St.

Paul University Philippines

Tuguegarao City, Cagayan 3500
Financial Accounting and Reporting

Topic: Partnership Liquidation – Installment Method – Safe Payment Schedule

Learning Outcome: At the end of the discussion, the student must be able to:

1. journalize the different transactions undertaken in an instalment liquidation.

2. prepare the statement of liquidation under instalment method
3. distribute available cash to partners using safe payment schedule

Lesson Proper:

Instalment Liquidation or Piecemeal Liquidation

This involves the selling of some assets, paying the liabilities of the partnership, dividing the available
cash to the partners, selling additional assets and making further payments to partners. The process of
selling non cash assets, payment to creditors and partners are done in piece meal or instalment basis.

Accounting procedures in instalment liquidation

1. Realization of some of the non cash assets – the sale could be at gain or loss. The gain or loss
would be distributed to the partners according to their capital ratio.
2. Payment to creditors
3. Distribution of available cash to partners.

Example:
On February 2, 2019, the partners of SMC Partnership decided to terminate their partnership. The
following are the ledger balances of accounts SMC Partnership prior to the liquidation process:

Cash P15,000 Accounts payable- Simeon P5,000

Accounts receivable 20,000 Liabilities 75,000
Inventories 65,000 Simeon, Capital (30%) 40,000
Land 50,000 Mally, Capital(40%) 80,000
Building 80,000 Cora , Capital(30%) 70,000
Furniture 40,000
Total Assets P270,000 Total P270,000

The partnership is to be liquidated by instalment. The following are the transaction that transpired after
the decision to liquidate:
 February 15 Non cash assets with a book value of P80,000 were sold at P90,000. Expenses of
P5,000 was incurred. Outside creditors were paid in full. The remaining cash was distributed to
partners after setting aside P2,000 for future liquidation expenses.

February 30 Non cash assets with a book value of P100,000 were sold at P80,000. All cash
were distributed to partners

March 5 The remaining non cash assets were sold at book value

Required: Prepare the statement of liquidation, safe payment schedules, and the journal entries
on the books of the partnership.
Solution:

SMC Partnership
Statement of Liquidation
March , 2019

Cash Non Cash Loan Liabilities Simeon, Mally, Cora,

Assets* Payable - Capital Capital Capital
(NCA) Simeon 30% 40% 30%
Balances 15,000 255,000 5,000 75,000 40,000 80,000 70,000
Realization/Sale of NCA 90,000 (80,000) 3,000 4,000 3,000
Payment of expenses (5,000) (1,500) (2,000) (1,500)
Balance 100,0000 175,000 5,000 75,000 41,500 82,000 71,500
Payment to creditors (75,000) (75,000)
Balance 25,000 175,000 5,000 0 41,500 82,000 71,500
*Distribution of Cash to (23,000) (7,429) (15,571)
partners
Balance 2,000 175,000 5,000 0 41,500 74,571 55,929
Realization/Sale of NCA 80,000 (100,000) (6,000) (8,000) (6,000)
Balance 82,000 75,000 5,000 35,500 66,571 49,929
*Distribution of cash to (82,000) (5,000) (13,000) (36,571) (27,429)
partners
Balance 0 75,000 0 0 22,500 30,000 22,500
Sale of remaining none cash 75,000 (75,000)
assets
Balance 75,000 0 0 0 22,500 30,000 22,500
Distribution of cash to (75,000) (22,500) (30,000) (22,500)
partners
Balance 0 0 0 0 0 0 0

*First distribution of cash to partners – prepare of Safe Payment Schedule or Cash Priority Program.
Safe Payment Schedule assumes possible losses due to inability of the partnership to dispose of part or
remaining non cash assets and failure of the partners with capital deficiencies to make additional
contributions.

Cash Priority Schedule or Program is called referred to a pre distribution plan, or advance
plan for the distribution of cash .This program or schedules specifies the order or sequence of
priority in which each partner will participate in the cash distribution and the amount of each
partner will receive as cash becomes available.

Safe Payment Schedule 1

Simeon, Mally, Cora,

Capital Capital Capital
30% 40% 30%
Balances before distribution of cash 41,500 82,000 71,500
Add: Loan balances 5,000 - -
Partners’ total interest 46,500 82,000 71,500
Less: Restricted Interest- possible loss of P175,000 (53,100) (70,800) (53,100)
If the partnership was not able to sell the remaining
non cash asset plus the P2,000 set aside for future
expenses. Total P177,000 to be distributed using
profit and loss ratio
Balance (6,600) 11,200 18,400
Loss absorption 40:30 6,600 (3,771) (2,829)
Free interest- cash to be distributed to partners 0 7,429 15,571

Notes:

1. Notice that there is P2,000 remaining cash since this is set aside for future expenses.
2. In the safe payment schedule, if partners were deficient, let the other partners with
positive capital balances absorbed the deficiency.
3. The restricted interest is the total unsold noncash assets plus cash set aside for future
liabilities and expenses.
4. The total free interest is equivalent to the cash to be distributed
Safe Payment Schedule 2

Simeon, Mally, Cora,

Capital Capital Capital
30% 40% 30%
Balances before distribution of cash 35,500 66,571 49,929
Add: Loan balances 5,000
Partners’ total interest 40,500 66,571 49,929
Less: Restricted Interest- possible loss of P75,000 (22,500) (30,000) (22,500)
If the partnership was not able to sell the remaining
non cash asset Total P75,000 to be distributed using
profit and loss ratio
Free interest- cash to be distributed to partners 18,000 36,571 27,429

Notes:
1. This time all partners have positive balance. This would be the basis for cash distribution.
2. The total free interest is equivalent to the cash to be distributed
3. The distribution of P18,000 to Simeon would be for his loan balance – P5,000 and capital
balance P13,000.

Journal Entries

1. Cash P90,000
Non cash assets P 80,000
Simeon, Capital 3,000
Mally, Capital 4,000
Cora, Capital 3,000
To sale of non cash assets

2. Simeon, Capital P1,500

Mally, Capital 2,000
Cora, Capital 1,500
Cash 5,000
To record payment of expenses
 3. Liabilities P75,000
Cash P 75,000

To record payment of liabilities

4. Mally, Capital P7, 429

Cora, Capital 15,571
Cash P23,000
To record the first distribution of cash to partners

5. Cash P80,000
Simeon, Capital 6,000
Mally, Capital 8,000
Cora, Capital 6,000
Non Cash Assets 100,000
To record sale of non cash assets

6. Loans Payable - Simeon P5,000

Simeon, Capital 13,000
Mally, Capital 36,571
Cora, Capital 27,429
Non Cash Assets 82,000
To record the second distribution of cash to partners

7. Cash P75,000
Non Cash Assets P 75,000

To record sale of remaining non cash assets

8. Simeon, Capital 22,500

Mally, Capital 30,000
Cora, Capital 22,500
Cash 75,000
To record the second distribution of cash to partners
Summative Assessment
Direction:
Write your solutions in a whole sheet of paper. Use dark ink pen in writing your solutions. On every sheet
write your name and course. Make your output clear and clean. Show all supporting computations.
Capture the image of your output clearly for easy reading. Thank you and God bless!

Problem # 1

On February 2, 2019, the partners of MAR Partnership decided to terminate their partnership. The
following are the ledger balances of accounts MAR Partnership prior to the liquidation process:

Cash P60, 000 Accounts payable- Ronald P10,000

Accounts receivable 50,000 Liabilities 100,000
Inventories 60,000 Marlon, Capital (50%) 200,000
Land 100,000 Acial, Capital(30%) 150,000
Building 200,000 Ronald, Capital(20%) 30,000
Furniture 20,000

The partnership is to be liquidated by instalment. The following are the transaction that transpired
after the decision to liquidate:

February 15 Non cash assets with a book value of P100,000 were sold at P120,000. Expenses
of P6,000 was incurred. Outside creditors were paid in full. The remaining cash was distributed to
partners after setting aside P4,000 for future liquidation expenses.

February 30 Non cash assets with a book value of P150,000 were sold at P140,000. All cash
were distributed to partners

March 5 The remaining non cash assets were sold at book value

Required: Prepare the statement of liquidation, safe payment schedules, and the journal entries
on the books of the partnership.

Problem #2
On February 2, 2019, the partners of ABC Partnership decided to terminate their partnership. The
following are the ledger balances of accounts ABC Partnership prior to the liquidation process:
Cash P30,000 Accounts payable- Abi P10,000
Accounts receivable 40,000 Liabilities 150,000
Inventories 130,000 Abi, Capital (30%) 80,000
Land 100,000 Biray, Capital(40%) 160,000
Building 160,000 Conny , Capital(30%) 140,000
Furniture 80,000

The partnership is to be liquidated by instalment. The following are the transaction that transpired
after the decision to liquidate:

February 15 Non cash assets with a book value of 160,000 were sold at P180,000. Expenses
of P5,000 was incurred. Outside creditors were paid in full. The remaining cash was distributed to
partners after setting aside P5,000 for future liquidation expenses.

February 30 Non cash assets with a book value of P200,000 were sold at P160,000. All cash
were distributed to partners

March 5 The remaining non cash assets were sold at a gain of P10,000.

Required: Prepare the statement of liquidation, safe payment schedules, and the journal entries on
the books of the partnership.

Congratulations!
End of the Module
 Problem #1

Solution:
MAR Partnership
Statement of Liquidation
As of February 2019

Non Cash Loan Marlon, Acial, Ronald,

Cash Assets* Payable - Liabilities Capital Capital Capital
(NCA) Ronald 50% 30% 20%
Balances P60,000 P430,000 P10,000 P100,000 P200,000 P150,000 P30,000
Realization/Sale of NCA 120,000 (100,000) 10,000 6,000 4,000
Payment of expenses (6,000) (3,000) (1,800) (1,200)
Balance P174,000 P330,000 P10,000 P100,000 P207,000 P154,200 P32,800
Payment to creditors (100,000) (100,000)
Balance P74,000 P330,000 P10,000 0 P207,000 P154,200 P32,800
*Distribution of Cash to (70,000) (25,000) (45,000)
partners
Balance P4,000 P330,000 P10,000 0 P182,000 P109,200 P32,800
Realization/Sale of NCA 140,000 (150,000) (5,000) (3,000) (2,000)
Balance P144,000 P180,000 P10,000 0 P177,000 P106,200 P30,800
*Distribution of cash to (144,000) (4,800) 0 (87,000) (52,200)
partners
Balance 0 P180,000 P5,200 0 P90,000 P54,000 P30,800
Sale of remaining none cash P180,000 (P180,000
assets )
Balance P180,000 0 P5,200 0 P90,000 P54,000 P30,800
Distribution of cash to (180,000) (5,200) (90,000) (54,000) (30,800)
partners
Balance 0 0 0 0 0 0 0

Safe Payment Schedule 1

Marlon, Acial, Ronald,

Capital Capital Capital
50% 30% 20%
Balances before distribution of cash P207,000 P154,200 P32,800
Add: Loan balances 10,000
Partners’ total interest P207,000 P154,200 P42,800
Less: Restricted Interest- possible loss of P330,000 (167,000) (100,200 (66,800)
If the partnership was not able to sell the remaining
 non cash asset plus the P4,000 set aside for future
expenses. Total P334,000 to be distributed using
profit and loss ratio
Balance 40,000 54,000 (24,000)
Loss absorption 50:30 (15,000) (9,000) 24,000
Free interest- cash to be distributed to partners 25,000 45,000 0

Safe Payment Schedule 2

Marlon, Acial, Ronald,

Capital Capital Capital
50% 30% 20%
Balances before distribution of cash P1777,000 P106,200 P30,800
Add: Loan balances 10,000
Partners’ total interest P1777,000 P106,200 P40,800
Less: Restricted Interest- possible loss of P180,000 (90,000) (54,000) (36,000)
If the partnership was not able to sell the remaining
non cash asset Total P180,000 to be distributed
using profit and loss ratio
Free interest- cash to be distributed to partners 87,000 52,200 4,800

Journal Entries
1. Cash 120,000
Non Cash Assets 100,000
Marlon, Capital 10,000
Acial, Capital 6,000
Ronald, Capitol 4,000
To record the sale of Non cash assets

2. Marlon, Capital 3,000

Acial, Capital 1,800
Ronald, Capital 1,200
Cash 6,000
To record the payment of liquidating expenses

3. Liabilities 100,000
Cash 100,000

To record the payment of liabilities

4. Marlon. Capital 25,000

 Acial, Capital 45,000
Cash 70,000

To record the first distribution of cash to partners

5. Cash 140,000
Marlon. Capital 5,000
Acial, Capital 3,000
Ronald, Capital 2,000
Non cash assets 150,000

To record the sale of Non-cash assets

6. Loans Payable-Ronald 4,800

Marlon, Capital 87,000
Acial, Capital 52,200
Cash 144,000

To record the second distribution of the partners

7. Cash 180,000
Non cash assets 180,000

To record the sale of remaining non cash assets

8. Loans Payable-Ronald 5,200

Marlon, Capital 90,000
Acial, Capital 54,000
Ronald, Capital 30,800
Cash 180,000

To record the last distribution for the partners

 Problem #2

Solution:
ABC Partnership
Statement of Liquidation
As of February 2019

Non Cash Loan Abi, Biray, Conny,

Cash Assets* Payable – Liabilities Capital Capital Capital
(NCA) Abi 30% 40% 30%
Balances P30,000 P51
Realization/Sale of NCA
Payment of expenses
Balance
Payment to creditors
Balance
*Distribution of Cash to
partners
Balance
Realization/Sale of NCA
Balance
*Distribution of cash to
partners
Balance
Sale of remaining none cash
assets
Balance
Distribution of cash to
partners
Balance 0 0 0 0 0 0 0