OSIAS COLLEGES, INC.

F. Tanedo St., Tarlac City Philippines 2300

(045)9820245, e-mail:osiastrc@pldtdsl.net
http:/www.osiascolleges.edu.ph

SUBJECT: FUNDAMENTALS OF ACCOUNTING PART II

TOPIC: Partnership Liquidation
MODULE: 4
OBJECTIVES: Explain partnership liquidation

LESSON PROPER:

I. READ

What Does Partnership Liquidation Mean?

The partnership liquidation process starts with the partnership selling off all its noncash as-
sets at auction. Most of the time these assets will create a loss because they will be sold for
less than what the partnership purchased them for, but some assets, like building, can ap -
preciate and be sold at a gain. Both the losses and gains from these sales are allocated to
the partners’ capital accounts based on the partnership agreement.

Next the partnership uses the cash it made from the sale of its assets and the remaining
cash in its bank account to pay off all remaining liabilities. Sometimes partnerships will
have enough cash to pay off their liabilities, but in bankruptcy situations partnerships most
often don’t.

If there any assets remaining after all the liabilities are paid off, these assets are distributed
to the partners based on their capital accounts. Once all the partnership has no remaining
assets or liabilities, the partners can close the bank accounts and file dissolution papers
with the applicable government agencies to legally dissolve the partnership.

STEPS IN PARTNERSHIP LIQUIDATION:

Before winding up the affairs of the business, the books should be adjusted and closed. After
closing, only asset, liability and capital accounts should remain open. Liquidation of the partnership
includes the basic steps below:
1. Sell non-cash assets and recognize the gain or loss on realization.
2. Allocate gain/loss on realization to the partners based on their profit and loss ratios.
3. Pay partnership liabilities.
4. Distribute the remaining cash to the partners based on their capital balances.

Partnership liquidation methods:

1. Lump-sum liquidation- under this method all non-cash assets sold and gains or losses from
realization are distributed, all liabilities are paid and then a single final cash distribution to
partners is made. It is normally assumed that the distribution of cash to the partners is
delayed until all non-cash assets are sold and all liabilities are paid.
2. Liquidation by installment- under this method non-cash assets are sold on piecemeal basis
with allocation of gains or losses based on assumed total gain or loss, payment of liabilities
and the remaining cash as it becomes available is distributed to the partners based on their
capital balances.

Lump-sum liquidation:
a. Sale of non-cash assets at a gain.
 P a g e (2)

b. Sale of non-cash assets at a loss with no capital deficiency.

c. Sale of non-cash assets at a loss with capital deficiency and all partners are solvent.
d. Sale of non-cash assets at a loss with capital deficiency and not all partners are solvent

Sample problem:
Ferrer, Go and Han share income and losses in a ratio of 5:3:2. After terminating their business
operations on June 1, 2021, adjusting, and closing accounts, the summary of the general ledger are
shown below.
Cash Php 55,000 Han, Loan Php 20,000
Non-cash assets 340,000 Liabilities 45,000
Ferrer, capital 110,000
Go, capital 110,000
Han, capital 110,000
Total Assets Php 395,000 Total Equities 395,000

The data will be used in the different four situations as follows:

1. Sale of non-cash assets at a gain.
All non-cash assets were sold for 380,000 by the end of June 30, 2021

Ferrer, Go and Han

Statement of Partnership Liquidation
June 30,2021
Cash NCA Liabilities Han, Loan Ferrer,capi- Go,capi- Han,capita
tal tal
Balances before 55,000 340,000 45,000 20,000 110,000 110,000 110,000
realization
Sale of non-cash assets 380,000 (340,000) 20,000 12,000 8,000
Balances after realization 435,000 0 45,000 20,000 130,000 122,000 118,000
Payment of liabilities (45,000) (45,000)
Balances after liabilities 390,000 0 0 20,000 130,000 122,000 118,000
payment
Payment of Han loan (20,000) (20,000)
Balances after payment of 370,000 0 0 0 130,000 122,000 118,000
Han loan
Distribution of cash to (370,000) (130,000) (122,000) (118,000)
partners
FINAL BALANCES 0 0 0 0 0 0 0

Journal entries:
1. Sale of non-cash assets and division of gain
Cash 380,000
Non-cash assets 340,000
Ferrer, capital 20,000
Go, capital 12,000
Han, capital 8,000

2. Payment of liabilities
Liabilities 45,000
Cash 45,000

3. Payment of partner’s loan

Han, loan 20,000
Cash 20,000
 P a g e (3)

4. Distribution of cash to partners

Ferrer, capital 130,000
Go, capital 122,000
Han, capital 118,000
Cash 370,000

2. Sale of non-cash assets at a loss with no capital deficiency.

All non-cash assets were sold for 290,000 by the end of June 30, 2021

Ferrer, Go and Han

Statement of Partnership Liquidation
June 30,2021
Cash NCA Liabilities Han, Loan Ferrer,capi- Go,cap- Han,capita
tal ital
Balances before realization 55,000 340,000 45,000 20,000 110,000 110,000 110,000
Sale of non-cash assets 290,000 (340,000) (25,000) (15,000) (10,000)
Balances after realization 345,000 0 45,000 20,000 85,000 95,000 100,000
Payment of liabilities (45,000) (45,000)
Balances after liabilities 300,000 0 0 20,000 85,000 95,000 100,000
payment
Payment of Han loan (20,000) (20,000)
Balances after payment of 280,000 0 0 0 85,000 95,000 100,000
Han loan
Distribution of cash to (280,000) (85,000) (95,000) (100,000)
partners
FINAL BALANCES 0 0 0 0 0 0 0

Journal entries:
1. Sale of non-cash assets and division of loss
Cash 290,000
Ferrer, capital 25,000
Go, capital 15,000
Han, capital 10,000
Non-cash assets 340,000

2. Payment of liabilities
Liabilities 45,000
Cash 45,000

3. Payment of partner’s loan

Han, loan 20,000
Cash 20,000

4. Distribution of cash to partners

Ferrer, capital 85,000
Go, capital 95,000
Han, capital 100,000
Cash 280,000
 P a g e (4)

3. Sale of non-cash assets at a loss with capital deficiency and all partners are solvent
All non-cash assets were sold for 100,000 by the end of June 30, 2021. The deficient
partner pays his deficiency.

Ferrer, Go and Han

Statement of Partnership Liquidation
June 30,2021
Cash NCA Liabilities Han, Loan Ferrer,capi- Go,cap- Han,capita
tal ital
Balances before realization 55,000 340,000 45,000 20,000 110,000 110,000 110,000
Sale of non-cash assets 100,000 (340,000) (120,000) (72,000) (48,000)
Balances after realization 155,000 0 45,000 20,000 (10,000) 38,000 62,000
Payment of liabilities (45,000) (45,000)
Balances after liabilities 110,000 0 0 20,000 (10,000) 38,000 62,000
payment
Receipt of deficiency 10,000 10,000
Balances after receipt 120,000 0 0 20,000 0 38,000 62.000
Payment of Han loan (20,000) (20,000)
Balances after payment of 100,000 0 0 0 0 38,000 62,000
Han loan
Distribution of cash to (100,000) (38,000) (62,000)
partners
FINAL BALANCES 0 0 0 0 0 0 0

Journal entries:
1. Sale of non-cash assets and division of loss
Cash 100,000
Ferrer, capital 120,000
Go, capital 72,000
Han, capital 48,000
Non-cash assets 340,000

2. Payment of liabilities
Liabilities 45,000
Cash 45,000

3. Receipt of partner’s deficiency

Cash 10,000
Ferrer, capital 10,000

4. Payment of partner’s loan

Han, loan 20,000
Cash 20,000

5. Distribution of cash to partners

Go, capital 38,000
Han, capital 62,000
Cash 100,000

4. Sale of non-cash assets at a loss with capital deficiency and not all partners are
solvent
All non-cash assets were sold for 90,000 by the end of June 30, 2021. The deficient partner,
Ferrer is insolvent.
 P a g e (5)

Ferrer, Go and Han

Statement of Partnership Liquidation
June 30,2021
Cash NCA Liabilities Han, Loan Ferrer,capi- Go,cap- Han,capita
tal ital
Balances before realization 55,000 340,000 45,000 20,000 110,000 110,000 110,000
Sale of non-cash assets 90,000 (340,000) (125,000) (75,000) (50,000)
Balances after realization 145,000 0 45,000 20,000 (15,000) 35,000 60,000
Payment of liabilities (45,000) (45,000)
Balances after liabilities 100,000 0 0 20,000 (15,000) 35,000 60,000
payment
Allocation of Ferrer’s deficit 15,000 (9,000) (6,000)
Balances after receipt 100,000 0 0 20,000 0 26,000 54.000
Payment of Han loan (20,000) (20,000)
Balances after payment of 80,000 0 0 0 0 26,000 54,000
Han loan
Distribution of cash to (80,000) (26,000) (54,000)
partners
FINAL BALANCES 0 0 0 0 0 0 0

Note: Ferrer’s deficiency is allocated to Go and Han in the ratio of 3:2. If Ferrer has loan to the
partnership, it will be applied to his deficiency.

Journal entries:
1. Sale of non-cash assets and division of loss
Cash 90,000
Ferrer, capital 125,000
Go, capital 75,000
Han, capital 50,000
Non-cash assets 340,000

2. Payment of liabilities
Liabilities 45,000
Cash 45,000

3. Allocation of partner’s deficiency

Go, capital 9,000
Han, capital 6,000
Ferrer, capital 15,000

4. Payment of partner’s loan

Han, loan 20,000
Cash 20,000

5. Distribution of cash to partners

Go, capital 26,000
Han, capital 54,000
Cash 90,000
 P a g e (6)

 Reference: https://www.myaccountingcourse.com/.../partnership-liquidation

II. REFLECT
Based on the lesson, can you explain partnership liquidation?

III. RESPOND

Accomplish the Learning Activity Sheets (LAS) provided for this lesson