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• Guidelines - Exam
8. Liquidation is the process of winding up the affairs of the business
towards its termination. It will normally take three steps to accomplish
this:
1. Converting or selling all remaining properties and non-cash assets into
cash with the gain or loss on conversion allocated to all partners.
2. Paying partnership liabilities and liquidation expenses.
3. Distributing the remaining cash in payment of the partners’ interest (for
loan and capital balances including profit share).
Liquidation Defined
9. Some of the legal provisions to be considered are the following:
1. Payments to creditors and partners should be made in the following order:
a. Those owing to outside creditors (other than partners),
b. Those owing to the partners other than their capital balances and share in the
profit,
c. Those owing to partners for their capital, and
d. Those owing to partners for their share in profits.
2. When a partner becomes insolvent, the claim against his separate properties shall
be ranked
in the following order:
a. Owing to personal creditors;
b. Owing to partnership creditors;
c. Owing to other partners for contributions made.
3. Partnership creditors have priority over partnership properties; in the same manner
the
partners’ personal creditors have priority over partners’ personal properties.
Legal Provisions
10. 4. In case the partnership is insolvent, the general partners (including industrial
partner) are
liable to pay the partnership creditors from his/her personal properties.
5. A deficient partner may apply the right of offset to a loan balance owing to him or
her by the partnership.
6. A limited partner is liable only to the extent of his or her contribution in the
partnership.
A limited partner shall not receive any part of his contribution until all liabilities of the
firm have been paid, except to general partners and to limited partners, and there
remains property of the partnership sufficient to pay them.
Legal Provisions (continued)
11. 1. Realization – the process of selling or converting the assets into cash.
2. Gain or loss on Realization – the difference between the cash proceeds and the book
value of the assets sold. A gain results when the net proceeds (amount received) is
higher
than the book value of the assets sold. Gains and losses affect the partners’ capital
balances
and are distributed on agreed profit or loss ratio.
3. Capital Deficiency – results when the share of a partner in the partnership losses
(whether from operating activities or sale of assets) is higher than his or her capital
balance.
Partner’s capital account will be a debit balance.
4. Right of Offset – a legal right to apply a part or all of the amount owing to a partner
against his or her capital deficiency.
5. Partners’ Interest – represents the sum of the loan payable to the partner and the
capital
Terminologies
12. 6. Partners’ Free Interest – represents partners’ interest that can be paid out of the
available cash of the partnership but this is possible only after partnership creditors
have been paid.
7. Partners’ Restricted Interest – represents interest that cannot be paid to the
partners
due to inadequacy of cash when there is unpaid partner’s deficiency or unsold
properties
not available for distribution to partners or the cash is restricted for contingent
expenses.
8. Solvent Partners – partners with sufficient remaining personal assets after
deducting or
liquidating their personal liabilities.
9. Theoretical Loss – represents possible or potential future loss of the partnership
arising
from unsold properties, deficiency of partners or future liquidation expenses.
Terminologies (continued)
13. 1. Simple Liquidation – all non-cash assets are sold before any
cash is disbursed to the partnership creditors and partners.
2. Installment Liquidation – non-cash assets are sold in installment
so that cash disbursed to all equity interests as the cash becomes
available.
Types of Partnership Liquidation
18. Required:
Prepare a worksheet to liquidate the
partnership.
The partnership of Able, Bower, and Cramer was liquidated. The
partners have shared profits and losses in the ratio of 2:4:4. Prior to
liquidation, their capital balances were the following:
Able Bower Cramer
P10,000 P(5,000) P(15,000)
Cash totaled P20,000, with liabilities amounting to P30,000. A
review of the individual partners' personal financial status reveals
the following:
Assets Liabilities
Able P 5,000 P20,000
Baker 6,000 4,000
Cramer 30,000 20,000
19. Cash Liab
Able
(20%)
Bower
(40%)
Cramer
(40%)
Beginning Bal.
Payment of Liabilities
Balance
Payment to cover cap. def.
Def. of B&C absorbed by
A
Balance
Payment of Liabilities
Payment
Balance
P 0
(20,000) (20,000)
P30,000 P10,000 P(5,000) P(15,00
0)
P20,000
P10,000 P10,000 P(5,000) P(15,00
0)
2,000 10,000
(10,000
)
P(3,000
)
12,000
P(5,000)
P10,000
P12,000
(10,000)
P10,000
P(3,000
)
P(5,000)
P 0
P2,000 P10,000
3,000 5,000
P 0 P 0
(8,000)
P2,000
P2,000
(2,000)
(2,000)
P 0
P 0
Assets Liabilities
Able P 5,000 P20,000
Baker 6,000 4,000
Cramer 30,000 20,000
Balance
Balance
Cash-P20,000
Liabilities-P30,000
P&L ratio 2:4:4
20. After operating for five years, the books of the partnership of Bo and By
showed the following balances:
Net assets P 169,000 Bo, Capital P 110,500
By, Capital 58,500
If liquidation takes place at this point and the net assets are realized at
book value, the partners are entitled to:
21. The following condensed balance sheet is presented for the partnership of AA, BB, and
CC, who share profits and losses in the ratio of 4:3:3, respectively:
Cash P 160,000
Other assets 320,000
Total P 480,000
Liabilities P 180,000
AA, capital 48,000
BB, capital 216,000
CC, capital 36,000
Total P 480,000
The partners agreed to dissolve the partnership after selling the other assets for
P200,000. Upon the dissolution of the partnership. AA should have received.
22. The following condensed balance sheet is presented for the partnership of AA, BB, and CC, who share
profits and losses in the ratio of 4:3:3, respectively:
Cash P 160,000
Other assets 320,000
Total P 480,000
Liabilities P 180,000
AA, capital 48,000
BB, capital 216,000
CC, capital 36,000
Total P 480,000
The partners agreed to dissolve the partnership after selling the other assets for P200,000. Upon the
dissolution of the partnership. AA should have received.
AA BB CC
Capital balances before liquidation P48,000 P216,000 P36,000
Loss on realization (P320,000 –P200,000): 4:3:3 (48,000) (36,000) (36,000)
Cash received P 0 P180,000 P 0
23.
24. Cash O.Assets Liab. A, Loan
Bal. before liquidation 200,000 500,000 250,000 70,000 200,000 30,000 150,000
260,000
Sale of assets & Distribution of
loss
Balances
Payment of liabilities
Balances
Balances
Balances
Payment to partners (per
sched.)
Sale of assets & Distribution of gain
Payment to partners
(300,000) (12,000) (16,000) (12,000)
460,000
(250,000)
210,000
(210,000)
230,000
230,000
(230,000)
200,000
200,000
200,000
(200,000)
250,000
(250,000)
70,000
70,000
(70,000)
188,000
188,000
(95,000) (45,000)
93,000
9,000
102,000
(102,000)
14,000
14,000
14,000
12,000
26,000
(26,000) (102,000)
102,000
138,000
138,000
93,000
9,000
February
A,Cap. B,Cap. C,Cap30%
30% 40%
January
25. A 30% B 40% C 30%
Capital balance before distribution 188,000 14,000 138,000
Add: Loan 70,000
Total Partners Interest 258,000 14,000 138,000
Restricted int.-possible loss of
P200,000 if nothing is realized on remining unsold
assets
( 60,000) (80,000 (60,000)
198,000 (66,000) 78,000
Restricted int.-additional possible loss of 66,000 to
A&C if B is unable to pay his possible deficiency,
shared in the ratio 30:30
(33,000) 66,000 (33,000)
165,000 45,000
Payment to applt on:
Loan 70,000
Capital 95,000 45,000
Total cash distribution 165,000 45,000
Schedule to Accompany Statement of Liquidation
26. • Larry, Marsha, and Natalie are partners in a company that is being
liquidated. They share profits and losses 55 percent, 20 percent, and 25
percent, respectively. When the liquidation begins they have capital
account balances of P108,000, P62,000, and P56,000, respectively. The
partnership just sold equipment with a historical cost and accumulated
depreciation of P25,000 and P18,000, respectively for P10,000. What is
the balance in Marsha's capital account after the transaction is complete
27. Larry, Marsha, and Natalie are partners in a company that is being liquidated. They share
profits and losses 55 percent, 20 percent, and 25 percent, respectively. When the liquidation
begins they have capital account balances of P108,000, P62,000, and P56,000, respectively. The
partnership just sold equipment with a historical cost and accumulated depreciation of
P25,000 and P18,000, respectively for P10,000. What is the balance in Marsha's capital account
after the transaction is completed?
P62,000 + [P10,000 - (P25,000 - P18,000)] (.20)
P62,000 + (P3,000) (.20)
P62,000 + P600
P62,600
28. W, X, and Y are partners sharing profits and losses in the ratio of 4:3:3, respectively.
The condensed balance sheet of Heidi Partnership as of December 31, 20x5 is:
Cash P 50,000
Other assets 130,000
Total assets P 180,000
Liabilities P 40,000
W, capital 60,000
X, capital 40,000
Y, capital 40,000
Total liabilities and capital P 180,000
Assume instead that the Heidi Partnership is dissolved and liquidated by
installments,
and the first realization of P40,000 cash is on the sale of other assets with book
value
of P80,000. After the payment of liabilities, the available cash shall be distributed to
W, X, and Y respectively, as follows:
29. W, X, and Y are partners sharing profits and losses in the ratio of 4:3:3, respectively. The
condensed balance sheet of Heidi Partnership as of December 31, 20x5 is:
Cash P 50,000
Other assets 130,000
Total assets P 180,000
Liabilities P 40,000
W, capital 60,000
X, capital 40,000
Y, capital 40,000
Total liabilities and capital P 180,000
Assume instead that the Heidi Partnership is dissolved and liquidated by installments, and the
first realization of P40,000 cash is on the sale of other assets with book value of P80,000. After the
payment of liabilities, the available cash shall be distributed to W, X, and Y respectively, as
follows:
Balances before liquidation P 60,000 P 40,000 P
40,000
Loss on realization (80,000 – P40,000): 4:3:3 (16,000) (12,000)
(12,000)
Balances P 44,000 P 28,000 P
28,000
Loss in possible unrealization of noncash assets (P130,00 – P80,000): 4:3:3 (20,000) (15,000)
30. RR, SS and I decided to dissolve the partnership on November 30, 2020. Their capital balances and
profit ratio on this date, follow:
Capital Balances Profit Ratio
RR P 50,000 40%
SS 60,000 30%
TT 20,000 30%
The net income from January 1 to November 30, 2020 is P44,000. Also, on this date, cash and
liabilities are P40,000 and P90,000, respectively. For RR to receive P55,200 in full settlement of his
interest in the firm, how much must be realized from the sale of the firm's non-cash assets?
1. Total capital (before liquidation)
2. Total liabilities (before liquidation)
3. Total assets (before liquidation)
4. Total non-cash assets (before liquidation)
5. Proceeds on sale of assets
31. RR, SS and I decided to dissolve the partnership on November 30, 2020. Their capital balances and
profit ratio on this date, follow:
Capital Balances Profit Ratio
RR P 50,000 40%
SS 60,000 30%
TT 20,000 30%
The net income from January 1 to November 30, 2020 is P44,000. Also, on this date, cash and
liabilities are P40,000 and P90,000, respectively. For RR to receive P55,200 in full settlement of his
interest in the firm, how much must be realized from the sale of the firm's non-cash assets?
Total Capital ( P50,000 + P60,000 + P20,000 + P44,000) P174,000
Total Liabilities 90,000
Total Assets P264,000
Less: Cash 40,000
Non-cash assets P224,000
Less: Loss on realization: (P55,200 - P67,600*) / 40% 31,000
Proceeds from sale P 193,000
* [P50,000 + (P44,000 x 40%)]
(P50,000 + P17,600)
P67,600
a
b
e
d
c
Total capital
Total liabilities
Total assets
Total Non-cash assets
Proceeds on sale of assets
32. The statement of financial position of the firm of A, B, and C just before the liquidation shows
the following:
Assets P 120,000
Liabilities 50,000
Loan from A 10,000
A, Capital 22,000
B, Capital 30,000
C, Capital 8,000
A, B. and C share profits 5:3:2 respectively. Certain assets are sold for P80,000. Creditors are paid
in full, partners are paid in P20,000, and cash of P10,000 is withheld pending future
developments.
How much cash is to be distributed to the partners?
33. Solution:
A B C Totals
Unadjusted Capital Balances P 22,000 P 30,000 P 8,000 P 60,000
Payable to A 10,000 10,000
Total Interest 32,000 30,000 8,000 70,000
Allocation of loss on Realization (25,000) (15,000) (10,000) (50,000)
Balance 7,000 15,000 (2,000) 20,000
Allocation of additional possible loss (1,250) (750) 2,000
First installment payment to partners P5,750 P 14,250 0 P 20,000
