Problem Solving

Lump-Sum Liquidation
I – Statement of Liquidation – Lump-sum

Assume the following data for QRS Partnership had the following condensed balance sheet just before
liquidation on November 1, 20x4, reports the following balances:

Assets Liabilities and Capital

Cash . . . . . . . . . . . . . . . . . . . . . . . P 24,000 Liabilities . . . . . . . . . . . . . . . . . . P 12,000
Noncash assets . . . . . . . . . . . . . . 84,000 Q, loans . . . . . . . . . . . . . . . . . . 2,400
Q, capital(30%) . . . . . . . . . . . . 9,600
R, capital (50%) . . . . . . . . . . . . 48,000
________ S, capital (20%) . . . . . . . . . . . . 36,000
P108,000 P108,000

Required: Prepare statement of liquidation, assuming:

1. The noncash assets were realized at P96,000.
2. The noncash assets were realized at P48,000.
3. The noncash assets were realized at P36,000. The personal assets and liabilities of the partners on
this date are as follows:
Personal Assets Partnership Liabilities
Q………………………………… P 288,000 P240,000
R…………………………………. 216,000 228,000
S…………………………………. 108,000 108,000
4. The noncash assets were realized at P42,000.
5. The noncash assets were realized at P24,000. The personal assets and liabilities of the partners
on this date are as follows:
Personal Assets Partnership Liabilities
Q………………………………… P 288,000 P284,400
R…………………………………. 216,000 228,000
S…………………………………. 117,600 108,000

6. The noncash assets includes goodwill of P54,000 and prepaid expenses of P18,000. The partners
agreed to write-off these accounts since they are valueless. The remaining noncash assets were
realized at P1,200 with liquidation expenses paid amounting to P14,400. The personal assets and
liabilities of the partners on this date are as follows:
Personal Assets Partnership Liabilities
Q………………………………… P 240,000 P204,000
R…………………………………. 216,000 192,000
S…………………………………. 108,000 112,800

7. Following are the data available before liquidating the partnership:

a. Prepaid expenses amounted to P8,400 were refunded to the partnership with the exception
of P1,440 that was forfeited.
b. R agreed to personally take certain equipment having a P6,000 book value. (The partners
estimated its current value at P7,200)
c. S agreed to personally take certain furniture having a P3,600 book value. ((The partners
estimated its current value at P3,000)
d. The remaining noncash assets were realized at P32,400.
Answer – Problem I
1: Gain on Realization Fully Allocated to Partner’s Capital Balances.

QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

Non- Q, R, S,
Cash Capital Capital Capital
Cash Assets Liabilities Q, Loan 30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of gain 96,000 (84,000) _____ ______ 3,600 6,000 2,400
Balances after realization 120,000 12,000 2,400 13,200 54,000 38,400
Payment of liabilities (12,000) (12,000)
Balances after payment of
liabilities 108,000 2,400 13,200 54,000 38,400
Payment to partners - loan (2,400) (2,400) ______ ______ _______
Balances after payment of
partners’ loans 105,600 13,200 54,000 38,400
Payment to partners -
capital (105,600) (13,200) (54,000) (38,400)

2: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised).

QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

Non- Q, R, S,
Cash capital Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of loss 48,000 (84,000) _____ ______ (10,800) (18,000) (7,200)
Balances after realization 72,000 12,000 2,400 (1,200) 30,000 28,800
Payment of liabilities (12,000) (12,000)
Balances after payment of
liabilities 60,000 2,400 (1,200) 30,000 28,800
Offset deficit versus loans _______ (1,200) 1,200 _______ _______
Balances after offsetting 60,000 1,200 30,000 28,800
Payment to partners – loan (1,200) (1,200) _______ ______
Balances after payment of
partners’ loans 58,800 30,000 28,800
Payment to partners -
capital (58,800) (30,000) (28,800)
3: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised and Additional Capital Investment is Required and
Made).

QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

Non- Q, R, S,
Cash capital Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of loss 36,000 (84,000) ________ ________ (14,400) (24,000) (9,600)
Balances after realization 60,000 12,000 2,400 ( 4,800) 24,000 26,400
Payment of liabilities (12,000) (12,000) ________ _______ _______ _______
Balances after payment of
liabilities 48,000 2,400 ( 4,800) 24,000 26,400
Offset loan versus deficit – _______ (2,400) 2,400 _______ _______
Balances after offsetting
partner’s loan 48,000 (2,400) 24,000 26,400
Additional investment by Q __2,400 2,400 _______ _______
Balances after additional
Investment 50,400 24,000 26,400
Payment to partners -
capital (50,400) (24,000) (26,400)

4: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).

QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

Non- Q, R, S,
Cash capital Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of gain 42,000 (84,000) _______ ________ (12,600) (21,000) (8,400)
Balances after realization 66,000 12,000 2,400 ( 3,000) 27,000 27,600
Payment of liabilities (12,000) (12,000) _______ _______ _______ _______
Balances after payment of
liabilities 54,000 2,400 (3,000) 27,000 27,600
Offset loan versus deficit _______ (2,400) 2,400 ______ ______
Balances after offsetting 54,000 ( 600) 27,000 27,600
Additional loss due to
insolvency of Q _______ 600 ( 429) ( 171)
Balances after additional ,
Loss 54,000 26,571 27,429
Payment to partners -
capital (54,000) (26,571) (27,429)
5: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).

QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

Non- Q, R, S,
Cash capital Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of gain 24,000 (84,000) _______ _______ (18,000) (30,000) (12,000)
Balances after realization 48,000 12,000 2,400 ( 8,400) 18,000 24,000
Payment of liabilities (12,000) (12,000) _______ _______ _______ _______
Balances after payment of
liabilities 36,000 2,400 ( 8,400) 18,000 24,000
Offset loan versus deficit ______ (2,400) 2,400 ______ _______
Balances after offsetting 36,000 (6,000), 18,000 24,000
Additional investment by Q _3,600 _ 3,600 ______ _______
Balances after additional
investment 39,600 (2,400) 18,000 24,000
Additional loss due to
insolvency of Q ______ 2,400 (1,714) ( 686)
Balances after additional
Loss 39,600 16,286 23,314
Payment to partners -
capital (39,600) (16,286) (23,314)

6: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent.

QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

Non- Q, R, S,
Cash capital Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Payment of liquidation
expenses (14,400) ______ ________ ________ (4,320) (7,200) (2,880)
Balances after payment of
liquidation expenses 9,600 84,000 12,000 2,400 5,280 40,800 33,120
Write-off goodwill and
prepaid expenses _______ (72,000) _______ ________ (21,600) (36,000) (14,400)
Balances after write-offs 9,600 12,000 12,000 2,400 (16,320) 4,800 18,720
Realization and distribution
of loss 1,200 (12,000) _______ ________ ( 3,240) ( 5,400) ( 2,160)
Balances after realization 10,800 12,000 2,400 ( 19,560) ( 600) 16,560
Payment of liabilities (10,800) (10,800) ________ _______ ________ _______
Balances after payment of
Liabilities -0- 1,200 2,400 (19,560) ( 600) 16,560
Offset loan versus deficit ______ _______ (2,400) 2,400 _______ _______
Balances after offsetting -0- 1,200 (17,160) ( 600) 16,560
Additional investment by Q
and R 17,760 _______ 17,160 600 ______
Balances after additional
Investment 17,760 1,200 16,560
Payment of liabilities (1,200) (1,200) _______
Balances after payment of
Liabilities 16,560 16,560
Payment to partners -
Capital (16,560) (16,560)
7: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) with Revaluation of Assets.

QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4

Non- Q, R, S,
Cash capital Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Increase in equipment 1,200 360 600 240
Decrease in furniture ______ (600) _______ ______ _(180) (300) (120)
Balances after revaluation 24,000 84,600 12,000 2,400 9,780 48,300 36,120
Refund of prepaid
expenses _6,960 (8,400) _______ ______ _(432) (720) (288)
Balances after refunds 30,960 76,200 12,000 2,400 9,348 47,580 35,832
Received noncash assets ______ (10,200) _______ ______ _____ (7,200) (3,000)
Balances after receipt
of noncash assets 30,960 66,000 12,000 2,400 9,348 40,380 32,832
Realization and distribution (
of loss 32,400 (66,000) _______ ______ 10,080) ( 16,800) ( 8,064)
Balances after realization 63,360 12,000 2,400 ( 732) 23,580 26,112
Payment of liabilities (12,000) (12,000) _______ _______ _______ _______
Balances after payment of
liabilities 51,360 2,400 ( 732) 23,580 26,112
Offset loan versus deficit _______ ( 732) 732 ______ ______
Balances after offsetting 51,360 1,668 23,580 26,112
Payment to partners -
loan (1,668) (1,668) ______ _______
Balances after payment
of loans 49,692 23,580 26,112
Payment to partners-
capitals (49,692) (23,580) (26,112)

III – Simple Liquidation

The CC, DD, and GG (CDG) Partnership has decided to liquidate as of December 1, 20x4. A balance
sheet as of December 1, 20X4, appears below:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 25,000
Accounts Receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Property, Plant and Equipment (net) . . . . . . . . . . . . . . . . . 300,000
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P500,000
Liabilities and Capital
Liabilities:
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P270,000
Capital:
CC, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P120,000
DD, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
GG, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230,000
Total Liabilities and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . P500,000
Additional Information
1. The personal assets (excluding partnership capital partner as of December 1, 20X4, follow:

CC DD GG
Personal assets . . . . . . . . . . . . . . . . . . P250,000 P300,000 P350,000
Personal liabilities . . . . . . . . . . . . . . . . 230,000 240,000 325,000
Personal net worth . . . . . . . . . . . . . . . P20,000 P60,000 P25,000
2. CC, DD, and GG share profits and losses in the ratio 20:40:40.
3. All of the non-cash assets were sold on December 10, 20x4, for P260,000

Required:

1. Prepare a statement of realization and liquidation for the CDG Partnership on December 10,
20x4.
2. Prepare a schedule of the net worth of each of the three partners as of December 10, 20x4, after
the liquidation of the partnership is completed.

Answer – Problem III

1.
CDG Partnership
Statement of Realization and Liquidation
Lump-sum Liquidation on December 10, 20X6
Capital Balances
Noncash Carlos Dan Gail
Cash Assets Liabilities 20% 40% 40%

Preliquidation balances 25,000 475,000 (270,000) (120,000) (50,000) (60,000)

Sale of assets and distribution

of P215,000 loss 260,000 (475,000) 43,000 86,000 86,000
285,000 -0- (270,000) (77,000) 36,000 26,000
Cash contributed by Gail to
extent of positive net worth 25,000 (25,000)
310,000 -0- (270,000) (77,000) 36,000 1,000
Distribution of deficit of
insolvent partner: (1,000)
20/60(P1,000) 333
40/60(P1,000) 667
310,000 -0- (270,000) (76,667) 36,667 -0-

Contribution by Dan to 36,667 (36,667)

remedy deficit
346,667 -0- (270,000) (76,667) -0- -0-

Payment to creditors (270,000) 270,000

76,667 -0- -0- (76,667) -0- -0-

Payment to partner (76,667) 76,667

Post-liquidation balances -0- -0- 0- -0- -0- -0-

 2.
CDG Partnership
Net Worth of Partners
December 10, 20X6
Carlos Dan Gail
Personal assets, excluding
partnership capital interests 250,000 300,000 350,000
Personal liabilities (230,000) (240,000) (325,000)
Personal net worth, excluding
partnership capital interests, Dec. 1, 20X6 20,000 60,000 25,000
Contribution to partnership (36,667) (25,000)
Liquidating distribution from partnership 76,667 -0- -0-
Net worth, December 10, 20X6 96,667 23,333 -0-

This computation assumes that no other events occurred in the 10-day period that changed any of the
partners’ personal assets and personal liabilities. In practice, the accountant must be sure that a
computation of net worth is current and timely.

The table shows the effects of the transactions between the partnership and each partner. A
presumption of this table is that the personal creditors of Dan or Gail would not seek court action to
block the settlement transactions with the partnership. Upon winding up and liquidation, the partnership
does not have any priority to the partner’s personal assets. Thus, the personal creditors may seek to
block the transactions with the partnership in order to provide more resources from which they can be
paid. A partner who fails to remedy his or her deficit can be sued by the other partners who had to
make additional contributions or even by a partnership creditor if the failed partner is liable to the
partnership creditor. But those claims are not superior to the other claims to the partner’s individual
assets.

When accountants provide professional services to partnerships and to its partners, the accountant
should expect, at some time, legal suits involving the partnership and/or individual partners. A strong
and thorough understanding of the legal and accounting foundations of partnerships will be very
important to that accountant.

VI – Journal Entries and Distribution to Partners

The partners of Arthur, Baker & Casey Partnership decided to liquidate on April 1, 20x4. The balance
sheet of the partnership on April 1, 20x4, follows, with the income-sharing ratio indicated parenthetically:
Assets Liabilities & Partners’ Capital
Cash . . . . . . . . . . . . . . . . . . . . . . P 30,000 Trade accounts payable. . . . P 65,000
Loans receivable from Arthur . . 20,000 Loans payable to Baker. . . . . 30,000
Other assets. . . . . . . . . . . . . . . . 250,000 Arthur, capital (2). . . . . . . . . 70,000
Baker, capital (5). . . . . . . . . 80,000
________ Casey, capital (3). . . . . . . . . 55,000
Total. . . . . . . . . . . . . . . . . . . . . . P300,000 Total. . . . . . . . . . . . . . . . . . . . P300,000
On April 1, 20x4, the disposal of other assets with a carrying amount of P100,000 realized P70,000, and all
available cash was distributed.
Required: Prepare journal entries for Arthur, Baker & Casey Partnership on April 1, 20x4, to record the
realization of the other assets and the distribution of available cash to creditors and to partners.
Answer – Problem VI

Cash 70,000
Arthur, Capital 6,000
Baker, Capital 15,000
Casey, Capital 9,000
Other Assets 100,000
To record realization of assets at a loss of $30,000, divided
among Arthur, Baker, and Casey in 2:5:3 ratio, respectively.
Trade Accounts Payable 65,000
Cash 65,000
To record payment of liabilities.

Arthur, Capital 20,000

Loan Receivable from Arthur 20,000
To offset Arthur's loan account against Arthur's capital
account.

Arthur, Capital 14,000

Loan Payable to Baker 20,000
Casey, Capital 1,000
Cash 35,000

To record payments to partners, computed as follows:

Arthur Baker Casey

Capital account balances P70,000 P80,000 P55,000
Add: Loan payable to Baker 30,000
Less: Loan receivable from Arthur (20,000)
Loss on realization of assets,
P30,000 (6,000) (15,000) (9,000)
Balances P44,000 P95,000 P46,000
Maximum potential additional loss
of P150,000 (P250,000 – P100,000 =
P150,000) divided in 2:5:3 ratio (30,000) (75,000) (45,000)
Cash payments P14,000 P20,000 P 1,000