PAERTNERSHIP LIQUIDATION

Termination of the business operations or the winding up of affairs.

Liquidation is the last phase of the partnership. To liquidate means to wind up affairs by paying up all
liabilities of the company to its creditors and paying all its owners their share in the capital.
1. Assets are converted into cash
2. Pay the liabilities to the creditors
3. Remaining amount is distributed to the owners

TYPES OF LIQUIDATION

LUMP-SUM LIQUIDATION
No distribution are made to the partners until the realization process is completed when the full
amount of the realization gain or loss is known.
Distribution of cash happens at the end of liquidation.
INSTALLMENT LIQUIDATION
Distributions are made to some or all of the partners as cash became available. Thus cash
distributions are made to partners before the full amount of the realization gain or loss.

LUMP-SUM

Problem 1

Partners A, B, and C with a profit and loss ratio of 3:5:2 decided to liquidate their partnership on
January 1, 2023. The following are the books of the partnership
Cash – 1,500,000 Liabilities -400,000
A capital – 600,000
B capital – 300,000
C capital – 200,000
How much will each partner receive?

ASSETS = LIABILITIES + EQUITY

Cash Liabilities Equity

A B C
1,500,000 400,000 600,000 300,000 200,000
(400,000) (400,000)
1,100,000 - 600,000 300,000 200,000
(1,100,000) (600,000) (300,000) (200,000)
- - - - -

Problem 2
Partners A, B, and C with a profit and loss ratio of 3:5:2 decided to liquidate their partnership on
January 1, 2023. The following are the books of the partnership:
Cash – 1,500,000 Liabilities – 600,000
Inventory – 800,000 A capital – 800,000
 B capital – 500,000
C capital – 400,000
The inventory was sold for 600,000
How much will each partner receive?

Cash Inventory Liabilities Equity

A B C
1,500,000 800,000 600,000 800,000 500,000 400,000
600,000 (800,000) (60,000) (100,000) (40,000)
2,100,000 - 600,000 740,000 400,000 360,000
(600,000) (600,000)
1,500,000 - - 740,000 400,000 360,000
(1,500,000) (740,000) (400,000) (360,000)
- - - - - -
Inventory – 800,000 – 600,000 = 200,000 (loss)
A = 200,000 * 30% = 60,000 (loss)
B = 200,000 * 50% = 100,000 (loss)
C = 200,000 * 20% = 40,000 (loss)

Problem 3
Partners A, B, and C with a profit and loss ratio of 3:5:2 decided to liquidate their partnership on
January 1, 2023. The following are the books of the partnership:
Cash – 1,500,000 Liabilities – 1,000,000
Inventory – 800,000 A capital – 500,000
B capital – 700,000
C capital – 100,000
The inventory was sold for 100,000
How much will each partner receive?
Assuming the following:
a. C is solvent
b. C has personal asset of 200,000 and personal liabilities of 400,000
c. C has personal assets of 200,000 and personal liabilities of 170,000

Cash Inventory Liabilities Equity

A B C
1,500,000 800,000 1,000,000 500,000 700,000 100,000
100,000 (800,000) (210,000) (350,000) (140,000)
1,600,000 - 1,000,000 290,000 350,000 (40,000)
a 40,000 40,000
1,640,000 1,000,000 290,000 350,000 -
(1,000,000) (1,000,000)
640,000 - 290,000 350,000 -
b 1,600,000 1,000,000 290,000 350,000 (40,00)
(15,000) (25,000) 40,000
1,600,00 1,000,000 275,000 325,000
(1,000,000) (1,000,000)
600,000 - 275,000 325,000
 (600,000) (275,000) (325,000)
- - - - - -
c 1,600,000 1,000,000 290,000 350,000 (40,000)
30,000 30,000
1,630,000 1,000,000 290,000 350,000 (10,000)
(3,750) (6,250) 10,000
1,630,000 1,000,000 286,250 343,750
(1,000,000) (1,000,000)
630,000 - 286,250 343,750
(630,000) (286,250) (343,750)
Inventory – 800,000 – 100,000 = 700,000 (loss)
b:
A= 40,000 * 3/8 = 15,000
B= 40,000 * 5/8 = 25,000

INSTALLMENT