Dissolution

Conditions resulting to dissolution

• Admission
• Retirement or withdrawal of a
partner
• Death, incapacity or insolvency of
a partner
• Incorporation of a partnership
Formation of a new partnership
 Partnership Liquidation
• Refers to dissolution of the partnership
leading to the termination of the business
activities carried on by the partnership

• and the winding up of partnership’s business

affairs to going out of business.
Partnership dissolution with liquidation may be
caused by any of the following factors:
1. The accomplishment of the purpose for which
the partnership was organized
2. The termination of the term/period covered by
the partnership contract.
3. The bankruptcy of the firm.
4. The mutual agreement among the partners to
close the business
 TYPES OF LIQUIDATION
• Lump-sum liquidation or liquidation by totals.
– This is a type of liquidation whereby the distribution of
cash to the partners is done only after all the non-cash
assets have been realized, the total amount of gain or loss
on realization is known, and all liabilities have been paid.
• Liquidation by instalment or piece-meal liquidation
– This is a type of liquidation whereby assets are realized on a
piecemeal basis and cash is distributed to partners on a
periodic basis as it becomes available, that is, even before all
non-assets are converted into cash.
PROCEDURES IN LUMP-SUM LIQUIDATION
1. Sale of non-cash assets
2. Distribution or allocation of gain or loss on
realization among the partners according to
their residual profit and loss ratios (salary
and interest factors disregarded) unless
liquidation ratios are specified in the
partnership agreement.
When realization of assets results in a loss, the loss is
carried to the capital accounts of the partners as a
deduction.
• If a partner’s capital account results in a debit balance
(called capital deficiency), the deficiency can be
eliminated by
– Making additional cash investment, if the deficient
partner is solvent.
– Charging the deficiency as additional loss to the
remaining partners, if the deficient partner is insolvent.
3.Distribution of cash to creditors
4. Distribution of cash to partners. In this
procedure, the provisions of the marshalling of
assets and the exercise of the right of offset are
applied
 STATEMENT OF LIQUIDATION
STATEMENT OF LIQUIDATION
• The statement of liquidation is a
prepared to summarize the liquidation
process.
• It is the basis of the journal entries made
to record liquidation.
 DEFINITION OF TERMS
1. Dissolution - the termination of a partnership as a going
concern; it is the termination of the life of a partnership.
2. Winding up - the process of settling the business Or
partnership affairs; it is synonymous to liquidation.
3. Termination - the point in time when all partnership affairs
are ended.
4. Liquidation - the interval of time between dissolution and
termination of partnership affairs; it is also the process of
winding up a business which normally consists of
conversion of assets into cash, payment of liabilities and
distribution of remaining cash among the partners.
5.Realization — the process of converting noncash
assets into cash.
6. Gain on realization - the excess of the selling price
over the cost or book value of the assets disposed or
sold through realization.
7. Loss on realization — the excess of the cost or book
value over the selling price of the assets disposed or
sold through realization.
8. Capital deficiency — the excess of a partner’s share
on losses over his capital.
9.Deficient partner - a partner with a debit balance in
his capital account after receiving his share on the loss
on realization.
10.Right of offset — the legal right to apply part or all
of the amount owing to a partner on a loan balance
against deficiency in his capital account resulting from
losses in the process of liquidation.
11.Partner’s interest — the sum of a partner’s capital,
loan balance and advances to the partnership.
 Marshalling of Assets
Marshalling of Assets
• involves the order of creditors’ rights against the
partnership’s assets and the personal assets of the individual
partners.
• The order in which claims against the partnership’s assets
will be marshalled is as follows: 1. Partnership creditors other
than partners
2. Partners’ claims other than capital and profits, such as loans
payable and accrued interest payable
3. Partners’ claim to capital or profits, to the extent of credit
balances in capital accounts.
Illustrative Problem
1. Other assets were sold for 140,000
 Entries
1. Cash 140,000
Other Assets 136,000
Gain on realization of assets 4,000
To record realization of non cash assets.
2. Gain on realization of assets 4,000
Encina, Capital 1,600
Endrada, Capital 1,600
Elina, Capital 800
To distribute gain to partners.
3. Liabilities 44,800
Cash 44,800
To settle obligations.
4. Loans Payable –Endrada 2,000
- Elina 3,200
Encina, Capital 39,600
Endrada, Capital 25,600
Elina, Capital 32,800
Cash 103,200
Final distribution to partners
2. Other assets were sold for P74,000
 Entries
1. Cash 74,000
Loss on realization of assets 62,000
Other Assets 136,000
To record realization of non cash assets.

2. Encina, Capital 24,800

Endrada, Capital 24,800
Elina, Capital 12,400
Loss on realization of assets 62,000
To distribute loss to partners.
3. Liabilities 44,800
Cash 44,800
To settle obligations.
4. Loans Payable- Enrada 800
Endrada, Capital 800
Right to offset,
5. Loans Payable Endrada 1,200
-Elina 3,200
Encina, Capital 13,200
Elina, Capital 19,600
Cash 37,200
3. Other assets were sold for P68,000 and
deficient partner is solvent
 Entries for Scenario 3
1.Cash 68,000
Loss on realization of assets 68,000
Other Assets 136,000
To record realization of non cash assets.

2. Encina, Capital 27,200

Endrada, Capital 27,200
Elina, Capital 13,600
Loss on realization of assets 68,000
To distribute loss to partners.
3. Liabilities 44,800
Cash 44,800
To settle obligations.
4. Loans Payable- Enrada 2,000
Endrada, Capital 2,000
Right to offset,
5. Loans Payable- Elina 3,200
Encina, Capital 10,800
Elina, Capital 18,400
Cash 37,200
Distribution of payments to partners.
4. Other assets were sold for P68,000 and
deficient partner is insolvent
 Entries for Scenario 3
1.Cash 68,000
Loss on realization of assets 68,000
Other Assets 136,000
To record realization of non cash assets.

2. Encina, Capital 27,200

Endrada, Capital 27,200
Elina, Capital 13,600
Loss on realization of assets 68,000
To distribute loss to partners.
3. Liabilities 44,800
Cash 44,800
To settle obligations.
4. Loans Payable- Enrada 2,000
Endrada, Capital 2,000
Right to offset,
5. Encina, Capital 800
Elina, Capital 400
Endrada, Capital 1,200
Capital deficiency absorption of insolvent partner.
Pls take note in the slide that its not additional cash but rather
the solvent partners shall absorb the deficiency of the
insolvent partner

6.Loans Payable- Elina . 3,200

Encina, Capital 10,000
Elina, Capital 18,000
Cash 31,200
Distribution of payments to partners.