DV CPA REVIEW

Benrosi V Building, 9746 Kamagong Street, Makati

09158288685/dvivoaccounting.com

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Partnership Accounting: Partnership Dissolution and Liquidation (PART II)

PARTNERSHIP DISSOLUTION – CHANGES IN OWNERSHIP INTEREST

Partnership dissolution due to changes in ownership interests occurs for a variety of reasons. These can
be summarized as follows:
1. Admission of a partner
2. Retirement of a partner
3. Death of a partner
4. Incorporation of a partnership

Admission of a New Partner

• An existing partnership may admit a new partner with the consent of all the partners.
• When a new partner is admitted, the partnership is dissolved and a new partnership is formed.
• New agreement covering partners’ interests, profit and loss sharing and other consideration
should be drawn because the dissolution of the original partnership cancels the old agreement.
• The admission of a new partner may occur in either of two ways, namely
o Purchase of all or part of the interest of one or more of the existing partners
o Investment of assets in the partnership by the incoming partner

Purchase of Interest from One or More Partners

• The partner in making the transfer of ownership can actually convey the following rights:
1. The right of co-ownership in the business property. This right justifies the partnership
drawings from the business as well as the settlement paid at liquidation or at the time of
partner’s withdrawal.
2. The right to share in profits and losses
3. The right to participate in the management of the business

• When an incoming partner purchases a portion or all of the interests of one or more of the original
partners, the partnership asset remain unchanged and no cash or other assets flow from the new
partner to the partnership.
• This transaction is recorded by opening a capital account for the new partner and decreasing the
capital accounts of the selling partners by the same amount.
• The cash paid by the buyer is not recorded in the books of the partnership for this is a personal
transaction between the selling partners and the buyer. The gain or loss arising from the sale of
interest is not to be recorded in the partnership books.

Cases of purchase of interest:

1. Purchase from one partner
2. Purchase from all the partners’
3. Alternative method – net assets of the partnership may be revalued when the purchase of interest
from all the partners is for an amount more than the interest acquired.
a. Goodwill should not be recorded until all identifiable assets have been adjusted to their
fair value.
b. Must prepare a cash distribution schedule since the division of cash coincides with the
partners’ charges to their capital accounts

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

The following procedures are recommended for fair and equitable division of cash among the existing
partners:
1. Determine the amounts of capital balances to be transferred by the existing partners
2. Apportion any excess (or deficiency) in the original partners’ profit and loss ratio.

New Partner Invests in a Partnership

• Total assets and total capital increase
• Three cases may exist when a new partner invests in a partnership:
1. The new partner’s investment (contributed capital) equals the new partner’s proportion of the
partnership book value (agreed capital).
2. The new partner’s investment is more than the new partner’s agreed capital. This indicates
that the partnership’s prior net assets are undervalued on the books or that unrecorded
goodwill exists
3. The new partner’s investment is less than the new partner’s agreed capital. This suggests
that the partnership’s prior net assets are overvalued on its books or that the new partner
may be contributing goodwill in addition to the assets invested.
• The following procedures may be used in determining how to account for the admission of a new
partner
1. Compute the new partner’s proportion of the partnership’s book value (agreed capital) as
follows:
Agreed capital = Prior capital of old partners + Investment of the new partner x percentage of
capital to new partner
2. Compare the new partner’s contributed capital with his or her agreed capital to determine the
procedures to be followed. In accounting for the partner’s admission.
3. Determine the specific admission method
a. Revalue net assets
b. Recognize goodwill
c. Bonus method
- Under revaluation of assets and goodwill recognition methods, the historical cost bases
of the partnership’s net assets are adjusted during the admission of the new partner.
- Some partners may object to this departure from historical costs and prefer to use the
bonus method.
- Under the bonus method, net assets remain at their historical costs.

Overview of Accounting for Admission of a New Partner

Step 2: Compare agreed capital and Step 3: Alternative methods to account for
investment of a new partner admission
Case 1: 1. No revaluation, goodwill or bonus
Investment cost = agreed capital
Case 2 1. Revalue net assets up to fair vale and
Investment cost > agreed capital allocate to old partners
2. Record unrecognized goodwill and allocate
to old partners
3. Allocate bonus to old partners
Case 3 1. Revalue net assets down to fair value and
Investment cost < agreed capital allocate to old partners
2. Recognize goodwill brought in by new
partner
3. Assign bonus to a new partner

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

Investment cost > agreed capital

Revaluation of assets upward. Under this alternative:
1. Asset book values are increased to their fair values
2. The old partners’ capital accounts are increased for their respective shares of increase in the
book value of the assets
3. The partnership’s total resulting capital reflects the prior capital balances plus the amount of
asset revaluation plus the new partner’s investment.

Record unrecognized goodwill. With this method:

1. Unrecognized goodwill is recorded.
2. The old partners’ capital accounts are increased for their respective shares of the goodwill.
3. The partnership’s total resulting capital reflects the prior capital balances plus the amount of
goodwill recognized plus the new partner’s investment.

Use bonus method. Basically, the bonus method is a transfer of capital balances among the
partners. This method is used when the partners do not wish to record adjustments in asset
accounts or recognize goodwill. Under this method:
1. The old partner’s capital accounts are increased for their respective shares of the bonus paid
by the new partner.
2. The partnership’s total resulting capital equals the prior capital balances plus the new
partner’s investment.

Investment cost < agreed capital

Revaluation of assets downward. Under this alternative:
1. Asset book values are decreased to their fair values
2. The old partners’ capital accounts are decreased for their respective shares of decrease in
the book value of the assets
3. The partnership’s total resulting capital reflects the prior capital balances less the amount of
asset write-down plus the new partner’s investment.

Recognize goodwill brought in by the new partner (Use new partner’s investment to estimate
goodwill to old partners, use old partners’ total capital to estimate goodwill to new partner). With
this method:
1. Goodwill brought in by the new partner is recorded and included in the new partner’s capital
account.
2. The old partners’ capital accounts remain unchanged.
3. The partnership’s total resulting capital reflects the prior capital balances plus the new
goodwill brought in plus the new partner’s investment.

Use bonus method. Basically, the bonus method is a transfer of capital balances among the
partners. This method is used when the partners do not wish to record adjustments in asset
accounts or recognize goodwill. Under this method:
1. The new partner is assigned a bonus from the old partners’ capital balances which are
decreased for their respective shares of the bonus paid to the new partner.
2. The partnership’s total resulting capital equals the prior capital balances plus the new
partner’s investment.

Profit and Loss Ratios and Capital Ratios are Different

• Use the capital ratio is used for purpose of computing the implied goodwill or the bonus.
However, of goodwill were subsequently written off, then the profit and loss ratio is to be used.

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

Withdrawal of a Partner
• When a partner retires or withdraws from the partnership, the partnership is dissolved, but the
remaining partners may continue to operate the business.
• The existing partners may buy out the retiring partner either by making a direct acquisition or by
having the partnership acquire the retiring partner’s interest.
• If the present partner directly acquires the retiring partner’s interest, the only entry on the
partnership’s books is to record the transfer of capital from the retiring partner to the remaining
partner.
• If the partnership acquires the interest of the retiring partner, the partnership must pay the retiring
partner an amount equal to his interest, more than his interest, or less than his interest.
• The interest of the retiring partner is usually measured by his capital balance, increased or
decreased by his share in the following adjustment:
1. Profit or loss from partnership operations from the last closing date to the date of his/her
retirement.
2. Changes in the valuation of all assets and liabilities (book values to fair values).

Cases of withdrawals:
1. Settlement equals withdrawing partner’s interest
2. Settlement more than withdrawing partner’s interest
a. Record goodwill to the excess payment made to the retiring partner. (Partial Goodwill
Method)
b. Record total implied goodwill of the partnership computed by dividing the excess
payment with the retiring partner’s P&L share percentage (Total Goodwill Method)
c. Treat the excess payment as bonus from the remaining partners. This is accomplished by
decreasing the remaining partners’ capital accounts by the excess using their profit and
loss percentage.
3. Settlement less than withdrawing partner’s interest.
a. May be attributed to an overvalued asset
b. Deficiency may be transfer to the retiring partner thru bonus method

Death of a Partner
• The estate of the deceased partner is entitled to receive the amount of his interest in the
partnership at the date of his death.
• The deceased partner’s capital is adjusted using his P&L ratio for changes in asset values arising
from the revaluation of assets, and for the profit from the date the books were last closed.
• The balance of his capital account after considering the necessary adjustments should be
transferred to a liability account pending settlement.

Incorporation of a Partnership
• The corporation will take over the assets and assume the liabilities of the partnership in exchange
for shares of stocks.
• The stock received by the partnership are distributed to the partners in settlement of their interest.
• The partners now become stockholders of the newly formed corporation.

Partnership books retained:

1. Revalue the assets and recognize goodwill, if any.
2. Close the partners’ capital accounts to the corporate capital accounts.

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

New books opened for the corporation:

1. Revalue the assets in accordance with the agreed transfer values.
2. Record the transfer of assets and liabilities to the corporation and the receipt of stocks by the
partnership.
3. Record the distribution of stocks to the partners in settlement of the balances of their capital
accounts.

PARTNERSHIP LIQUIDATION
• Partnership liquidation means winding up the business usually by selling the assets, paying the
liabilities, and distributing the remaining cash to the partners.
• A business which is in the process of converting its assets into cash and making settlement with
creditors is said to be in liquidation.

Accounting Problems in Partnership Liquidation

• The basic objectives of a partnership during the liquidation process are to convert the partnership
assets to cash (called realization of assets), to pay off partnership obligations and to distribute
cash and any unrealized assets to the individual partners. The purpose of accounting during this
period is to have an equitable distribution of partnership cash to creditors and partners.
• The purpose is to have an equitable distribution of partnership cash to creditors and partners.
• There are certain rules that should be followed in the liquidation of the partnership namely:
o Always allocate and close gains or losses to the partners’ capital accounts prior to
distributing any cash to the partners
o When the business is liquidated, the partner is entitled to an amount depending upon his
capital contribution, his drawing, his share in the net income or loss from operations
before liquidation, gains and losses on realization, and the balance of his loan account, if
any.
• As a general rule, the cash should be distributed as follows:
1. First, to outside creditors
2. Second, to partners for loan accounts
3. Third, to partners for capital accounts
• Right of offset – when a partner’s capital balance shows a debit balance (or even a potential debit
balance depending on possible losses) and said partner has a loan account, the law permits the
exercise of right of offset by part or all of his loan against the capital deficiency.

Methods of Partnership Liquidation

1. Lump-Sum Liquidation, otherwise called Total Liquidation or Single Distribution
2. Installment Liquidation, otherwise called Installment Distribution

LUMP-SUM LIQUIDATION
• A lump-sum liquidation of a partnership is one in which all the assets are converted into cash
within a very short time, outside creditors are paid, and a single, lump-sum payment is made to
the partners for their total interests.
• Realization of Assets – Partnership will experience losses on the sale of its assets; before any
distribution may be made to the partners, either liabilities to outside creditors must be paid in full
or the necessary funds may be placed in an escrow account.
• Expenses of Liquidation – expenses such as legal, accounting and advertising costs of selling the
assets may be incurred. These are allocated using the P&L ratio of the partners.

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

Liquidation procedures
1. Realization of assets and distribution of gain or loss on realization among the partners based on
the P&L ratio.
2. Payment of expenses
3. Payment of liabilities
4. Elimination of partner’s capital deficiencies. If after the distribution of loss on realization, a partner
incurs a capital deficiency (i.e., partner’s share of realization loss exceeds his capital credit), this
deficiency mut be eliminated using one of the following methods, in the order of priority.
a. If the deficient partner has a loan balance, exercise the right of offset
b. If the deficient partner is solvent, make him invest cash to eliminate his deficiency
c. If the deficient partner is insolvent, let the other partners absorb his deficiency
5. Payment to partners (in order of priority):
a. Loan accounts
b. Capital accounts

PARTNERSHIP LIQUIDATION BY INSTALLMENT

Procedures for Liquidation by Installment
The following are the accounting procedures that may be followed in liquidating a partnership by
installments:
1. Record the realization of assets and distribute the realized gains or losses among the partners
using the profit and loss ratio.
2. Pay liquidation expenses and unrecorded liabilities, if there are any, and distribute these among
the partners using the profit and loss ratio.
3. Pay the liabilities to outsiders.
4. Distribute cash to the partners after possible future losses have been apportioned to partners in
accordance with a cash distribution program.

Note: Eliminate any capital deficiency only before final payments to partners.

Periodic Computation of Safe Payments to Partners

• The Statement of Partnership Liquidation is usually supported by a schedule of safe installment
payments to partners, simply called Schedule of Safe Payments, prepared periodically.
• According to the schedule, each installment of cash is distributed as if no more cash is
forthcoming, either from sale of assets or from collection of deficiencies from partners. Cash is,
therefore, distributed to a partner only if he has an excess credit balance in his partnership
interest (i.e., capital account or capital and loan accounts combined) after the absorption of his
share of the maximum possible loss that may occur.
• The possible loss (hypothetical loss) consists of the following:
1. Total value of remaining non-cash assets. These assets are assumed unrealizable, i.e., they
can not be sold, hence, they are considered loss chargeable to the partners.
2. Cash withheld to pay for anticipated liquidation expenses and unrecorded liabilities that may
arise. The said expenses and liabilities represent possible loss to the partners because upon
their payment, the amount paid is to be correspondingly absorbed by the partners.
• Additional loss may also accrue to the partners when a debit balance in any of the capital
accounts results from the foregoing allocations of possible loss.
• The deficiency of any of the partners is absorbed by the other partners as additional possible loss
to them because he is presumed unable to pay anything to the firm.
• When the ratio of capital balances are already the same as their profit and loss ratio, preparation
of schedule of safe payments are no longer necessary because all subsequent payments can be
made solely based on the profit and loss ratio.

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

Preparation of Schedule of Safe Payments

1. Determine the total interest of each partner. Before cash distribution, a partner’s capital is added
to the loan he granted to the firm to arrive at his interest.
2. Compute the total possible loss of the partnership to be absorbed by each partner – this consists
of the value of the remaining non-cash or other assets and the cash withheld. Each partner
absorbs a possible loss of an amount equal to the total possible loss multiplied by his profit and
loss ratio.

Cash Withheld
The cash set aside in a separate fund is not a factor in computing possible loss. It is the cash set aside to
ensure payments of potential liquidation expenses which may be incurred, and unrecorded liabilities
which may be discovered. This cash withheld is added to the total value of remaining non-cash assets to
obtain the maximum possible loss needed in the computation of safe installment payment. Also, cash
available for distribution to the partners for the period is net of the cash withheld.

PREPARATION OF A CASH DISTRIBUTION PROGRAM

• If the liquidation process extends over a long period of time, calculations may become rather
frequent and bother-some such that it may be desirable to prepare in advance an installment
distribution plan or pre-determination plan, known as Cash Distribution Program. This program
permits the partners to determine how cash should be safely distributed if and when it becomes
available.
• Procedures to prepare a Cash Distribution Program:
1. Compute the loss absorption potential of each partner – the loss absorption potential is the
maximum loss each partner can absorb and which can eliminate him from any cash
distribution.; this is computed by dividing the partners’ total interest (capital + loan balances)
by his profit and loss percentage.
2. Determine the priority of payments to partners. – the priority of payments is in terms of the
excess loss absorption potential of a partner over another. The partner who has the biggest
loss absorption potential has the first priority.
3. Compute the amount of cash to be paid to the partners under each priority. – this amount is
arrived at by multiplying the partners’ excess loss absorption potential by his profit and loss
percentage.

SUMMARY
1. In determining partners’ capital balances before liquidation, the following should be noted:
a. Payables to partners. These should be added from the partner’s capital accounts.
b. Receivables from partners. These should be deducted from the partners’ capital
accounts.
c. Drawing accounts. These should be closed to the partners’ capital accounts
d. Partnership goodwill. This should be written off against partners’ capital accounts
according to the profit and loss ratio
2. Gains or losses on realization should be distributed to the partners based on the agreed profit
and loss ratio.
3. Liabilities should be paid in full, or cash sufficient to ensure the payment of all liabilities should be
withheld.
4. After the payment of the liabilities, partners’ loan accounts should be paid subject to the right of
offset.
5. In determining the amount of installment distribution of cash to the partners, it is assumed that as
of the date of particular disbursement, all cash on hand (excluding cash withheld for the payment
of liabilities and anticipated liquidation expenses) is to be disbursed and all the remaining non-

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

cash assets will not be realized. If only part of the cash is to be paid to the partners, the amount
of the possible future loss is the net assets of the business plus the cash withheld.
6. Cash distribution to the partners should be made with the objective of systematically bringing the
ratio of the partner’s capital accounts in agreement with the partners’ profit and loss ratio.
7. In the event of liquidation, if a partner has either a credit or debit loan balance and installment
payments are desired, for practical purposes the balance can be combined with the partner’s
capital account since the loan account may be used to offset a debit capital balance.

PROBLEMS: PARTNERSHIP DISSOLUTION

Admission of a New Partner
Assume the following data for the LMN Partnership on December 31, 2022:
Partners Capital P&L ratio
L P20,000 20%
M 20,000 30%
N 30,000 50%

On this date, O is admitted to the partnership.

Questions:
1. Assume O purchases one-half of the interest of L.
a. What is the total capital after admission of O?
b. What entry is required upon admission of O to the partnership?
2. Assume O is admitted into the partnership for a 50% interest in profits and losses to the
partnership. The old partners are to retain their original capital and profit-sharing
relationships to each other and are to transfer sufficient amount of their own capital
accounts to O in order to accomplish his admission as planned. O agreed to pay a total of
P50,000 to L, M and N.
a. What is the total partnership capital after admission of O?
b. What is the amount of gain or loss to be recorded arising from the transaction?
c. What entry is required upon admission of O to the partnership?
3. Assuming the same information in number 2, using the revaluation method/goodwill
method.
a. How much is the identifiable assets/goodwill that must be recognized?
b. How much is the partnership capital after the admission of O?
c. What entry is required to record the admission of O to the partnership?

New Partner Invests in Partnership

Assume that after operations during 2022, AB partnership has a book value of P300,000 and profit
percentages on January 1, 2023, as follows:
Partners Capital P&L ratio
Andy P200,000 60%
Bony 100,000 40%
Total P300,000 100%

On January 2, 2023, Cody is to invest cash into the partnership. Cody will have a one-fourth
interest and a 25% percent share of profits. Andy and Bony will share the remaining 75% percent
of profits in the ratio.

8|Page
LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

Questions:
1. Assume that Cody invests P100,000.
a. How much is the total capital of the partnership after the investment of Cody?
b. What entry is required to record on partnership books?
2. Assume that Cody invests P110,000 for a one-fourth capital interest in the partnership.
a. Using the revaluation approach, assume that Cody paid a P7,500 excess over the
proportionate book value because the partnership owns a land with a book value
of P40,000 but a recent appraisal value of P70,000.
i. How much is the total partnership capital after the investment of Cody?
ii. How much is the share of Andy and Bony in the revaluation of the land?
iii. What entries are required to record the foregoing transactions?
b. Using the goodwill method:
i. How much is the total partnership capital after the investment of Cody?
ii. How much is the goodwill to be recognized upon investment of Cody?
iii. How much is the share of Andy and Bony in the recognized goodwill?
c. Using the bonus method:
i. How much is the total partnership capital after the investment of Cody?
ii. What is the entry to record the transfer of capital to existing/new partner?
3. Assume that Cody invests P80,000 for one-fourth capital interest in the partnership.
a. Using the revaluation approach, assume that the inventory of the partnership is
currently recorded at book value of P140,000 has a fair market value of only
P80,000 because some items were obsolete. The partners agree to write down the
inventory to its fair value before the admission of new partner.
i. How much is the total partnership capital after the investment of Cody?
ii. How much is the share of Andy and Bony in the write down of the
inventory?
iii. What entries are required to record the foregoing transactions?
b. Using the goodwill method:
i. How much is the goodwill that must be recognized upon investment of
Cody?
ii. How much is the share of Andy and Bony in the goodwill?
iii. How much is the total partnership capital after the investment of Cody?
iv. What entries are required to record the foregoing?
c. Using the bonus method:
i. How much is the bonus to old partners? New partner?
ii. How much is the total capital of the partnership after the investment of
Cody?
iii. What entries are required to record the foregoing?

Withdrawal of a Partner
On January 2, 2022, the capital balances and profit and loss ratio of B, C and D are as follows:
Partners Capital P&L ratio
B P10,000 50%
C 15,000 30%
D 20,000 20%

On April 30, 2022, B withdraws from the partnership. The net income of the partnership for the
four months ended April 30, 2022 is P14,000. It is agreed that the inventory costing P5,000 has
market value of P7,000 on April 30, 2022.

9|Page
LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

1. Assuming settlement equals the withdrawing partner’s interest:

a. How much is the total partnership capital immediately before the withdrawal of B?
b. How much is the total partnership capital after the withdrawal of B?
2. Assuming settlement is more than the withdrawing partner’s interest:
a. Using the partial goodwill method:
i. How much goodwill should be recognized?
ii. What entry is required on the settlement to B?
b. Using the full goodwill method:
i. How much goodwill should be recognized?
ii. What entry is required on the settlement to B?
c. Using the bonus method:
i. How much is the amount transferred to/from the partners?
3. Assuming that settlement is less than the withdrawing partner’s interest:
a. Using the revaluation method:
i. What entry is required to settle the payment to B?
b. Using the bonus method:
i. What entry is required to settle the payment to B?
ii. How much bonus should be transferred to C and D?

COMPREHENSIVE PROBLEM: LUMP-SUM PARTNERSHIP LIQUIDATION

Partnership D, E and F are partners. A condensed statement of financial position of the company
on April 27, 2022, the day the partners decide to liquidate the business is presented below:

D, E and F
Statement of Financial Position
April 27, 2022
ASSETS LIABILITIES AND EQUITY
Cash P20,000 Accounts payable P28,000
Other assets 80,000 D, loan 2,000
Total Liabilities 30,000

D, capital P9,000
S, capital 21,000
T, capital 40,000 70,000
Total Assets P100,000 Total Liabilities and Equity P100,000

1. Assume that the Other Assets, P80,000, were realized at P60,000 thus resulting to the total
loss of P20,000:
a. How much is the total payment to D? E? F?
b. What are the entries required to record the transactions?
2. Assume that the Other Assets, P80,000, were realized at P55,000 resulting to a total loss of
P25,000:
a. How much is the total payment to D? E? F?
b. What are the entries required to record the transactions?
3. Assume that the Other Assets, P80,000, were sold for P49,500, thus, resulting to a loss of
P30,500 and assuming that the partners are personally solvent:
a. How much is the total investment needed to be made? Which partner will
contribute additional cash?
b. How much is the total payment to D? E? F?
c. What are the entries required to record the transactions?

10 | P a g e
LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

4. Assume that the Other Assets, P80,000, were sold for P49,500, thus resulting to a loss of
P30,500 and assuming that the partners are personally insolvent?
a. How much was the loss absorbed by other partners arising from the capital
deficiency? How much is the share of the non-capital deficient partners?
b. How much is the payment to D? E? F?
c. What are the entries required to record the transactions?

COMREHENSIVE PROBLEM: PARTNERSHIP LIQUIDATION BY INSTALLMENT

R, S and T are partners who share profits and losses as follows: R, 50%; S, 30%; T, 20%. All
partners are personally insolvent. On December 31, 2022, they agree to liquidate their partnership.
The firm’s Statement of Financial Position on this date is as follows:

R, S and T
Statement of Financial Position
December 31, 2022
ASSETS LIABILITIES AND EQUITY
Cash P5,430 Accounts payable P12,892
Other assets 61,870 R, loan 8,000
Total Liabilities 20,892

R, capital P16,402
S, capital 5,469
T, capital 24,537 46,408
Total Assets P67,300 Total Liabilities and Equity P67,300

The following data relate to the realization of other assets:

Liquidation
Unrecorded
Book Value Cash Realized Loss Cash Withheld Expenses
Liabilities
Paid
January P24,700 P20,120 P4,580 P3,000 P1,200 P,1550
February 33,170 21,000 12,170 800 1,400 200
March 4,000 3,700 300 – 200 –

Questions:
1. Prepare the Statement of Liquidation for R, S and T Partnership.
2. Prepare the corresponding Schedule of Safe Payments.
3. How much did R, S and T receive in the first installment payment in January?
4. How much did R, S and T receive in the first installment payment in February?
5. How much did R, S and T receive in the first installment payment in March?
6. How much is the total amount of cash received by R during the liquidation?
7. How much is the total amount of cash received by S during the liquidation?
8. How much is the total amount of cash received by T during the liquidation?
9. How much total liabilities was paid during the liquidation?

11 | P a g e
LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

COMPREHENSIVE PROBLEM: CASH DISTRIBUTION PROGRAM

Assume that the partners of Bankrupt Company agree to liquidate their partnership on July 1,
2022 because the company is having financial difficulties. The partner’s capital, loan account
balances and profit and loss ratio before liquidation are:

Capital Loan P&L ratio

Burgos P36,000 Cr P14,000 20%
Corpuz 28,000 Dr* 4,000 20%
Diaz 12,000 Cr 4,000 50%
Ebro 30,000 Cr – 10%
*Loan to Corpuz from Bankrupt Company

The partners and the creditors have agreed that Ebro will act as the administrator. Ebro
anticipates that it will take approximately three months to complete the liquidation. The partners
request that available cash be distributed to them at the end of each month. Consequently, Ebro
prepares the Cash Distribution Program to ensure reasonable cash payments to partners.

On July 1, 2022, the company’s assets and liabilities are:

Cash P6,000
Non-cash assets 244,000
Liabilities 130,000

Ebro expects that the realization of non-cash assets will be as follows:

July P144,000
August 20,000
September 20,000

Ebro plans to set aside P10,000 cash at the end of July and P4,000 at the end of August to reserve
for future unrecorded liabilities. By the end of September, Ebro expects that all liquidation
expenses and unrecorded liabilities will be known so that a final distribution plan can be made.

The following events took place during the three-month liquidation of the company:
Cash Realized, Net
Book Values of Unrecorded
of Liquidation
Assets Realized Liabilities
Expenses
July P136,000 P180,000 –
August 22,000 18,000 P8,000
September 20,000 46,000 –

Diaz contributed P5,000 cash in August.

Questions:
1. Prepare a cash distribution program.
2. Prepare a statement of liquidation for the partnership.
3. How much is the loss absorption potential of each of the partner?
4. To whom and how much is the first priority payment?
5. To whom and how much is the second priority payments?
6. To whom and how much is the third priority payments?
7. How much is total payment to Burgoz, Corpuz and Diaz and Ebro in July?

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Benrosi V Building, 9746 Kamagong Street, Makati
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8. How much is total payment to Burgoz, Corpuz and Diaz and Ebro in August?
9. How much is total payment to Burgoz, Corpuz and Diaz and Ebro in September?
10. How much is the total liabilities paid during the liquidation?
11. What are the entries required to record the liquidation transactions?

MULTIPLE CHOICE QUESTIONS

A. THEORIES
1. Which of the following conditions constitutes a legal dissolution of a partnership?
a. Death of a partner
b. Retirement of a partner
c. Admission of a partner
d. All of the above
2. When admitting a new partner into an existing partnership, any allocation of goodwill to the old
partners is based on
a. The profit and loss ratio
b. An equal distribution among the partners
c. The fair values of the assets each partner has contributed to the partnership
d. The relative capital balances of the partners
3. The recognition of goodwill in the accounting records of a partnership may be appropriate for:
a. The admission of a new partner for a cash investment
b. The retirement of an existing partner
c. Either of the foregoing situations
d. Neither of the foregoing
4. When the investment of a new partner exceeds the new partners’ initial capital balance and
goodwill is not recorded, who will receive the bonus?
a. The new partner
b. The old partners in their old profit and loss ratio
c. The old partners in their new profit and loss ratio
d. The old and new partners in their new profit and loss ratio
5. When Mr. X is admitted to the partnership the fair value of the assets he contributes exceeds his
initial capital balance. If Mr. Z will retire soon from the partnership, what method of recording Mr
X’s admission should Mr. Z prefer?
a. The bonus method
b. The goodwill method
c. Either the bonus or the goodwill method
d. The equity method
6. When Mr. B is admitted to the partnership, the fair value of the assets he contributes exceeds his
initial capital balance. In this case who gets the bonus under the bonus method and who
contributes the goodwill under the goodwill method?
a. Mr. B gets the bonus and contributes the goodwill
b. The old partners get the bonus and contribute the goodwill
c. Mr. B gets the bonus, but the goodwill is contributed by the old partners
d. The old partners get the bonus, but the goodwill is contributed by Mr. B.
7. Under what circumstances will the bonus and goodwill methods produce different results in the
future?
a. If the new partners’ percentage interest in profits and losses is the same as his initial
fractional interest in the partnership capital.
b. If the new percentage interests in profits and losses of the old partners is in the same
relative proportion as their old percentage interests.
c. If any partner retires in the near future.

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

d. If the partnership realizes losses, rather than profits.

8. Goodwill should be recognized on the retirement of a partner from a partnership:
a. If the partnership contact provides that the retiring partner is to receive the balance of his
or her capital account plus an amount of goodwill
b. If a new partner acquires from the retiring partner for cash the interest of the retiring
partner in the partnership
c. If the retiring partner agrees to accept an amount of cash that is less than the balance of
the partners’ capital account
d. Under no circumstances
9. If a partnership contract requires the computation of goodwill when a partner retires from the
partnership, the appropriate journal entry for the partners’ retirement is:
a. Debits Goodwill for the entire amount computed
b. Debits Goodwill for the retiring partners’ share only
c. Debits Retirement Expense for the retiring partners’ share of the computed goodwill
d. Debits the continuing partners’ capital accounts for a bonus to the retiring partner
10. When a partner retires and receives in cash less than his capital balance, how should the
difference be treated?
a. The difference should be credited to all the partners in their profit and loss ratio.
b. The difference should be debited to all the partners in their profit and loss ratio.
c. The difference should be credited to the remaining partners in their remaining profit and
loss ratio.
d. The difference should be debited to the remaining partners in their remaining profit and
loss ratio.
11. If A is the total capital of the partnership before the admission of a new partner, B is the total
capital of the partnership after the investment of a new partner, C is the amount of the new
partner’s investment, and D is the amount of capital credit to the new partner, then there is:
a. A bonus to the new partner if B = A + C and D < C
b. Goodwill to the old partners if B > (A + C) and D = C
c. Neither bonus nor goodwill if B = A – C and D > C
d. Goodwill to the new partner if B > (A + C) and D < C
12. In the LM Partnership, Laura and Maria had a capital ratio of 3:1 and a profit and loss ratio of 2:1,
respectively. They used the bonus method to record Nora’s admittance as a new partner. What
ratio should be used to allocate, to Laura and Maria, the excess of Nora’s contribution over the
amount credited to Nora’s capital account?
a. Laura and Maria’s new relative capital ratio
b. Laura and Maria’s new relative profit and loss ratio
c. Laura and Maria’s old capital ratio
d. Laura and Maria’s old profit and loss ratio
13. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest
exceeded her capital balance. Under the bonus method, the excess
a. Was recorded as goodwill
b. Was recorded as an expense
c. Reduced the capital balance of Bill and Hill
d. Had no effect on the capital balances of Bill and Hill
14. When is a partnership legally insolvent?
a. When the partnership assets are insufficient to meet partnership liabilities
b. When the partnership assets are insufficient to meet the partnership liabilities and at least
one partner is personally insolvent
c. When all the partners are personally insolvent

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
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d. When the assets of the partnership plus the assets of all the partners are insufficient to
meet the partnership plus the individual partners’ liabilities
15. In which order are partnership assets distributed to partners under the Partnership Law
a. Capital balances, loans, profits
b. Loans, profits, capital balances
c. Loans, capital balances, profits
d. Profits, capital balances, loans
16. In a partnership liquidation the realization losses result in a debit balance in one partners’ capital
account. If this partner fails to contribute personal assets to make up this deficit, how should the
debit balance be handled by the partners?
a. It should be written off against partnership profits like any other bad debt.
b. It should be allocated to all the partners in their profit and loss ratio.
c. It should be allocated to the remaining partners in their remaining profit and loss ratio.
d. It should be set up as a receivable and turned over to a collection agency.
17. What is the rule of offset?
a. Receivables from partners should offset against their debit capital balances before they
receive any cash distributions.
b. Loans to partners should offset against their debit capital balances before they receive
any cash distributions
c. Loans from partners should offset against their credit capital balances before they receive
any cash distributions
d. Loans from partners should offset against their debit capital balances before they receive
any cash distributions.
18. If a partnership is liquidated, how is the final allocation of business assets made to the partners?
a. Equally
b. According to the profit and loss ratio
c. According to the final capital account balances
d. According to the initial investment made by each of the partners
19. Which of the following statements is true concerning the accounting that is made for a partnership
going through liquidation?
a. Gains and losses are reported directly as increases and decreases in the appropriate
capital account.
b. A separate income statement is created just to measure the profit or loss generated
during liquidation
c. Since gains and losses rarely occur during liquidation, no special accounting treatment is
warranted.
d. Within a liquidation, all gains and losses are divided equally among the partners
20. During a liquidation, a partners’ capital account balance drops below zero. What should happen?
a. The other partners should file a legal suit against the partner with the deficit balance.
b. The partner with the highest capital balance should contribute sufficient assets to
eliminate the deficit.
c. The deficit balance should be removed from the accounting records with only the
remaining partners sharing in future gains and losses.
d. The partner with a deficit should contribute enough assets to offset the deficit balance.
21. If Juan, a partner with a loan receivable from a liquidating partnership, receives less cash than
the amount of the loan during the liquidation, the payment is recorded with a debit to:
a. Loan receivable from Juna
b. Juan capital
c. Juan drawing
d. Loan payable to Juan

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

22. In the liquidation of a partnership, a loan payable to a partner:

a. May offset against that partners’ capital account balance before liquidation commences
b. Will not advance the time of payment to that partner during the liquidation
c. Has the same priority as amounts payable to outside creditors of the partnership
d. Must be closed to that partners’ drawing account
23. If cash payments to partners of a partnership in liquidation are delayed until all noncash assets
have been realized, any cash remaining after all partnership creditors have been paid is
distributed.
a. According to the liquidator’s best judgement
b. In the ratio for sharing net income and losses
c. In amounts equal to the partners’ loan and capital account balances
d. In some other manner
Data for Questions 24 and 25
P, F, R and S are partners sharing profits and losses equally. The partnership is insolvent and is to be
liquidated. The status of the partnership and each partner is as follows:

Partnership Capital Balance Personal Assets (exclusive Personal Liabilities

of partnership interest) (exclusive of partnership
interest)
P 30,000 200,000 80,000
F 20,000 60,000 120,000
R (40,000) 160,000 10,000
S (60,000) 2,000 56,000

24. The partnership creditors:

a. Must seek recovery against R because she is personally solvent and has a negative
capital balance
b. Will not be paid in full regardless of how they proceed legally because the partnership
assets are less than the partnership liabilities
c. Will have to share F’s interest in the partnership on a pro rata basis with F’s personal
creditors
d. Have first claim to the partnership assets before any partner’s personal creditors have
rights to the partnership assets.
25. The partnership creditors may obtain recovery of their claims:
a. In the amount of P12,500 from each partner
b. From the personal assets of either P or F
c. From the personal assets of either R or S
d. From the personal assets of either P or R for all or some of their claims
26. In the installment liquidation of a partnership, each installment of cash is distributed:
a. In the partner’s profit and loss ratio
b. In the ratio of partner’s capital account balances
c. As agreed to by the partners
d. As if no more cash would be forthcoming
27. In the cash distribution plan, how is the amount of a cash distribution determined?
a. By multiplying a partners’ profit and loss ratio by his pre-liquidation capital balance.
b. By subtracting a partner’s loss absorption potential from the loss absorption potential of
the next strongest partner.
c. By subtracting a partners’ loss absorption potential from the loss absorption potential of
the next strongest partner and dividing this difference by his profit and loss ratio.

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LECTURER: JOHN HENRY G. PANTOJA (JGP)
 DV CPA REVIEW
Benrosi V Building, 9746 Kamagong Street, Makati
09158288685/dvivoaccounting.com

d. By multiplying a partners’ profit and loss ratio by the difference between his loss
absorption potential and the loss absorption potential of the next strongest partner.
28. In the cash distribution plan which partner gets the first cash distribution?
a. The partner with the largest loan balance
b. The partner with the largest loss absorption potential
c. The partner with the largest capital balance
d. The partner with the largest profit and loss ratio
29. In accounting for partnership liquidation, cash payments to partners after all non-partner creditors’
claims have been satisfied, but before the final cash distribution, should be according to:
a. The partners’ relative profit and loss ratios
b. The final balances in partner capital accounts
c. The partners’ relative share of the gain or loss on liquidations
d. Safe payments computation
30. In a partnership liquidation, the final cash distribution to the partners should be made in
accordance with the
a. Partners’ profit and loss ratio
b. Balances of the partners’ loan and capital accounts
c. Ratio of the capital contributions by the partners
d. Ratio of capital contribution less withdrawals by the partner.

17 | P a g e
LECTURER: JOHN HENRY G. PANTOJA (JGP)