners

The journal entries for the liquidation of the partnership of A, B and C are as follows:
May 2020:

Cash P90,000
A, Capital 12,000
B, Capital 12,000
C, Capital 6,000
Non-cash Assets P 120,000
To record sale of non-cash asset with the loss distributed to partners’
capital.

Liabilities P89,6000
Cash P89,6000
To record payment of liabilities to outside creditors

C, Loan P 6,400
C, Capital 5,000
Cash P11,400
To record the first instalment payment to Partner C.

June 2020:
Cash P60,000
A, Capital 16,000
B, Capital 16,000
C, Capital 8,000
Non-cash Assets P 100,000
To record sale of non-cash asset with the loss distributed to partners’
capital.

B, Loan P 2,400
A, Capital 26,400
C, Capital 34,200
Cash P63,000
To record the second instalment payment to the partners.

July 2020:
Cash P30,000
A, Capital 8,800
B, Capital 8,800
C, Capital 4,400
Non-cash Assets P 52,000
To record sale of non-cash asset with the loss distributed to partners’
capital.

B, Loan P1,600
A, Capital 12,800
B, Capital 11,200
C, Capital 6,400
Non-cash Assets P 32,000
To record the final payment to the partners.

CASH PRIORITY PROGRAM

As previously discussed, to ensure the proper and correct distribution of available cash to partners, there is needed
to prepare a schedule of safe payments. However, it has been observed that we have to continue preparing it until
such time that partners’ interest are in proportion to their P&L ratio. Should the liquidation process extend over the
long period of time, there is a need to prepare a schedule of safe payments repeatedly.
To address such concern, in lieu to the schedule of safe payments, an advance planning for cash distribution may be
prepared, which is called the Cash Priority Program. The program will be prepared prior to the liquidation process to
determine how cash should be safely distributed if and when it becomes available.

Procedures in Preparing Cash Priority Program

1. Compute the loss absorption balance of each partner. The loss absorption balance represents the maximum
loss that each partner can absorb. The partner with highest loss absorption balance will be the first recipient
of cash whenever it becomes available. This is computed by dividing the partner’s interest by his profit and
loss ratio. Using A, B and C partnership as an example, the computation are as follows:
PARTNERS A B C
Partner’s interest P76,000 P52,000 P70,400
Divide by: 40% 40% 20%
Loss Absorption Balance P190,000 P130,000 P352,000

2. After computation of the loss absorption balance, determine the priority of the payment of the partners. As
mentioned, the partner with a highest loss absorption balance has the first priority in the cash distribution as
it becomes available. The procedure is as follows:

PARTNERS A B C
Loss Absorption Balances P190,000 P130,000 P352,000
Priority I – to C (Excess of loss absorption (162,000)
balances of C over A)
Balances 190,000 130,000 190,000
Priority II – to A and C (Excess of loss (60,000) (60,000)
absorption balances of A and C)
Balances P130,000 130,000 130,000

3. Determine the amount of priority cash payments by multiplying the partner’s excess loss absorption balance
to his profit and loss ratio. The procedure is shown below:

PARTNERS CASH PAYMENTS

A B C A B C Total
P/L ratio 40% 40% 20% 40% 40% 20%
Loss Absorption P190,000 P130,000 P352,000
Balances
Priority I – to C (162,000) P32,400 P32,400
(Excess of loss
absorption balances
of C over A)
Balances 190,000 130,000 190,000
Priority II – to A and (60,000) (60,000) P24,000 12,000 36,000
C (Excess of loss
absorption balances
of A and C)
Balances P130,000 130,000 130,000 P24,000 0 P44,400 P68,400

The completed cash priority program is shown below:

A, B and C Partnership
Cash Priority Program
May 1 –July 31, 2020

PARTNERS CASH PAYMENTS

A B C A B C Total
P/L ratio 40% 40% 20% 40% 40% 20%
Loss Absorption P190,000 P130,000 P352,000
Balances
Priority I – to C (162,000) P32,400 P32,400
(Excess of loss
absorption balances
of C over A)
 Balances 190,000 130,000 190,000
Priority II – to A and (60,000) (60,000) P24,000 12,000 36,000
C (Excess of loss
absorption balances
of A and C)
Balances P130,000 130,000 130,000 P24,000 0 P44,400 P68,400

Analysis:
1. Based on the information provided by the cash priority program. The first P32,400 cash available for
distribution should be given to partner C.
2. The next cash available in the amount of P36,000 shall be given to partner A and C in accordance to their
respective P&L ratio.
3. Any amount in excess of P32,400 and P36,000, which is P68,400, shall be given to all partners in
accordance to their profit or loss ratio.

Based on the Statement of liquidation of A, B and Partnership using the cash priority program illustrated above, the
distribution of cash available to partners is as follows:

PARTNERS
Amount A B C
May Installment:
Cash Available P11,400 P11,400
Payment in May P11,400

June Installment P63,000

Priority I - C (21,000) 21,000
Priority II – A & C (36,000) P24,000 12,000
Excess – A, B & C: (6,000)
A = 6,000 x 40% 2,400
B = 6,000 x 40% P2,400
C= 6,000 x 20% 1,200
Payment in June P26,400 P2,400 P34,000

July Installment P32,000

A = 32,000 x 40% (12,800) 12,800
B =32,000 x 40% (12,800) 12,800
C= 32,000 x 20% (6,400) 6,400
Payment in July P12,800 P12,800 P6,400
Total Payments to P39,200 P15,200 P52,000
Partners

Based on the illustration above, take note that the amount of cash distributed monthly to each partner based on the
schedule of safe payments is the with the amount computed using the cash priority program.

C. CLOSURE ACTIVITIES:

1. JJ, KK and LL are partners with P&L ratio of 5:3:2, respectively. The partners decided to liquidate the
partnership effective Jan 1, 2020. The partnership trial balances on December 31, 2019 were as follows:
Debit Credit
Cash P12,500
Non-cash assets 112,500
Liabilities to Creditors P33.750
Loan Payable – LL 3,750
JJ, Capital 45,000
KK, Capital 30,000
LL, Capital 12,500
Totals P125,000 P125,000

Required: Prepare a statement of liquidation if:

Case 1. Non-cash assets were sold at a gain of P25,000 liquidation expenses of P1,875 are paid.
2. Only P85,000 were realized from the sale. The deficient partner is personally insolvent
3. Non cash asset were sold half of its book value, all partners are personally solvent.
 2. Ana, Bana, and Cana are partners sharing pP&L ratio of 4:3:3, respectively. On January 1, 2020, they
decided to liquidate the partnership and the balance sheet were prepare as follows:
ASSETS LIABILITIES and EQUITY
Cash P1,000 Liabilities P3,000
Non-cash Assets 23,000 B, Loan 2,500
C, Loan 1,250
A, Capital 7,225
B, Capital 6,275
C, Capital 3,750
TOTAL P24,000 TOTAL P24,000

Additional Information:
Date Book Value Cash realized Payment of Payment to Cash Withheld
Liquidation Creditors
Expense
January P6,000 P5,250 P250 P3,000 P1,000
February 3,500 3,000 375 500
March 7,500 5,000 500 1,250
April 6,000 2,500 2,500 0

Required: Prepare a statement of liquidation using schedule of safe payments and cash priority program.

IV. SYNTHESIS/ GENERALIZATION

CHAPTER SUMMARY:
• Liquidation is the termination of business operations or the winding up of affairs.
• Orders of priority in the settlement of claims in cases of liquidation: (1) Outside creditors; (2) Inside creditors;
and (3) owners’ capital balances.
• In case of partnership insolvency, only the excess of partner’s personal assets over his personal liabilities
can be used to settle partnership debt. Any capital deficiency of an insolvent partner is absorbed by the
solvent partner.
• Accounting procedures when computing for settlement of the partners’ interests in cases of liquidation:
o Step 1 – Compute the net proceeds. Deduct all expenses, whether paid or not, as well as any cash
retention for future costs.
o Step 2 – Compute for the gain or loss by comparing the net proceeds with the total carrying
amount of non-cash assets, whether sold or not.
o Step 3 – allocate the gain or loss to the partners’ interests. Any residual amount in a partner’s
capital balance represents the settlement of his interest in the partnership.
• Under the cash priority program, when all the priorities are paid, any remaining cash distribution is allocated
to the partners based on their respective P/L ratio.

V. EVALUATION

The student’s performance will be evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises
20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)

A. REVIEW QUESTIONS
1. Differentiate dissolution from liquidation.
2. Differentiate lump-sum payment from installment liquidation
3. Differentiate schedule of safe payments from cash priority program
4. How is legal doctrine of right of offset applied?
 5. What is restricted interest?

B. TRUE OR FALSE
1. A partnership is said to be dissolved when the operation of the business is terminated.
2. Personal creditors shall be preferred to those of partnership as regards to partnership properties.
3. Liquidation is always preceded by dissolution, but dissolution is not always followed by liquidation.
4. To ensure the proper and correct distribution of available cash to partners, there is needed to prepare a
schedule of safe payments.
5. The rule indicating priority of partner’s loan account over the partner’s capital account gives the partners the
option to exercise his right of offset.
6. Gains and losses are allocated to capital accounts.
7. Residual profit and loss ratios are typically used to make allocations to partners’ capital accounts
8. The liquidation stops until the partner with the deficit invests enough to cover the shortfall.
9. Creditor liabilities are reduced by the amount of the partner’s deficit capital account balance.
10. Cash distribution plans informs the partners of the allocation that will occur when cash distributions are
made.

C. PROBLEMS.

Problem 1. JJ, KK and LL are partners with P&L ratio of 5:3:2, respectively. The partners decided to liquidate the
partnership effective Jan 1, 2020. The partnership trial balances on December 31, 2019 were as follows:
Debit Credit
Cash P12,500
Non-cash assets 112,500
Liabilities to Creditors P33.750
Loan Payable – LL 3,750
JJ, Capital 45,000
KK, Capital 30,000
LL, Capital 12,500
Totals P125,000 P125,000

Required: Prepare a statement of liquidation. The non-cash assets are sold for P28,125 and liquidation expenses of
P1,875 are paid. LL is insolvent and is unable to repay the partnership for the debit balance.

Problem 2. Ana, Bana, and Cana are partners sharing pP&L ratio of 4:3:3, respectively. On January 1, 2020, they
decided to liquidate the partnership and the balance sheet were prepare as follows:
ASSETS LIABILITIES and EQUITY
Cash P1,000 Liabilities P3,000
Non-cash Assets 23,000 B, Loan 2,500
C, Loan 1,250
A, Capital 7,225
B, Capital 6,275
C, Capital 3,750
TOTAL P24,000 TOTAL P24,000

Additional Information:
Date Book Value Cash realized Payment of Payment to Cash Withheld
Liquidation Creditors
Expense
January P6,000 P5,250 P250 P3,000 P1,000
February 3,500 3,000 375 500
March 7,500 5,000 500 1,250
April 6,000 2,500 2,500 0

Required: Prepare a statement of liquidation using schedule of safe payments and cash priority program.

Problem 3. Midoriya, Bakugou, and Todoroki are partners of the PLUS ULTRA Co., shared profits and losses in the
ratio of 5:3:2, respectively. On December 31, 2019, the end of the unprofitable year, they decided to liquidate the
partnership. The partner’s capital account balances on the date were 22,000, 24,900, and 15,000 for Midoriya,
Bakugou, and Todoroki, respectively.
The liabilities in the balance sheet amounted to 30,000 including loan of 10,000 payable to Midoriya. The cash
balance was 6,000. The partners planned to realize the non-cash assets in the installment and to distribute cash as it
becomes available. All three partners are solvent.
If Midoriya received a total of 20,000 as a result of liquidation, what was the total amount realized by the partnership
on the non-cash assets?

Problem 4. The partnership of C, A and G decided to liquidate their partnership on May 31, 2013. Before liquidating
and sharing net income. Their capital balances are as follows: C (30%) P1,250,000, A (30%) P900,000 and G (40%)
P1,100,000. Net income for January to May is P600,000, liabilities of the Partnership amounted to P1,050,000 and its
total assets include cash amounting to P350,000. Unsettled liabilities are P550,000. C invested additional cash
enough to settle their partnership’s indebtedness. A is personally solvent, G is personally insolvent, and C becomes
insolvent after investing the cash needed by the partnership.
1.How much were the partnership’s non-cash sold for?
2. How much cash will A invest in the partnership?
3. How much will C receive as a result of their liquidation?

Problem 5 X, Y and Z are partners in a wholesale business. On January 1, 2012 the total capital and drawings are
presented as follows

Capital Drawing
X P375,000 P36,000
Y 550,000 24,000
Z 1,125,000 17.000

Partners agree that profit and loss ratio are shared equally. Because of the failure of some debtors to pay their
outstanding accounts, the partnership lose heavily and compelled to liquidate. The operating loss in 2012 is
P252,000. After exhausting the partnership assets they still owe P207,000 to creditors on December 31, 2012 Y has
no personal assets but the others are well off.

1. How much was absorbed by Z to eliminate the capital deficiency of Y?

2. How much should X invest to eliminate his capital deficiency?

Problem 6. The balance sheet of Sitia Partnership on May 1, 2019 before liquidation is as follows:
ASSETS LIABILITIES and CAPITAL
Cash 14000 Liabilities 35000
Other Assets 71000 Irys, capital (70%) 28000
Roze, capital (30%) 22000
Total 85000 Total 85000
In May, assets with a book value of 34000 are sold for 29000. Creditors are paid in full. Liquidation expenses of 1000
is paid, and 3000 is paid to partners.
In May, how much did Roze receive?

Read and understand and learn the following regarding the next topic
which is Corporate Liquidation:
VI. ASSIGNMENT/ AGREEMENT
a. Difference between liquidity and solvency
b. The liquidation process
c. Identification of various classes of creditors whose claims are to be
satisfied in corporate liquidation.
d. The statement of affairs

Millan, Accounting for Special Transactions 2018e

Dayag, Advanced Financial Accounting and Reporting 2019e
VII. REFERENCES
Guerrero, Advanced Accounting 2017e
Catacutan, et al, Fundamentals of Accounting Part II

END OF CHAPTER 4