Ac 1104 - Partnership Liquidation

AC 1104 – PARTNERSHIP
LIQUIDATION
 Liquidation – is the process of converting all assets of the business into cash
(realization), followed by payments of creditors’ claims and the partners’ interest.
This process is usually called as “winding up of business activities”. It usually
happens once the partners decided to end or terminate business operations after
the partnership has been dissolved. A partnership is liquidated when business
operations are completely terminated or ended.
 When the business is to be liquidated, the accounts must be adjusted and closed
and the resulting income or loss in the final period is transferred to the capital
accounts of the partners. During the liquidation process, the basic objectives of a
partnership are to convert the partnership assets to cash, to pay off partnership
obligations and to distribute cash and any unsold assets to the individual partners.
The focus of accounting during this period is the computation of gains or losses on
realization of assets, the payment of liabilities in accordance with law, and an
equitable final distribution of cash to partners.
 Winding up – is the process of settling the business or partnership affairs.
 Termination – is the point in time when all partnership affairs are ended.
 Liquidation – is the interval of time between dissolution and termination of partnership affairs. It is
also the process of winding up a business which usually includes the conversion of non-cash assets
into cash, payment of liabilities, and distribution of cash and any unsold assets to the partners.
 Realization – is the process of converting non-cash assets into cash.
 Gain on realization – is the excess of the selling price over the book value of the assets sold through
realization.
 Loss on realization – is the excess of the book value over the selling price of the assets sold through
realization.
 Capital deficiency – is the excess of the partners’ share of losses over their capital credit balances.
 Deficient partner – is a partner with a debit balance in his capital account after receiving his share
on the loss on realization.
 Right of offset – is the legal right of a partner to apply part or all of his loan account
balance against his capital deficiency resulting from losses in the realization of the
partnership assets.
 Partners’ interest – is the sum of a partner’s capital and loan accounts in the
partnership.
 The general rule for cash distribution shall be in the following order:
 1. First, to outside creditors.
 2. Second, to partners for loan or advances to the business by the partners.
 3. Third, to partners for capital accounts.
 Methods of Partnership Liquidation
 a. Lump-sum method, also called Total Liquidation or Single Distribution
 b. Installment method or Installment Distribution
 Lump-sum Liquidation
 A lump-sum liquidation of a partnership is one in which all the non-cash assets are converted
into cash within a very short time and the related gains or losses distributed, and all outside
creditors are paid before a single final cash distribution is made to partners.
 Procedures in Lump-sum Liquidation:
 1. Realization of non-cash assets and distribution of gain or loss on realization among the
partners based on the profit and loss ratio.
 2. Payment of expenses.
 3. Payment of liabilities.
 4. Elimination of partners’ capital deficiencies. If after the distribution of loss on realization,
a partner incurs a capital deficiency (ex: partner’s share of realization loss exceeds his
capital credit), this deficiency must be eliminated by using one of the following methods, in
the order of priority:
 a. If the deficient partner has a loan balance, exercise the right of
offset.
 b. If the deficient partner is solvent, make him invest cash to eliminate
his deficiency.
 c. If the deficient partner is insolvent, let the other partners absorb his
deficiency.
 5. Payment to partners, in the order of priority:
 a. Loan accounts
 b. Capital accounts
 Illustration: Lump-sum Liquidation
 The following will be used to present the lump-sum liquidation of ABC Partnership in which Andy, Bea and
Carol are partners. The Statement of Financial Position of the partnership on December 1, 2021, the day the
partners decided to liquidate the business is presented below.
 ABC Partnership
 Statement of Financial Position
 Assets Liabilities and Capital
 Cash P 30,000 Liabilities P 132,000
 Other Assets 225,000 Bea, Loan 7,000
 Carol, Loan 11,000
 Andy, Capital 49,000
 Bea, Capital 30,000
 _______ Carol, Capital 26,000
 Total Assets P255,000 Total Liabilities and Capital P 255,000
 Case 1: Gain on Realization
 Assume that the Others Assets, with book value of P225,000 were sold for P240,000 resulting in a gain of
P15,000 which was distributed in the ratio 4:4:2. (A statement of liquidation to summarize the steps in the
liquidation process is prepared).
 The entries to record the liquidation process are:
 a. Cash 240,000
 Other Assets 225,000
 Andi, Capital (15,000 x 4/10) 6,000
 Bea, Capital (15,000 x 4/10) 6,000
 Carol, Capital (15,000 x 2/10) 3,000
 - Sale of other assets and division of gain based on partners’ P/L ratio.
 b. Liabilities 132,000
 Cash 132,000
 - Payment of liabilities.
 c. Bea, Loan 7,000
 Andi, Capital (49,000 + 6,000) 55,000
 Bea, Capital (30,000 + 6,000) 36,000
 Carol, Capital (26,000 + 3,000) 29,000
 Cash 138,000
 - Payment to partners for loan and capital accounts.
 ABC Partnership
 Statement of Liquidation
 December 1, 2021
 Other Bea Carol Andi Bea Carol
 Cash Assets Liabilities Loan Loan Capital Capital Capital
 Profit and loss ratio 40% 40% 20%
 Balance before liquidation 30,000 225,000 132,000 7,000 11,000 49,000 30,000 26,000
 Sale of assets and distribution
 of gain 240,000 (225,000) 6,000 6,000 3,000
 Balances 270,000 132,000 7,000 11,000 55,000 36,000 29,000
 Payment of liabilities (132,000) (132,000)_________________________________________________
 Balances 138,000 7,000 11,000 55,000 36,000 29,000
 Payment to partners (138,000) (7,000) (11,000) (55,000) (36,000) (29,000)

 Case 2: Loss on Realization, no capital deficiency
 Assume that the Other Assets with book value of P225,000 were sold for P155,000 resulting to a loss
of P70,000 which was distributed in the ratio 4:4:2.
 Note: Each partner’s capital balance was sufficient to absorb his share of the loss. Thus, the
payment to partnership creditors and the final distribution of cash to partners presented no
problem.
 a. Cash 155,000
 Andi, Capital (70,000 x 4/10) 28,000
 Bea, Capital (70,000 x 4/10) 28,000
 Carol, Capital (70,000 x 2/10) 14,000
 - Sale of other assets and distribution of loss on partners’ profit and loss ratio.
 Cash 132,000
 Andi, Capital (49,000 – 28,000) 21,000
 Bea, Capital (30,000 – 28,000) 2,000
 Carol, Capital (26,000 – 14,000) 12,000
 Cash 53,000
 ABC Partnership
 December 31, 2021
 Other Bea, Carol, Andi, Bea, Carol
 Profit and loss ratio 40% 40% 20%
 Sale of assets and
 distribution of loss 155,000 (225,000) (28,000) (28,000) (14,000)
 Balances 185,000 132,000 7,000 11,000 21,000 2,000 12,000
 Payment of liabilities (132,000) (132,000)_____________________________________
 Balances 53,000 7,000 11,000 21,000 2,000 12,000
 Payment to partners (53,000) (7,000) (11,000) (21,000) (2,000) (12,000)
 Case 3: Loss on Realization Resulting to Capital Deficiency to a partner with a loan Account
 Assume that the other assets were sold for P137,000 resulting to a total loss of P88,000. (The
distribution of loss among the partners using the profit and loss ratio resulted to a debit balance in the
capital account of Bea. To eliminate the deficiency, Beas has to exercise the right of offset. P5,200 of
her loan to the partnership was applied to her deficiency. After, payment to outside creditors,
remaining cash was distributed to the partners).
 a. Cash 137,000
 Andi, Capital (88,000 x 40%) 35,200
 Bea, Capital (88,000 x 40%) 35,200
 Carol, Capital (88,000 x 20%) 17,600
 - Sale of other assets and distribution of loss based on partners’ profit and loss
 ratio.
 Cash 132,000
 - Offset of loan against capital deficiency.
 d. Bea, Loan (7,000 – 5,200) 1,800
 Andi, Loan (49,000 – 35,200) 13,800
 Carol, Loan (26,000 – 17,600) 8,400
 Cash 35,000
 ABC Partnership
 Other Bea, Carol, Andi, Bea, Carol,
 Profit and loss ratio 40% 40% 20%_
 Balances 167,000 132,000 7,000 11,000 13,800 ( 5,200) 8,400
 Payment of liabilities (132,000) (132,000)_______________________________________________
 Balances 35,000 7,000 11,000 13,800 (5,200) 8,400
 Offset of loan against the debit
 balance in the capital of Bea (5,200) 5,200___________
 Balances 35,000 1,800 11,000 13,800 8,400

 Payment to partners (35,000) (1,800) (11,000) (13,800) (8,400)
 Case 4: Loss on Realization Resulting to Capital Deficiency to a Solvent Partner
 Assume that the Other Assets were sold for P125,000 resulting to a total loss of P100,000. (The
distribution of the loss resulted to a debit balance in the capital account of Bea. Rea exercised
the right to offset to eliminate her capital deficiency but her loan balance is not enough to cover
her deficiency. She invested additional cash of P3,000 to full100y eliminate her deficiency).
 a. Cash 125,000
 Andi, Capital (100,000 x 40%) 40,000
 Bea, Capital (100,000 x 40%) 40,000
 Carol, Capital (100,000 x 20%) 20,000
 - Sale of other assets and distribution of loss based on partners’ P/L ratio.
 Cash 132,000
 d. Cash 3,000
 - Additional investment by deficient partner, Bea.
 e. Carol, Loan 11,000
 Andi, Capital (49,000 – 40,000) 9,000
 Carol, Capital (26,000 – 20,000) 6,000
 Cash 26,000
 Balances before liquidation 30,000 225,000 132,000 7,000 11,000 49,000 30,000 26,000
 Balances 155,000 132,000 7,000 11,000 9,000 (10,000) 6,000
 Payment of liabilities (132,000) (132,000)_______________________________________________
 Balances 23,000 7,000 11,000 9,000 (10,000) 6,000
 Offset of loan, (Bea) (7,000) 7,000___________
 Balances 23,000 11,000 9,000 (3,000) 6,000
 Additional investment by Bea 3,000 3,000___________
 Balances 26,000 11,000 9,000 6,000
 Payment to partners (26,000) (11,000) (9,000) (6,000)
 Case 5: Loss on Realization Resulting to Capital Deficiency of an Insolvent Partner.
 Assume in the same facts as in case 4, except that Bea is personally insolvent and the P3,000 due from her is
uncollectible. (In effect, Andi and Carol will absorb her deficiency as additional loss to them in the ratio of
4:2).
 The entries to record liquidation process are:
 a. Cash 125,000
 Andi, Capital (100,000 x 40%) 40,000
 Bea, Capital (100,000 x 40%) 40,000
 Carol, Capital (100,000 x 20%) 20,000
 - Sale of other assets and distribution of loss based on partners’ P/L ratio.
 Cash 132,000
 d. Andi, Capital (3,000 x 4/6) 2,000
 Carol, Capital (3,000 x 2/6) 1,000
 - Absorption of Bea’s deficiency by Andi and Carol.
 e. Carol, Loan 11,000
 Andi, Capital (49,000 – 40,000 – 2,000) 7,000
 Carol, Capital (26,000 – 20,000 – 1,000) 5,000
 Cash 23,000
 Other Bia, Carol, Andi, Bea, Caro,
 Balances 155,000 132,000 7,000 11,000 9,000 (10,000) 6,000
 Payment of liabilities (132,000) (132,000) 0
 Balances 23,000 7,000 11,000 9,000 (10,000) 6,000
 Offset of loan – Bea (7,000) 7,000 0
 Balances 23,000 11,000 9,000 ( 3,000) 6,000
 Additional loss to partners (2:1) (2,000) 3,000 ( 1,000)
 Balances 23,000 11,000 7,000 5,000
 Payment to partners (23,000) (11,000) (7,000) ( 5,000)
 Case 6: Partnership is Insolvent but Partners are Personally Solvent
 If partnership is insolvent, the available cash is insufficient to pay the creditors and at least one or perhaps all of
the partners will have deficiencies in their capital.
 Assume that the Other Assets were sold for P95,000 resulting to a total loss of P130,000. (The total cash of P125,000
is paid to the creditors, leaving an unpaid amount of P7,000. The distribution of the P130,000 loss resulted to
capital deficiency of P3,000 and P22,000 to Andi and Bea, respectively. Bea exercised the right to offset her loan
balance against her capital deficiency leaving her capital account with a debit balance of P15,000. Andi and Bea
paid the amount of their deficiencies totaling P18,000. P7,000 is used to settle the remaining liabilities and P11,000
is given to Carol for settlement of her equity).
 a. Cash 95,000
 Andi, Capital (130,000 x 40%) 52,000
 Bea, Capital (130,000 x 40%) 52,000
 Carol, Capital (130,000 x 20%) 26,000
 - Sale of Other Assets and distribution of loss based on partners’ P/L ratio.
 b. Liabilities (30,000 + 95,000) 125,000
 Cash 125,000
 - Partial payment of liabilities.
 d. Cash 18,000
 Andi, Capital (49,000 – 52,000) 3,000
 Bea, Capital (30,000 + 7,000 – 52,000) 15,000
 - Additional investment by deficient partners
 e. Liabilities (132,000 – 125,000) 7,000
 Cash 7,000
 - Full payment of liabilities.
 f. Carol, Loan 11,000
 Cash 11,000
 - Payment to partner for loan account.
 Profit and loss ratio 40% 40% 20%__
 Sale of assets and distribution of loss 95,000 (225,000) (52,000) (52,000) (26,000)
 Balances 125,000 132,000 7,000 11,000 ( 3,000) (22,000)
 Partial payment of liabilities (125,000) (125,000) 0
 Balances 7,000 7,000 11,000 ( 3,000) (22,000)
 Offset of loan – Bea (7,000) 7,000 0
 Balances 7,000 11,000 ( 3,000) (15,000)
 Additional investments 18,000 3,000 15,000 0
 Balances 18,000 7,000 11,000
 Full payment of liabilities (7,000) (7,000) 0
 Balances 11,000 11,000
 Payment to partners (11,000) (11,000) 0
 Case 7: Partnership is Insolvent and Partners are Personally Insolvent
 Illustration: Ben, Carol, and Jessie are partners who are sharing profits and losses equally. They decided to liquidate on
November 1, 2021. The Statement of Financial Position prior to liquidation is presented below:
 Statement of Financial Position
 Assets Liabilities and Capital
 Other Assets 105,000 Ben, Capital 5,000
 Carl, Capital 15,000
 Jessie, Capital 35,000
 Total Assets P 110,000 Total Liabilities and Capital P 110,000
 The personal assets and liabilities of the partners on this date aside from their equities in the partnership are:
 Partners Personal Assets Personal Liabilities
 Ben P 150,000 P 50,000
 Carl 40,000 40,000
 Jessie 30,000 50,000
 Other assets were sold for P45,000 resulting to a loss of P60,000. The P50,000 cash is used to pay
the creditors, leaving an unpaid amount of P5,000. Ben and Carl have debit balances in their
capital accounts after distributing the loss on realization. Ben is solvent while Carl is insolvent, so
the deficiency of Carl is absorb as additional loss by Ben and Jessie. Jessie is an insolvent partner
but he can still absorb losses since he has credit balance in his capital account. Ben invests
P17,500 to eliminate his deficiency. The P5,000 is used to pay the balance of liabilities to
outsiders and P12,500 is paid to Jessie in settlement of his equity
 Entries to record the liquidation process are:
 a. Cash 45,000
 Ben, Capital (60,000 / 3) 20,000
 Carl, Capital (60,000 / 3) 20,000
 Jessie, Capital (60,000 / 3) 20,000
 - Sale of Other Assets and distribution of loss based on partners’ P/L ratio.
 Cash 50,000
 c. Ben, Capital (5,000 / 2) 2,500
 Jessie, Capital (5,000 / 2) 2,500
 Carl, Capital 5,000
 - Additional loss to Ben and Jessie.
 d. Cash 17,500
 Ben, Capital (5,000 – 20,000 – 2,500) 17,500
 - Additional investment by Ben,
 e. Liabilities (55,000 – 50,000) 5,000
 Cash 5,000
 F. Jessie, Capital 12,500
 Cash 12,500
 Cash Other Assets Liabilities Ben, Capital Carl, Capital Jessie, Capital
 Profit and loss ratio 1/3 1/3 1/3
 Balances before liquidation 5,000 105,000 55,000 5,000 15,000 35,000
 Sale of assets and distribution of loss 45,000 (105,000) (20,000) (20,000) (20,000)
 Balances 50,000 55,000 (15,000) ( 5,000) 15,000
 Partial payment of liabilities (50,000) ( 50,000) 0
 Balances 5,000 (15,000) ( 5,000) 15,000
 Additional loss to Ben and Jessie ( 2,500) 5,000 ( 2,500)
 Balances 5,000 (17,500) 12,500
 Additional investment by Ben 17,500 17,500 0
 Balances 17,500 5,000 12,500

 Full payment of liabilities ( 5,000) (5,000) 0
 Balances 12,500 12,500
 Payment to Jessie (12,500) (12,500)
 Installment Liquidation
 Installment liquidation – is a process of selling some assets, paying the liabilities of the
partnership, dividing the available cash to the partners, selling additional assets and making
further payments to partners. This is also termed as “piecemeal” liquidation because the
complete liquidation might take several months. Partners may prefer to receive the amount due
to them in a series of installments rather than wait until the assets have been converted to cash.
 The following procedures may be followed in installment liquidation:
 1. Realization of assets and distribution of gain or loss on realization among the partners based
on their profit and loss ratio.
 2. Payment of liquidation expenses and adjustments for unrecorded liabilities, if any, and
distribute these among the partners based on their profit and loss ratio.
 3. Payment of liabilities to outsiders.
 4. Distribution of available cash based on a schedule of safe payments. Payment to partners can
also be made based on a Cash Priority Program.
 Marshalling of Assets – this legal doctrine refers to the segregation of assets
owned by the partnership and the personal assets owned by the several partners. It
defines the priority of claims against the assets of the partnership and the partners
when the partnership and/or one or more of the partners are insolvent.
 Partnership assets are first applied for the payment of debts of the partnership.
Once the partnership creditors are already satisfied, the excess assets will be
available to satisfy the claims of the partners over the partnership, which can be
used to pay his personal creditors.
 The personal assets of a partner are applied in the following order of priority:
 1. Settlement of debt to personal creditors.
 2. Settlement of debts to partnership creditors.
 3. Settlement of obligations to partners by way of contribution.
 Illustration: The Statement of Financial Position of the partnership of John, Ray, and Vince
on January 1, 2021, prior to liquidation shows the following balances:
 Assets Liabilities
 Other Assets 265,000 John, Loan 10,000
 Vince, Loan 5,000
 John, Capital 75,000
 Ray, Capital 60,000
 _________ Vince, Capital 50,000
 Total Assets P 280,000 P280,000
 John, Ray and Vince share profits in the ratio of 5:3:2, respectively. Non-cash assets are sold
and all available cash is distributed to the proper parties at the end of each month
 Liquidation takes place as follows:
 Book value of Assets Sold Cash Realized on Sale of Assets
 January P 90,000 P 55,000
 February 60,000 22,500
 March 65,000 15,000
 April 50,000 20,000
 P265,000 P112,000
 Certain assets are sold in January for P55,000. Partial payment to the creditors is made after the first
realization. In February, the liabilities are paid in full after the February realization and the remaining
cash is distributed to the partners. The distribution is supported by schedule of safe payments.
 Schedule of Safe Payments – is prepared when there is cash available for distribution after payment
to outside creditors has been made. It indicates how the available cash should be distributed to
partners. It prevents overpayment to any partner as each installment of cash is distributed as if no
more cash is forthcoming either from sale of assets or from collection of deficiencies from partners.
 Other Loan___ Capital__________
 Cash Assets Liabilities John Vince John Ray Vince
 P/L Percentages 50% 30% 20%
 January- sale of assets and distribution of loss 55,000 ( 90,000) (17,500) (10,500) ( 7,000)
 Balances 70,000 175,000 80,000 10,000 5,000 57,500 49,500 43,000

 Partial payment to creditors (70,000) (70,000) 0
 Balances 175,000 10,000 10,000 5,000 57,500 49,500 43,000
 February-sale of assets and distribution of loss 22,500 (60,000) (18,750) (11,250) (7,500)
 Balances 22,500 115,000 10,000 10,000 5,000 38,750 38,250 35,500
 Full payment to creditors (10,000) (10,000) 0
 Balances 12,500 115,000 10,000 5,000 38,750 38,250 35,500
 February installment to partners (Fig. 5-9) (12,500) (5,000) (7,500)
 Balances 115,000 10,000 38,750 38,250 28,000

 Other Loan___ Capital____
 Cash Assets Liabilities John Vince John Ray Vince
 P/L Percentages 50% 30% 20%

 Balances 115,000 10,000 38,750 38,250 28,000
 March-sale of assets and distribution of loss 15,000 (65,000) (25,000) (15,000) (10,000)
 Balances 15,000 50,000 10,000 13,750 23,250 18,000
 March installment to partners (Fig. 5-10) (15,000) ( 7,500) (7,500)
 Balances 50,000 10,000 13,750 15,750 10,500
 April-sale of assets and distribution of loss 20,000 (50,000) (15,000) (9,000) ( 6,000)
 Balances 20,000 10,000 (1,250) 6,750 4,500
 Offset of John’s loan (1,250) 1,250 0
 Balances 20,000 8,750 6,750 4,500
 April installment to partners 20,000 (8,750) (6,750) (4,500)
 The journal entries related to the illustration are as follows:
 January
 a. Cash (90,000 – 35,000) 55,000
 John, Capital (35,000 x 50%) 17,500
 Ray, Capital (35,000 x 30%) 10,500
 Vince, Capital (35,000 x 20%) 7,000
 Other Assets (Book value) 90,000
 - Sale of assets with book value of P90,000 and distribution of loss
 Cash (15,000 + 55,000) 70,000
 February
 a. Cash (60,000 – 37,500) 22,500
 John, Capital (37,500 x 50%) 18,750
 Ray, Capital (37,500 x 30%) 11,250
 Vince, Capital (37,500 x 20%) 7,500
 - Sale of assets with book value of P60,000 and distribution of loss.
 Cash 10,000
 - Full payment of liabilities.
 c. Vince, Loan 5,000
 Vince, Capital 7,500
 Cash 12,500
 March
 a. Cash (65,000 -50,000) 15,000
 John, Capital (50,000 x 50%) 25,000
 Ray, Capital (50,000 x 30%) 15,000
 Vince, Capital (50,000 x 20%) 10,000
 b. Ray, Capital 7,500
 Cash 15,000
 - March installment to partners.
 April
 a. Cash (50,000 – 30,000) 20,000
 John, Capital (30,000 x 50%) 15,000
 Ray, Capital (30,000 x 30%) 9,000
 Vince, Capital (30,000 x 20%) 6,000
 b. John, Loan 1,250
 John, Capital 1,250
 c. John, Loan 8,750
 Ray, Capital 6,750
 Cash 20,00
 Figure 4-9 Schedule of Safe Payments
 February 28, 2021
 John Ray Vince
 Capital balances before distribution of cash 38,750 38,250 35,500
 Add: Loan balances 10,000 - 5,000
 Partners’ total interest 48,750 38,250 40,500
 Restricted interest–possible loss of P115,000 if nothing is realized on remaining assets, 5:3:2 (57,500) (34,500) (23,000)
 Balances ( 8,750) 3,750 17,500
 Restricted interest–add’l possible loss to Vince if John is unable to meet his deficiency, 3:2 8,750 (5,250) ( 3,500)
 Balances (1,500) 14,000
 Restricted interest – add’l possible loss to Vince if Ray is unable to meet his possible deficiency 1,500
( 1,500)
 Free interest – amount to be paid to Vince 12,500
 Payment to apply on loan 5,000
 Payment to apply on capital 7,500
 Total cash distribution 12,500
 Figure 4-10 Schedule of Safe Payments
 March 31, 2021
 John Ray Vince
 Capital balance before distribution of cash 13,750 23,250 18,000
 Add: Loan balances 10,000 - -
 Restricted interest - possible loss of P50,000 if nothing
 is realized on remaining assets, 5:3:2 (25,000) (15,000) (10,000)
 Balances (1,250) 8,250 8,000
 Restricted interest – possible loss to Ray and Vince if John
 is unable to meet his possible deficiency, 3:2 ( 750) ( 500)
 Free interest – amounts to be paid to each partner 7,500 7,500
 Cash Priority Program
 This program is prepared just prior to liquidation and allows the partners to determine how cash
should be safely distributed if and when it becomes available.
 The steps in the preparation of the cash priority program are:
 1. Determine the total partners’ interest. This is the capital balance before liquidation plus loan by
the partners to the partnership less advances by the partnership to the partners.
 2. Divide the total partners’ interest by their profit and loss ratio to get each partner’s loss
absorption capacity. The loss absorption balance represents the maximum loss that the partners can
absorb without reducing their equity below zero. The partner with the highest loss absorption balance
has the first priority on cash distributions.
 3. When the loss absorption balance are determined, allocations may now be made, starting with
priority 1 wherein the highest loss absorption is reduced to the next highest. Each reduction in the
loss absorption balance requires payment to partners computed by multiplying the amount of
reduction by the partners’ P/L ratio.
 4. Once the partners’ loss absorption balances are equal, cash distribution are made in the P/L ratio.
 Figure 4-11 Cash Priority Program
 Cash Payments to
 John Ray Vince John Ray Vince Total
 Cash balances 75,000 60,000 50,000
 Add: loan balances 10,000 - 5,000
 Divide: by P/L ratio 50% 30% 20%
 Loss absorption balances 170,000 200,000 275,000
 Priority 1: To Vince (75,000) - - 15,000 15,000
 170,000 200,000 200,000
 Priority II: To Ray and Vince (30,000) ( 30,000) - 9,000 6,000 15,000
 0 9,000 21,000 30,000
 Priority III: Amounts in excess of
 P30,000 based on P/L ratio 50% 30% 20% 100%
 The following information are provided by the Cash Priority Program (Figure 4-11):
 * The first P15,000 available for distribution to the partners should be paid to Vince.
 * The next P15,000 should be paid to Ray and Vince in the ratio of 30:20.
 * Any amount in excess of P30,000 should be paid to John, Ray and Vince in their
profit and loss ratio of 50:30:20.
 The computation of installment payments at the end of each month are presented below:
 February distribution:
 John Ray Vince
 Available for distribution P12,500
 Priority I – Vince P12,500

 March distribution:
 John Ray Vince
 Available for distribution P15,000
 Priority I – Vince ( 2,500) 2,500
 (P15,000 – 12,500)
 Priority II – Ray and Vince (12,500)
 Ray (12,500 x 3/5) 7,500
 Vince (12,500 x 2/5) ________ 5,000
 Payment to partners 7,500 7,500
 Note: It should be noted that the same amount of cash distributions were arrived at in
February and March when using the schedule of safe payments and cash priority program.
 *******END*******

Ac 1104 - Partnership Liquidation

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Ac 1104 - Partnership Liquidation

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AC 1104 – PARTNERSHIP

 Balances 35,000 1,800 11,000 13,800 8,400

 Balances 17,500 5,000 12,500

 Balances 70,000 175,000 80,000 10,000 5,000 57,500 49,500 43,000

 Balances 115,000 10,000 38,750 38,250 28,000

 P/L Percentages 50% 30% 20%

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