Partnership

1 Liquidation
Prepared By: Jebeth V. Rivera
 Introduction
2Dissolution is a legal concept indicating a change in the legal relationship
between or among partners. Termination is the end of the normal business
function of the partnership. Liquidation is the winding up of business
affairs. Here, the association of the partners, for purposes of carrying on
activities in the usual manner, is considered ended. Partners can only
engage in activities leading to final settlement of business affairs.

DISSOLUTION W/ LIQUIDATION
A partnership is liquidated when its business operations are completely
terminated or ended. The partnership assets are sold, the partnership
creditors are paid, and the remaining assets, if any, are distributed to the
partners as a return of their investments.

Partnership dissolution with liquidation may be caused by any of the

following factors:
3 The accomplishment of the purpose for which the partnership was organized.
1.
2. The termination of the period covered by the partnership contract.
3. The bankruptcy of the firm.
4. The mutual agreement among the partners to close the business.
5. By court decree.

The liquidation of a partnership creates the following accounting problems.

1. Determination of the profit or loss from the beginning of the current accounting
period to the date of liquidation and the distribution of such profit or loss.
2. Correction of accounting errors in prior periods like overstatement or understatement
of inventories, excessive depreciation charges, and failure to provide adequately for
doubtful accounts.
3. Closing the partnership books
4. Liquidation of the business
PARTNERSHIP LIQUIDATION
4 liquidation of a partnership may take place over a period of time after
The
the date of termination. The partners may seek the best possible prices for
the partnership assets and may not wish to accept a forced sale price like in
a public auction. This phase-out period requires accounting for the
liquidation activities of the partnership. In addition, the legal rights of the
partners and creditors must be fully protected. Moreover, the partnership
agreement should specify if a special liquidation profit and loss sharing
ratio is to be used in lieu of the normal profit and loss sharing ratio.

At the point of partnership liquidation, the assets and liabilities of the

partnership are directly intertwined with those of the individual partners
personal assets and liabilities because of the unlimited liability of each
partner. The priorities for creditors claims against the asset available to pay
the partnership's liabilities involve two concepts:
marshaling of assets and;
the right of offset
Marshaling of assets
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-involves the order of creditors right against the partnerships assets
and the personal assets of the individual partners. The order in which
claims against the partnerships assets will be marshaled is as follows:
1. Partnership creditors other that partners
2. Partners claims other that capital and profit, such as loans payable
and accrued interest payable
3. Partners claim to capital and profits, to the extent of credit balances
in capital accounts.

The order of claims against the personal assets of the individual partners is
as follows:
1. Personal creditors of individual partners
2. Partnership creditors for unpaid partnership liabilities, regardless of
a partners capital balance in the partnership
Right of offset
6 - involves offsetting a deficit in a partners capital (debit balance in the
capital account of a partner) against the loan payable to the partner.

STATEMENT OF LIQUIDATION
- is a statement prepare to guide and summarize the liquidation process. It
is the basis of the journal entries made to record the liquidation. The statement
presents in working paper form the effects of the liquidation in the balance
sheet. It shows the conversion of assets into cash, the allocation of gains or
losses to the partners, and the distribution of cash to creditors and partners.

TYPES OF LIQUIDATION
1. Lump-sum liquidation or liquidation by totals – process whereby the
distribution of cash to the partners is done only after all the noncash assets
have been realized, the total amount of gain or loss on realization is known and
all liabilities have been paid.
2. Liquidation by installment or piece-meal liquidation – process whereby assets are realized on a
piece-meal basis over an extended or longer period of time and cash is distributed to partners
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periodically, as it becomes available, because it may not be possible to postpone payments to
creditors and partners until all assets have been realized.

JOURNAL ENTRIES TO RECORD THE LIQUIDATION PROCESS

Illustrative problem: The other assets were sold for 145,000.
E, F and G
Statement of Financial Position
December 1, 2019
Assets Liabilities & Capital
Cash 8,000 Liabilities 44,800
Other asset 136,000 B. Franco, Loan 2,000
C. Garces, Loan 3,200
A. Elmo, Capital (2) 38,000
B. Franco, Capital (2) 24,000
C. Garces, Capital (1) 32,000
Total 144,000 144,000
Instructions:
8 1. Prepare a statement of liquidation
2. Prepare journal entries to record the liquidation process.
Answer:

Elmo, Franco and Garces

Statement of Liquidation

December 1 – 31, 2019

Cash Other Asset Liabilities Franco, Loan Garces, Loan Elmo, Capital Franco, Graces,
Capital Capital

Profit & Loss 2 (40%) 2 (40%) 1 (20%)

ratio

Balance b4 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000

Liquidation

Sale of 145,000 (136,000) 3,600 3,600 1,800

Asset/Gain
Distribution

Balances 153,000 - 44,800 2,000 3,200 41,600 27,600 33,800

Payment of (44,800) (44,800)

Liabilites

Balances 108,200 - - 2,000 3,200 41,600 27,600 33,800

Payment to (108,200) - - (2,000) (3,200) (41,600) (27,600) (33,800)

partners
a. Realization of assets and distribution of gain on realization, 2:2:1
9 Cash 145,000
Other Assets 136,000
A. Elmo, Capital (9,000X2/5) 3,600
B. Franco, Capital (9,000X2/5) 3,600
C. Garces, Capital (9,000X2/5) 1,800

b. Payment of Liabilities
Liabilities 44,800
Cash 44,800
c. Payment to partners
B. Franco, Loan 2,000
C. Garces, Loan 3,200
A. Elmo, Capital (2) 41,600
B. Franco, Capital (2) 27,600
C. Garces, Capital (1) 33,800
Cash 108,200
 Discussion Questions
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1. What are the major causes of dissolution with liquidation? What are the
accounting implications of dissolution?
2. Explain the marshaling of assets procedure in a partnership liquidation.
3. X, Y, and Z are partners. The partnership is liquidating and partner Z is
personally insolvent. What implications does this have for partners X and
Y?
4. Define the right of offset in a partnership liquidation. When will the
right of offset be used in a liquidation?
5. Differentiate a lump-sum liquidation from an installment liquidation.
6. The DEF partnership has total assets of 55, 000. Partner D has a capital
credit of 6,000, partner E has a capital deficit of 20,000, and partner F has
a capital credit of 8,000. Is the DEF Partnership solvent or insolvent?
 Exercises
11Problem 1
E, F and G
Statement of Financial Position
December 1, 2019

Assets Liabilities & Capital

Cash 8,000 Liabilities 44,800
Other asset 136,000 B. Franco, Loan 2,000
C. Garces, Loan 3,200
A. Elmo, Capital (2) 38,000
B. Franco, Capital (2) 24,000
C. Garces, Capital (1) 32,000
Total 144,000 144,000
 Exercises
12Case (1) The other assets were sold for 140,000
Case (2) The other assets were sold for 100,000
Case (2) The other assets were sold for 74,000

Instructions:
1. Prepare a statement of liquidation
2. Prepare journal entries to record the liquidation process.

Problem 2
D. Aguilar, E. Benito, F. Casimiro and G. David are partners with capital
balances of 11,000, 10,300, 13,700 and 9,000 respectively. Profits are shared in
the ratio of 4:3:2:1 by Aguilar, Benito, Casimiro and David, respectively.
Assets are sold, liabilities are paid and cash of 12,000 remains.

Instructions: Show how the cash of 12,000 be divided.

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