Partnership Liquidation

 Winding up of its affairs

 Steps:
1. Converting the firm’s assets into cash
2. Discharging the firm’s liabilities
3. Distribution of Cash and other assets
 Challenges in the liquidation process
1. Selling and converting all non-cash assets into cash
2. Inadequacy of the a partner or partners’ interest to absorb losses
3. Prioritization of payment to creditors in case of cash inadequacy
4. Marshalling of partnership and personal asset
 Legal Provisions
o Payment of partnership must be in this order:
1. To creditors other than the partners
2. To partners other than for their capital balance and share in P/L
3. To partners for their capital balance
4. To partners for P/L
o Priority
 Partnership Creditors > Partnership property and Partners’ personal property
o Order of claims against insolvent partner/s’ separate properties
1. Owing to his personal creditors
2. Owing to partnership creditors
3. Owing to other partners for contributions made
 Right of offset
o Use partner’s loan to decrease of eliminate capital deficiency
 Interest
o Sum of the partners’ loan and capital balance
 Theoretical loss
o Possible loss from unsold assets
o Expected liquidation expenses
 Simple Liquidation
o Liquidation by total
o Lump sum method
o Cash distribution to the creditors and partners when immediately possible
 Marshalling of assets
o Ranking of the claims of personal creditors and protecting their rights over the partner’s
personal and partnership assets
 Liquidation by Installment
o Cash distribution are made on installations
o Any cash distribution is made as if it would be the last distribution
o Schedule of safe payment
 Compute the free and restricted interest to absorb losses from:
 a. Non-cash assets still on hand
b. Unpaid Partner’s deficiency
c. Cash withheld for future liquidation expenses
o Steps
1. Form the table with components:
a. Cash
b. Non cash
c. Liabilities
d. Loans to or loans from partners
e. Capital balances of each partners
2. Record sale of assets and distribute to partners based on P/L
a. Increase: Cash
b. Decrease: Non-cash
c. Distribute P/L to partners
3. Liquidation Expense
a. Decrease: Cash and Partners’ capital balance based on P/L
4. Payment of Liabilities:
a. Decrease: Cash and Liabilities
5. Preparation of Schedule of Safe Payment
a. List capital balances + or – loan balances to or from partners
o Loans to partner = May utang kay partner
o Loans from partner = May utang si partner kay partnership
b. Add the non-cash assets and cash withheld for future liquidation
expenses then deduct by the sum of capital balances
c. In case of deficiency, divide the deficiency to solvent partners’ P/L the
deduct it to remaining capital balance
d. All deductions to capital balance = Restricted Interest
o Partner’s Interest used to absorb future losses
o Cannot be immediately recovered because of insufficiency or
restricted cash
e. Ending balance = Free Interest
o Partner’s interest that can be immediately recovered or paid in
cash
 Cash Priority Program
o Steps
1. Record capital balance of each partner + loan balances = Total partners’
interest
2. Divide total partners’ capital to P/L ratio to get Loss Absorption Balance
3. Subtract the highest Lost Absorption Balance to second highest to get first prio.
4. Determine payment to the first prio partner with formula:
Cash Prio Payment ¿=Excess LAB∗profit ∨lossratio
5. Repeat step 3 and 4 for all remaining partners until all Lost Absorption Balance
are equal
6. Prepare schedule of payment based on who has priority for each payment
 a. Note: Must cover 1st prio’s priority payment first before the next priority

Corporate Bankruptcy
 Petition for rehabilitation or liquidation
o Done by officers
o 2/3 vote of its voting shares
 Process of Corporate Liquidation
o Sell all non-cash assets @ NRV
o Pay the creditors
 Types of assets
o Assets pledged to fully secured creditors
 Secured assets is greater than or equal to the debt or creditor
o Assets pledged to partially secured creditors
 Secured assets is less than the debt or creditor
o Free assets
 Used to cover other claims of creditors
 Types of creditors
o Fully secured creditors
 Assets is more than liabilities
o Partially secured creditors
 Assets is less than liabilities
o Unsecured creditors with priority
 No assets secured
 Acts as fully secured
 Sure to be paid
 Legally required to pay them
 Examples:
 Salaries/wages
 Taxes
 Liquidation expenses
 Trustees fee’s
o Unsecured creditors without priority
 No assets secured
o NOTE: If classification of PRINCIPLE would be the same with the INTEREST
 If notes payable to bank is partially secured, then the interest-bank is also
partially secured
 Process in solving Corporate Liquidation problems
o Know the total NRV of assets
 How much is the total cash that can be used to pay the creditors
 NOTE: if not NRV of prepaid expenses are not given, assume it is ZERO or 0
 NOTE: Right-off goodwill, enter it as ZERO or 0
o Compute for the net free assets
 Assets available to your unsecured creditors without priority
 Total Assets at NRV
Less: Total Fully Secured Creditors
Total Partially Secured Creditors
Total Unsecured Creditors with priority
Net Free Assets
 NOTE: If assets pledged to fully secured creditors > Fully secured creditors, then
the difference would be part of unsecured creditors without priority
 NOTE: Unsecured part of the partially secured creditors is part of unsecured
without priority
 NOTE: If liability is not categorized as part of unsecured with priority, then it is
part of unsecured without priority
o Compute for the recovery percentage
Net free assets
 Recovery Percentage=
Total unsecured creditors
 NOTE: total unsecured creditors include both with and without priority
o Answer the questions being asked:
 Estimated deficiency to unsecured creditors
= Net Free * (1 – Recovery Percentage)
= Total Assets at NRV – Total liabilities
 Payment to partially secured creditors
= Secured portion + (unsecured portion * Recovery Percentage)
 Payment to unsecured without priority
= Total unsecured creditors without priority * Recovery percentage
 Statement of Liquidation and Realization
 Assets to be realized
o All assets of debtor at date of receiver’s appointment at carrying value
 Assets acquired
o Additional assets acquired during the receivers management
 Assets realized
o Non-cash converted and measured at its realizable value
 Assets not realized
o Assets on hand at end of receivership based on their original amount on the left side
 Liab. Liquidated and Liab. Not liquidated
o At the end of receivership
 Liab. To be liquidated
o Outstanding claims before receivers appointment
o Utang bago ibigay kay receiver
 Liab. Incurred
o Additional obligations assumed during receivers management
 Interest expense = Supplementary debit not exhibited
 Cost of sales, dep, loss on sales = Supplementary charges not exhibited
o Not exhibited because supplementary charges represents charges during the period of
receivership excluding asset expiration or specific losses on conversion of non-cash
assets.
 Statement of Realalization and Liquidation
ASSETS
To be Realized Realized:

Acquired: Not Realized:

LIABILITIES
Liquidated: To be liquidated:

Not Liquidated: Incurred:

SUPPLEMENTARY
chrages Credit

TOTALS

 Solutions for problems

1. How much was the cash balance transferred to the receiver?
= Assets to be realized + Net income – Liab to be realized
 Para mas madaling matandaan:
 Transferred to receiver = To be – To be + Net Income
 Net income = Retained earnings – capital stocks
2. How much was the cash balance transferred back to the debtor corporation
= Liab not realized + (Net Income – Net Profit) – assets not realized
 Para mas madaling matandaan:
 Transferred back = Not – Not + (Net Income – Net Profit)
 Net profit is supplementary credit – supplementary charges
Joint Arrangement
 Two or more parties
 Joint control
o Contractual agreed sharing of control of the arrangement
o Unanimous consent in relevant activities
 Relevant activities: activities that significantly affect the returns of the
arrangement
 Separate Vehicle
o Separately identifiable financial structure
o Scope is greater than the entity
 Joint Venture
o Right to net assets
 Assets after deducting liabilities
o Parties: Joint venturers
o Always structured with a separate vehicle
o Setup: Corporation
 Limited Liabilities
o Accounting

EQUITY METHOD

  Beginning Balance / Acquisition Cost  Dividends

  Share in Net Income  Share in Net Loss
  Share in Increase in OCI  Share in Decrease in OCI
  Share in Decrease in OCI  Share in Increase in OCI
  Impairment Recovery  Impairment Loss of investment

 Joint operation
o Rights to specific assets
o Obligations to liabilities
o Parties: Joint operators
o With or without structured through a separate vehicle
o Setup: Similar to partnership setup
 Unlimited Liabilities
o Each party carries its own
 Property, plant and equipment
 Inventories
o Each party recognizes its own
 Assets
 Liab
 Revenue
 Expenses
 Share in the assets, liab, revenue and expenses of joint operation
 o Accounting

Cost and Expenses Contra Cost and Expenses

o Merchandise purchases o Purchase return, discount,
o Merchandise contribution allowances
o Expenses
Contra Revenue and Gains Revenue and Gains
o Sales discount, allowances, return o Sales

Debit > Credit = Loss ; Debit < Credit = Income

 Notes: in answering problems:

o If joint operation is in the debit side, then it is a loss
o Steps when given a balance for the joint operation:
1. Look at the entry and find the missing data for the operator to balance the
figures
2. Analyze if the Joint operation entry is a debit or a credit
 Debit = loss ; Credit = gain
3. Divide the profit or loss with the operators by P/L or equally if P/L is not given
4. Distribute the profit or loss to the operators
 Operator’s balance in the entry + or – gain or loss
o To determine the profit or loss of a Joint Venture:
Sale XXX
Less: COGS (XXX)
Freight In (XXX)
OpEx (XXX)
Profit or Loss XXX

Note: When given “x/x of the goods”, multiply “x/x” to COGS and Freight in

o Steps when solving problems related to total shares of operator and Accountability
where one operator took over unsold merchandise and with bonus after bonus in
venture completion
1. Get the total debit or credit of joint op before the taking over of unsold merch
2. Add the total debit or credit with the amount taken over by the operator
3. Make entry for the taking over
Operator XXX
Joint operator XXX
4. If given entries, combine the entries with the entries for taking over
 NOTE: when kulang, use the operator not included in the entries given
as a balancing figure
5. Determine amount of bonus
 Bonus before bonus
= Net Income * Bonus Rate
NOTE: Net Income = credit amount of Joint Operations in step 4
 Bonus after Bonus
  Bonus = Bonus Rate * (Net Income – Bonus)
NOTE: Net Income = credit amount of Joint Operations in step 4
Use algebra in solving (Transpose values)
6. When given bonus after bonus, deduct Bonus from Net Income
7. Distribute the remaining Net Income to partners based on P/L or equally if P/L is
not given
8. Add the bonus to the operator with bonus to get Total Share
9. Compute for Accountability or Equity
 = Debit or Credit balance of the operator + or – Profit or loss
o Steps in solving Joint Operation problems
1. Determine if there is a managing operator
2. Form T-account for Joint operation

Joint Operation
Purchases Net Sales
Accrued Expenses Inventory Taken Over
Cartage
Operating expenses
Sales Allowances Discount, Return
3. Determine the ending balance of Joint Operation
 Credit Balance= Profit
 Debit Balance = Loss
4. Form T-Account for Joint Operation – Cash

Joint Operation -
Investments Down payments on purchases
Collection Cartage
Operating Expenses
Accrued Expenses
Accounts payable
5. Cash settlement balance: Determine the ending balance of Joint Operation -
Cash
 Credit Balance= May utang na
6. Debit Balance = May cash na pwede pang distribute
7. Cash settlement if cash account is not given, use table format

Operator 1 Operator 2
Investments
Operating Expenses
Customs duties and cartage
Share in Profit
TOTAL INVESTMENT

Withheld
Taken over
TOTAL RETURN
 EQUITY/ACCOUTNABILITY
 EQUITY = Total Investment – Total Return
 NOTE: Pag negative, you have the accountability
8. Form the Profit Distribution Table
 In determining the Commission if there is a managing partner, analyze
the given end determine where to base the commission rate
 The amount to be distributed is based on the ending balance of Joint
Operation
9. When asked “How much will Operator1 Receive”, formulate investment in joint
venture account

Investment in joint venture account – Operator1

Investment Inventory Taken over if any
Profit Withheld or acquired assets from
joint operation if any
Consignment Sales
 Consignor transfers inventory to consignee
 Consignor
o Has ownership
o Has the obligation to repay the expenses of the consignee
o Consignment Out
 Nominal Account

Consignment Out
Expenses of consignor and consignee Sales

 Sales are treated as revenue

 Expenses are expenses
 Consignee
o Holds the physical items and sells it
o Seller
o Incurs
 Sales
 Expenses
1. Cartage in
2. Freight
3. Delivery installation
4. Commission
5. Advertising expense
o 50% can only be reimbursed
o Account Sales: make when incurring expenses upon sales
o Consignment In
 Real Account
Consignment In
Expenses of consignee only Sales

 Sales are not treated as revenue, but as payable

 Since dapat ibayad ito kay consignor
 Expenses are treated as receivable
 Since consignor has the obligation to repay the expenses
 Parang abono
 o Steps in solving the problem on Consignment sales
1. Look for what is being asked
2. When asked for remittance, formulate an account sales
 Determine the total sales
o NOTE: Minsan hindi given si sales price or total sales, so
compute it by using the data in the given
 Less the charges
o NOTE: Shipping cost is always charged to consignor since siya
yung nagpadala
o Commission is always based on sales if not specified in the
problem
 Ending balance is to be remitted
o NOTE: look at the problem if may advances or returns
o NOTE: problem may specify that a specific amount was not
remitted, subtract that amount to the ending balance of the to
be remitted para malaman kung magkano yung remitted.
3. When asked for Consignment out balance and Profit
 Form the table
Expenses Total (units) Unsold (units) Returned (units) Sold (units)
Consignor
Cost
Freight

Consignee
Cartage in
Delivery and install.
Commission
Freight Returns

TOTALS
 Consignor: Divide the total amounts to the number of units for each
category to know what portion of the total belongs to unsold, returned,
and sold
 Consignee: Must know to where does the expense are allocated to
o Cartage: Divide by the units
o Delivery: Depends on the items sold, so allocate to sold
o Commission: Depends on sold, so allocate to sold
 o Freight returns: Depends on the returned items, so allocate to
returned
 Get the totals to get Consignment out balance
 Profit = Sales – Sold balance – expenses related to returns
4. When given a follow up question on consignment such as additional sold items
 Make a new Account sales
o Remember to divide the expenses to the number of shipped
units by consignor to get the per unit cost, then multiply that to
the additional sold items
 When computing for consignment out balance
o Note to match this with the unsold balance, where dapat
bawasan mo yung charges sa unsold and then deduct that
amount sa expenses sa additional sold items
 Kasi need na mag matching principle
 This is deferred expenses
 When computing for profit
o Same formula pero multiple sales price with the additional
number of sold items
o NOTE: hindi na need sama si expenses related to returns kasi
nabawas na yun sa nauna computation