Professional Documents
Culture Documents
Learning Objectives
1. Define partnership liquidation and identify its causes.
2. Discuss the various problems encountered in
partnership liquidation.
3. Identify and differentiate the two types of liquidation.
4. Discuss and understand the accounting procedures
under lump-sum liquidation.
Introduction
Dissolution does not mean the formal termination of a
business
Dissolution can be recognized as change in the capital
structure of a business as a new unit
Dissolution calling for the winding up of business
affairs LIQUIDATION
Association of the partners for the purposes of carrying
on activities in the usual manner is considered ended
Partners engage in activities leading to final settlement
Dissolution with Liquidation
Completely terminated or ended
Partnership assets are sold, the partnership creditors
are paid, and the remaining assets, if any are
distributed to the partners as a return of their
investments
Causes of Partnership Dissolution with
Liquidation
1. Accomplishment of the purpose for which the
partnership was organized
2. Termination of the term/period covered by the
partnership contract
3. Bankruptcy of the firm
4. Mutual agreement among the partners to close the
business
Accounting Problems
1. Determination of the profit or loss from the beginning
of the accounting period to the date of liquidation and
the distribution of such profit or loss
2. Closing of the partnership books
3. Correction of accounting errors in prior periods like
overstatement or understatement of inventories,
excessive depreciation charges, and failure to provide
adequately for doubtful accounts
4. Liquidation of the business
Accounting Problems (Contd)
At this point of partnership liquidation, the assets and
liabilities of the partnership are directly intertwined
with those of the individual partners personal assets
and liabilities because of the unlimited liabilities of the
partner
Priorities for creditor claims involve two concepts:
1. Marshaling of assets
2. Right of offset
Marshaling of Assets
The order of creditors rights against the partnerships
assets and the personal assets of the individual
partners.
The order of which claims against the partnerships
assets will be marshaled as follows:
1. Partnership creditors other than partners
2. Partners claims other than capital and profits, such as
loans payable and accrued interest payable
3. Partners claim to capital or profits, to the extent of
credit balances in capital accounts
Marshaling of Assets (Contd)
The order of claims against the personal assets of the
individual partners are as follow:
1. Personal creditors of individual partners
2. Partnership creditors on unpaid partnership
liabilities regardless of a partners capital balance in
the partnership
Right of Offset
Involves offsetting a deficit in a partners capital (debit
balance in the capital account of a partner) against the loan
payable to that partner. The loan payable to a partner has a
higher priority in liquidation than a partners capital
balance but a lower priority than liabilities to outside
creditors.
Definition of Terms
Termination of a partnership as a going concern; it
Dissolution is the termination of the life of the partnership
Lump-sum
Distribution of cash to the partners is done only
Liquidation or after all the non-cash assets have been realized,
Liquidation by the total amount of gain or loss on realization is
known and all liabilities have been paid
Totals
Liquidation by
Assets are realized on a piecemeal basis and cash
Installments or is distributed to partners on a periodic basis as it
Piece-meal becomes available, that is, even before all non-
assets are converted into cash
Liquidation
Procedures in Lump-Sum Liquidation
Books should be adjusted and balances of nominal accounts
are closed
Net income or loss for the period is transferred to the
partners capital account
Advances and withdrawals are closed to capital account
since cash settlement shall be based on the partners capital
account balance
Ready to proceed with liquidation
Procedures in Lump-Sum Liquidation
(Contd)
Sale of non-cash assets and distribution or allocation of
gain or loss on realization among the partners according to
their residual profit and loss ratios (salary and interest
factors disregarded) unless liquidation ratios are specified
in the partnership agreement.
Distribution of cash to creditors and partners. In this
procedure, the provisions of the marshaling of assets and
the exercise of the right to offset are applied
Procedures in Lump-Sum Liquidation
(Contd)
Liquidation expenses may be incurred to facilitate the
immediate realization of non-cash assets. Payment of
liquidation expenses reduces the cash and is recorded as a
deduction from the partners capital based on the partners
profit or loss ratios.
When realization results in a loss, the loss is carried to the
capital accounts of the partners as a deduction. If a
partners capital account results in a debit balance (called
capital deficiency) after the distribution of loss on
realization such can be offset against any loan balance of
the partner to the partnership. The amount of offset shall
Procedures in Lump-Sum Liquidation
(Contd)
be the amount of the loan or the amount of the deficiency
whichever, is lower.
Cash can be distributed to partners before or after the
elimination of the deficiency. If cash is distributed after the
elimination of the deficiency.
Capital deficiency is eliminated by:
1. Making additional cash investment, if the deficient
partner is solvent.
2. Charging the deficiency as additional loss to the
remaining partners, if the deficient partner is insolvent.
Procedures in Lump-Sum Liquidation
(Contd)
Cash available for distribution is then paid to partners to
apply first on loan then on capital.
Note that the final distribution of cash to partners is made
based on partners capital balances and not on any ratio.
If cash is distributed to partners before eliminating the
deficiency:
1. Cash available for distribution is paid to partners based
on an accompanying schedule to determine amounts to
be paid to partners.
Procedures in Lump-Sum Liquidation
(Contd)
2. Deficient partner may
a. If solvent, make additional investments; to be paid to
partners as second cash distribution, or the deficient
partner may make direct cash settlement to other
partners.
b. If insolvent, the deficiency shall be absorbed by the other
partners as additional loss according to their profit or loss
ratio.
Procedures in Lump-Sum Liquidation
(Contd)
Instructions:
1. Prepare a statement of liquidation of the cases. For case 6,
prepare also a schedule of cash distribution.
2. Present journal entries to record the liquidation process.
Points of Emphasis in the Preparation
of Statement of Liquidation
1. Make sure that the balances before liquidation show
equality of debits and credits. This will always be true after
each liquidation transaction.
2. Maintain two columns only for debits. These are cash and
other assets regardless of whether the assets were given
itemized like cash, receivables, inventory, supplies
equipment, etc. Noncash assets are classified as other
assets.
3. Gain on realization increases capital while loss on
realization decreases capital.
Points of Emphasis in the Preparation
of Statement of Liquidation (Contd)
4. Figures in parenthesis for each liquidation transaction
represents reduction in the account.
5. Double rule when all column are brought to zero balance.
CASE 1 Gain on realization, no capital
deficiency
Encina, Endrada and Elina
Statement of Liquidation
December 1 to 31, 2010