Sido? apy RS Sey oe iar Chapter 4 | Partnership Liquidation Learning Objectives State the order of priority | of liquidation. ql 2. Account for the liquidation of a partnership, | | in the settlement of claims in cases Liquidation | Liquidation is the termination of business operations or the | winding up of affairs. It is a process by which \ 1, assets are converted into cash, 2. liabilities are settled, and 3. any remaining amount is distributed to the owners. Liquidation may be either voluntary (e.g., per agreement of partners of a solvent partnership) or involuntary (e.g., bankruptcy). The conversion of assets into cash is referred to as “realization” while the settlement of claims of creditors and owners is referred to as “liquidation.” However, the term liquidation is used in a broader sense to include the entire winding up process. The winding up process starts with the conversion of non: cash assets into cash. As such, the timing of the “realization” of non-cash assets determines the manner on which the “liquidation” (e., payment of claims) is carried out. Conversion of non-cash assets into cash | Methods of liquidation Liquidation may be aceomplished either through: 1, Lump-sum liquidation — all the non-cash assets of the partnership are sold simultaneously, or within a very short period of time, and the proceeds are used to sottle first all thPartnership Liquidation 101 liabilities and any remaining amount is paid to the partners under a lump-sum payment (i.e,, one-time or single payment) Lump-sum liquidation is possible when there is a contracted buyer of all the non-cash assets or the assets are sold on a “package deal” basis, 2. Installment liquidation — in most cases, it would take some time before all the assets of a business are converted into cash. In such case, the partners’ claims are settled on an installment basis as cash becomes available, but only after all partnership liabilities are fully settled. When financial statements are prepared during the liquidation process, all the assets of the partnership are restated to their realizable values (i.e,, estimated selling price less estimated costs to sell) and alll liabilities to their expected settlement amounts. The use of historical cost, fair value, present value, or other measurement basis is appropriate only when the entity isa going concern. Settlement of claims The available cash of the partnership is used to settle claims in the following order of priority: 1, Outside creditors 2, Inside creditors (eg., payables to partners) 3. Owners’ capital balances Right of offset ‘As shown above, a loan payable to a partner has a higher priority over the partner's capital balance. However, the legal right of ofiset allows a deficit in a partner's capital account to be offset by a loan payable to that partner. Lump-sum liquidation vs. Installment liquidation The following are the procedures in the accounting for lunyp-sum, liquidation and installment liquidation:M0 Chapter g ‘Lump-sum Installment | T. All of the non-cash assets | 1. Some of the non-cash oe are converted to cash. are converted toroants | 2 The total gain or loss on|2. The carrying amount of any the sale is allocated to the | unsold non-cash asset is) partners’ capital balances | considered as a loss. This is based on their P/L ratios. allocated to the partners’, capital balances based on” their P/L ratios. | 3. Actual liquidation expenses | 3. Actual and estimated future | are allocated to the| liquidation expenses are partners’ ‘capital balances allocated to the paftners' | based on their P/L ratios. capital balances based on) | their P/L ratios. | 4 The liabilities to outside | 4. The liabilities to outside)” creditors are fully settled. creditors are partially or fully settled. 5. The liabilities to inside|5. The liabilities to inside creditors are fully settled. creditors are partially of fully settled but only after the full settlement of the liabilities to outside creditors. 6. Any remaining cash is|6. If both the liabilities to | distributed to the owners in| outside and inside creditors full settlement of their) are fully settled, any interests, Temaining cash Jess cash s¢t aside for future tiquidatiot | expenses is distributed the owners as __ partial seltlement of their interest®Partnership Liquidation Tilustration 1: Lump-sum vs. Installment liquidation Fact pattern: 103. (On January 1, 20x1, the partners of ABC Co. decided to liquidate their partnership. The following information was made available: Cash 20,000 Accounts receivable 60,000 Inventory 120,000 Equipment, net 300,000 Total 500,000 Accounts payable 30,000 Payable toB 20,000 A, Capital (20%) 100,000 B, Capital (30%) 150,000 Capital (50%) 200,000 Total 500,000 Case 1: Lump-sum liquidation Information on the conversion of non-cash assets is as follows: a, 50,000 was collected on the accounts receivable; the balance is uncollectible. b. P70,000 was received for the entire inventory. ¢. The equipment was sold for P250,000, d._P2,000 liquidation expenses were paid, Requirement; Determine the amounts of cash distributed to the partners in the final settlement of their interests. Solution: Step 1: Compute for the gain or loss on the sale a) Collection on accounts receivable b) Sale of inventory ©) Sale of equipment 4) Liquidation expenses _ Net cash proceeds 50,000 70,000 250,000 (2,000) 368,000HOGew Sy ee eee Less: Carrying amount of non-cash assets | (GOK Noortrvsreeivables DK inventory + 300K Equipment) (480,000) Total loss (112,000) Step 2: Allocate the gain or loss to the partners” capital balances (include _their right of offset) A 20%) _BG0%) _C60%) Totals | Capital balances 790,000 150,000 200,000 450,000 Payable to B (right of ofiet) 20,000 20,000 Total 700,000 170,000 200,000 470,000 Allocation of loss [112K x (20%; 30% & 50%) (22,400) (33,600) __(56,000)_(112.000 144,000 __358,000 Arits. received by the partners _77,600__ 136,400 To check the accuracy of our answer, let us identify if the total amount distributed to the partners is equal to the amount of cash available for distribution to owners: Beginning balance of cash 20,000 Net proceeds from the sale of non-cash assets 368,000 _Less: Payment to outside creditors (accounts payable) (30,000) Cash available for distribution to partners. 358,000, Notice that the cash available for distribution to partners of P358,000 is equal to the total amount received by the partners. 4 Journal entries: Jan. | Cash 368,000 Loss on sale (inclusive of liquidation expenses) | 112,000 Receivables Inventory Equipment record the realization of non-cash assets te ac api ~ 22,400 4 ms api 33,600 Capita 56,000 Loss on salePariership Liquidation 105 SE __S to close the, toss on sale to the partners” _ respectoe capital accounts | fam. | Accounts payable 30,000 ae Cash 30,000 Me {0 record the settlement of liabilities to outside | creditors _ s Ii. | Payable to B 20,000 si Cash 20,000 t0 record the settlement of lability to inside creditor | Jan. | A, Capital 77,600 aka | B, Capital aseax 20K loan) 116,400 Capital 144,000 Cash (58K -20K loan) 338,000 to recor the setioment ofthe partners’ capital batences We can prepate a formal report on the liquidation through the statement of liquidation. A Statement of liquidation is a financial report that highlights the realization (zeceipts from asset disposals) and the liquidation (settlement of creditors’ and partners’ claims) of a partnership.—— . 7 = = OL, (O00%7FD) =~ (OOF9TT) (00922) (o00'see) Siouped oy swsWkeg 00'HFT OOF TT 009%4é : = : O00'see. spo, Too) (op'az) DONpaD apisuray jiomteg —¢ OoorrL —_OOr'9TL 0st 000% 7 = o00'sge _ WHOL (00008) To00'DE) _ S4OIPaud apisyno Oj Susie “TZ 000° OOF'9IL 009'Ze 00°02 00°08 2 000'88¢ SOL (ooo'9s) (009) (Or z2) (ooousH o00's9E S80] Jo uous $986 Yse3-UOU Jo UOISIDAUO ~ >] coon ___000'0ST on‘oor ooo'oz oe —— OUR UO‘ | 22049q SODUTP, (2009) (08) o0e) aot aqvied yswo-woN SV oe E wpdey ‘9 wnduy’g ede ‘y —aiquiivg — syuno20y Aey SOHAL Bessy __ a Txo7 ‘1 Aenuel uopepinbyy jo juaWaIeIS “0D av yasideuyPartnership Liquidation 107 iP ee 107 Case 2: Installment liquidation Use the fact pattern above but assume that the partnership will be liquidated over a prolonged period of time. Distributions to the partners will be made as cash becomes available. Information on the first conversion of non-cash assets is as follows: a. 75% of the accounts receivable was collected for only P30,000. b. Half of the inventory was sold for P40,000, c. Equipment with carrying amount of P200,000 was sold for 120,000. d, Actual liquidation expenses of P2,000 were paid. e. Estimated future liquidation expenses totaled P1,000. f 9,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses. Requirement: Determine the amounts of cash distributed to the partners from the partial realization of partnership assets. Solution: Step 1: Compute for the gain or loss a) Collection on accounts receivable 30,000 b) Sale of inventory 40,000 ©) Sale of equipment : 120,000 d) Actual liquidation expenses (2,000) ©) Estimated liquidation expenses (1,000) f) Cash retained for future expenses (9,000) ‘Net cash proceeds 178,000 Less: Carrying amount of all non-cash assets 60K Accounts receivables 120K Inventory +300K Equipment) (480,00) Total loss (302,000) SS OD & Notes: ® The procedure above is similar to the procedure used in lump-sum liquidation, with the following additional concepts: a. Expected future expenses are recognized immediately as losses to be allocated.to the partners’ capital balances:| goer | | b. Unsold non-cash assets are considered as Tosses to be allocated also to the partners’ capital balances. © To simplify our solution, the total gain or Toss to be allocated to the partners’ capital balances is computed simply by comparing the net proceeds and the carrying amount of all non. cash assets, whether sold of not. Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset) A(20%) __B (30%) _C 50%) _ Totals Capital balances 700,000 150,000 200,000 450,000 Payable to B 20,000 20,000 Total 700,000 170,000 200,000 470,000 Allocation of loss 302K x (20%: 30% 6 50%)) (60,400) (90,600) (151,000) (302,000) Amts. received by the partners __ 39,600 79400 49,000 168,000 Checking: Beginning balance of cash 20,000 Net cash proceeds (net of all costs and cash retentions) 178,000 Payment to outside creditors (accounts payable) (30,000) Cash available for distribution to partners 168,000 [122 Summary: Lump-sum and Installment Liquidation | Step 1: Compute for the net proceeds. Deduct all expenses, whether | paid or not, as well as any cash retention for future costs. Step 2: Compute for the gain ot loss by comparing the net | proceeds with the total carrying amount of non-cash assets, whether sold or not | Step 3: Allocate the gain or loss to the partners’ interests. Any | | residual amount in a partner's capital balance, including his | | right of offset, represents the settlement of his interest in the partnership.Partnership Liqitidation 109 Illustration 2: Lump-sum liquidation On January 1, 20x1, the partners of ABC Co. decided to liquidate their partnership. The following information was made available: Cash 20,000 Accounts receivable 60,000 Inventory 120,000 Equipment, net 300.0 Total 500,01 Accounts payable 50,000 A, Capital (20%) 100,000 B, Capital (30%) 150,000 C Capital (50%) é 200,000 Total 500,000 A third party offered to buy for P480,000 the partnership assets including liabilities but excluding cash but after the following assets are revalued to fair values: Accounts receivable 45,000 Inventory 75,000 Equipment 920,000 Requirement: Determine the amounts of cash distributed to the partners. Solution: Net proceeds from sale of assets and liabilities 480,000. Carrying amount of net assets sold (60K A/R + 120K Invty. + 300K Equipt. - 30K A/P) (430,000) Gain on sale 50,000 To simplify the solution, we simply ignored the revaluation of the assets. Instead, we compared directly the net selling price of P480,000 with the carrying amount of the net assets sold, excluding the P20,000 cash on hand which was not sold. The difference represents the gain to be closed to the Partners’ capital balances.Chapter gions ee eT cee ep eres eee 150,000 200,000 450,000 Capital balances 100,000 Allocation of gain SOK x 20 a 10.000 15.000 25,000 _50,000 Amts. received by partners 710,000 _ 165,000 225,000__ 500,000 Checking: Beginning balance of cash 20,000 Net proceeds from sale of assets and liabilities 480,000 500,000 Cash available for distribution to partners I Illustration 3: Installment liquidation On January 1, 20x1, partners A and B, who share profits and losses ona 3:1 ratio, decided to liquidate their business. As of this date, the following information has been determined: a ___ Cash Otherassets Liabilities A, Capital __ B, Capital 20,000 480,000 50,000 250,000 200,000 In the first month of liquidation, P180,000 were received on the sale of some assets, liquidation expenses of P5,000 were paid, and additional liquidation expenses of #2,000 were anticipated before the liquidation is completed. Creditors were paid 28,000. Available cash was distributed to the partners. Requirement: Determine the amounts of cash distributed to the partners. Solution; Sale of certain non-cash assets 180,000 ‘Actual liquidation expenses (6,000) mated future liquidation expenses 2.000 Net cash proceeds 773,000 is: Carrying amount of all non-cash assets (480,000). | iPartnership Liquidation at Notes: Remember the following concepts: * Expected future expenses are recognized immediately as losses. @ It doesn’t matter whether or not all the non-cash assets were sold. Any unsold asset is considered as loss. AGA) BU/4) Totals Capital balances before liquidation 250,000 200,000 450,000 Allocation of loss [307K «(94 & 24) (230,250) _ (76,750) (307,000) Amounts received by the partners 19,750 123,250 143,000 Checking: Beginning balance of cash 20,000 Net cash proceeds (net of liquidation expenses) 173,000 Partial payment of liabilities » (28,000) Cash set aside for the unpaid balance of liabilities. (50K - 28K) * (22,000) Cash available for distribution to partners 143,000 * Before payment can be made to the partners, all the liabilities must be settled first or sufficient funds must be set aside to settle any unpaid liabilities. Marshalling of assets As mentioned earlier, one of the characteristics of a partnership is “unlimited liability.” This is because the personal assets of the general partners are subject to the daims of partnership creditors in case of partnership insolvency. The legal doctrine of marshalling of assets is applied when the partnership and some of the partners are insolvent. The following are the rules when applying this doctrine: 1. First, any available assets of the partnership are used to settle the partnership's liabilities. 2. Second, in case the assets of the partnership are insufficient to Pay all liabilities (i.e., insolvency), the solvent general partners are required to provide additional funds from their personal assets,go Si The claims to the personal assets of partner are ranked in the following order: a. Those owing to personal creditors of the b. Those owing to partnership creditors. ¢. Those owing to partners by way of cont partner. tribution. 3, Third, in case some partners are insolvent (or, limited partners), their capital deficiency is offset to the capital balances of the other partners. If after allocating the capital deficiency of an insolvent (or limited) partner, @ solvent partner's capital balance results to a negative amount, the solvent partner is required to provide additional contribution. Ilustration 1: Insolvency of partnership Fact pattern: On Jan. 1, 20x1, the partners of ABC Co, decided to liquidate their partnership. The following information was made available: Cash 20,000 Accounts receivable 60,000 Inventory 129,000 Equipment, net 300,000 Total 500,000 Accounts payable 30,000 Payable to B 20,000 A, Capital (20%) 100,000 B, Capital (30%) 150,000 C, Capital (50%) __ 200,000 Total 500,000 ‘The noncash assets were realized as follows: a. 10,000 were collected on the accounts receivable; the balan®® is uncollectible. b. 5,000 were received for the entire inventory ¢, The equipment was sold for P53,000, . d. 2,000 liquidation expensea were paidPartnership Liquidation 113 "Case 1: All partners are personally solvent Requirement: Compute for the settlements to the assuming all of them are solvent. rtners Solution: Step 1: Compute for the gain or loss a) Collection on accounts receivable 10,000 b) Sale of inventory 5,000 ¢) Sale of equipment 53,000 d) Actual liquidation expenses (2,000) _ ‘Net cash proceeds 66,000 Less: Carrying amount of all non-cash assets (60K Accounts receivablet 120K Inventory +300K Equipment) (480,000) Total loss (414,000) Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset) A (20%) B (30%) CC (50%) Totals Capital balances 100,000 150,000 200,000 450,000 Payable to B 20,000 20,000 Total 100,000 170,000 200,000 470,000 Allocation of loss AISK x 20%; 30% 6 50% '82,800)' (124,200) (207,000) (414,000, Totals 17,200. 45;800 (7,000) 56,000 Additional contribution of C 7000 7,000 Amts. received by the partners 17,200 45,800 = 63,000 Because C is personally solvent, he is required to provide additional contribution to cover his capital deficiency. Checking: Beginning balance of cash 20,000 Net proceeds 66,000 Additional contribution by C 7,000 Less: Payment to outside creditors (30,000) Cash available for distribution to partners 63,000insolvent pieces beetles | i Case 2: Some partners are personally ttlements to the partners | Requirement: Compute for the sel [assuming C is insolvent. Solution: . , Step 1: Compute for the gain ar loss - (See ‘Case 1’ above Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset) A (20%) _B (30%) C (50%) Totals Capital balances 790,000 150,000 200,000. 450,000 PayabletoB 20,000 _20,000. Tatal 700,000 170,000 200,000 470,000 Allocation of loss “AIAK x 20%; 30% & 50% (82,800) (124,200) (207,000) (414,000) Totals 17,200 45,800 (7,000) 56,000 Allocation of capital deficiency to the other partners 7K x (20%/50%) & (30%/50%) (2,800) __ (4,200) 7000. * Amts. received by the partners 14,400 __41,600 + 56,000 Because C is personally insolvent, his capital deficiency is allocated to the other partners with positive capital balances. The allocation is based on the solvent partners’ P/L ratios [e.g allocation to 4 20% A's interest = (20% A's interest +30% B's interest) Checking: Beginning balance of cash 2000 Net proceeds 6000 Lass:Paymentto outside creditors 0,000), Cash available for distribution to partners “56,000 Case 3: P/L ratio in fraction Use the fact pattern except that the partners share in profits and losses in the following ratio: A (1/7), B (2/7), and C (4/7) | Requirement: Compute for the settlements to the partners assuming, C is insolvent,ership Liquidation J ee 115 Step 1: Compute for the gain or loss ~ (See ‘Case 1’ above) Step 2: Allocate the gain or loss to the partners’ capital balanc their right of offset) Am Bem Cai Totals _ es (include Capital balances 100,000 150,000 200,000 450,000 Payable to B 20,000 20,000 «Total 100,000 170,000 200,000 470,000 Allocation of loss AUK x (1/7) 217) de (407) (59,143) (118,286) (236,571) (414,000) Totals 40,857 51,714 6,571) 56,000 Allocation of capital deficiency to the other partners 36,571 x (LA%W/AS) & QNTIVES% (11,907) (24,664) 36,571 n TCR) 25°/43%0" (11,907) (24,664) 36,571 = Amis. received by the partners 28,950 27,050 = 56,000 * A's share in percentage: (1/7) = 14% B's share in percentage: (2/7) = 29% Denominator: (14% + 29%) = 43% Illustration 2: Marshalling of assets On Janualy 1, 20x1, the partners of ABC Co. decided to liquidate their partnership. The following information was made availabl. Cash Accounts receivable Inventory Equipment, net Total 500,000 S00 Accounts payable i 150,000 A, Capital (20%) 50,000 B, Capital (30%) 100,000 & Capital (50%) 200,000 Total 500,000 ——_______.__ 00sh assets amounted to me | | The net proceeds from the sale of non-ca | ; | \ 40,000. The personal assets and personal liabilities of the partners are as follows: —— SA Personal assets 300,000 260,000 200,000 Personal liabilities (220,000) 220,000) (320,000) Requirements: | a. How much additional contributions shall be made by the partners in order to settle all of the partnership liabilities? ‘| b. Determine the amounts of cash distributed to the partners in the final settlement of their capital accounts. | Solutions: Requirement (a): | Cash 20,000 | Proceeds 40,000 Payment for liabilities 150,000) | Additional contributions needed to settle liabilities (90,000) Requirement (b): Net proceeds 40,000 _Carrying amount of non-cash assets (0K +120K+300K)__(480,000)_ Total loss (440,000) a SS > Let us determine which partners are solvent and which are insolvent using the rules of ‘marshalling of assets’: i Personal assets 300,000 260,000 200,000 Personal liabili' (220,000) (220,000) _ (320, 000) 00) _@20,000) _ (20,000) vailal E ip rs A 40,000 - id B are solvent up to P80,000 and P40,000, ectively: while C is insolvent. msPartnership Liquidation > _The capital balances of the partners are settled as follows A 20%) B (30%) C60%) Totals _ Capital balances 50,000 100,000 200,000 ),000 Allocation of loss HHO x 20%; 30% & 50% (88,000) (132,000) _ (220,000) _(440,000) Totals (38,000) (32,000) (20,000) (90,000) (a) Allocation of C’s capital deficiency -20K x (215) & (315) (8,000) (12,000) __20,000 Totals (46,000) (44,000) z (90,000) (b) Additional contributions by solvent partners 46,000 40,000 z 86,000 Totals 2 (4.000) - (4,000) (© Allocation of capital deficiency of B (3,000) 4,000 = Totals (4,000) - : 4,000) (a) Additional contribution by A 4,000 z = 4,000 Payments to partners % Notes: (a) Since C is personally insolvent, his ¢apital deficiency is allocated to the other partners with positive capital balances. (b) A and B are solvent. Therefore, they are required to provide additional contributions necessary to cover their capital deficiencies. However, since B is solvent only up to P40,000, he is required to contribute only up to that amount. (0) The remaining capital deficiency of B is allocated to A. (d) A is required to provide additional contribution necessary to cover the capital deficiency of B. Notice that the total additional contributions of the partners are equal to the amount computed in ‘Requirement (a),’ Ist additional contribution by A 46,000 Additional contribution by B 40,000 2nd additional contribution by A. 4,000 Total additional contributions 90,000.me Seater Illustration 3.1: Application of the basic accounting equation Fact pattern: (On Jan. 1, 20x1, A, Band C decided to liquidate theiz partnership, ‘The capital balances were: A (20%), ?100,000; B (30%), P170,009 and C (50%), P200,000. Case 1: Cash after settlement of liabilities All the partnership assets were converted into cash and after payment of P30,000 liabilities, ‘P56,000 are available to the ‘partners. Only A and Bare solvent. nem Requirement: Determine how the partners’ capital accounts are settled. Solution: Using the basic accounting “Assets = Liabilities + Equity,” the loss _on sale is determined as follows: Assets Liabi Equi Cash = Payables + Partners’ capital 56,000 4 - 470,000 Notice that the equation does not balance. The balancing figure is the Joss, which shall be closed to the partners’ capital balances. The loss is squeezed as follows: Cash 56,000 Total partners’ equity (100K + 170K + 200K) (470,000) Loss (414,000) > The distribution to owners is computed as follows: A 20%) _BG0%) ___C(50%) Totals Capital balances, 100,000 170,000 200,000 470.0% Allocation of loss 41AK x 207%; 0% 6 50 (82,800) (207,000) _ angele Total 17,200 ary CT azion of capital deficiency 50%) & (30%/50%) (2,800) (4,200) 7.000 : the pari 14.0h) 600 nnnPartnership Liquidation 119 [ Case 2: Cash before settlement of liabilities | All the parinership assets were converted into P56,000 cash. The | partnership has liabilities of P30,000. Only A and B are solvent. Requirement: Determine how the partners’ capital accounts are settled. Solution: Assets _ Cash = Payables + Partners’ capital 56,000 # 30,000 + 470,000 Cash 56,000 Less: Payment for liabilities (30,000) Cash available for disiribution to partners 26,000 Total partners’ equity (470,000) Loss (balancing figure in acctg. equation) (444,000) > _ The distribution to owners is computed as follows: AQ0%) BG0%) _CG0%) ‘Totals Capital balances 100,000 170,000 200,000 470,000 Allocation of loss MAK x 20%; 30% & 50% (88,800) (133,200) 000) _ (444,000) Total 11,200 36,800 (22,000) 26,000 Allocation of capital deficiency to the other partners: é 22K x (20°% 50%) & (30%/50%) __(8,800)__(13,200) ‘Payments to the partners | Case 3: Zero remaining assets ’ | |All the partnership assets were realized but were exhausted in | settling the liabilities, except one for P50,000 which remains | unpaid. B and C are solvent, but A is insolvent.Chapters gy Requirement: Determine how the partners’ capital accounts are settled. Solution: Assets = Liabilities + Ente _ 0 z 50,000 + aa Cash 0 Less: Outstanding liabilities (50,000) Total (50,000) (520,000) ‘A (20%) __BG0%) —_C(50%) _‘Totals ‘Capital balances 700,000 170,000 200,000 470,000 Allocation of loss “520K x 20% 30% & 50% (104,000) (156,000) (260,000) _ (520,000) Total (4,000) 14,000 (60,000) (50,000) Alloc. of A’s capital deficiency “AK x (30%IS0%) & (50%/80%) 4,000 (1,500) 500 : Total = 12,500 (62,500) (50,000) Additional contrition by © 62,500 62,500 Payinent to partner = __ 12,500 - 12,500, Checking: Beginning balance of cash 0 Additional contribution by C 62500 Less'Paymentfortherentaining ability 50,000). Cash distribution to B 712,500 Illustration 3.2: Reconstruction of information On Jan. 1, 20x1, A and B liquidated their partnership. The capital balances were: A (60%), P100,000 and B (40%), 200,000. Before liquidation, the partnership had 20,000 cash and 30,000 liabilities. The partnership incurred loss of P120,000 on the sale of assets. A is solvent but B is insolvent, non-casPartnership Liquidation ra Requirements: a. How much was the carrying amount of the non-cash assets? b. How much was the net proceeds from the sale of non-cash assets? ¢. How much did A and B receive from the settlement of their interests? Solutions: Requirement (a): Carrying amount of non-cash assets Using the basic accounting equation, the non-cash assets are squeezed as follows: Assets = Liabilities + Equi Cash + Others = Payables + Partners’ capital 20000 + 2 = 30,000 + 300,000 Non-cash assets = (30K + 300K - 20K) = 310,000 Requirement (b): Net proceeds Net proceeds 190,000 (squeeze) Carrying amount of non-cash assets (310,000) Loss on sale (120,000) (start) Requirement (c): Payment to partners A (60%) _B(40%) Totals Capital balances before liquidation 100,000 200,000 300,000 Allocation of loss -120K x 60% & 40% (72,000) (48,000) _ (120,000) Amounts received by partners 28,000 152,000 180,000 Checking: Beginning balance of cash 20,000 Net proceeds from sale of non-cash assets 190,000 Payment to outside creditors (30,000) ci ash avuilable for distribution to partners 180,000Illustration 3.3: Reconstruction of information A and B liquidated their partnership. Before liquidation, the partnership had total assets of ?500,000 and the capital balances were: A (60%), P300,000 and B (40%), P150,000. Non-cash assets were sold for P300,000, and on the final settlement, A received 192,000. Requirements: a. How much was the total loss on the sale of partnership assets? b. How much did B receive in the settlement of his capital balance? How much were the total liabilities of the partnership? c d. How much was the balance of cash before the sale of non-cash assets? Solutions: Requirements (a) & (b): Step 1: Prepare the pro-forma distribution table. gee | A A 6O%)_—B BO) __—Totals_ B (40%) Totals. | | Capital balances before liquidation Capital balances before liquidation 300,000 150,000 450,000, Allocation of loss a “Amounts received by partners 192,000 2 z Step 2: Squeeze for the loss allocated to A. A (60%) _B (40%) Totals Capital balances before liquidation 300,000 150,000 450,000 Allocation ofloss___ (108,000) 2 xX ‘Amounts received by partners 192.000 ? 2 13 192K — 300K = (108,000) share of A in the lass Step 3: ‘Squeeze’ for the other missing amounts. A (60%) B (40%) Totals Capital balances before liquidation 300,000 150,000 450,000 _ Allocati¢ S_____(108,000) (72,090 _ 180,000)" “Amounts received by partners 192,000 ~ 78,0006 00, (1(198K allocation ‘otal 105s lrequirement (a)! ratio of B) = 72,000 share of Bin thedoss ) = 78,000 settlement to B frequttormeist by) (9 (180,000 total Loss x 40%Partnership Liquidation 3 Requirement (0): Assets = Liabilities + A,Capital + B, Capital 500,000. ? 300,000. 150,000. Liabilities = 30,000 (500K - 300K - 150K) Requirement (d): Beginning balance of cash 20,000 (squeeze) Net proceeds from sale of non-cash assets (giver) 300,000 Payment to outside creditors (se requirement 'e? (60,000) Cash available for distribution to the partners (A, 192K +B, 78K) _ 270,000 (start) Illustration 3.4: Reconstruction of information Aand B, with P/L ratio.of 60:40, liquidated their partnership. After all the non-cash assets were sold for P190,000 and all the P30,000 liabilities were settled, the partners had P180,000 to distribute among themselves. A received P28,000 in the settlement of his 100,000 capital balance. Requirements: a. How much were the total assets before the liquidation? b. How much was the capital balance of B before the liquidation? c. How much did B receive in the final settlement? Solutions Requirements (a) & (b): Step 1: Prepare the accounting equation. Cash + Non-cash = Liabilities + A,Capital + _B, Capital 2+ 2 = 30,000 + 100,000 + 2 Step 2: Compute for the balance of cash. Beginning balance of cash 20,000 (squeeze) Net proceeds from sale of non-cash assets (given) 190,000 Payment to outside creditors (giver) (30,000) Cash avaifable for distribution to the partners (given) 180,000 (start)TR de a Step 3: Compute for the balance of non-cash assets. “A (60%) _B 0%) Totais Capital balances before liquidation 100,000 ; : 28,000 s 2 a ns i B (40%) Totals A (60%) Capital balances before liquidation 100,000 2 ? | Allocation of loss panogyet____ (220,000) ? zo Amounts received by partners 28,000 z (928K - 100K = (72,000) share of Ain the loss ©) (72K allocation to A = 60% P/L ratio of A) = 120,000 total loss Net proceeds (given) 7 190,000 Less: Carrying amount of Non-cash assets (squeeze) (310,000) (120,000) Total loss on sale (sce above) Step 4: Complete the accounting equation. Cash + Non-eash = Liabilities + A, Capital_+ B, Capital 20,000 + 310,000 = 30,000 + —*(100,000— + —_—200,0000 @ 20K cash + 310K non-cash — 30K abilities - 100K A, Capital = 200,000 Answers to requirements: > (a) Total assets = 330,000 20K cash + 310K non-cash) > (b) Capital balance of B = 200,000 (sve above) Requirement (c): A (60%) B (40%) Totals ‘Capital balances before liquidation 100,000 200,000" 300,000 Allocation of loss (72,000) (48,000)! _ (120,000. ‘Amounts received by pi 28,000 152,000 __ 180,000. went (b) 0 (01120K total loss x 400% = (48,000) 4 Alternative solution Total cash available to partners 130,000 Less: Amount received by A (28,000), ‘Amount received by B IRequisenteun yr 152,008 ———Partnership Liquidation Bs Capital before liquidation [Requirement (b) ~ squeeze 200,000 Share of B im LOSS [-120K 10ss se Sane) « 40%) 48,000) Amount received by B (see abow) 2,000 Total liabilities (given) 30,000 A's Capital before liquidation (given) 160,000 B's Capital before liquidation (see abvve) 200,000_ Total assets [Requirement (a)] 330,000 Ilustration 4.1: Drawing accounts On January 1, 20x1, the partners of ABC Co. decided to liquidate their partnership on installment basis. Distributions to the partners will be made as cash becomes available. Information before the start of liquidation is as follows: Dr. cr. 20,000 | During January, non-cash assets with carrying amount of P130,000 were sold for P60,000. Disposal costs of P20,000 were incurred. All of the partners are personally insolvent. Requirement: Compute for the distributions to the partners in January.pe Og Solution: 60,00) Sale of non-cash assets 2 Disposal cost ou Net cash proceeds canta 000 -Carrying amount of all non-cash assets (60K + 120K * aoe | Total loss on sale > _ The distributions to the owners are com uted as follows: C 60%) Total A 0%) B06) Capital balances 700.000 150,000 °° 200,000 450,000 Drawing accounts (20,000) 30,000+ 10,00) Receivable from C (10,000) (10,000) Payable to B 20,000 20000 Total 0,000 170,000 +=—«220,000 470.000 Allocation of loss “ASOK x 20%; 30% & 50% 88,000) (132,000) (220,000) _ (440,000 Total 6,000) 38,000 - 30,000 Allocation of eapital deficiency of Ab 8,000 (6,000) : x Payments to the partners - 30,000 > 30,000 «The drawings account of C is added to his capital balance because the drawings account has a eredit balance. » Because all the partners are insolvent, any capital deficiency is allocated only to the partner with a positive capital balance. Checking: Beginning balance of cash 20,000 Net proceeds from sale of non-cash assets 40,000 Payment to outside creditors (20,000) ‘Cash available for distribution to the partners 30,000 Illustration 4.2: Drawing accounts A and B liquidated their partnership, Their capital balances before closing the books were P100,000 anc P150,000, respectively. The P/L ratio is 2:3. Each partner acts as an agent of the partnershiP- Before closing the -books..the~partnersshadethenfollowiNé transactions on behalf of the partnership:Partnership Liquidation 7 - a Cash receipts 100,000 120,000 Cash disbursements 75,000 150,000 All assets were sold and after settlement of liabilities, 120,000 cash is available for distribution to the partners. Both partners are personally insolvent. Requirement: Compute for cash distributions to the partners. Solution: A B Cash receipts 100,000 120,000 Cash disbursements (75,000) (150,000) Excess receipt (Excess disbursement) 25,000 (30,000) Because the pariners transact on behalf of the partnership, any excess cash receipt by a partner must be remitted to the partnership (@ receivable by the partnership from him), while ‘any excess cash disbursement must be reimbursed by the partnership (a payable by the partnership to him). Temporary receivables and payables may be closed to the drawings account of the partners (oe ducussion on ‘Parmer’ ledger acount). AQ) __BGI5)__ Totals Unadjusted capital balances 100,000 150,000 250,000 (Receivable from)/Payable to (25,000) __30,000 5,000 ‘Adjusted capital balances 75,000 180,000 255,000 Allocation of loss -135K™ x (2/5) &(35)_(54,000) __ (81,000) _ (135,000) Amts, received by the partners 21,000 __ 99,000 __120,000 ‘8 (120K available cash ~ 255K adjusted capital) ~ -135,000 loss Non-cash asset used as payment for claim If a creditor or a partner agrees to receive non-cash assets as settlement of his claim, the non-cash asset is considered sold at the amount agreed to be debited to the creditor's or partner's claim. The difference between the carrying amount of the non-cash assetwei and the agreed settlement amount is treated as gain or loss that is apportioned to all of the partners’ capital balances. Illustration: : A, B, C and D liquidated their partnership business. Before (40%), 200,000; B (30%), settling the capital balances of A 150,000; C (20%), P100,000; ane D (10%), 750,000, the partners agreed on the following: + B shall take equipment with a ; a price of P120,000, which is to be offset to his capital balance. * The remaining cash of 182,000, after settlement of partnership liabilities, shall be divided in a manner that will avoid the need for any possible recovery of cash from a partner. carrying amount of P100,000 aj Requirement: How much did C receive in the settlement of the partners’ capital accounts? Solution: ‘A@0%) _B (30%) _C (20%) _ (40%) _ Totals ‘Capital balances 00,000 150,000 100,000 50,000 500,00 Allocation of loss Total 120,800 90,600 60,400 30,200 302,00 Payment in equipment (120,000) 120,000) Total 120,800 (29,400) 60,400 30,200 182,00 Allocation of capital deficiency © (294K x 4/7): (207) &(V7)_(16.800) 29.400 (8,400) (4,200) 2 =. __(4200) Payment in cash 104000 52,000 26,000 __ 132.0 «The loss is computed as follows: _ Assets = Liabilities + Equi! Cash 182,000 z 500,000 prise) 120,000 Equipment ( site Total loss (eslaning figure) ¥B02000 = 500/000-2798, 000)Partnership Liquidation 129 The phrase ”....shall be divided in a manner that will avoid the need for any possible recovery of cash from a partner” means all the partner: insolvent. Thus, B's capital deficiency is absorbed by the other partners, re Safe payments schedule and Cash priority program ‘The computations presented earlier for installment liquidation may be presented in a formal manner through either 1. Safe payments schedule; or 2, Cash priority program ‘The basic purpose of these schedules is to prevent overpayments to partners during installment liquidation. Safe payment schedule ‘The safe payment schedule shows how much cash can be “safely” paid to the partners during installment liquidation, which avoids any overpayment. The preparation of this schedule requires the application of the same concepts as those we have applied earlier, namely: a. Unsold non-cash assets are treated as loss; and b. Expected future liquidation costs and potential unrecorded Habilities are recognized immediately as losses. The sum of (a) and (b) above is referred to as “maxinnum loss possible.” "The safe payment schedule may be used as supporting information to the Statement of liquidation. Illustration: Safe payment schedule On January 1, 20x1, the partners of ABC Co. decided to liquidate their partnership. The following information was made available: Cash 20,000 Accounts receivable 60,000 Inventory 120,000130 a Equipment net 800,008 Total ‘ 500,000 Accounts payable 30,000 Payable to B i 20,000 A, Capital (20%) 100,000 B, Capital (30%) 150,000 Capital G0%) 200,000 Total 500,000 a The partnership will be liquidated on an installment basis. Distributions to owners will be made as cash becomes available. January 20x1: The following transactions occurred in January 20x1: | 75% of the accounts receivable was collected for only P30,000. | Half of the inventory was sold for P40,000. Equipment with carrying amount of 200,000 was sold for 120,000. |. P2,000 liquidation expenses were paid. Estimated future liquidation expenses totaled P1,000. 9,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses, Requirement: Prepare the safe payment schedule on Jan. 31, 20x1. Solution: First, the actual loss on realization of assets is determined aS follows: Loss on collection of accounts receivable (30K - (60K x75%)] (15,000) Loss on sale of inventory [40K - (120K x 50%)] (20,000) Loss on sale of equipment (120K - 200K) (80,000) Actual liquidation expenses (2,000) Actual loss on realization ~ Jan, 20x1 (117,000) | i F131 Next, the maximum loss possible is computed as follows: Carrying amount of unsold non-cash assets (60K x 25%) + (120K x 50%) + (300K - 200K) (175,000) Estimated future liquidation costs (1,000) Cash set aside for potential unrecorded liabilities (9,000) Maximum loss possible __(185,000) Finally, the safe payment schedule is prepared as follows: ‘ABC Co. - Safe payment schedule January 31, 20x1 AQ0%) _B(30%) _C(50%) __ Total Payable to B eo) - 20,000 Capital balances before liquidation 100,000 150,000 200,000 _ 450,000 Total interest -Jan.1,20x1 100,000 170,000 200,000 470,000 Allocation of lass on realization - Jan, 20x1 (23,400) (35,100) _ (58,500) _ (117,000) Total 76,600° 134,900 141,500 353,000 Allocation of maximum loss possible -Jan. 20x1___ (37,000) _(55;500) (92,500) _(185,000) First installment payment Lopariners— fon. 2081 39,600__79,400___49,000__168,000 Notice that when preparing a safe payment schedule, the actual and estimated losses are computed separately. The. computations presented earlier, where we did not compute for these losses separately, are just a simplification of the computation for distributions to the partners. If you use the simplified method, you should be able to come up with the same amounts of distributions to the partners.The balance of cash is reconciled as follows: Cash sh Jan. 1, 20x1 20,000 Collection of accounts receivable 30,000 Payment for 2,000 liquidation expenses Payment to outside 40,000 | 30,000 creditors Ist installment 320,000 | 168,000 payment to partners 10,000_ Jan. 31, 20x1 i Sale of inventory Sale of equipment The ending balance’ of cash represents the 71,000 and P9,000 cash set aside for future costs. February 20x1: The following transactions occurred in February 20x1: a. 10,000 was collected on the remaining accounts receivable; the balance was deemed uncollectible b. The other half of the inventory was sold for ?20,000. The remaining items of equipment were sold for P30,000. d. 10,000 liquidation expenses and previously unrecorded liabilities were paid. The liquidation process ended on February 28, 20x1. | | | | | | } Requirement: Prepare the safe payment schedule on Feb. 28, 20x1. Solution: On final settlement, there is no need to. compute for the maximum loss possible Loss on collection of accounts receivable [10K - (60K x 25%)] + (6,000) Loss on sale of inventory (20K - (120K x 50%)] (40,000) Loss on sale of equipment (0K - 190k) Actual liquidation expensesPartnership Liguidation 133 ‘ABC Co. - Safe payment schedule February 28, 20x] A(20%) BB G0%) —_C60% Total Payable toB ~ 20,000 20,000 Capital balances before | liquidation 100,000 150,000 200,000 000. Total interest Jan. 1,.20x1 100,000 170,000 200,000 1000 | Allocation of loss on realization -fan. 20x1 (23,400) First installment payment topartners - Jan. 20x1 (39,600) (79.400) __(49,000)_(168, 000) Total interest - Feb.1,20x1 37,000 155,500 92,500 185,000 Allocation of loss on realization - Feb. 20x1 (25,000) Final installment payment to partners 12,000 18,000 ___30,000___60,000 (5100) (68,500) (117,000) | (37,500) __ (62,500) _(125,000) The balance of cash is reconciled as follows: Cash Feb. 1, 20x1 70,000 Collection of accounts Payment for receivable 10,000 | 10,000 liquidation expenses Sale of inventory 20,000 Final payment to Sale of equipment 30,000 partners Feb. 28, 20x1 The statement of liquidation in February is shown below:TOE Be GI SOME Toone) ‘ooo’ 00) = - = (00009) uaUTTeIsUT [eu -sieURIed o wuoudeg oovos ——000'8t_——mozE : - : 00'09 sootopeg, {oos'z9) (oos’ze){oo0"sz) {ooo'szt)—Go0'us TXOZ “424 ~ $50] JO) uoHnqLstp pute sjasse jo o0s‘t6 oos'ss oo0'e - i: o00’sZE 000 ! (oor) (Oov'6s)Co08"6e)o0r0z) ss = (o00'891) GOs'trL —_ove'rLE—ng'az —_aan'uz = ooo'sct 00st Sue = 5 q = Tjoo0e) = (ooo) SoypaD spay oF uHuAE | OOSrL O06 FLT n9'9e ——n00z coo'oe ooo’szt _an0'g07 oos'es}Coor’se) Coote) (oon’soe) —000°881 000'00Z ——000'OST ODOT. Cone. oo0'oe con'osr 00007 padiy wade Gg pander a aiqvkod ——yseo-wayy 40> i ‘V— IQuhivg ——stumoxy | figynby Songer] siassy x07 ‘ez Aaenaqag 01 1x02 ‘I Aenue{ poyad ayp x04 | ‘uorepmbyy jo uaurs}e}g, | o2aVv teers "yaidey relPartnership Liquidation 135 Cash priority program Another method of ensuring that there are no overpayments to the partners is by preparing a “cash priority program” or “‘cash distribution program.” This schedule determines which partner shall be paid first and which partner shall be paid last, after all the liabilities are settled, This schedule can be prepared even prior to the sale of any asset. The preparation of this schedule requires the application of the same concepts as those we have applied earlier, namely: a, Unsold non-cash assets are treated as loss; and b. Expected future liquidation costs and Potential unrecorded liabilities ace recognized immediately as losses. An additional procedure when preparing a cash priority Program is to rank the partners according to their maximum loss absorption capacity. The partner with the highest maximum loss absorption capacity shall be paid first. The partner with the lowest maximum loss absorption capacity shall be paid last, The maximum loss absorption capacity is computed as follows: Maximum loss Total partner's interest in the partnership absorption capacity Partner's P/L percentage Illustration 1: Cash priority program On January 1, 20x1, the partners of ABC Co. decided to liquidate their partnership. The following information was made available: Cash 20,000 Accounts receivable 60,000 Inventory 120,000 Equipment, net 300,000 Total 500,000 500,000 Accounts payable 30,000 Payable to B 20,000 A, Capital (20%) 100,000 B, Capital (30%) 150,000 Capital (50%) 200,000 Total 500,000 aeu se ee 136 Chapter, ‘The partnership will be liquidated on an installment basis ang distributions to the partners will be made as cash becomes available. > Even prior to the sale of any asset, we can determine the amount of minimum safe payments to the partners (when or as cash becomes available) by preparing a cash priority program. This is prepared as follows: First, the maximum loss absorption capacities (MLAC) of the partners are determined. This will be the basis in ranking the partners according to their priority over cash payments. ‘A(20%) —B (30%) __C (50%) Payable to B z 20,000 3 Capital balances before liquidation 100,000 __ 150,000 __ 200,000 Total interest in the partnership 100,000 170,000 200,000 Divide by: P/L percentage 20% 30% 50% ‘Max. loss absorption capacity 500,000 566,667 400,000 Rank of payment 2et Ist 3rd. Second, the partners’ MLAC are equalized. This will be the basis in preparing the cash priority program. A(20%) _B (30%) _CG0%). “Rank of payment _ nt Ist 3rd Maximum loss absorption capacity 500,000 566,667 400,000 _Difference between 1st and 2nd (66.667) Balance 500,000 500,000 400,000 _Difference betwee 000) (100,000) 100 400,000 __ 400,000 Third, the cash priorities are computed by multiplying the differences above by the respective partners’ P/L ratio.Ponies Maina 137 __Cash priority program | A (20%) B (30%) — C (50%) | ist Srd_ Ist priority (66,667 x 30%) 20,000 2nd priorit |_20,000 30,000 20,000 _| 50,000 The cash priority program above means that when cash becomes available: 1. Bis paid P20,000 first; 2. Next, A and B are paid P20,000 and P30,000, respectively; and 3. Any remaining cash will be distributed to all partners based on their P/L ratio. % Applications of the cash priority program January 2021: The following transactions occurred in January 20x1: | a. 75% of the accounts receivable was collected for only P30,000. b. Half of the inventory was sold for P40,000. |c. Equipment with carrying amount of P200,000 was sold for | P120,000. | d. 2,000 liquidation expenses were paid. |e. Estimated future liquidation expenses totaled P1,000. £ 9,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses. Requirement: Determine the cash payments to the partners on January 31, 20x1 using a cash priority program. Solution: The amount of cash available for distribution to the partners on January 31, 20x1 is computed as follows:a) Collection of accounts receivable aa b) Sale of inventory 000 z, 120,000 | ©) Sale of equipment i ed d) Payment for liquidation expenses (2,009) | e) Cash set aside for estimated liquidation expenses (1,000) | Net proceeds 178,000 Add: Cash balance, beg. (see Balance Shest above) 20,000 _Less: Accounts payable tz aac Stet toe)___©0.40) 168,000 Cash available for distribution to partners. Using the cash priority program, the distributions to the partners on January 31, 20x1 are determined as follows: we ere A B c 20%) (30%) (50%) Total Available cash - Jan, 31, 20x1 168,000 Allocation: 1st priority 20,000 (20,000) 2nd priority 20,000 30,000 (50,000) Balance 98,000 Payment after priorities [98K x (20%: 30% & 50%] ___19,600_ 29,400 49,000 _ (98,000) Ist installment payment 39,600__79,400 49,000 = & Notes: * After A and B are allocated their cash priorities, the P98,000 balance is allocated to the partners based on the P/L ratio. * The amounts computed above are equal to the amounis computed in ‘Illustration 1: Lump-sum vs. Installment liquidation ~ Case 2: Installment liquation’ and the illustration on ‘Sf payment schedule’.Partnership Liquidation February 20x: The following transactions occurred in February 20x1: a, 10,000 was collected on the remaining accounts receivable; the balance was deemed uncollectible. | b. The other half of the inventory was sold for P20,000. ¢. The remaining items included in the equipment account are sold for P30,000. 4. P10,000 liquidation expenses and previously unrecorded liabilities were paid, The liquidation process ended on February 28, 20x1. Reqitiremertts: Determine the cash payments to the partners on February 28, 20x] using a cash priority program. a) Collection of accounts receivable 10,000 b) Sale of inventory 20,000 ©) Sale of equipment 30,000 d) Payment for liquidation expenses (10,000) ‘Net proceeds 50,000 Add: Cash - Feb. 1, 20x1 (P1K and 99K cash set aside on Jan. 31) 10,000, Cash available for distribution to partners 60,000 Using the cash priority program, the amounts of distributions to the partners on February 28, 20x1 are determined as follows: A B c (20%) __ (30%) (50%) Total Available for cash - Feb. 28, 20x1 60,000 Allocation: Payment after priorities [60K x (20%; 30% & 50%)} 12,000 __18,000__30,000__ (60,000) Final installment payment 12,000 __ 18,000 __30,000 ~aS Sle fe Illustration 2: Cash priority program The partners in ABC Co. decided to li their capital balances were: quidate their business whey A, Capital (40%) 240,000 B, Capital (40%) 390,000 C, Capital (20%) 288,000 The non-cash assets were sold on installment and_ partial payments were made to the partners as cash became available. ‘After the second sale of non-cash assets, all the three partners received cash from the partial distribution. On the third sale of non-cash assets, the cash available for distribution to the partners is P10,000. Requirement: Using cash priority program, compute for the amount received by partner C on the third distribution. Solution: Cash available for distribution 10,000 Multiplied by: C's P/L ratio 20% Amount received by C 2,000 | The problem states that all the partners received cash from the second distribution. This means that all the priorities have | been paid. Thus, the third distribution is allocated based on the | partners’ respective P/L ratios. |Partnership Liquidation 141 Chapter 4: Summary Liquidation is the termination of business operations or the winding up of affairs, The order of priority in the settlement of claims during liquidation is: (1) Outside creditors; (2) Inside creditors; and (3) Owners’ capital balances. + _Pro-forma computation for distributions to partners: A(x%) __B(x%)__ Totals i Be) __ Total. Capital balances x xx x Payable (Receivable) —parmer's right ofoffet xx. xx xx Total xXx xx xx Allocation of loss - bese on PYL ratio x) x) Ants. received by the partners ax xx ax © The loss is computed as follows: » Net proceeds (net of actual and estimated expenses and cash retentions) less Carrying amount of all non-cash assets, whether sold or not; or The balancing figure in the basic accounting equation: A = £+C In case of partnership insolvency, the rule of marshalling of assets is applied. Under this rule, only the excess of a 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 partners. Under the cash priority program, when all of the priorities are paid, the remaining cash is distributed.to the partners based ‘on the P/L ratio.Chapters je PROBLEMS PROBLEM 1: TRUE OR FALSE 1. Dissolution and liquidation are 2. In the liquidation of a business, y simultaneously with the creditors’ claims. the same. f the owners’ claims are setteg Fact pattern ue A partnership has total assets of P5 (all non-cash), total, liabilities | of PI, and the following capital balances: A, Capital (50%) P2 and B, Capital (60%) P2. Scenario 1: Cash distributions to partners The total assets were sold for P4. 3, The cash available for distribution to the partners is P3. 4. The loss on the sale is P2. 5. A’s share in the final cash distribution is P1. Scenario 2: Reconstruction of information 6. If the loss on the sale’of the assets is P3, the sale proceeds must be?l. 7. If the cash available for distribution to the partners is P2, A's share is P1. 8. If the cash available for the partners’ claims is P2, the sae proceeds must have been P1. 9. If A’s share in the final cash distribution is PO.75, the loss on the sale of assets must have been P1. If the assets are realized, and the liabilities are settled, a carrying amounts, B's share in the final distribution will be Pl 1c PROBLEM 2: MULTIPLE CHOICE - THEORY 1, Which of the following does not relate to the liquidation of partnership? a. Realization of assetsParmorship Ligation b. Division of loss or gain on realization through charges or credits to partners’ capital accounts c. Payment of the liabilities d. Payment of the partners’ interests e. Conversion of the partners’ capital balances into ordinary shares 2. Which of the following has the least priority of payment in case of partnership liquidation? a. Priority claims, such as for artisan’s wages, taxes and other dues to the government and liquidation expenses. b. Secured creditors to the extent covered by proceeds from sale of pledged assets. c. Unsecured creditors to the extent covered by proceeds from sale of unpledged (or free) assets. d. The partners’ capital balances. 3. A partner is considered insolvent if a. the balance of his/her capital account is negative. b. his/her personal assets exceed personal liabilities. c. his/her personal creditors are all secured creditors. d. his/her personal liabilities exceed personal assets. 4. A and B are pariners of AB Co, which is undergoing liquidation. After AB Cos assets were realized and its liabilities settled, A’s capital account has a negative balance. Which of the following statements is correct? a. Bshalll absorb A’s capital deficiency if A is solvent. b. A shall make an additional contribution if A is insolvent. . AandB shall make pro rata contributions to eliminate A’s capital deficiency. d. B shall absorb A’s capital deficiency if A is insolvent. 5. When making safe payments to the partners during installment liquidation of a partnership, which of the following statements is correct?Chapter, i can be used; however, this a. A cash priority progré i ical aaa program can only be prepared after sale of assets. b. The carrying amount retention for future cost: c. A safe payment to the partners ¢ afterall the assets were realized. d. A safe payment to the partners after all the liabilities were a sufficient cash is retained for such payment. of unsold assets and any cash s are treated as Joss. an only be made uni can only be made uni tually settled even ig PROBLEM 3: EXERCISES Use the following information for independent Cases 1 to 6: 1. The statement of financial position of ABC Co. before liquidation is as follows: Cash 40,000 Accounts payable 60,000 ‘Accounts receivable 120,000 Payable to B 40,000 Inventory 240,000 A, Capital (20%) 200,000 Equipment 800,000 B, Capital (30%) 300,000 ‘Accum. depreciation (200,000) _C, Capital (50%) 400,000 Total Assets 1,000,000_ Total Liab. & Equity 1,000,000 Case 1: The non-cash assets were realized as follows: a. Ofthe total accounts receivable, only P100,000 were collected. b. The entire inventory was sold for 140,000. c. The equipment was sold for P500,000. d. 4,000 liquidation expenses were paid, Requirement: Compute for the cash distributions to the partners: Case 2: The partnership is liquidated on installment basis. In the first month of the liquidation process: a, 80% of the accounts receivable was collected for only P60,000: b. Two-thirds of the inventory was sold for P80,000.Partnership Liguidation ¢. Equipment with carrying amount of P300,000 was sold for ‘P240,000. d. P4,000 liquidation expenses were paid. An additional P2,000 is expected to be incurred in the succeeding periods, e. P18,000 cash is set aside for potential unrecorded liabilities Requirement: Compute for the cash distributions to the pariners. Case 3: A third party offered to buy the non-cash assets and assume the accounts payable of the partnership for P960,000. However, certain assets are to be revalued as follows: Accounts receivable, P90,000; Inventory, P150,000; and Equipment, P640,000 Requirement: Compute for the cash distributions to the partners. Case 4; The non-cash assets were sold for P100,000. The financial conditions of the partners are as follows: A B c Personal assets 600,000 520,000 400,000 Personal liabilities (440,000) (440,000) (640,000) Requirement: Compute for the cash distributions to the partners. Case 5; The partnership will be liquidated on an installment basis. Distributions to the owners will be made as cash becomes available. The following transactions occurred in January 20x1: 75% of the accounts receivable was collected for only P60,000. Half of the inventory was sold for P80,000. Equipment with carrying amount of P400,000 was sold for 240,000. d. P4,000 liquidation expenses were paid. Estimated future liquidation expenses totaled P2,000. €. P18,000 cash was retained in the business for potential unrecorded liabilities and anticipated. expenses. eR yChapter; fig) occurred in February 20x1- > The following transactions remaining accounts receivable, a. 20,000 was collected on the the balance was deemed uncollectible. b. The other half of the inventory was sold fo cc. The remaining items included in the equi] sold for P60,000. 4. 20,000 liquidation expenses and P: * liabilities were paid. e. The liquidation process ended on Feb \d for P40,000. pment account were reviously unrecorded ruary 28, 20x1. | | | | Requirements: Prepare the schedule of safe payments as of a. January 31, 20x1; and | b. February 28, 20x1. | Case 6: Use the fact pattern and the additional information in Case 5. | Requirements: Determine the cash distributions to the partners on | the dates below using a cash priority program | a. January 31, 20x1 | b. February 28, 20x1 | 2._ The accounts of A&B Co. before liquidation are as follows: Cash _Otherassets Liabilities A, Capital __ B, Capital 40,000 960,000 100,000 500,000 400,000 In the first month of liquidation, certain assets were sold for 360,000, gross of P10,000 disposal costs. Additional P4,000 costs are anticipated before the liquidation is completed. Liabilities amounting to P56,000 were paid. Partial distributions were mad to the partners. A and B share in profits and losses on a 3:1 ratio. Requirement: Compute for the cash distributions to the partners. |Partnership Liquidation ay Use the following information for Cases 1 and 2 below: 3. ABC Co. filed for bankruptcy and is starting its liquidation process, The partners’ capital balances are: A (20%), P200,000; B (30%), P340,000; and C (50%), P400,000. C is insolvent. Case 1: All the assets were sold and alter settling the P60,000 liabilities, P112,000 are available to the partners. Requirement: Compute for the cash distributions to the partners. Case 2: After all the assets were sold, the partnership had cash of 112,000 and total liabilities of 60,000. Requirement: Compute for the cash distributions to the partners. 4. A&B Co. is undergoing liquidation. Before the liquidation, A&B Co, had P40,000 cash, some non-cash assets, liabilities of 60,000, and the following capital balances: A (60%), P200,000 and B (40%), 400,000. The partnership incurred loss of 240,000 on the initial sale of non-cash assets. Only A is solvent. Requirements: Compute for the following: a, Carrying amount of the non-cash assets b. Net proceeds from the sale of non-cash assets ¢. Cash distributions to A and B 5. A&B Co. is undergoing liquidation. Before the liquidation, A&B Co, had total assets of P1,000,000, some liabilities, and the following capital balances: A (60%), P600,000 and B (40%), 300,000. The non-cash assets were sold for 600,000 and, after settling all the liabilities, A received 384,000 in the final cash distribution. Requirements: Compute for the following; a. Loss on the sale of asseta meat b. B's total share in the cash distribution to the partners c. Total liabilities of the partnership d. Cash balance before the sale of non-cash assets 6, Aand B, with P/L ratio of 60:40, liquidated their partnership, After all the non-cash assets were sold for 380,000 and the 760,000 liabilities were settled, the partners had 360,000 tp Gistribute among themselves. A teceived 756,000 in the settlement of his P200,000 capital balance. Requirements: Compute for the following: a. Total assets immediately before the liquidation b. Beginning balance of B’s capital account c. B's share in the cash distribution 7. A and B's respective capital balances were P200,000 and P300,000 before closing the following transactions which the partners made on behalf of the partnership: pene Cash receipts 200,000 240,000 Cash disbursements 150,000 300,000 The partnership is liquidated. All the assets were sold and after paying all the liabilities, P240,000 are available to the partners, both of whom are personally insolvent. The P/L ratio is 2:3. Requirement: Compute for the cash distributions to the partners. 8. On Jan. 1, 20x1, A, B, C and D decided to liquidate their partnership. Their capital balances as of this date were: Ar Capital (40%) 400,000; B, Capital (30%), 300,000; C, Capital (20%), 200,000; and D, Capital (10%), P100,000. After all the non-cash assets were sold and the liabilities settled, the partners agreed on the following: a. B takes equipment with carrying amount of P200,000 at a” equity setoff price Gf/P240:000. iPartnership Liquidation _ 149 b. The P364,000 remaining cash is to be divided in a manner that avoids the need for any possible cash recovery from a partner. Requirement: Compute for C’s share in the cash distribution PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL 1. On January 1, 2003, the partners of Cobb, Davis, and Eddy, who share profits and losses in the ratio of 5: respectively, decided to liquidate their partnership. On this date the partnership condensed balance sheet was as follows: Cash 50,000 Liabilities 60,000 Other assets 250,000 Cobb, capital 80,000 Davis, capital 90,000 Eddy, capital 70,000 Total assets 300,000 Total Liab. & Equity 300,000 On January 15, 2003, the first cash sale of other assets with a carrying amount of 150,000 realized 120,000. Safe installment payments to the partners were made the same date. How much cash should be distributed to each partner? Cobb Davis Eddy Cobb Davis Eddy 15,000 51,000 44,000 ¢.55,000 33,000 22,000 .40,000 45,000 35,000 d.60,000° 36,000 24,000 (AICPA) Use the following information for the next five questions: Jack and Beans, who share in profits and losses in the ratio of 3:7, decided to liquidate their Talk Partnership. The partners’ capital balances were P300,000 and P190,000, respectively. 2. fall partnership assets and liabilities are realized and settled at their carrying amounts, how much will Beans receive from the liquidation? a. 300,000 . 120,000 bb. 190,000 d. answer not determinablewo Si liabilities of 200,000. If ay x i s total The partnership has to! Ll eat partnership assets are realize Jack receive from the liquidation? a. 243,000 . 300,000 b. 57,000 . 133,000 4, If after all partnership assets are realized and all liabilities are settled the partnership has remaining cash of ®120,000, how much will Beans receive from the liquidation? a. 189,000 c. 69,000 b. 120,000 a0 5. [fon the final settlement of the partners’ claims Beans received 99,000, how much did Jack receive? a. 261,000 <. 89,000 | b. 234,000 a0 6. Before the realization of non-cash assets, the partnership hasa zero balance in its cash account and a P200,000 balance in its liabilities. If Jack received P261,000 on the final settlement of the partners’ claims, how much were the net proceeds from | the sale of the non-cash assets? j a. 560,000 cc. 290,000 b. 360,000 4.0 7. Partners A, B and C decided to liquidate their partnership. A summary of the partnership's statement of financial position is shown below: Assets Liabilities Equity Cash — Noncash AQ0%) BG0% CG0%) | 20,000 480,000 __30,000 000___170,000_ 200,000 One-third of the noncash assets were sold for 970,000. The partnership paid 8,000 liquidation expenses. Partner C is insolvent. How much cash did A receive from the settlement of the partners’ interests?Partnership Liquidation a. 12,400 ¢. 13,600 b. 16,800 d. 12,800 Use the following information for the next tivo questions A, Band C decided to liquidate their partnership business. The financial position of the partnership shows the following partners’ equity: ‘A, capital (30%) 210,000 B, capital (20%) 150,000 C, capital (50%) Total Upon liquidation, all the partnerships’ assets are sold and sufficient cash is realized to pay all liabilities except one for 30,000. All partners are solvent except C, 8, By what amount would the capital of A change? a. 180,000 decrease ¢. 24,000 increase ‘b. 234,000 decrease d.0 (AICPA - Adapted) 9. How much is the additional contribution required of B? a. 6,000 c. 24,000 b. 18,000 do 10. ABC Co. is undergoing liquidation, Information before the start of the liquidation process is as follows: Cash 10,000 Accounts payable ‘80,000 Accounts receivable 80,000 Payable to B 20,000 Receivable from A 10,000 A, Capital (50%) 250,000 Inventory 190,000. B, Capital (30%) 150,000 Equipment, net 320,000 _C, Capital (20%) 100,000 Total 600,000 Total Liab. & Equity 600,000 The total cash distributed to the partners after the first and second sales of noncash assets were £12,000 and P30,000, respectively. How much cash did B receive iw fhe second cashdistribution?pS a. 12,000 c. 3,600 b. 17,600 d, 26,000 PROBLEM 5: CLASSROOM ACTIVITY INSTRUCTIONS: 1. Find a study partner, preferably a smart one. — 2. You and your partner were partners in a business partnership that is now undergoing liquidation. 3. Fill-in the blanks below then answer the requirements. 4. Have your computations audited by your kind classmates then return the favor. > Financial information before the start of liquidation: Name of business: Cash Accounts payable | Accounts receivable Payable to Partner Inventory . Partner__, Cap. (__%) Equipment, net Partner Cap. (__%) | Total Assets Total Liabilities & Equity » The non-cash assets were realized as follows: _Camying amount Net proceeds Accounts receivable | Inventory | Equipment, net l Requirement: Compute for the cash distributions to you and yout partner. Show solution in awesome form.Partnership Lindation 153 PROBLEM 6: FOR CLASSROOM DISCUSSION Fact pattern: 1. Done Partnership is undergoing liquidation. Information on Done is as follows: Cash 20,000 Accounts payable 30,000 Accounts receivable 60,000 Payable to B 20,000 Receivable from A 10,000 A, Capital (60%) 250,000 Inventory 120,000 B, Capital (40%) 200,000 Equipment, net 290,000 Total 500,000 Total Liab. & Equity 500,000 Case 1: Lump-sum liquidation The non-cash assets were realized as follows: a. Only 70% of the accounts receivable was collected; the balance is uncollectible. b. 20,000 was received for the entire inventory. c. The equipment was sold for P310,000. d. 12,000 liquidation expenses were paid Requirement: Compute for the cash distributions to the partners. Case 2: Installment liquidation Done will be liquidated on installment basis. Cash distributions to the partners will be made as cash becomes available. In the first month of the liquidation process, the non-cash assets were realized as follows: a. Half of the accounts receivable was collected. Of the remaining half, 10,000 accounts are deemed worthless. . Seventy-five percent of the inventory was sold at 80% of cost. ¢ Equipment with carrying amount of P200,000 was sold for P185,000. . P12,000 liquidation expenses were paid. Additional P5,000° liquidation expenses are expected to be incurred in subsequent periods. Requirement: Compute for the cash distributions to the partners.Case 3: Gain on settlement of liability All the non-cash assets, except the realized for P250,000. The accounts payab! 24,000, after offset of a P6,000 credit memorandum. receivable fom A, wer, Requirement: Compute for the cash distributions to the partners, Case 4: Marshalling of assets ; All the non-cash assets, except the receivable from A, were realized for 65,000. The personal assets and liabilities of the rtners are as follows: vee ge ll Personal assets 200,000 380,000 Personal liabilities (440,000) (240,000) Requirement: Compute for the cash distributions to the partners. Case 5: Reconstruction of information After all the assets (excluding the receivable from A) were realizet and the liabilities to outside creditors were settled, B received 140,000 in the cash distribution to the partners. Requirement: Compute for the following: a. Loss on sale b. Share of A in the cash distribution to the partners c. Cash available for distriboution to the partners d. Net proceeds from sale of the non-cash assets, excluding the receivable from A Case 6: Non-cash asset used as payment for claim All the assets (excluding the receivable from A) were realized, except for equipment with carrying amount of 60,000 which will take at an equity setoff price of P20,000. The remaining cash! 35,000 is to be divided among the partners in a manner that wi! avoid the possible recovery of cash from a partner. le was settled fo,Requirement: How much is the total payment to B in cash and in kind? Case 7: Cash priority program Done will be liquidated on installment basis. In the first month of the liquidation process, the non-cash assets were realized as follows a. Half of the accounts receivable was collected, b. Seventy-five percent of the inventory was sold at 80% of cost. c. Equipment with carrying amount of P200,000 was sold for ‘P185,000. d. P12,000 liquidation expenses were paid. Additional P5,000 liquidation expenses are expected to be incurred in subsequent periods. Requirement: Compute for the cash distributions to the partners using a cash priority program.