Partnership Liquidation

 Process of converting all assets of the business into cash, followed by the final
payments of creditors’ claims and the partners’ capital balances in the partnership
 Involves selling the assets of the firm, paying the liabilities and distributing any
remaining assets
 Ends both the legal and economic life of the entity
 May be voluntary or involuntary

Steps involved in liquidation

1. Complete the accounting cycle for the final operating period
2. Sell noncash assets
3. Allocate gains or losses on realization based on capital ratio
4. Pay partnership liabilities
5. Distribute remaining cash to partners
 Partnership Liquidation

Marshaling of assets
1. Segregation of assets owned by the partnership and the personal assets owned by the
partners
2. Defined the priority of claims against the assets of the partnership and of the partners

Application of personal assets of a partner

3. Personal creditors
4. Partnership creditors
5. Other partners by way of contribution
 Partnership Liquidation

Partnership claims
1. Creditors other than partners
2. Partners other than for capital and profits
3. Partners with respect to capital and profits

Lump sum liquidation

4. Adjustments of accounts and closing of nominal accounts
5. Sale and/or distribution of noncash assets
6. Distribution of any gain or loss on realization
7. Accounting for any capital deficiency resulting from the distribution of loss from
realization
 Partnership Liquidation

Statement of liquidation
1. Report that shows the summary of winding up the affairs of the partnership and
priority of cash distributions
2. Prepared as the basis of the journal entries needed to record the liquidation process

Other notes
3. If the capital of the partners is deficient, exercise the right to offset if he has a loan to
the partnership.
4. If there is no loan or if the capital balance still results in a deficiency, the deficient
partner must contribute cash to negate his deficiency.
5. If the deficient partner is insolvent, the other partners absorb the deficiency.
6. The right to offset is required to be included in the articles of partnership.
 Partnership Liquidation

The following data are taken from the records of ABC Services on Dec. 31, 2013
Account Debit Credit
Cash 50 000
Accounts receivable 1 500 000
Merchandise inventory 800 000
Office supplies 50 000
Accounts payable 1 950 000
Loan payable to Adams 50 000
Adams, capital 100 000
Bartley, capital 200 000
Carson, capital 300 000
Service income 450 000
Salaries expense 600 000
Supplies expense 50 000
 Partnership Liquidation

The existing agreed profit and loss distribution ratio is 1: 2: 2 for Adams, Bartley and
Carson, respectively. Since the partnership was incurring losses in the last successive
years, the partners agreed to terminate the partnership. The noncash assets were realized
at a total lump sum amount of P1 950 000.

Prepare a statement of liquidation for the partnership given the following independent
situations:
1. All general partners are solvent.
2. Bartely is insolvent.
3. The noncash assets were realized for P1 800 000
 Partnership Liquidation

The following account balances were taken from DE Partnership on Dec. 31, 2013
Assets Liabilities and Capital
Cash 50 000 Accounts payable 1 100 000
Accounts receivable 300 000 Loans from Evigan 100 000
Loans to Dawson 100 000 Dawson, capital 150 000
Merchandise inventory 850 000 Evigan, capital (50 000)

Dawson and Evigan share profits and losses in the ratio 2: 1, respectively. The partners
dissolved and liquidated the partnership on the same day. The accounts receivable and
merchandise inventory were sold for P1 300 000.
Prepare the partnership’s statement of liquidation and the entries necessary to record the
partnership’s liquidation.
 Partnership Liquidation

Installment liquidation
1. Also known as piecemeal liquidation
2. Gradual liquidation
3. More realistic than lump-sum liquidation

Tools involved in installment liquidation

4. Safe payments schedule
5. Cash priority program
 Partnership Liquidation

Safe payment schedule

1. Shows a conservative approach to liquidation
2. Prepared when there is availability of cash after payment to outside creditors
3. Indicates how the available cash should be distributed to partners

Assumptions made by a safe payment schedule

4. Anticipation of all possible liabilities and expected losses/expenses to be incurred
during liquidation
5. All unsold non-cash assets will be worthless
 Partnership Liquidation

Safe payment schedule

1. Shows a conservative approach to liquidation
2. Prepared when there is availability of cash after payment to outside creditors
3. Indicates how the available cash should be distributed to partners

Assumptions made by a safe payment schedule

4. Anticipation of all possible liabilities and expected losses/expenses to be incurred
during liquidation
5. All unsold non-cash assets will be worthless
 Partnership Liquidation

Consider the following post-closing trial balance of HIJ Partnership as of Dec. 31,
2013
Debit Credit
Cash 50 000
Accounts receivable 1 500 000
Inventory 800 000
Supplies 50 000
Accounts payable 1 400 000
Loan payable to H 50 000
H, Capital (P/L = 20%) 200 000
I, Capital (P/L = 40%) 350 000
J, Capital (P/L = 40%) 400 000
 Partnership Liquidation

Assume that the non-cash property of the partnership was realized in 2014 as
follows:

Jan. 15 The whole accounts receivable were realized at P1 400 000

Additional liability of P10 000 is conservatively estimated to be incurred
Expected liquidation expenses of P20 000 will likely be incurred
Feb. 20 The inventory are sold for P740 000
Estimated liability and expected liquidation expenses remained at P10 000 and
P20 000, respectively
Apr. 1 Unused supplies were sold for P30 000 and used to pay the actual
liquidation expense of P5 000 and actual liability of P5 000 previously estimated at
P10 000 and P20 000
 Partnership Liquidation

Cash priority program

1. Also termed as ‘predistribution plan’
2. Guarantees that no overpayment will happen in making premature payments
3. Determines to whom and how much available cash shall be distributed even ptior
to actual realization
4. Combines partner’s loan balances with their respective capital balances
5. Anticipates all possible liabilities, losses and other liquidation expenses

Using the same date used in the illustration of satfey payments schedule, prepare a
cash priority program for HIJ Partnership.