Lecture Notes On Liquidation

  • November 2019
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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

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