Installment Liquidation Lecture Notes

  • November 2019
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INSTALLMENT LIQUIDATION Initial Disposal of Non-cash Assets 1. Sale of non-cash assets and distribution of gain or loss on realization according to their profit and loss ratio. 2. Payments of liquidation expenses and unrecorded liabilities if any. 3. Payment of partnership liabilities 4. Payment to partners Succeeding Sale of Non-Cash Assets 1. Sale of non-cash assets and distribution of gain or loss on realization according. to their profit and loss ratio. 2. Payments of liquidation expenses and unrecorded liabilities if any. 3. Payment of partnership liabilities (unpaid balance) 4. Payment to partners Final Sale of Non-cash Assets 1. Sale of non-cash assets and distribution of gain or loss on realization according to their profit and loss ratio. 2. Payments of liquidation expenses and unrecorded liabilities if any. 3. In case of capital deficiency: a. Solvent partner/s 1) Apply right of offset 2) Additional investment b. Insolvent partner/s 1) Apply right of offset 2) Absorption of loss by solvent partners 4. Final CASH settlement to partners COMPUTATION OF SAFE PAYMENTS 1.

Compute the Total Partner’s Interest (Capital + Loan Balance)

2.

Distribution of possible loss to partners:

3.

a.

Total amount of unsold non-cash assets;

b.

Cash withheld to pay for liquidation expenses and any possible unrecorded liabilities;

Additional loss to partners to eliminate any capital deficiency. 

Sample Problem The following is the balance sheet of John and Paul on June 1, 2006: Assets Cash

P 50,000

Liabilities and Partners Capital Liabilities P 150,000

Other Assets

P 550,000

Total

P 600,000

John, Loan John, Capital Paul, Capital

50,000 225,000 175,000 P 600,000

The partners share net income and net losses as follows: John, 60%; Paul, 40%. In June, other, assets with a carrying amount of P 220,000 realized P 180,000, creditors were paid in full, and available cash was distributed to partners. In July, other assets with a carrying amount P 100,000 realized P 120,000, and liquidation cost of P5,000 were paid. In August , the remaining other assets realized P 200,000, and final settlement was made between the partners.

Prepare the necessary journal entries and Statement of Liquidation as of June 1, 2006.

Answer JP PARTNERSHIP Statement of Liquidation June 1, 2006

Cash

Other Assets

Liabiliti John es Loan

John Capital(6 0%)

P50,000

P550,00 0

P150,0 00

P225,00 0

Realization of assets and distribution of loss

180,000

(220000 )

Balances

P230,00 0

P330,00 0

Payment of Liabilities

(150,000 )

Balances

P80,000

Payment to partnersSchedule 1

(80,000)

Balances before realization

P50,0 00

Paul, Capital (40%) P175,000

June Installment

Balances

P330,00 0

P330,00 0

120,000

(100,00 0)

Balances

P120,00 0

P230,00 0

Payment of liquidation expenses

(5,000)

Balances

P115,00 0

Realization of assets and distribution of gain

(16,000)

P50,0 00

P201,00 0

P159,000

P50,0 00

P201,00 0

P159,000

(50,0 00)

(3,000)

(27,000)

0

P198,00 0

P132,000

12,000

8,000

P210,00 0

P140,000

(3,000)

(2,000)

P207,00 0

P138,000

(150,0 00)

0

July Installment

P150,0 00

(24,000)

P230,00 0

0

0

0

0

0

0

Payment to partnersSchedule 2

(115,000 )

Balances

0

P230,00 0

August Installment

200,000

(230,00 0)

Balances

P200,00 0

0

Final cash settlement to partners

(200,000 )

Realization of assets and distribution of loss

0

0

0

0

(69,000)

(46,000)

P138,00 0

P92,000

(18,000)

(12,000)

P120,00 0

P80,000

(120,000 )

(80,000)

============================== ==============================

Schedule 1 Computation of Safe Payment John Capital(6 0%) Capital balances Loan Balance

P201,000

Paul, Capital (40%) P159,000

50,000

Total Partners’ Interest

P251,000

P159,000

Possible loss- P330,000

(198,000)

(132,000)

Balances

P53,000

P27,000

Loan

P50,000

Capital

3,000

P27,000

Schedule 2 Computation of Safe Payment John Capital(6 0%)

Paul,

Capital balances

P207,000

P138,000

Possible loss- P230,000

(138,000)

(92,000)

Balances

P69,000

P46,000

Capital

Capital (40%)

P69,000

JOURNAL ENTRIES Cash

180,000

Gain or Loss on Realization

40,000

Other assets

220,00

P46,000

0 Realization of other assets John Capital

24,000

Paul Capital

16,000

Gain or Loss on Realization

40,000

Distribution of loss to partners Liabilities

150,000

Cash

150,00 0

Payment of Liabilities John Loan

50,000

John Capital

3,000

Paul Capital

27,000

Cash

80,000

Payment to partners Cash

120,000 Other assets

100,00 0

Gain or Loss on Realization

20,000

Realization of other assets Gain or Loss on Realization

20,000

John Capital

12,000

Paul Capital

8,000

Distribution of gain to partners John Capital

3,000

Paul Capital

2,000

Cash

5,000

Payment of liquidation expenses John Capital

69,000

Paul Capital

46,000

Cash

115,00 0

Payment to partners Cash

200,000

Gain or Loss on Realization

30,000

Other assets

230,00 0

Realization of other assets John Capital

18,000

Paul Capital

12,000

Gain or Loss on Realization

30,000

Distribution of loss to partners John Capital

120,000

Paul Capital

80,000

Cash Final Payment to partners

200,00 0

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