Partnership

Liquidation
Accounting for Partnerships and Corporations
RCA 2022
Points to be discussed
01. Definition
What is Partnership
Liquidation?
02. Rules in Settling Accounts After
Dissolution
What assets should be
liquidated to pay the partners
in the liquidation process?

03. Insufficient Partnership 04. Preference of 05. Method of Partnership

Assets Payment Liquidation
What if the Partnership Who should be paid first? What are the methods of
assets are insufficient to pay Partnership Liquidation?
the partners?

2
Definition

The liquidation of a partnership is the winding up of its business activities characterized by sale of all non-cash assets, settlement of
all liabilities and distribution of the remaining cash to the partners.
The conversion of non-cash assets into cash is referred to as REALIZATION.
This may either result to a gain or loss on realization and shall be divided in the profit and loss ratio of the partners.
In some cases, a substantial loss on realization may yield for a partner a capital deficiency, which is the excess of a partner’s share in
losses over the partner’s capital credit balance.
This deficiency will certainly affect the partner’s interest – the sum of his capital and loan accounts – in the partnership.

3
Rules in settling accounts

The asset of the Partnership consist of the following:

1. Partnership Property
2. Additional contributions of the partners needed for the payment of all liabilities.

The assets of a general partnership shall be applied in the following order:

3. First, those owing to OUTSIDE creditors.

4. Second, those owing to INSIDE creditors in the form of loans or advances for business expenses
by the partners.
5. Third, those owing to the partners with respect to their CAPITAL contributions.
6. Lastly, those owing to the partners with respect to their SHARE OF PROFITS.

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Insufficient Partnership Assets

In cases when the partnership assets are insufficient to settle all outside liabilities, the partners should
make additional contributions in the partnership.

Any partner who contributed in excess of his share in this liability has a right to collect the supposed
additional contributions from the other partners.

5
Right of Offset

The Right of Offset gives the partner with the loan account the option to exercise his right of offset.

This privilege is the legal right of a partner to apply part of all of his loan account balance against his
capital deficiency resulting from losses in the realization of the partnership assets.

6
Methods of Partnership Liquidation

Lump-sum method

Under this method, all non-cash assets are realized and the related gains or losses distributed and all
liabilities are paid before a single final cash distribution is made to the partners.

Installment method

Under this method, realization of non-cash assets is accomplished over an extended period of time.
When cash is available, creditors may be partially or fully paid. Any excess may be distributed to the
partners in accordance with a program of safe payments or a cash priority program. This process
persists until all the non-cash assets are sold.

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Entries Related to Liquidation

1. Sale of Non-cash Assets

At Book Value At Below Book Value

Cash XX Cash XX
Non-cash Assets XX Loss on Realization XX
Non-cash Assets XX
At Above Book Value

Cash XX
Non-cash Assets XX
Gain on Realization XX

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Entries Related to Liquidation

2. Distribution of Gain or Loss on Realization 3. Payment of Liabilities

Distribution of Gain on Realization Liabilities XX

Cash XX
Gain on Realization XX
Capital XX 4. Exercise of Right of Offset

Distribution of Loss on Realization Loan Payable to Partner XX

Capital XX
Capital XX
Loss on Realization XX 5. Additional Investment by Deficient Partner

Cash XX
Capital XX
9
Entries Related to Liquidation

6. Deficiency Absorbed by Solvent Partner

Capital (Solvent) XX
Capital (Deficient) XX

7. Distribution of Cash to Partners

Capital XX
Cash XX

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Illustration
Ernesto Lindo, Nilo Burgos and Nick Marasigan are partners in a public relations firm and share profits and losses in the
ratio of 2:2:1, respectively. They decided to liquidate their business on December 31, 2020. The following is the considered
statement of financial position prepared prior to liquidation:
Lindo, Burgos and Marasigan
Statement of Financial Position
Dec. 31, 2020

Cash 200,000
Non-cash Assets 3,400,000
Total Assets 3,600,000

Liabilities 1,120,000
Burgos, Loan 50,000
Marasigan, Loan 80,000
Lindo, Capital 950,000
Burgos, Capital 600,000
Marasigan, Capital 800,000
11 Total Liabilities and Capital 3,600,000
 Click icon to add picture

LUMP-SUM Liquidation
Illustration 1
Case 1. Loss on Realization Fully Absorbed by Partners’ Capital Balances
Assume that the non-cash assets are sold at P2,500,000 with a resulting loss on realization of P900,000 which was
distributed in the ratio 4:4:2. The capital balance of each partner was sufficient to fully absorb the share in the loss. The
payment of cash to partnership creditors and the final distribution of the remaining cash to the partner presented no problem.

Cash NCA Liabilities B. Loan M. Loan L. Capital B. Capital M. Capital

P/L % 40% 40% 20%

Beg. Bal. 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000

Sale of NCA 2,500,000 (3,400,000) (360,000) (360,000) (180,000)

Balances 2,700,000 -0- 1,120,000 50,000 80,000 590,000 240,000 620,000

Payment of
(1,120,000) (1,120,000)
Liabilities
Balances 1,580,000 -0- 50,000 80,000 590,000 240,000 620,000

Payment to
(1,580,000) (50,000) (80,000) (590,000) (240,000) (620,000)
Partners
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Journal Entries
Cash 2,500,000 B. Loan 50,000
Loss on Realization 900,000 M. Loan 80,000
Non-cash Assets 3,400,000 L. Capital 590,000
To record sale of NCA B. Capital 240,000
M. Capital 620,000
L. Capital 360,000 Cash 1,580,000
B. Capital 360,000 To record settlement to Partners
M. Capital 180,000
Loss on Realization 900,000
To record distribution of losses

Liabilities 1,120,000
Cash 1,120,000
To record payment of liabilities

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Illustration 2
Case 2. Loss on Realization Resulting to a Capital Deficiency with Right of Offset
Assume that the non-cash assets are sold at P1,850,000 with a resulting loss on realization of P1,550,000 which was distributed in the ratio
4:4:2. The capital balance of Partner Nilo Burgos was insufficient to fully absorb his share in the loss and thus, incurred a capital deficiency
of P20,000. Instead of making additional investment, Burgos opted to exercise his right of offset. A portion of his loan to the partnership was
applied to his deficient capital. Outside creditors were paid and a final distribution of the remaining cash to the partners was made.

Cash NCA Liabilities B. Loan M. Loan L. Capital B. Capital M. Capital

P/L % 40% 40% 20%

Beg. Bal. 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of NCA 1,850,000 (3,400,000) (620,000) (620,000) (310,000)
Balances 2,050,000 -0- 1,120,000 50,000 80,000 330,000 (20,000) 490,000
Payment of
(1,120,000) (1,120,000)
Liabilities
Balances 930,000 -0- 50,000 80,000 330,000 (20,000) 490,000
Right of Offset (20,000) 20,000)
Balances 930,000 30,000 80,000 330,000 -0- 490,000
Payment to
(930,000) (30,000) (80,000) (330,000) (490,000)
Partners
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Journal Entries
Cash 1,850,000 B. Loan 20,000
Loss on Realization 1,550,000 B. Capital 20,000
Non-cash Assets 3,400,000 To record offset of B. Loan to B. Capital
To record sale of NCA
B. Loan 30,000
L. Capital 620,000 M. Loan 80,000
B. Capital 620,000 L. Capital 330,000
M. Capital 310,000 M. Capital 490,000
Loss on Realization1,550,000 Cash 930,000
To record distribution of losses To record settlement to Partners

Liabilities 1,120,000
Cash 1,120,000
To record payment of liabilities

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Illustration 3
Case 3. Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent Partner
Assume that the non-cash assets are sold at P1,700,000 with a resulting loss on realization of P1,700,000 which was distributed in the ratio
4:4:2. The capital balance of Partner Nilo Burgos was again insufficient to fully absorb his share in the loss and this, incurred a capital
deficiency of P80,000. Burgos exercised his right of offset but it was not enough to cover his losses; he has no recourse but to invest
additional cash of P30,000 to fully eliminate his deficiency.
Cash NCA Liabilities B. Loan M. Loan L. Capital B. Capital M. Capital

P/L % 40% 40% 20%

Beg. Bal. 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of NCA 1,700,000 (3,400,000) (680,000) (680,000) (340,000)
Balances 1,900,000 -0- 1,120,000 50,000 80,000 270,000 (80,000) 460,000
Payment of
(1,120,000) (1,120,000)
Liabilities
Balances 780,000 -0- 50,000 80,000 270,000 (80,000) 460,000
Right of Offset (50,000) 50,000
Balances 780,000 -0- 80,000 270,000 (30,000) 460,000
Addt’l
30,000 30,000
Investment
Balances 810,000 80,000 270,000 -0- 460,000
Payment to
(810,000) (80,000) (270,000) (460,000)
Partners
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Journal Entries
Cash 1,700,000 B. Loan 50,000
Loss on Realization 1,700,000 B. Capital 50,000
Non-cash Assets 3,400,000 To record offset of B. Loan to B. Capital
To record sale of NCA
Cash 30,000
L. Capital 680,000 B. Capital 30,000
B. Capital 680,000 To record addt’l investment of B.
M. Capital 340,000
Loss on Realization1,700,000 M. Loan 80,000
To record distribution of losses L. Capital 270,000
M. Capital 460,000
Liabilities 1,120,000 Cash 810,000
Cash 1,120,000 To record settlement to Partners
To record payment of liabilities

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Illustration 4
Case 4. Loss on Realization Resulting to a Capital Deficiency to Personally Insolvent Partner
Assume the same facts as in case 3 except that Nilo Burgos is personally insolvent and is unable to make additional investments for his
remaining deficiency of P30,000. In this case, Lindo and Marasigan have to absorb this deficiency as additional loss to them in the ratio of
4:2.
Cash NCA Liabilities B. Loan M. Loan L. Capital B. Capital M. Capital

P/L % 40% 40% 20%

Beg. Bal. 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of NCA 1,700,000 (3,400,000) (680,000) (680,000) (340,000)
Balances 1,900,000 -0- 1,120,000 50,000 80,000 270,000 (80,000) 460,000
Payment of
(1,120,000) (1,120,000)
Liabilities
Balances 780,000 -0- 50,000 80,000 270,000 (80,000) 460,000
Right of Offset (50,000) 50,000
Balances 780,000 -0- 80,000 270,000 (30,000) 460,000
Addt’l Loss (20,000) 30,000 (10,000)
Balances 780,000 80,000 250,000 -0- 450,000
Payment to
(780,000) (80,000) (250,000) (450,000)
Partners
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Journal Entries
Cash 1,700,000 B. Loan 50,000
Loss on Realization 1,700,000 B. Capital 50,000
Non-cash Assets 3,400,000 To record offset of B. Loan to B. Capital
To record sale of NCA
L. Capital 20,000
L. Capital 680,000 M. Capital 10,000
B. Capital 680,000 B. Capital 30,000
M. Capital 340,000 To record allocation of loss to L and M
Loss on Realization1,700,000
To record distribution of losses M. Loan 80,000
L. Capital 250,000
Liabilities 1,120,000 M. Capital 450,000
Cash 1,120,000 Cash 780,000
To record payment of liabilities To record settlement to Partners

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Illustration 5
Case 5. Partnership Insolvent but Partners Personally Solvent
Assume that the non-cash assets are sold at P900,000 with a resulting loss on realization of P2,500,000 distributed in the ratio of 4:4:2. The cash balance after
full realization of the non-cash assets in the amount of P1,100,000 was not enough to settle all the liabilities to outsiders. Also, the capital balances of Ernesto
Lindo and Nilo Burgos were insufficient to fully absorb their share in the loss and thus, incurred capital deficiencies of P50,000 and P400,000, respectively.

Cash NCA Liabilities B. Loan M. Loan L. Capital B. Capital M. Capital

P/L % 40% 40% 20%

Beg. Bal. 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of NCA 900,000 (3,400,000) (1,000,000) (1,000,000) (500,000)
Balances 1,100,000 -0- 1,120,000 50,000 80,000 (50,000) (400,000) 300,000
Payment of
(1,100,000) (1,100,000)
Liabilities
Balances -0- 20,000 50,000 80,000 (50,000) (400,000) 300,000
Right of Offset (50,000) (50,000) 50,000 50,000
Balances -0- -0- 30,000 -0- (350,000) 300,000
Addt’l
350,000 350,000
Investment
Balances 350,000 30,000 -0- 300,000
Payment of
(20,000) (20,000)
Liabilities
Balances 330,000 -0- 30,000 300,000
Payment to
21 (330,000) (30,000) (300,000)
Partners
Journal Entries B. Loan 50,000
L. Loan 50,000
B. Capital 50,000
L. Capital 50,000
Cash 900,000 To record offset of B. Loan to B. Capital and L. Loan to L. Capital
Loss on Realization 2,500,000
Non-cash Assets 3,400,000 Cash 350,000
To record sale of NCA B. Capital 350,000
To record additional investment of B
L. Capital 1,000,000
B. Capital 1,000,000 Liabilities 20,000
M. Capital 500,000 Cash 20,000
Loss on Realization2,500,000 To record payment of Liabilities
To record distribution of losses
M. Loan 30,000
Liabilities 1,100,000 M. Capital 300,000
Cash 1,100,000 Cash 330,000
To record payment of liabilities To record settlement to Partners

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 Click icon to add picture

INSTALLMENT Liquidation

Program of Safe Payments

Illustration 6
The balance sheet for Date Calingasan. Helen Tugade and Christine Gamba, partners sharing profits
in the ratio 4:3:3, respectively, showed the following balances on April 30, 2020, just before
liquidation.
Calingasan, Tugade and Gamba
Statement of Financial Position
April 30, 2020
Assets Liabilities and Capital

Cash 315,000 Liabilities 435,000

Non-cash Assets 1,250,000 Gamba, Loan 30,000
Calingasan, Capital 600,000
Tugade, Capital 350,000
Gamba, Capital 150,000

Total Assets 1,565,000 Total Liabilities and Capital 1,565,000

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Illustration 6

In May, part of the assets are sold at book value P300,000. In June, the remaining assets are sold for
P210,000. Assume that available cash is distributed to the proper parties at the end of May and at the
end June. Assume that partners are solvent and that any partner who is deficient made appropriate
payment to the Partnership on July 31.

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 Statement of Liquidation
Cash NCA Liabilities G. Loan C. Capital T. Capital G. Capital
Beg. Bal. 315,000 1,250,000 435,000 30,000 600,000 350,000 150,000
May – Sale of
300,000 (300,000)
NCA
Balances 615,000 950,000 435,000 30,000 600,000 350,000 150,000
May – Payment
(435,000) (435,000)
of Liabilities
Balances 180,000 950,000 -0- 30,000 600,000 350,000 150,000
May –
Installment to ? ? ? ? ?
Partners

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Schedule of Safe Payments

Calingasan Tugade Gamba

Cash balance before distribution of cash 600,000 350,000 150,000
Add: Loan balances 30,000
Partners’ Total Interest 600,000 350,000 180,000
Theoretical Loss (if nothing is realized in the remaining
(380,000) (285,000) (285,000)
NCA) 4:3:3: Ratio
Balances 220,000 65,000 (105,000)
Additional Theoretical Loss is Gamba cannot satisfy possible
(60,000) (45,000) 105,000
deficiency (4:3 Ratio)
Free Interest – amounts that can be safely paid to partners 160,000 20,000 -0-

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 Statement of Liquidation
Cash NCA Liabilities G. Loan C. Capital T. Capital G. Capital
Beg. Bal. 315,000 1,250,000 435,000 30,000 600,000 350,000 150,000
May – Sale of NCA 300,000 (300,000)
Balances 615,000 950,000 435,000 30,000 600,000 350,000 150,000
May – Payment of
(435,000) (435,000)
Liabilities
Balances 180,000 950,000 -0- 30,000 600,000 350,000 150,000
May – Installment
(180,000) (160,000) (20,000)
to Partners
Balances -0- 950,000 30,000 440,000 330,000 150,000
June – Sale of NCA 210,000 (950,000) (296,000) (222,000) (222,000)
Balances 210,000 -0- 30,000 144,000 108,000 (72,000)
Right of Offset (30,000) 30,000
Balances 210,000 -0- 144,000 108,000 (42,000)
June – Installment
? ? ? ?
to Partners

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Schedule of Safe Payments

Calingasan Tugade Gamba

Cash balance before distribution of cash 144,000 108,000 (42,000)
Additional Theoretical Loss is Gamba cannot satisfy possible
(24,000) (18,000) 42,000
deficiency (4:3 Ratio)
Free Interest – amounts that can be safely paid to partners 120,000 90,000 -0-

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 Statement of Liquidation
Cash NCA Liabilities G. Loan C. Capital T. Capital G. Capital
Beg. Bal. 315,000 1,250,000 435,000 30,000 600,000 350,000 150,000
May – Sale of NCA 300,000 (300,000)
Balances 615,000 950,000 435,000 30,000 600,000 350,000 150,000
May – Payment of
(435,000) (435,000)
Liabilities
Balances 180,000 950,000 -0- 30,000 600,000 350,000 150,000
May – Installment
(180,000) (160,000) (20,000)
to Partners
Balances -0- 950,000 30,000 440,000 330,000 150,000
June – Sale of NCA 210,000 (950,000) (296,000) (222,000) (222,000)
Balances 210,000 -0- 30,000 144,000 108,000 (72,000)
Right of Offset (30,000) 30,000
Balances 210,000 -0- 144,000 108,000 (42,000)
June – Installment
(210,000) (120,0000 (90,000)
to Partners
Balances -0- 24,000 18,000 (42,000)
July - Investment 42,000 42,000
Balances 42,000 24,000 18,000 -0-
Final Installment -0- -0- -0-
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Journal Entries
Cash 300,000 Gamba, Loan 30,000
Non-cash Assets 300,000 Gamba, Capital 30,000
To record sale of NCA To record offset of G. Loan to G. Capital

Calingasan, Capital 120,000

Liabilities 435,000 Tugade, Capital 90,000
Cash 435,000 Cash 210,000
To record payment of liabilities To record safe payments to partners
Calingasan, Capital 160,000 Cash 42,000
Tugade, Capital 20,000 Gamba, Capital 42,000
Cash 180,000 To record additional investment of G
To record safe payments to partners
Calingasan, Capital 24,000
Cash 210,000 Tugade, Capital 18,000
Calingasan, Capital 296,000 Cash 42,000
Tugade, Capital 222,000 To record final installment to partners
Gamba, Capital 222,000
Non-cash Assets 950,000
31 To record sale of NCA
 Click icon to add picture

INSTALLMENT Liquidation

Cash Priority Program

Illustration 7
Violeta Pitular, Bart Urbano and Doris Marie Pateno divide profits 60%, 25% and 15%, respectively.
A statement of financial position on June 30, 2020, just before the liquidation, showed the following
balances:
Piturlar, Urbano and Pateno
Statement of Financial Position
June 30, 2020
Assets Liabilities and Capital

Cash 50,000 Liabilities 350,000

Non-cash Assets 925,000
Pitular, Capital 450,000
Urbano, Capital 100,000
Pateno, Capital 75,000

Total Assets 975,000 Total Liabilities and Capital 975,000

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Illustration 7

Certain assets are sold in July at book value of P500,000 and available cash is distributed to
appropriate parties. Remaining assets are sold in August for P150,000 and cash is distributed in final
installment.

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Cash Priority Program
Pitular Urbano Pateno Pitular Urbano Pateno
Capital Balances 450,000 100,000 75,000
Add: Loan Balances -0- -0- -0-
Partners’ Total Interests 450,000 100,000 75,000
Divide by: Profit and Loss Ratio 60% 25% 15%
Loss Absorption Balances 750,000 400,000 500,000
Priority I: To Pitular (250,000) 150,000
500,000 400,000 500,000
Priority II: To Pitular and Pateno (100,000) (100,000) 60,000 15,000
400,000 400,000 400,000 210,000 -0- 15,000
Priority III: Amounts in excess of
60% 25% 15%
P225,000*** based on P/L Ratio

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Statement of Liquidation
Pitular Urbano Pateno Total
Balances before liquidation 450,000 100,000 75,000 625,000
July – Sale of NCA at book value
Balances 450,000 100,000 75,000 625,000
July – Payment to Partners (190,000) (10,000) (200,000)
Balances 260,000 100,000 65,000 425,000
August – Sale of NCA below BV (165,000) (68,750) (41,250) (275,000)
Balances 95,000 31,250 23,750 150,000
August – Payment to Partners (20,000) (5,000) (25,000)
Balances before Last Priority 75,000 31,250 18,750 125,000
Final Payment to Partners (75,000) (31,250) (18,750) (125,000)

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End of Lesson
Thank you.

RCA 2022