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 partner’s 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:

ASSETS LIABILITIES & PARTNER’S EQUITY

Cash P 40,000 Accounts Payable P 125,000
Other Assets 460,000 Andy, Capital 100,000
Bel ,Capital 125,000
Candy, Capital 150,000
Total Assets P 500,000 Total Equities P 500,000
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
A. Other assets were sold for P520,000

ABC Partnership
Statement of Liquidation
May 1, 2005
CAPITAL
Cash Other Liabilities Andy BeL 50% Candy
Assets (30%) 20%
Balances before realization 40,000 460,000 125,000 100,000 125,000 150,000
 Sales of non-cash assets and dist. Of 510,000 (460,000) 15,000 25,000 10,000
gain
Balances 550,000 0 125,000 115,000 150,000 160,000
Payment of liabilities (125,000) (125,000)
Balances 425,000 0 0 115,000 150,000 160,000
Payment to partners (425,000) (115,000) (150,000) (160,000)
=================================================

JOURNAL ENTRIES
May 1 Cash 510,000
Other Assets 460,000
Gain or Loss on Realization 50,000
Sale of non-cash assets

1 Gain or Loss on Realization 50,000

Andy, capital 15,000
Bel, capital 25,000
Candy, capital 10,000

Distribution of gain to partners

1 Accounts payable 125,000

Cash 125,000
Payment of liabilities

1 Andy, capital 115,00

Bel, capital 150,000
Candy, capital 160,000
Cash 425,000
Final cash settlement to partners
B. Other assets were sold for P400,000
ABC Partnership
Statement of Liquidation
May 1, 2005

CAPITAL

Cash Other Liabilities Andy BeL 50% Candy

Assets (30%) 20%
Balances before realization 40,000 460,000 125,000 100,000 125,000 150,000
Sales of non-cash assets and dist. Of 400,000 (460,000) (18,000) (30,000) (12,000)
gain
Balances 440,000 0 125,000 82,000 95,000 138,000
Payment of liabilities (125,000) (125,000)
Balances 315,000 0 0 82,000 95,000 138,000
Payment to partners (315,000) (82,000) (95,000) (138,000)
=================================================

JOURNAL ENTRIES
May 1 Cash 400,000
Gain or Loss on Realization 60,000
Other Assets 460,000
Sale of non-cash assets

1
Andy, capital 18,000
Bel, capital 30,000
Candy, capital 12,000
Gain or Loss on Realization 60,000
Distribution of loss to partners

1 Accounts payable 125,000

Cash 125,000
Payment of liabilities
 1 Andy, capital 82,000
Bel, capital 95,000
Candy, capital 138,000
Cash 425,000
Final cash settlement to partners

C. Other assets were sold for P100,000. Deficient partner is solvent

ABC Partnership
Statement of Liquidation
May 1, 2005
CAPITAL

Cash Other Liabilities Andy BeL 50% Candy

Assets (30%) 20%
Balances before realization 40,000 460,000 125,000 100,000 125,000 150,000
Sales of non-cash assets and dist. Of 100,000 (460,000) (108,000) (180,000) (72,000)
gain
Balances 140,000 0 125,000 ( 8,000 ) ( 55,000) 78,000
Payment of liabilities (125,000) (125,000)
Balances 15,000 0 0 (8,000) (55,000) 78,000
Additional investment 63,000 8,000 55,000

Balances 78,000 0 0 0 0 78,000

Payment to partner (78,000) (78,000)
=================================================
JOURNAL ENTRIES
May 1 Cash 100,000
Gain or Loss on Realization 360,000
Other Assets 460,000
Sale of non-cash assets

1 Andy, capital 108,000

Bel, capital 180,000
Candy, capital 72,000
Gain or Loss on Realization 360,000
 Distribution of loss to partners

1 Accounts payable 125,000

Cash 125,000
Payment of liabilities

1 Cash 63,000
Andy, capital 8,000
Bel, capital 55,000
Additional investment by deficient partners

1 Candy, capital 78,000

Cash 78,000
Final cash settlement to partner

D. Other assets were sold for P100,000. Deficient partner is insolvent

ABC Partnership
Statement of Liquidation
May 1, 2005
CAPITAL

Cash Other Liabilities Andy BeL 50% Candy

Assets (30%) 20%
Balances before realization 40,000 460,000 125,000 100,000 125,000 150,000
Sales of non-cash assets and dist. Of 100,000 (460,000) (108,000) (180,000) (72,000)
gain
Balances 140,000 0 125,000 ( 8,000 ) ( 55,000) 78,000
Payment of liabilities (125,000) (125,000)
Balances 15,000 0 0 (8,000) (55,000) 78,000
Absorption of loss 8,000 55,000 (63,000)

Balances 15,000 0 0 0 0 15,000

Payment to partner (15,000) (15,000)
=================================================
JOURNAL ENTRIES
May 1 Cash 100,000
 Gain or Loss on Realization 360,000
Other Assets 460,000
Sale of non-cash assets

1 Andy, capital 108,000

Bel, capital 180,000
Candy, capital 72,000
Gain or Loss on Realization 360,000
Distribution of loss to partners

1 Accounts payable 125,000

Cash 125,000
Payment of liabilities

1 Candy, capital 63,000

Andy, capital 8,000
Bel, capital 55,000
Solvent partner absorbs the def. of insolvent part.ners

1 Candy, capital 15,000

Cash 15,000
Final cash settlement to partner