Liquidation

Chapter 5
 Definition
• Liquidation of a partnership is the winding up of its
business activities characterized by sale of all noncash
assets, settlement of all liabilities and distribution of the
remaining cash to the partners.
• The conversion of noncash assets into cash is referred to
as realization.
• Gain or loss on realization shall be divided in the profit
and loss ration of the partners.
Order of Preference:
The assets of a general partnership shall be applied in the
following order:
1. Those owing to outside creditors.
2. Those owing to inside creditors in the form of loans or
advances for business expenses by the partners.
3. Those owing to the partners with respect to their capital
conntribution.
4. Those owing to the partners with respect to their share of the
profits.
 Illustration

Apalisoc, Onate and Geron are partners in a prawn

export business. Initially, Apalisoc contributed P300,000;
Onate, P200,000; and Geron, P100,000. On the date of
dissolution, the remaining asets of the partnership
amounted to P1,000,000. The partnership has outstanding
obligations with Pido, P140,000; Tuddao, P100,000 and
loans payable to Apalisoc, P40,000.
Assume in the previous illustration that the obligations of
the partnership, all accruing to outside creditors, amounted
to P1,120,000.
Distribution of Separate Properties of an Insolvent Partner
If a partner is insolvent, his personal properties shall be
distributed as follows:
1. Those owing to separate creditors
2. Those owing to partnership creditors
3. Those owing to the partners by way of additional contributions
when the assets of the partnership were insufficient to settle all
obligations.
 Illustration

Assume in the previous illustration, Geron has personal

obligation to dela Paz in the amount of P80,000. Geron's
separate properties has an aggragate value of P90,000.
 Methods of Partneship Liquidation
The following methods may be used when a partnership is
liquidated:
1. Lump-sum Method
Under this method, all noncash 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.
2. Installment Method
Under this method, realization of noncash 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 persists until all the
noncash assets are sold.
 Lump-sum Liquidation

Under this method, all noncash assets are realized and all
liabilities are settled before a single final cash distribution is
made to the partners. The procedures below may be
followed in lump-sum liquidation:
1. Realization of noncash assets and distribution of gain or
loss on realization among the partners based on P/L ratio.
2. Payment of liabilities.
3. Elimination of partner's capital deficiencies.
4. Payments to partners.
 Illustration

Malaya, Tria and 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, 2018. The following condensed statement
of financial position prepared prior to liquidation:
 Illustration
Malaya, Tria and Marasigan
Statement of Financial Position
December 31, 2018

ASSETS: LIABILITIES & EQUITY

Cash P200,000 Liabilities P1,120,000
Noncash assets 3,400,000 Tria, Loan 50,000
Total assets P3,600,000 Marasigan, Loan 80,000
Malaya, Capital 950,000
Tria, Capital 600,000
Marasogan, Capital 800,000
Total L&E P3,600,000
Case 1: Loss on Realization fully absorbed by Partner's
Capital Balances
Assume that the noncash assets are sold at P2,500,000
with a resulting loss on realization of P900,000 which was
distributed in the ratio 2:2:1.
Case 2: Loss on Realization Resulting to a Capital
Deficiency with Right to Offset
Assume that the noncash assets are sold at P1,850,000.
Case 3: Loss on Realization Resulting to a Capital
Deficiency to a Personally Solvent Partner
Assume that the noncash assets are sold at P1,700,000.
Case 4: Loss on Realization Resulting to a Capital
Deficiency to a Personally Insolvent Partner
Assume that the noncash assets are sold at P1,700,000.
Partner Tria is personally insolvent.
Case 5: Partnership Insolvent but Partners Personally
Solvent
Assume that the noncash assets are sold at P900,000.
 Illustration

Cardenas, Go and Balocating are partners who are

sharing P/L in the ratio of 4:3:2 respectively. They decided
to liquidate their business on December 31, 2018 because
of constant credit problems.

Partner Personal assets Personal liabilities

Cardenas P310,000 P200,000
Go 94,500 119,000
Balocating 40,000 50,000
 Illustration
Cardenas, Go and Balocating
Statement of Financial Position
December 31, 2018

ASSETS: LIABILITIES & EQUITY

Cash P5,000 Liabilities P370,000
Noncash assets 605,000 Cardenas, Capital 100,000
Total assets P610,000 Go, Capital 60,000
Balocating, Capital 80,000
Total L&E P610,000
Case 6: Partnership Insolvent but Partners Personally
Insolvent
Assume that the noncash assets are sold at P335,000.
 Illustration
The balance sheet of the partnership showed the following balances:

Gamba, Mulles and Pitular

Statement of Financial Position
April 30, 2018
ASSETS: LIABILITIES & EQUITY
Cash P315,000 Liabilities P435,000
Noncash assets 1,250,000 Pitular, Loan 30,000
Total assets P1,565,000 Gamba, Capital 600,000
Mulles, Capital 350,000
Pitular, Capital 150,000
Total L&E P1,565,000
Additional information:
• Gamba, Mulles and Pitular share profit and loss in the ratio of
4:3:3, respectively.
• 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 of June.
• Assume further that partners are solvent and that any partner who
is deficient made appropriate payment to the partnership on July
31.
Schedule A
Schedule B
Statement of Liquidation
 Illustration
Del Rosario, Manalo and Pateno divide profits 60%, 25% and 15% respectively.
A balance sheet on June 30, 2018, just before the partnership liquidation,
showed up the following balances:
Del Rosario, Manalo and Pateno
Statement of Financial Position
June 30, 2018
ASSETS: LIABILITIES & EQUITY
Cash P50,000 Liabilities P350,000
Noncash assets 925,000 del Rosario, Capital 450,000
Total assets P975,000 Manalo, Capital 100,000
Pateno, Capital 75,000
Total L&E P975,000
Additional information:
• 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 P150,000 and cash is
distrubuted in final settlement.
Cash Priority Program
Statement of Liquidation