Lecture Notes On Liquidation
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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 Cash P 40,000 Accounts Payable Other Assets 460,000 Andy, Capital Bel ,Capital Candy, Capital Total Assets P 500,000 Total Equities The partners divide profit or loss in the ratio of 3:5:2 respectively.
& PARTNER’S EQUITY P 125,000 100,000 125,000 150,000 P 500,000
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 Balances before realization
40,000
Other Assets 460,000
Liabilities 125,000
Andy (30%) 100,000
BeL 50% 125,000
Candy 20% 150,000
Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Payment to partners
510,000
(460,000)
550,000 (125,000) 425,000 (425,000)
0 0
125,000 (125,000) 0
15,000
25,000
10,000
115,000
150,000
160,000
115,000 (115,000)
150,000 (150,000)
160,000 (160,000)
================================================= JOURNAL ENTRIES May 1
Cash Other Assets Gain or Loss on Realization Sale of non-cash assets 1
510,000 460,000 50,000
Gain or Loss on Realization Andy, capital Bel, capital Candy, capital
50,000 15,000 25,000 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 Final cash settlement to partners
425,000
B. Other assets were sold for P400,000 ABC Partnership Statement of Liquidation May 1, 2005 CAPITAL Cash Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Payment to partners
40,000 400,000 440,000 (125,000) 315,000 (315,000)
Other Assets 460,000 (460,000)
Liabilities
0
125,000 (125,000) 0
0
125,000
Andy (30%) 100,000 (18,000)
BeL 50% 125,000 (30,000)
Candy 20% 150,000 (12,000)
82,000
95,000
138,000
82,000 (82,000)
95,000 (95,000)
138,000 (138,000)
================================================= JOURNAL ENTRIES May 1
Cash Gain or Loss on Realization Other Assets Sale of non-cash assets
400,000 60,000 460,000
1 Andy, capital Bel, capital Candy, capital Gain or Loss on Realization
18,000 30,000 12,000 60,000
Distribution of loss to partners
1
Accounts payable Cash Payment of liabilities
125,000 125,000
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 Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Additional investment Balances Payment to partner
40,000 100,000 140,000 (125,000) 15,000 63,000 78,000 (78,000)
Other Assets 460,000 (460,000)
Liabilities
0
125,000 (125,000) 0
0 0
125,000
Andy (30%) 100,000 (108,000)
BeL 50% 125,000 (180,000)
Candy 20% 150,000 (72,000)
( 8,000 )
( 55,000)
78,000
(8,000) 8,000
(55,000) 55,000
78,000
0
0
0
78,000 (78,000)
================================================= JOURNAL ENTRIES May 1
1
Cash Gain or Loss on Realization Other Assets Sale of non-cash assets
100,000 360,000
Andy, capital Bel, capital Candy, capital Gain or Loss on Realization
108,000 180,000 72,000
460,000
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 Final cash settlement to partner
78,000
D. Other assets were sold for P100,000. Deficient partner is insolvent ABC Partnership Statement of Liquidation May 1, 2005 CAPITAL Cash Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Absorption of loss Balances Payment to partner
JOURNAL ENTRIES
40,000 100,000 140,000 (125,000) 15,000 15,000
0
Other Assets 460,000 (460,000)
Liabilities
0
125,000 (125,000) 0
125,000
0 0
Andy (30%) 100,000 (108,000)
BeL 50% 125,000 (180,000)
Candy 20% 150,000 (72,000)
( 8,000 )
( 55,000)
78,000
(8,000) 8,000
(55,000) 55,000
78,000 (63,000)
0
0
15,000
(15,000) (15,000) =================================================
May 1
Cash
100,000
1
Gain or Loss on Realization Other Assets Sale of non-cash assets
360,000
Andy, capital Bel, capital Candy, capital Gain or Loss on Realization
108,000 180,000 72,000
460,000
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 Cash Final cash settlement to partner
15,000 15,000
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 Cash P 40,000 Accounts Payable Other Assets 460,000 Andy, Capital Bel ,Capital Candy, Capital Total Assets P 500,000 Total Equities The partners divide profit or loss in the ratio of 3:5:2 respectively.
& PARTNER’S EQUITY P 125,000 100,000 125,000 150,000 P 500,000
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 Balances before realization
40,000
Other Assets 460,000
Liabilities 125,000
Andy (30%) 100,000
BeL 50% 125,000
Candy 20% 150,000
Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Payment to partners
510,000
(460,000)
550,000 (125,000) 425,000 (425,000)
0 0
125,000 (125,000) 0
15,000
25,000
10,000
115,000
150,000
160,000
115,000 (115,000)
150,000 (150,000)
160,000 (160,000)
================================================= JOURNAL ENTRIES May 1
Cash Other Assets Gain or Loss on Realization Sale of non-cash assets 1
510,000 460,000 50,000
Gain or Loss on Realization Andy, capital Bel, capital Candy, capital
50,000 15,000 25,000 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 Final cash settlement to partners
425,000
B. Other assets were sold for P400,000 ABC Partnership Statement of Liquidation May 1, 2005 CAPITAL Cash Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Payment to partners
40,000 400,000 440,000 (125,000) 315,000 (315,000)
Other Assets 460,000 (460,000)
Liabilities
0
125,000 (125,000) 0
0
125,000
Andy (30%) 100,000 (18,000)
BeL 50% 125,000 (30,000)
Candy 20% 150,000 (12,000)
82,000
95,000
138,000
82,000 (82,000)
95,000 (95,000)
138,000 (138,000)
================================================= JOURNAL ENTRIES May 1
Cash Gain or Loss on Realization Other Assets Sale of non-cash assets
400,000 60,000 460,000
1 Andy, capital Bel, capital Candy, capital Gain or Loss on Realization
18,000 30,000 12,000 60,000
Distribution of loss to partners
1
Accounts payable Cash Payment of liabilities
125,000 125,000
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 Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Additional investment Balances Payment to partner
40,000 100,000 140,000 (125,000) 15,000 63,000 78,000 (78,000)
Other Assets 460,000 (460,000)
Liabilities
0
125,000 (125,000) 0
0 0
125,000
Andy (30%) 100,000 (108,000)
BeL 50% 125,000 (180,000)
Candy 20% 150,000 (72,000)
( 8,000 )
( 55,000)
78,000
(8,000) 8,000
(55,000) 55,000
78,000
0
0
0
78,000 (78,000)
================================================= JOURNAL ENTRIES May 1
1
Cash Gain or Loss on Realization Other Assets Sale of non-cash assets
100,000 360,000
Andy, capital Bel, capital Candy, capital Gain or Loss on Realization
108,000 180,000 72,000
460,000
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 Final cash settlement to partner
78,000
D. Other assets were sold for P100,000. Deficient partner is insolvent ABC Partnership Statement of Liquidation May 1, 2005 CAPITAL Cash Balances before realization Sales of non-cash assets and dist. Of gain Balances Payment of liabilities Balances Absorption of loss Balances Payment to partner
JOURNAL ENTRIES
40,000 100,000 140,000 (125,000) 15,000 15,000
0
Other Assets 460,000 (460,000)
Liabilities
0
125,000 (125,000) 0
125,000
0 0
Andy (30%) 100,000 (108,000)
BeL 50% 125,000 (180,000)
Candy 20% 150,000 (72,000)
( 8,000 )
( 55,000)
78,000
(8,000) 8,000
(55,000) 55,000
78,000 (63,000)
0
0
15,000
(15,000) (15,000) =================================================
May 1
Cash
100,000
1
Gain or Loss on Realization Other Assets Sale of non-cash assets
360,000
Andy, capital Bel, capital Candy, capital Gain or Loss on Realization
108,000 180,000 72,000
460,000
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 Cash Final cash settlement to partner
15,000 15,000
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