ADVANCED FINANCIAL ACCOUNTING AND REPORTING

G.P. COSTA
PARTNERSHIP LIQUIDATION

Partnership Liquidation

The process of winding up the affairs of the business

The process of converting all assets of the business into cash (realization), followed by the final payments of creditor’s claims
and the partner’s capital balances in the partnership.
Must observe the “Principle of Equitable Distribution of the Assets” Between partnership creditors and partner’s legal rights

MARSHALING OF ASSETS

A legal doctrine that 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 of the partners WHEN the partnership and/or
one or more of the partners are insolvent

As to Partnership assets debts of partnership shall apply to 1.outside creditors

As to Personal assets of the partner (insolvent), applied in the order of priority 1.Settlement of debts to personal creditors
2. To partnership creditors
3. To other partners by way of contribution

METHODS OF LIQUIDATION

1. Liquidation by Total or Lump sum Method

2. Liquidation by Installment or Piecemeal Liquidation

LUMP SUM LIQUIDATION

1. Adjustments of accounts and closing of nominal accounts

2. The non-cash assets are converted into cash by selling it to 3rd parties When resulted to Gain on realization =
increase on partners’ capital When resulted to Loss on realization = decrease on partners’ capital

3. Any Gain or Loss on Realization will be distributed to the partner’s capital balances BASED ON P/L ratio

4. Any capital DEFICIENCY resulting from distribution of loss from realization must be eliminated by:

a. Applying “Right of Offset” if the deficient partner has loans receivable from partnership (Loans Payable to Partner)

b. Make Additional Investment - if such partner is a solvent general partner

c. Absorption method based on P/L ratio – when a deficient partner is a LIMITED partner or is INSOLVENT
 d. A partner is insolvent his asset is less than his liabilities.

5. Available cash will be distributed according to priority:

a. Payment of liabilities to outside creditors (Liabilities)

b. Payment of payable to partners (Loans Payable, partner)

c. Payment of partner’s capital

Installment liquidations involve the distribution of cash to partners as it becomes available during the liquidation period and
before all liquidation gains and losses have been realized.

1. No cash is distributed to partners until all non-partner liabilities have been paid.

2. Payments to partners can be determined by a safe payment schedule for each installment distribution.

3. When the partners’ capital accounts are aligned in the profit and loss sharing ratios, safe payment schedules will not
be necessary.

4. Once all the partners are included in an installment distribution, future installment payments to the partners will be
in the profit sharing ratios. Thus, additional safe payment schedules are not necessary.

Problem 1

The partnership of Denmark and Spain is in the process of liquidation. On January 1, 2017, the ledger shows account
balances as follows:

Cash P 8,000 Accounts Payable P 12,000

Accounts Receivable 20,000 Denmark, Capital 32,000

Lumber Inventory 32,000 Spain, Capital 16,000

On January 10, 2017, the lumber inventory is sold for P20,000, and during January, accounts receivable of P16,800 is collected.
No further collections on the receivables are expected and the partners have incurred P3,200 of liquidation expenses. Profits are
shared 60% for Denmark and 40% for Spain.

How much cash will partner Denmark and Spain receive upon liquidation?
A. 22,800; P9,920
B. 37,600; P18,400
C. P20,960; P8,640
D. P20,500; P20,500

Problem 2
The partnership of JJ, KK, LL and MM is preparing to liquidate. Profit and loss sharing ratios are shown is the summarized
balance sheet at December 31, 2019 as follows:
 Assets Liabilities and Capital

Cash 100,000.00 Other Liabilities 50,000.00

Inventories 100,000.00 JJ, loan 50,000.00

Loan to KK 10,000.00 JJ, capital (40%) 100,000.00

Other Assets 255,000.00 KK, capital (20%) 160,000.00

LL, capital (20%) 50,000.00

MM, capital (20%) 55,000.00

Total 465,000.00 Total 465,000.00

During January 2020, the inventories are sold for P42,500, the others liabilities are paid and P25,000 is set-aside for
contingencies

Compute the total cash payment to partners:

Payment to

Partners

a. 97,500.00

b. 102,500.00

c. 72,500.00

d. 67,500.00

Problem 3

Partners Kilo, Lima and Nancy decided to liquidate their partnership on

Capitals P&L ratio

Kilo P 600,000 40%

Lima 784,000 40%

Nancy 240,000 20%

The net income from January 1, 2017 to November 30, 2017 is P656,000. On November 30, 2017, the cash balance is
P520,000, and that of liabilities is P1,160,000. Kilo is to receive P706,560 in the settlement of his interest.

Calculate: (1) The loss on realization, and (2) the amount to be realized from the sale of non-cash assets?
A. P 389,600 (2) P2,530,400
B. (1) P 248,000 (2) P5,100,000
 C. (1) P 620,000 (2) P3,860,000
D. (1) P 522,000 (2) P3,860,000

Problem 4

On December 31, 2019, the accounting record of MM, NN, OO Partnership (a general partnership) included the following
ledger account balances:

(Dr.) Cr.
MM, drawing (15,000.00)

OO, drawing (5,625.00)

NN, loan 18,750.00

MM, capital 76,875.00

NN, capital 62,812.50

OO, capital 67,500.00

Total assets of the partnership amounted to P299,062.50 including P32,812.50 cash and partnership liabilities totaled, P93,750.
The partnership was liquidated on December 31, 2019 and OO received P52,031.25 cash pursuant to the liquidation. MM, NN
and OO shared net income and losses in a 5:3:2 ratio, respectively.

1. The loss on realization

Problem 5

Balance sheet data for the firm of W, X, and Y as of January 1, 2018, follow:
 Assets P 1,225,000 Liabilities P 675,000

W, Capital 200,000

X, Capital 200,000

Y, Capital 200,000

P 1,225,000 P 1,225,000

Partners share profits equally after allowance of a salary to Y, the managing partner, of P7,500 monthly. As a result of
operation losses sustained at the beginning of 2018, W advanced P 150,000 to the firm on April 1; it was agreed that
he would be allowed interest at 6%. With continued losses, the members decided to liquidate. Y agreed to take over partnership
equipment in part of settlement of his interest, the transfer being made at an agreed value of P 40,000. On November 1, P
200,000 cash was available for distribution to partners after the sale of remaining assets and payment of partnership obligations
to outsiders. Y had withdrawn his salary for January and February but had not received his salary for the period of March 1 to
November 1; no other cash payments had been made to partners. Available cash was distributed on November 1 and the firm
was declared dissolved.

How much cash should W received in the distribution of P 200,000 cash available?

Problem 6

The balance sheet for Michael, Ronan and Trina partnership, who share profits and losses in the ratio of 50%, 25% and 25%,
respectively, shows the following balances just before liquidation.

Cash P 24,000

Other Assets 119,000

Liabilities 40,000

Michael, Capital 44,000

Ronan, Capital 31,000

Trina, Capital 28,000

On the first month of liquidation, certain assets are sold for P64,000. Liquidation expense of P2,000 are paid, and additional
liquidation expenses are anticipated. Liabilities are paid amounting to P10,800 and sufficient cash is retained to ensure the
payment to creditors before making payments to partners. On the first payment to the partners, Michael receives P12,500

Determine the amount of cash withheld for anticipated liquidation expenses.

A. P35,200 C. P33,200
B. P29,200 D. P6,000
Problem 7
A, B, and C are partners sharing profits in the ratio of 5:3:2, respectively. A balance sheet prepared just prior to
partnership liquidation shows the following:

A B C

Capital Balances P 122,000 P 72,000P 47,000

Loan Balances P 43,000 P 48,000P 6,000

Assets are sold and cash is distributed to partners in monthly instalments during the course of liquidation as follows:

January P 20,000

February 50,000

March 80,000

April (final distribution) 20,000

A. Prepare a program to show how cash is to be distributed during the entire course of liquidation.

B. Using the program developed above, prepare a schedule summarizing the payments to be made to partners at the
end of each month.