Partnership Liquidation

Module 4

PARTNERSHIP ACCOUNTING BY PROFESSOR ZENAIDA MANUEL

 Objective 1

 Differentiate dissolution from liquidation

 Reasons for liquidating
 Steps in liquidating
 Legal provisions
 Types of liquidation

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 Objective
Objective 11
LIQUIDATION is defined as the process of dissolving
the business, winding up its affairs leading to its
termination. Module 3 is dissolution but is a result only
of a change in ownership without necessarily terminating
business operation.
REASONS: accomplishment of the purpose for which
it was formed, disagreement among the partners,
retirement or death of a partner, or due to insolvency.
A business is insolvent when its assets are not sufficient
to pay existing claims of its creditors.

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 Objective 1

It will normally take three steps to liquidate:

• Converting or selling all remaining properties and
non-cash assets into cash with the gain or loss on
conversion allocated to all the partners.
• Paying partnership liabilities and liquidation
expenses.
• Distributing the remaining cash in payment of the
partners’ interest (loan and capital balances)

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 Objective 1
LEGAL PROVISIONS which should be considered based on
the New Civil Code (ART 1839) are the following:
•following
Payments to creditors and partners should be made in the
order:
a. those owing to outside creditors (other than the
partners),
b. those owing to the partners other than their capital
balances and share in the profit,
c. those owing to partners for their capital, and
d. those owing to partners for their share in the profits.

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 Objective 1

• When a partner becomes insolvent, the claim

against his separate properties shall be ranked
in the following order:
a. owing to personal creditors;
b. owing to partnership creditors;
c. owing to other partners for contributions
made.

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 Objective 1

•properties
Partnership creditors have priority over partnership
while partners’ personal creditors have priority
over partners’ personal properties.

• In case the partnership is insolvent, the general partners

(including industrial partner) are liable to pay the
partnership creditors from his/her personal properties.

•A deficient partner may apply the right of offset to a

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 Objective 1

•his
A limited partner is liable only to the extent of
or her contribution in the partnership (Article
1856). A limited partner shall not receive any
part of his contribution until all liabilities of the
firm have been paid, except to general partners
and to limited partners, and there remains
property of the partnership sufficient to pay
them.

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 Objective 1

TYPES OF PARTNERSHIP LIQUIDATION

• Simple Liquidation - this is the process where
all the non-cash assets are sold at a lump sum so
that cash is immediately available for
distribution.
• Installment Liquidation - this is the process
where the non-cash assets are sold in installment
so that cash is disbursed to all equity interests as
the cash becomes available.
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 Objective 2- Account for liquidation
Accounting process:
1.Adjust and close the books.
2.Prepare a statement of financial position.
3.Sell the non-cash assets with the gain (loss) added (deducted) to
the partners’ capital accounts using their P & L ratio.
4.Payment of liabilities or claims owing to outside creditors.
5. Payment to partners for loan and capital.
If a deficiency occurs, eliminate deficient capital by:
1)applying the right of offset or
2)requiring the partner to invest/pay out of personal assets or
3)making the other partners absorb the deficiency if deficient partner
is insolvent.
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 Objective 2- illustration

After adjusting and closing the books, prepare a

Statement of Financial Position

Cash P100,000 Total liabilities P 60,000

Inventories 50,000 David, Capital 80,000
Land 60,000 Grace, Capital 40,000
Building (net) 30,000 Jane, Capital 60,000
Total Assets P240,000 Total P240,000

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 Objective
Objective 22

 Assume that David, Grace, and Jane have

profit and loss sharing ratio of 3:1:1
 Assume that all of the noncash assets are
sold for P150,000 for a gain of P10,000.
 Allocate this gain to the partners, and
determine partners’ interest
 Make payments first to creditors, next to the
partners.
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 Objective
Objective 22
 P10,000 × 3/5 = P6,000 to David
 P10,000 × 1/5 = P2,000 to Grace
 P10,000 × 1/5 = P2,000 to Jane

After paying the liabilities, how much will be

the available cash for the partners?
P100,000 before liquiudaton + P150,000 cash
from the sale – P60,000 paid to outside debts
= P190,000
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 Objective
Objective 22

Total Partners’ Interest to be paid = P190,000:

 David: P80,000 + P6,000 = P86,000
 Grace: P40,000 + P2,000 = 42,000
 Jane: P60,000 + P2,000 = 62,000

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 Objective
Objective 3-
3- Prepare
Prepare entries
entries
1. Cash 150,000  
Non Cash Assets (in detail)   140,000
David, Capital   6,000
Grace , Capital   2,000
Jane, Capital 2,000

To record sale of assets at a gain.    

2. Liabilities (in detail) 60,000  

Cash   60,000
To record payment to outside creditors.

3. David, Capital 86,000 

Grace , Capital 42,000
Jane, Capital 62,000
PARTNERSHIP
Cash ACCOUNTING BY PROFESSOR ZENAIDA MANUEL 190,000
 Accounting for Liquidation- illustration
2

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 Illustration 2

The other assets were sold for P210,000

as follows: Accounts receivable P44,000;
Merchandise P37,000; Equipment
P133,500. Liquidation expenses were paid
in the amount of P4,500.
There is a net gain of P30,000 which
increased the partner’s capital accounts.
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 Liquidation at a net gain on
realization

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 Analysis
a) Loss on realization occurs for accounts receivable and
merchandise because cash proceed is lower than its cost. Decrease
the partners’ capital amounts for the loss based on the P&L ratio.
b) There is a gain for the equipment because the cash proceed is
higher than the book value. Increase the partners’ capital accounts
using the profit and loss ratio. This brings the other assets to a
zero balance. Note that after steps 1,2,3, the partners’ equity
increased.
c) Liquidation expenses decreases the cash and the partners’ capital
accounts.
d) The payment of liabilities decreases the cash and reduces the
liabilities to zero.
e) The remaining
PARTNERSHIP cashBYisPROFESSOR
ACCOUNTING distributed to theMANUEL
ZENAIDA partners.
 Entries

1. Cash 44,000  
A, Capital 2,000  
B, Capital 3,000  
C, Capital 1,000  
Accounts Receivable 50,000
Accounts receivable sold at a loss.
2. Cash 37,000  
A, Capital 1,000  
B, Capital 1,500  
C, Capital 500  
Merchandise Inventory 40,000
Merchandise sold at a loss.  
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 Entries

  3. Cash 133,500  

Accumulated Depreciation 15,000  
Equipment 105,000
A, Capital 14,500
B, Capital 21,750
C, Capital 7,250
Equipment sold at a gain.
4. A, Capital 1,500  
B, Capital 2,250  
C, Capital 750  
Cash
Liquidation expenses paid. 4,500
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 Entries

5. Accounts Payable 25,000  

Cash 25,000
To record payment of liabilities.

6. Loan due to B 5,000  

A, Capital 60,000  
B, Capital 60,000  
C, Capital 80,000  
Cash 205,000
To record cash distribution to
partners.

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 Liquidation with Loss on Realization
With
WithCapital
Capital
deficiency,
deficiency,and
and
right
rightof
ofoffset
offset

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 Analysis
It is possible that the business is sold lock, stock and barrel
and no liquidation expenses are incurred. Since the cash
proceeds is lesser than the book value of the assets sold, there
is a loss on realization which is distributed to the partners
based on their profit and loss ratio causing the partners’
capital to decrease. Note that the share of B in the loss
(P48,000) is more than his capital balance P45,000, resulting
in a capital deficiency. Since there is a loan payable to B, this
loan will be offset against his capital deficiency. Here is a
situation where both the partner and the partnership are
debtors against each other, hence the right of offset is
applicable. Steps 2 and 3 may be interchanged.
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 Entries
1. Cash 84,000  
Accumulated Depreciation 15,000  
A, Capital 32,000  
B, Capital 48,000  
C, Capital 16,000  
Accounts Receivable 50,000
Merchandise Inventory 40,000
Equipment 105,000
To record sale of assets at a loss.
2. Accounts Payable  
Cash 25,000
To record payment of liabilities. 25,000
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 Entries

3.Loan due to B 3,000  

B, Capital 3,000
To offset B’s deficiency against the loan
payable to him.
4.Loan due to B* 2,000  
A, Capital 18,000  
C, Capital 59,000  
Cash 79,000
To distribute cash to partners.
*It is also acceptable for the loan balance to be paid separately (as
the fourth entry) before paying the capital balances (as the fifth
entry) for as long as the partnership assets are sufficient (Art. 1863).
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 Objective 2: limited partner is
deficient
If B is a limited partner, his deficiency cannot
be applied against the loan due to him. As a
limited partner he is only a contributor and
therefore liable only to the extent of what he
invested. His deficiency* will be absorbed as
a loss by the other partners decreasing their
capital and share in the cash distribution.
Liquidation, after outside creditors are paid:
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 Liquidation statement
BBdeficient
deficientbut
butaa
limited
limitedpartner.
partner.

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 Entries
Same entries for assets sold and outside
debts paid.

3. A, Capital 2,000  
C, Capital 1,000
B, Capital 3,000
B’s deficiency absorbed by A and C.
4. Loan due to B 5,000  
Cash  5,000
To record payment of loan.  
A, Capital 16,000
C, Capital 58,000
Cash 74,000
To record cash distribution to partners A and C.
Entries 2 and 4, payment of liabilities, can be combined
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 Insufficient loan for right of offset

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 Entries

Same entries for sale and payment of liabilities.  

3.Loan due to B 5,000
B, Capital 5,000
To offset B’s deficiency against the loan due to him
4. Cash 4,000
B, Capital 4,000
To record addtl investment for deficiency balance.
5. A, Capital 14,000
C, Capital 57,000
Cash 71,000
To record cash distribution to A and C.

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 Analysis and Entries
If B is a general but insolvent partner and his deficiency
cannot be absorbed fully by the right of offset, the other
partners will absorb the deficiency as a loss. Cash will be
P67,000 after payment of outside claims. The last 2 entries:
A, Capital 2,667
C, Capital 1,333
B, Capital 4,000
Deficiency absorbed by A and C.
A, Capital 11,333
B, Capital 55,667
Cash 71,000
Cash distribution to A and C.
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 Objective 3: Insolvent Partnership
A firm is insolvent if its assets are insufficient to pay its creditors. In
this case, partnership creditors have the right to go after the partners’
personal assets. Partners are required to contribute to the partnership
whenever its assets are insufficient following the doctrine of
unlimited liability. However, the payment of liabilities depends upon
the legal doctrine of Marshalling of Assets which is applied when
the partnership or the partner becomes insolvent. It states that
partnership assets are available for partnership creditors, only the
excess may be used to pay for partner’s personal debts. Likewise,
personal assets are available for personal creditors, only the excess
may be used for payment to partnership creditors and those owing to
co-partners for additional contributions required.
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 Marshalling of Assets- Example
1

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 Marshalling of Assets
XXand
andYYareare
deficient
deficient
partners
partners

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 Analysis

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 Marshalling of Assets- Example 2

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 Analysis

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 Analysis

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 Marshalling of Assets- Example
3

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 Liquidation Table
Deficient
Deficientpartner
partner
isisinsolvent
insolvent

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 Analysis

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 Objective 4-Account for Instalment Liquidation

In liquidation by installment, the assets are sold over an

extended period of time, hence full or total cash
distribution cannot immediately be made. The cash is
distributed in installment as it becomes available, first to
the creditors then to the partners. Cash available to partners
may not be sufficient if there are still unsold assets and
future liquidation expenses to reckon with.

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 Objective 4- Account for Liquidation
STEPS IN INSTALMENT LIQUIDATION:
1.Periodic sale of non-cash assets with gain or loss distribution.
2.Periodic payment of liquidation expenses with loss distribution
to partners.
3.Periodic payment of liabilities from available cash.
4.Periodic payment to partners if there is available cash. If cash
is insufficient prepare a schedule of safe payment. Observe the
rule concerning unpaid liabilities.
5.Repeat steps one to four until you get to the final sale when the
rules for simple liquidation should then be observed.

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 Objective 4-Schedule of Safe Payment

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 Objective 4- illustration

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 Objective 4- illustrative problem

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 February statement of liquidation

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 Supporting Feb cash distribution

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 March statement of liquidation

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 Schedule 2: Safe payment for March

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 Objective 4 Summary

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 End of Module 4

Thanking my colleagues for using my textbook.

Maam Zen Manuel

THAT IN ALL THINGS GOD MAY BE

GLORIFIED
 

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