ACC30

Accounting for Partnerships Discussion and Illustrations

C. Gomez Partnership Liquidation

Definition of Terms

Dissolution Termination of the life of a partnership due to changes in ownership (e.g.

admission, withdrawal, etc.)
Liquidation Winding up of the affairs of the partnership; process by which the partnership:
1) realizes its non-cash assets, 2) settles its outstanding liabilities, and 3)
distributes any remaining capital to the partners.
Realization Process of converting non-cash assets into cash, by selling to third parties.
Gain on realization Cash received in the sale of non-cash assets > Book value of non-cash assets
Loss on realization Cash received in the sale of non-cash assets < Book value of non-cash assets
Capital deficiency Occurs when a partner’s capital account has a negative (debit) balance
Right of offset Legal right to apply part or all of the amount owing to a partner (Payable to
Partner) against a deficiency in his capital account resulting from losses in the
process of liquidation
Solvent partner Partner who, in case he/she ends up with a capital deficiency, is capable to
pay or eliminate the deficiency using his/her own funds.
Insolvent partner Partner who has no personal funds to be used to eliminate any capital
deficiency.

Steps in Partnership Liquidation

1. Sale of non-cash assets (realization)
2. Distribution of gain/loss from realization, according to agreed ratio
3. Payment of liabilities to third parties
4. Elimination of capital deficiency, if any:
a. If partnership has an existing loan payable to deficient partner, by offsetting the deficiency against
the balance of the loan
b. If partnership has no existing loan payable to deficient partner, but such partner is solvent, by
making an additional cash investment
c. If partnership has no existing loan payable to deficient partner and such partner is insolvent, by
distributing the deficiency to the other partner, according to the agreed ratio
5. Payment of liabilities to partners (Loans payable partner)
6. Distribution of remaining cash to partners, according to capital balances

Illustration
XYZ Partnership

Statement of Financial Position

December 1, 20x9

Assets Liabilities & Equity

Cash P8,000 Liabilities P44,800
Other 136,000 Payable to 2,000
assets Y
Payable to 3,200
Z
X, Capital 38,000
Y, Capital 24,000
Z, Capital 32,000
Total P144,00 Total P144,00
0 0
 ACC30
Accounting for Partnerships Discussion and Illustrations
C. Gomez Partnership Liquidation

Agreed ratio among X, Y, and Z is 40:40:20

Case 1 – Other assets were sold for P68,000. Deficient partner is solvent.

Case 2 – other assets were sold for P68,000. Deficient partner is insolvent
 XYZ Partnership
STATEMENT OF LIQUIDATION

ASSETS LIABILITIES & EQUITY

Loan Capital
Cash Other assets Liabilities
Y Z X Y Z
40% 40% 20%
Balances before liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,00
Realization of assets (loss) 68,000 (136,000) (27,200) (27,200) (13,60
Balances after realization 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,40

Payment of liabilities (44,800) (44,800)

Balance after payment of liabilities 31,200 - - 2,000 3,200 10,800 (3,200) 18,40

Elimination of capital deficiency

Offset loan (2,000) 2,000
Balance 31,200 - - - 3,200 10,800 (1,200) 18,40
Additional investment (solvent) 1,200 1,200
Balances after elimination of deficiency 32,400 - - - 3,200 10,800 - 18,40

Distribution of remaining cash (32,400) (3,200) (10,800) (18,40

- - - - - - - -
Case 2

XYZ Partnership
STATEMENT OF LIQUIDATION

ASSETS LIABILITIES & EQUITY

Loan Capital
Cash Other assets Liabilities
Y Z X Y Z
40% 40% 20%
Balances before liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,00
Realization of assets (loss) 68,000 (136,000) (27,200) (27,200) (13,60
Balances after realization 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,40

Payment of liabilities (44,800) (44,800)

Balance after payment of liabilities 31,200 - - 2,000 3,200 10,800 (3,200) 18,40

Elimination of capital deficiency

Offset loan (2,000) 2,000
Balance 31,200 - - - 3,200 10,800 (1,200) 18,40
Deficiency absorbed by other partners (800) 1,200 (4
Balances after elimination of deficiency 31,200 - - - 3,200 10,000 - 18,00

Distribution of remaining cash (31,200) (3,200) (10,000) (18,00

- - - - - - - -
 XYZ Partnership
STATEMENT OF LIQUIDATION

ASSETS LIABILITIES & EQUITY

Loan Capital
Cash Other assets Liabilities
Y Z X Y Z
40% 40% 20%
Balances before liquidation
Realization of assets (loss) - - - -
Balances after realization - - - - - - - -

Payment of liabilities - -
Balance after payment of liabilities - - - - - - - -

Elimination of capital deficiency

Offset loan - -
Balance - - - - - - - -
Additional investment (solvent) - -
Balances after elimination of deficiency - - - - - - - -

Distribution of remaining cash - - - -

- - - - - - - -
XYZ Partnership
STATEMENT OF LIQUIDATION

ASSETS LIABILITIES & EQUITY

Loan Capital
Cash Other assets Liabilities
Y Z X Y Z
40% 40% 20%
Balances before liquidation
Realization of assets (loss) - - -
Balances after realization - - - - - - - -

Payment of liabilities - -
Balance after payment of liabilities - - - - - - - -

Elimination of capital deficiency

Offset loan - -
Balance - - - - - - - -
Deficiency absorbed by other partners - - -
Balances after elimination of deficiency - - - - - - - -

Distribution of remaining cash - - - -

- - - - - - - -