Partnership Liquidation
Partnership Liquidation
Partnership Liquidation
Overview
This learning material provides discussion of Partnership Liquidation concepts. It
introduces the learner to the subject, guides the learner through the official text, develops the
learner’s understanding of the requirements through the use of examples and indicates significant
judgements that are required in accounting for partnerships. Furthermore, the module includes
questions that are designed to test the learner’s knowledge of the concepts pertaining to
accounting for special transactions.
3. Content/Discussion
4. Progress Check
PARTNERSHIP LIQUIDATION
Liquidation refers to the winding up of the affairs of the partnership. This involves
realization of all non-cash assets of the partnership into cash and settling all claims to the
partnership. It involves the termination of the partnership as a legal entity as well as the cessation
of its operating activities. In this chapter, the discussion will center on liquidation or formal
termination of the partnership and the problems and procedures involved in winding up or
liquidating its affairs.
LEGAL PROVISIONS
Some legal provisions applicable to partnership liquidation as provided for in Philippine
Partnership Law are the following:
2. Partnership creditors have priority over partnership properties in the same manner that
partners' personal creditors have priority over partners' personal properties.
3. When a partner becomes insolvent, the claims against his separate properties shall be
ranked in the following orders:
a. owing to his personal creditors
b. owing to partnership creditors
c. owing to other partners for contribution made.
A partner's loan (based on no. 1-b above) has priority in the payment but this may be
decreased or eliminated if such partner has a capital deficiency. This legal doctrine is called
Right of Offset. Also, other partners may be given priority over the partner with a loan balance if
a cash schedule that has been prepared shows that the capital balance of the latter would be
insufficient to absorb additional partnership losses. Loans and advances, aside from the capital
balances, are considered in determining cash distribution to partners. No. 2 above informs
readers that in case the partnership becomes insolvent (its liabilities exceed assets) then available
partnership cash shall all be distributed to partnership creditors and the individual partners may
be called upon to satisfy the remaining unpaid claims of the partnership creditors from their
personal assets.
I. Installment Liquidation – cash distributions to partners are made once cash becomes
available from the realization of non-cash assets.
II. Lump Sum Liquidation – is the process whereby the liquidation is carried over an
extended period of time thus realization and cash distribution are made on installment
basis.
Loss can also be computed as: Loss = Partners’ interest – cash to be distributed to
partners.
1. Lump-sum liquidation – single distribution
2. Installment liquidation – “piece meal”
A G J Total
Priority 1 P 0 P30,000 P 0 P30,000
Priority 2 0 10,000 15,000 25,000
NPP 35,500 14,200 21,300 71,000
P35,500 P54,200 P36,300 P126,000
Assuming that the other non-cash assets will be realized at P300,000, how should the excess cash
be distributed?
4. Progress Check
1. Explain what is meant by partnership liquidation?
2. Differentiate liquidation by total against liquidation by installment.
3. Enumerate the principal steps involved in partnership liquidation.
4. Explain the legal doctrine of the right of offset.
5. Explain the accounting procedures to be followed if there are two or more deficient partners
5. Exercises
1. The following condensed balance sheet is presented for the partnership of Smith and Jones,
who share profits and losses in the ratio of 60:40, respectively:
Other assets P 450,000
Smith, loan 20,000
P 470,000
Accounts payable P 120,000
Smith, capital 195,000
Jones, capital 155,000
P 470,000
The partners have decided to liquidate the partnership. If the other assets are sold for P385,000,
what amount of the available cash should be distributed to Smith?
a. P136,000 c. P159,000
b. P156,000 d. P195,000
2. On January 1, 2009, the partners of Cobb, Davis, and Eddy, who share profits and losses in
the ratio of 5:3:2, respectively, decided to liquidate their partnership. On this date the
partnership condensed balance sheet was as follows:
Assets
Cash P 50,000
Other assets 250,000
P 300,000
Liabilities and Capital
Liabilities P 60,000
Cobb, capital 80,000
Davis, capital 90,000
Eddy, capital 70,000
P 300,000
On January 15, 2009, the first cash sale of other assets with a carrying amount of P150,000
realized P120,000. Safe installment payments to the partners were made the same date. How
much cash should be distributed to each partner?
Cobb Davis Eddy
a. P15,000 P51,000 P44,000
b. P40,000 P45,000 P35,000
c. P55,000 P33,000 P22,000
d. P60,000 P36,000 P24,000
3. On August 16, 2008, Tyron, Dana and Ira form a partnership investing cash of P105,000,
P94,500 and P29,400, respectively. The partners share profits 3:2:2 and on October 29, 2008,
they have cash of P7,000, and other assets of P332,500; liabilities are P179,200. On this date
they decided to go out of business and sell all the assets for P210,000. Ira has personal assets
of P10,500 that may, if necessary, be used to meet partnership obligations.
Cash P 50,000
Accounts payable 120,000
Undoy, capital (30%) 90,000
Vennie, capital (30%) ( 60,000)
Wally, capital (40%) ( 100,000)
If Wally contributes P70,000 to the partnership to provide cash to pay creditors, what amount of
Undoy’s P90,000 partnership equity would appear to be recoverable?
a. P 90,000 b. P 79,000 c. P 81,000 d. P 75,000
5. W,X,Y and Z are partners sharing earnings in the ratio of 3/21, 4/21, 6/21 and 8/21,
respectively. The balances of their capital accounts on December 31, 2006 are as follows:
W P 1,000
X 25,000
Y 25,000
Z 9,000
P 60,000
The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that the debit balance of any partner’s capital is uncollectible. After the P22,200 was divided, the
capital balance of X was:
a. P3,200 b. P3,920 c. P4,500 d. P17,800
6. Evaluation
Answer the following questions:
The following condensed balance sheet is presented for the partnership of Smith and Jones, who
share profits and losses in the ratio of 60:40, respectively:
Other assets P 450,000
Smith, loan 20,000
P 470,000
Accounts payable P 120,000
Smith, capital 195,000
Jones, capital 155,000
P 470,000
The partners have decided to liquidate the partnership. If the other assets are sold for P385,000,
what amount of the available cash should be distributed to Smith?
P136,000 c. P159,000
P156,000 d. P195,000
On January 1, 2009, the partners of Cobb, Davis, and Eddy, who share profits and losses in the
ratio of 5:3:2, respectively, decided to liquidate their partnership. On this date the partnership
condensed balance sheet was as follows:
Assets
Cash P 50,000
Other assets 250,000
P 300,000
Liabilities and Capital
Liabilities P 60,000
Cobb, capital 80,000
Davis, capital 90,000
Eddy, capital 70,000
P 300,000
On January 15, 2009, the first cash sale of other assets with a carrying amount of P150,000
realized P120,000. Safe installment payments to the partners were made the same date. How
much cash should be distributed to each partner?
Cobb Davis Eddy
P15,000 P51,000 P44,000
P40,000 P45,000 P35,000
P55,000 P33,000 P22,000
P60,000 P36,000 P24,000
On August 16, 2008, Tyron, Dana and Ira form a partnership investing cash of P105,000,
P94,500 and P29,400, respectively. The partners share profits 3:2:2 and on October 29, 2008,
they have cash of P7,000, and other assets of P332,500; liabilities are P179,200. On this date
they decided to go out of business and sell all the assets for P210,000. Ira has personal assets of
P10,500 that may, if necessary, be used to meet partnership obligations.
If Wally contributes P70,000 to the partnership to provide cash to pay creditors, what amount of
Undoy’s P90,000 partnership equity would appear to be recoverable?
P 90,000 b. P 79,000 c. P 81,000 d. P 75,000
W,X,Y and Z are partners sharing earnings in the ratio of 3/21, 4/21, 6/21 and 8/21, respectively.
The balances of their capital accounts on December 31, 2006 are as follows:
W P 1,000
X 25,000
Y 25,000
Z 9,000
P 60,000
The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that the debit balance of any partner’s capital is uncollectible. After the P22,200 was divided, the
capital balance of X was:
P3,200 b. P3,920 c. P4,500 d. P17,800
As of December 31, 2004, the books Ton Partnership showed capital balances of: T, P40,000; O,
P25,000; N, P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners
decided to liquidate and they sold all non-cash assets for P37,000. After settlement of all
liabilities amounting P12,000, they still have cash of P28,000 left for distribution. Assuming that
any capital debit balance is uncollectible, the share of T in the distribution of the P28,000 cash
would be:
P17,800 b. P18,000 c. P 19,000 d. P17,000
A, B and C are partners in textile distribution business, sharing profits and losses equally. On
December 31, 2004 the partnership capital and partners drawings were as follows:
A B C Total
Capital P100,000 P 80,000 P300,000 P480,000
Drawing 60,000 40,000 20,000 120,000
The partnership was unable to collect on trade and was forced to liquidate. Operating profit in
2004 amounted to P72,000 which was all exhausted including the partnership assets. Unsettled
creditors’ claims at December 31, 2004 totaled P84,000. B and C have substantial private
resources but A has no personal assets. Final cash distribution to C was:
P78,000 b. P84,000 c. P108,000 d. P162,000
Gardo and Gordo formed a partnership on July 1, 2004 to operate two stores to be managed by
each of them. They invested P30,000 and P20,000 and agreed to share earnings 60% and 40%,
respectively. All their transactions were for cash, and all their subsequent transactions were
handled through their respective bank accounts as summarized below:
Gardo Gordo
Cash receipts ……………………………………. P79,100 P65,245
Cash disbursements……………………………… 62,275 70,695
On October 31, 2004, all remaining noncash assets in the two stores were sold for cash of
P60,000. The partnership was dissolved, and cash settlement was effected. In the distribution of
the P60,000 cash, Gardo received:
P24,000 b. P26,000 c. P34,000 d. P36,000
B. References