PALAWAN STATE UNIVERSITY

INTEGRATED REVIEW
PARTNERSHIP
SATURDAY – SEPTEMBER 15/22, 2018

CONCEPTS

PARNERSHIP DISSOLUTION WITH LIQUIDATION

Partnership can be dissolved and terminated without the liquidation at first, hence, the procedure
we’ve just learned on the concept of Partnership Dissolution applies. The last thing that the
partnership shall do is to terminate the organization due to the following reason:

a. Bankruptcy
b. Agreement to close the business
c. Purpose have been served
d. Period covered in the partnership is terminated

and that time is required to process the statement of liquidation to wit:

a. Winding up of the business

b. Converting its non-cash assets into cash
c. Payment of liabilities
d. Distribution of cash and remaining unsold assets to all partners present

THE EFFECTS OF LIQUIDATION UPON CONVERTION OF NON-CASH ASSETS INTO

CASH IS A REALIZATION that could lead to:

 Gain- where excess of selling price over book value of the non-cash assets is recognized
 Loss- where the book value of the non-cash assets sold exceeds the selling price
 Capital deficiency- excess of Partners share from loss realization over Partners capital
credits and the recipient of that deficiency is called the Deficient partner

STATUS OF DEFICIENT PARTNER/ACTION

 Solvent- the deficient partner can pay the other partner or to the partnership his capital
deficiency
 Insolvent- the deficient partner can’t pay the other partner or to the partnership his capital
deficiency
 Right to offset- a deficient partners can exercise the right to offset his capital deficiency over
his partner loan, in full or partial, incurred by the partnership.

APPLICATION

LIQUIDATION BY LUMP SUM- Realization of Non-Cash assets, settlement of liabilities, and

distribution of cash for payment of partner’s loan and capital balances are done once

Books shall be adjusted; nominal accounts are closed and the drawing account that was remain
open for purpose of maintaining the account of Partners capital intact shall now be offset to
partners’ capital credit balance

1. Realization of Non-cash assets and distribute gain of loss to partners based on the P&L
ratio as agreed. Gain increases partners capital balances, while loss decreases partners’
capital
2. Settlement of liabilities- that of the outside creditors (1 st priority)
3. Set the action to be taken by the partner who have capital deficiency to:
a. Offset with the partner’s loan if there is any
b. Solvent and willing to pay the deficiency
c. Insolvent, the partners with capital credit balances absorbed the deficiency based on the
P&L ratio
 4. Pay partner’s loan (2nd priority)
5. Distribute the remaining cash to Partner based on the capital credit balances, disregarding
P&L ratio (3rd priority)

Note: Realization of non-cash assets should follow the strict Journal Entry as we are to close the
books of the Partnership, accompanied by the STATEMENT OF LIQUIDATION

PANGAKO COMMERCIAL EST

Statement of Financial Position
As of December 31, 20x

Cash P45,000
Accounts receivable P60,000
Allowance for uncollectible accounts 3,000 57,000
Merchandise inventory 70,000
-----------
Total assets P172,000
=======

Accounts payable P62,000

Pa Loan 5,000
Pa Capital 35,000
Nga Capital 35,000
Ko Capital 35,000
------------
Total liabilities and capital P172,000
=======

The Partners decided to liquidate the business on this date, and towards January 20y the
partnership were able to collect P50,000 and the balance are written off, including the valuation
account and charge it to their respective capital accounts. While the inventory is realized at 85% of
its realizable value. At the end of the January 20y the liquidation process is done

Required: Statement of liquidation and journal entries to complete the liquidation process
Assume that after realization and distribution of gain or loss, and payment of liabilities
but before payment of Pa loan of P5,000 Partners Pa and Ko are deficient partner and
considered insolvent for P15,000 and P10,000 respectively with Nga Credit
capital credit balance is P30,000, how much shall be the amount to be distributed to
partners Pa, Nga, and Ko
What if Pa is solvent and pay his deficiency, how much is the amount cash to be distri-
buted to Pa, Nga, and Ko

HOW TO CALCULATE CASH SETTLEMENT WITHOUT THE AID OF STATEMENT OF

LIQUIDATION

In most cases requirement for liquidation does not require preparation of Statement of Liquidation
but only calls for the calculation of cash settlement to partners, in that case:

 It is for record that the non-cash have already been converted to cash
 Liabilities have been paid
 Capital shall remain at its balances before realization of non-cash assets
 The remaining cash balance less loans and capital balances shall represent gain of loss

Illustration:

On December 31, 20v the capital balances of partners A, B, & C stand at P160,000, P100,000, and
P20,000 respectively, with profit and loss in the ratio of 3:2:1. The partners liquidation decided with
realization of the Non-cash assets at P148,000 cash, after all the liabilities have been paid the
balance of cash amounted to P112,000. How much is the loss and how the cash shall be distributed
to the partners?

Total cash available P112,000

Total Capital balances 280,000
Loss on realization of assets P168,000
========
Distribution of cash to partners
Particular A B C
Capital balances before realization of loss 160000 100000 20000
Distribution of loss -84000 -56000 -28000
Balances 76000 44000 - 8000
Additional to partners A,B absorbed C deficiency -4800 -3200 8000
(3:2)
Cash settlement 71200 40800 -0-

If in case the realized assets resulted to gain to pay for liabilities, the remaining liability shall be
satisfied by:
a. The additional cash investment of deficient by solvent partners
b. Direct collection by the partnership creditors from any one of the partners, and the latter to
make cash settlements among themselves

PROBLEM

Koling, Pong, and Kang, formed a partnership by investing cash of P60,000, P54,000, and P16,000
respectively, on March 1, and agreed with the P&L ratio of 3:2:1. After 6 months, they have cash of
P5,000, other assets of P121,000, and liabilities of P32,000. They decided to dissolve the firm on
August 31, and to accept an offer of P49,000 for the others assets. Koling and Pong are personally
well-off, but Kang has personal assets of only P45,000 against personal liabilities of 50,000

Required:

1.Compute the amount of Koling would receive in the distribution of cash to the partners in the
final liquidation
2. Compute the minimum amount that should be realized from the other assets to enable Kang to
fully satisfy his personal obligation

APPLICATION

LIQUIDATION BY INSTALLMENT- this speak of liquidation where non-cash assets are sold on a
piecemeal, under this method the following shall be considered

a. Cash is distributed to partners even before fully realizing non-cash assets and determining
total gain or loss on realization
a.1 after fully satisfying creditors claims or after settling aside sufficient cash for these
liabilities
a.2 cash distribution to the partners be made as if it is the last using cash priority program

b. Restricted interest shall consist of

b.1 remaining unsold assets
b.2 cash withheld (for possible expenses)
b.3 debit balance in capital

The procedure above shall be utilized as a schedule to accompany statement of liquidation as one of
the methods to distribute the cash to the partners prior to the full realization of the non-cash assets

If otherwise, CASH PRIORITY PROGRAM is applied. This approach shall give the partners an
idea who shall receive the cash available for distribution even without the full realization of non-
cash assets and distribution of gain or loss in order of the priority guided by the program. The
following steps as follows:

a. Determine total partners’ interest

a.1 includes the capital balances before liquidation (capital end balances)
a.2 add to capital loan by partners to the partnership
a.2 deduct to capital advances (receivables) by partnership to partners.
 b. Divide the total partnerships’ interest by their profit and loss ration to get each partners’
loss absorption capacity- purpose of which is to determine the amount of loss the partners
may absorb which may eliminate any partner in any cash distribution. The Partners’ with
highest absorption balance shall have the 1st priority on cash distribution
c. From the loss absorption balance, the highest loss absorption balance is reduced to the next
highest. The reduce balance shall be multiplied partners’ profit and loss ratio
d. Once the absorption balance is equal, cash distribution is made in the profit and loss ratio
e. In Case gain or loss is not determinable, no gain or loss shall be recorded and cash is
recorded equal to the amount of the book value of the asset sold, the total gain or loss is
recognized in the final realization of the assets sold and it is the difference between the cash
realized and the book value of the asset sold. Such gain or loss is then carried to capital.

CONCEPT APPLICATION

The partnership of KA LA WANG presented the balances as at December 31, 20s, subject for 00

Account titles Amount (In Pesos)

Cash 200,000
Other assets 500,000
Liabilities 250,000
Ka loan 70,000
Ka capital (30%) 200,000
La capital (40%) 30,000
Wang capital (30%) 150,000

Cash is realized for other assets as follows, and amount realized are distributed at the end of each
month to the appropriate parties

Yr 20s Book value Cash proceeds

January 300,000 260,000
February 200,000 230,000

CASH PRIORITY PROGRAM

P&L Ratio 30% 40% 30%
Capital balances/activity Priority distribution
Particular Ka La Wang Ka La Wang
Capital balance before 200,000 30,000 150,000
liquidation
Add loan 70,000
Partners total interest 270,000 30,000 150,000
Divide by P&L ratio 30% 40% 30%
Loss absorption 900,000 75,000 500,000
capacity
Allocation 1- to Ka 400,000 120,000
(900k-500k) x 30%
Balances before 2nd 500,000 75,000 500,000
allocation
Allocation 11- to Ka & 425,000 425,000 127,500 127,500
Wang x 30%, & 30%
respectively
Balances before 3rd 75,000 75,000 75,000 247,500 127,500
allocation,should the
balances are not yet
equal

Cash is now ready for distribution based on the cash availability after satisfying the creditors
outside of the partnership, note that the 1st available cash shall be received by Ka at P120,000, and
the 2nd available cash shall be received by Ka and Wang for P127,500 each base on the cash priority
program
INSTALLMENT DISTRIBUTION

Particular Amount Cash allocation

Ka La Wang
1st Cash available (Cash balance 210,000
(Cash balance P200,000+Proceeds
260,000- 1st Cash available (Cash
balance P200,000+Proceeds 260,000-
Liabilities 250,000)Liabilities
250,000)
Allocation 1 per cash priority prog 120,000 120,000
Allocation 2 balance x 30:30 90,000 45,000 45,000
respectively for Ka and Wang
Total 165,000 45,000

February allocation- last cash 230,000

proceeds
Less the balance of cash priority 165,000 82.500 82,500
(247,500+127500- 120,000-
90000)x30:30 ratio Ka and Wang
resprectively
Balance x 30:40:30 65,000 19,500 26,000 19,500
Total cash allocation 102,000 26,000 102,000

From the given cash priority program…prepare the statement of liquidation to test the balances
equal the cash installment distribution

PROBLEM TO SOLVE

The December 31, 2017 ledger balances of Nida, Olga and Pida who share profits and losses
50%,25%,25% respectively appears as follows: In Pesos

Cash 19,000
Accounts receivable 197,000
Allowance for doubtful accounts 6,000
Accounts payable 77,000
Pida Loan 9,000
Salary payable to Nida 6,000
Nida Capital 50,000
Olga Capital 28,000
Pida Capital 40.000

At this date, the firm decided to liquidate and the ensuing activities are.. In Pesos

Particulars Jan Feb March

Cash collection from 112,000 36,000 35,000
customer
Payments in full 38,000 39,000 0
settlement of liabilities
Liquidation expenses 4,400 2,800 4,000
Cash payment to 16,000 19,800 Remainder
partners

Required:
1. Prepare the journal entries to record the liquidation of the partnership
2. Prepare statement of liquidation with supporting schedules of cash distributions to partners