AE 112-

INSERT RELATED PICTURE HERE

MODULE 9
(INSTALLMENT
LIQUIDATION)

COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. describe the nature of installment
liquidation;
2. understand the procedures
followed under installment
liquidation; and
3. prepare a Statement of Liquidation
and the accompanying schedule.

FINANCIAL
ACCOUNTING AND
REPORTING

The first great gift we can bestow on others is a good example.

Thomas Morell

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 1
 COURSE INTRODUCTION
This course introduces accounting, within the context of business and business decisions.
Students explore the role of accounting information in the decision-making process and
learn how to use various types of accounting information found in financial statements and
annual reports. This course starts with a discussion of accounting thought and the theoretical
background of accounting and the accounting profession. The next topic is the accounting
cycle - recording, handling, and summarizing accounting data, including the preparation
and presentation of financial statements for merchandising and service companies.
Moreover, it continues with transactions, financial statements, and problems peculiar to the
operations of partnerships and corporations as distinguished from sole proprietorships. Topics
include accounting for partnership formation and operations; share capital issuances,
treasury shares, other related transactions affecting accumulated profits. Emphasis is placed
on understanding the reasons underlying basic accounting concepts and providing students
with an adequate background on the recording, classification, and summarization functions
of accounting to enable them to appreciate the varied uses of accounting data.

NATURE OF INSTALLMENT LIQUIDATION

Under the installment liquidation, non-cash assets are sold on a piece-meal basis over an
extended period of time. Cash realized is immediately distributed to partners after fully
satisfying creditors' claims or after setting aside sufficient cash for these liabilities. In as much
as cash distributions are made before realizing all non-cash assets and the total gain or loss
on realization is not yet determined, it is necessary that each cash distribution to partners be
considered as if it were the last. Remaining unsold assets, therefore, must be treated as a
complete loss, assuming that nothing is realized on them. Also, debit balances capital and
potential capital deficiencies are assumed uncollectible. In this sense, partners' interests are
reduced by cash distributions to a balance proportionate to the partners' profit and loss
ratios. Succeeding cash distributions are then based on the profit and loss ratio.

The liquidation procedures shall be the same as in lump sum liquidation except that:

1. Cash is distributed to partners even before fully realizing non-cash assets and
determining total gain or loss on realization.

2. Restricted interest, in the Accompanying Schedule to Determine Amounts to be Paid

to Partners, shall consist of:
a. Remaining unsold assets
b. Cash withheld (for possible expenses)
c. Debit balances in capital

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 2
 Illustrative Problem A:
The statement of financial position of the partnership of Arias, Buendia, and Caras on
December 31, 2019, when the partners decide to liquidate follows:

Assets
Cash P200,000
Other Assets 500,000
Total Assets P700,000
Liabilities and Capital
Liabilities P250,000
Arias, Loan 70,000
Arias, Capital (30%) 200,000
Buendia, Capital (40%) 30,000
Caras, Capital (30%) 150,000
Total Liabilities and Capital P700,000

Cash is realized on the other assets as follows, and amounts realized are distributed at the
end of each month to the appropriate parties.

Fiscal Year 2020 Asset Book Value Cash Proceeds

January P300, 000 P260,000
February 200,000 230,000

Instructions:
1. Prepare a statement of liquidation to summarize the course of liquidation schedules in
support of monthly distributions.
2. Prepare the journal entries to record the liquidation

Arias, Buendia and Caras

Statement of Liquidation
January to February 2020

Other Arias Arias Buendia, Caras,

Cash Assets Liabilities Loan Capital Capital Capital
Profit and Loss Ratio (30%) (40%) (30%)
Balances before liquidation P200,000 P500,000 P250,000 P70,000 P200,000 P30,000 P150,000
January:
Sale of assets &
distribution of loss 260,000 (300,000) (12,000) (16,000) (12,000)
Balances P460,000 P200,000 P250,000 P70,000 P188,000 P14,000 P138,000
Payment of liabilities (250,000) (250,000)
Balances P210,000 P200.000 P70,000 P188,000 P14,000 P138,000
Payment to partners (per (210,000) (70,000) (95,000) (45,000)
schedule)
Balances P200,000 P93,000 P14,000 P93,000
February:
Sale of assets & P230,000 (200,000) 9,000 12,000 9,000
distribution of gain
Balances P230,000 P102,000 P26,000 P102,000
Payment to partners (230,000) (102,000) (26,000) (102,000)

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 3
 Arias, Buendia, and Caras Partnership
Schedule to Accompany Statement of Liquidation
Amounts to be Paid to Partners January 31, 2020
Arias Buendia Caras
(30 %) (40 %) (30 %)
Capital balances before cash distribution P l88,000 P 14,000 P 138,000
Add Loans 70,000
Total partners' interest P 258,000 P 14,000 P 138,000
Restricted interest - possible loss of
P200,000 if nothing is realized on
remaining unsold assets ( 60,000) ( 80,000) ( 60,000)
P 198,000 ( P 66,000) P 78,000
Restricted interest - additional possible
loss of P66,000 to Arias and Caras if
Buendia is unable to pay his possible deficiency,
shared in the ratio of 30:30 ( 33,000) 66,000 ( 33,000)
Free interest - payments to partners P l65,000 P 45,000
Payment to apply on:
Loan P 70,000
Capital 95,000 P 45,000
Total cash distributions P l65,000 P 45,000

Based on the schedule, the January payments to partners shall be made to partners Arias
and Caras which shall apply first on the loan an then on capital.

Journal entries to record the liquidation:

January Cash 260,000

Arias, Capital 12,000
Buendia, Capital 16,000
Caras, Capital 12,000
Other Assets 300,000
Sale of assets and distribution of loss.

Liabilities 250,000
Cash 250,000
Payment to liabilities

Arias, Loan 70,000

Arias, Capital 95,000
Caras, Capital 45,000
Cash 210,000
Payment to partners.

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 4
 February Cash 230,000
Other Assets 200,000
Arias, Capital 9,000
Buendia, Capital 12,000
Caras, Capital 9,000
Sale of assets and distribution of gain.

Arias, Capital 102,000

Buendia, Capital 26,000
Caras, Capital 102,000
Cash 230,000
Final payment to partners.

PROGRAM OF CASH DISTRIBUTION

Partners may desire to determine in advance as to whom cash distributions shall be made
as cash may become available. This procedure requires the preparation of a program
called Cash Priority Program, Cash Predistribution Plan, or Program of Priorities. The program
is prepared prior to liquidation, that is, before cash becomes available for distribution. Cash
realized on other assets is distributed based on the program without the need for the
preparation of the schedule previously used to accompany the statement of liquidation.
The steps in the preparation of the program are the following:

1. Determine total partners' interest; that is, capital balances before liquidation plus
loans by partners to the partnership less advances by the partnership to the partners.

2. Divide total partners' interest by their profit and loss ratio to get each partner's loss
absorption capacity. The loss absorption capacity is the maximum amount of loss that
a partner may absorb and may eliminate any partner in any cash distribution. A
partner, therefore, with the highest loss absorption balance bas the first priority on
cash distributions.

3. Once the loss absorption balances are determined, allocations may now be made,
starting with Allocation I wherein the highest loss absorption balance is reduced to the
next highest. Each reduction in the loss absorption balance requires payment to
partners computed by multiplying the amount of reduction by the partner's profit and
loss ratio.

4. After the partners' loss absorption balances are made equal, cash distributions are
made in the profit and loss ratio.

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 5
 Using the same information for the partnership of Arias, Buendia, and Caras, the cash priority
program follows:

Aris, Buendia and Caras Partnership

Cash Priority Program
January 1, 2020

Payments to
Arias Buendia Caras Arias Buendia Caras
Capital balances before P200,000 P30,000 P150,000
liquidation
Add Loans 70,000
Total partners’ interest P270,000 P30,000 P150,000
Divided by the profit & loss
ratio 30% 40% 30%
Loss absorption capacity P900,000 P75,000 P500,000
Allocation I: Cash to Arias
reducing his loss
absorption balance to
an amount reported for
Caras; reduction of
P400,000 requires
payment of 30% x (400,000) P120,000
P400,000
P500,000 P75,000 P500,000
Allocation II: Cash to Arias
and Caras to reduce their
loss absorption balances
to amount reported for
Buendia; reduction of
P425,000 requires
payment as follows:
To Arias, 30% x P425,000 (425,000) 127,500
To Caras, 30% x P425,000 (425,000) 127,500
P75,000 P75,000 P75,000 P247,500 - P127,500
Allocation III. Further cash
distributions are to be
made in the P & L ratio.

A summary of the information provided by the cash priority program follows:

After fully satisfying liabilities:

1. The first P 120,000 cash available to partners should be paid to Arias.

2. The next P255, 000 should be paid to Arias and Caras in the ratio 30:30.

3. Amounts in excess of P375, 000 should be paid to Arias, Buendia, and Caras in the
profit and loss ratio of 30:40:30.

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 6
 Application of the cash priority program on the installment distribution upon liquidation of
the partnership of Arias, Buendia, and Caras shall be:

Installment Distribution
January 31, 2020

Amount Arias Buendia Caras

Cash Available P210,000
Allocation I – Payable to
Arias 120,000 P120,000
Allocation II – Payable to
Arias and Caras, 30:30 P90,000 45,000
P165,000 - P45,000

Installment Distribution
February 28, 2020

Amount Arias Buendia Caras

Cash Available P230,000
Allocation II – Balance
P255,000 – P90,000 payable
to Arias and Caras, 30:30 165,000 P82,500 P82,500
Allocation III – Payable to
Arias, Buendia and Caras,
30:40:30 P65,000 19,500 P26,000 19,500
P102,000 P26,000 P102,000

Key Points. The same amount of cash distributions per accompanying schedule to the
statement of liquidation were arrived at in January and February. Also, when cash available
for distribution is not sufficient to cover an allocation, the partners share such insufficient cash
on the basis of their profit and loss ratio.

There may be instances wherein the gain or loss related to the sale of individual assets during
the course of liquidation is difficult to determine. In such cases, no gain or loss is recognized
on realization and cash is recorded equal in amount to the book value of the assets sold.
The total gain or loss on realization is recognized in the final realization of assets and it is the
difference between the cash realized and the book value of the remaining assets sold. Such
gain or loss is then carried to capital.

Reference: Baysa, J.T. and Lupisan, M.Y. (2018). Accounting for Partnership and Corporation.
Mandaluyong City: Millenium Books, Inc.

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 7
 Practice Exercise 9-1. (Distribution of Cash)
Aguilar and Bernardo share earnings in a 60:40 ratio. They have decided to liquidate their
partnership. A portion of the assets has been sold but other assets with a carrying amount of
P84,000 still must be realized. All liabilities have been paid, and cash of P40,000 is available
for distribution to partners. The capital accounts show balances of P80,000 for Aguilar and
P44,000 for Bernardo.

Instructions: Determine how should the cash of P40,000 be divided.

Practice Exercise 9-2. (Safe Cash Distribution)

When Conde and Dalmacio, partners who share earnings equally, were incapacitated in
an airplane accident, a liquidator was appointed to wind up their business. The accounts
showed cash, P70,000; other assets, P220,000; liabilities, P40,000; Conde's capital, Pl42,000;
and Dalmacio's capital, PI08,000. Because of the highly specialized nature of the non-cash
assets, the liquidator anticipated that considerable time would be required to dispose them.
The expenses of liquidating the business (advertising, rent, travel, etc.) are estimated at
P20,000.

Instructions: Determine the amount of cash that can be distributed safely to each partner at
this point.

Practice Exercise 9-3. (Program of Cash Distribution)

Capital and loan balances for partners Estela, Fajardo, Gomez who share profits 40%, 40%,
and 20% respectively, are as follows just before liquidation :

Instructions:
1. Prepare a schedule becomes available cash will be distributed to partners as it becomes
available
2. How much must partnership realize on the sale of its assets if Halili is to receive P10,000 as
final settlement
3. If Halili receives a total of P3, 200 in cash, how much will Jacinto have received at this
point?
4. If Halili is personally insolvent and Ibanez receives a total of P 1,800 in final liquidation of
the firm, what was the partnership loss on liquidation?

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 8
 SUMMATIVE ASSESSMENT (GRADED ACTIVITY) –
Cash Priority Program; Statement of Liquidation
On January 1, 2020, partners Kho, Lagman and Magno decided to liquidate their
partnership. Prior to the liquidation, the partners had cash of P 12,000, non-cash assets of
Pl46,000, liabilities to outsiders of P36,000 and a note payable to Partner Magno of P 14,000.
The capital balances of the partners were: Kho - P36,000; Lagman - P54,000; Magno -
P18,000. The partners share profits and losses in the ratio of 3:3:4, respectively.

During January 2020, the partnership received cash of P30,000 from the sale of assets with a
book value of P38,000 and paid P3,600 of liquidation expenses. During February, the
partnership realized P44,000 from the sale of assets with a book value of P35,000 and paid
liquidation expenses of P8,400. During March, the remaining assets were sold for P36,000. The
partners agreed to distribute cash at the end of each month.

Instructions:
1. Prepare a cash priority program.
2. Prepare a statement of liquidation.
3. Prepare the necessary journal entries to ·record the liquidation process.

Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 9