Prior to liquidation: 1. Determine the net income or loss and distribute the same to partners according to their profit and loss ratio. Close Partners Drawing account to Partners capital 2. Revalue the assets of the partnership and distribute the increase/decrease to partners capital account.. LIQUIDATION refers to the winding up of the affairs of the partnership. This leads to sale of all non-cash into cash and payment to creditors and to partners. Types of Liquidation 1. Lump-sum liquidation all assets are converted into cash, then payments are made first to creditors, then to partners. 2. Installment Liquidation assets are sold on a piece-meal fashion and available cash are distributed first to creditors then to partners . Terms: 1. Realization conversion of non-cash assets into cash. 2. Gain on realization - selling price of the assets exceeds its carrying value. 3. Loss on Realization selling price of the assets is less than its carrying value. 4. Capital deficiency - debit balance in partners capital due to excessive share in loss on realization. 5. Deficient partner a partner with capital deficiency. 6. Right of offset part or full amount of the solvent or insolvent partners loan is being applied to his capital deficiency. 7. Absorption of loss the solvent partner absorbs the deficiency of the insolvent partner/s.

Steps applied in lump-sum liquidation: 1. Sale of non-cash assets and distribution of gain or loss to partners according to their existing profit and loss ratio. 2. Payment of existing obligations to creditors. 3. In case of capital deficiency: a. Solvent partner - apply right of offset - additional investment. b. Insolvent partner: - apply right of offset

-

absorption of loss.

4. Payment to partners: a. loan b. capital

SAMPLE PROBLEM: Assume that partners Andy, Bel and Candy decided to liquidate the partnership on May 1, 2005. A balance sheet was prepared as follows: LIABILITIES Cash P 40,000 Accounts Payable Other Assets 460,000 Andy, Capital Bel ,Capital Candy, Capital Total Assets P 500,000 Total Equities The partners divide profit or loss in the ratio of 3:5:2 respectively. Required: A. Other assets were sold for P510,000. B. Other assets were sold for P400,000. C. Other assets were sold for P100,000. Deficient partner is solvent D. Other assets were sold for P100,000. Deficient partner is insolvent ASSETS & PARTNERS EQUITY P 125,000 100,000 125,000 150,000 P 500,000

A. Other assets were sold for P520,000 ABC Partnership Statement of Liquidation May 1, 2005 CAPITALCash Balances before realization 40,000 Other Assets 460,000 Liabilities 125,000 Andy (30%) 100,000 BeL 50% 125,000 Candy 20% 150,000

Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Payment to partners

510,000 550,000 (125,000) 425,000 (425,000)

(460,000) 0 0 125,000 (125,000) 0

15,000 115,000 115,000 (115,000)

25,000 150,000 150,000 (150,000)

10,000 160,000 160,000 (160,000)

================================================= JOURNAL ENTRIESMay 1 Cash Other Assets Gain or Loss on Realization Sale of non-cash assets 1 Gain or Loss on Realization Andy, capital Bel, capital Candy, capital Distribution of gain to partners 510,000 460,000 50,000 50,000 15,000 25,000 10,000

1

Accounts payable Cash Payment of liabilities

125,000 125,000

1

Andy, capital Bel, capital Candy, capital Cash Final cash settlement to partners

115,00 150,000 160,000 425,000

B. Other assets were sold for P400,000 ABC Partnership Statement of Liquidation May 1, 2005 CAPITALCash Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Payment to partners 40,000 400,000 440,000 (125,000) 315,000 (315,000) Other Assets 460,000 (460,000) 0 0 Liabilities 125,000 125,000 (125,000) 0 Andy (30%) 100,000 (18,000) 82,000 82,000 (82,000) BeL 50% 125,000 (30,000) 95,000 95,000 (95,000) Candy 20% 150,000 (12,000) 138,000 138,000 (138,000)

================================================= JOURNAL ENTRIESMay 1 Cash Gain or Loss on Realization Other Assets Sale of non-cash assets 1 Andy, capital Bel, capital Candy, capital Gain or Loss on Realization Distribution of loss to partners 18,000 30,000 12,000 60,000 400,000 60,000 460,000

1

Accounts payable Cash Payment of liabilities

125,000 125,000

1

Andy, capital Bel, capital Candy, capital Cash Final cash settlement to partners

82,000 95,000 138,000 425,000

C. Other assets were sold for P100,000. Deficient partner is solvent ABC Partnership Statement of Liquidation May 1, 2005 CAPITALCash Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Additional investment Balances Payment to partner 40,000 100,000 140,000 (125,000) 15,000 63,000 78,000 (78,000) Other Assets 460,000 (460,000) 0 0 0 Liabilities 125,000 125,000 (125,000) 0 0 Andy (30%) 100,000 (108,000) ( 8,000 ) (8,000) 8,000 0 BeL 50% 125,000 (180,000) ( 55,000) (55,000) 55,000 0 Candy 20% 150,000 (72,000) 78,000 78,000 78,000 (78,000)

================================================= JOURNAL ENTRIESMay 1 Cash Gain or Loss on Realization Other Assets Sale of non-cash assets 1 Andy, capital Bel, capital Candy, capital Gain or Loss on Realization 100,000 360,000 460,000 108,000 180,000 72,000 360,000

Distribution of loss to partners

1

Accounts payable Cash Payment of liabilities

125,000 125,000

1

Cash Andy, capital Bel, capital Additional investment by deficient partners

63,000 8,000 55,000

1

Candy, capital Cash Final cash settlement to partner

78,000 78,000

D. Other assets were sold for P100,000. Deficient partner is insolvent ABC Partnership Statement of Liquidation May 1, 2005 CAPITALCash Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Absorption of loss Balances Payment to partner 40,000 100,000 140,000 (125,000) 15,000 15,000 0 Other Assets 460,000 (460,000) 0 0 0 Liabilities 125,000 125,000 (125,000) 0 Andy (30%) 100,000 (108,000) ( 8,000 ) (8,000) 8,000 0 BeL 50% 125,000 (180,000) ( 55,000) (55,000) 55,000 0 Candy 20% 150,000 (72,000) 78,000 78,000 (63,000) 15,000

(15,000) (15,000) =================================================

JOURNAL ENTRIES

May 1

Cash

100,000

Gain or Loss on Realization Other Assets Sale of non-cash assets 1 Andy, capital Bel, capital Candy, capital Gain or Loss on Realization Distribution of loss to partners 1 Accounts payable Cash Payment of liabilities 1 Candy, capital Andy, capital Bel, capital Solvent partner absorbs the def. of insolvent part.ners 1 Candy, capital Cash Final cash settlement to partner

360,000 460,000

108,000 180,000 72,000 360,000

125,000 125,000

63,000 8,000 55,000

15,000 15,000