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PARTNERSHIP DISSOLUTION WITH LIQUIDATION

Dissolution with Liquidation

1. A partnership is liquidated when its business operations are


completely terminated or ended.

2. It may be caused by any of the following factors:


a. The purpose for which the partnership was organized has
been accomplished.
b. The term/period covered by the partnership contract has
terminated.
c. The firm became bankrupt.
d. The partners mutually agree to close the business.

3. Partnership assets are sold.

4. Partnership creditors are paid.

5. Remaining assets are distributed to the partners as a


return of their investments.

6. The purpose of accounting during this period is to have an


equitable distribution of partnership assets to creditors and
partners.

Definition of Terms

1. Dissolution the termination of the life of the partnership.

2. Liquidation the process of winding up a business which


normally consists of conversion of assets into cash, payment of
liabilities and distribution of remaining among the partners.

3. Realization the process of converting non-cash assets into cash.

4. Receiver the person assigned to take care of liquidation.

5. Gain on realization the excess of the selling price over the


carrying amount of the assets sold through realization.

6. Loss on realization the excess of the carrying amount over the


selling price of the assets sold through realization.

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7. Capital deficiency the excess of a partners share on losses
over his capital balance.

8. Deficient partner a partner with a debit balance in his capital


account.

9. Right of offset the legal right to apply part or all of the amount
owing to a partner on a loan balance against a deficiency in his
capital account resulting from losses in the process of liquidation.

10. Partners interest the sum of a partners capital, loan balance


net of advances to the partnership.

11. Solvent partner personal assets of the partner exceed his


personal liabilities.

12. Insolvent partner personal assets of the partner are less than
his personal liabilities.

13. Statement of Liquidation an accounting statement summarizing


the winding up of the business affairs of the partnership.

Types of Liquidation

1. Lump-sum liquidation This is a process whereby the distribution


of cash to the partners is done only after all the non-cash assets
have been realized, the total amount of gain or loss on
realization is known, and all liabilities have been made.

2. Installment method This is a process whereby assets are


realized on a piecemeal basis and cash is distributed to partners
on a periodic basis as it becomes available even before
converting all assets into cash.

Procedures in Lump Sum Liquidation

1. Finish the accounting cycle.


a. Adjust the books.
b. Determine the net income and close the net income to
partners capital accounts.
c. Close all nominal accounts.

2. Sell non-cash assets and distribute gain or loss on realization


among partners using profit and loss ratio.

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a. Any difference between the selling price and carrying
amount of the sold assets shall be recorded in an account
called Gain or Loss on Realization.
b. The Gain or Loss on Realization account shall be closed to
the partners capital accounts using profit and loss ratio.
c. Gain on realization increases the capital balance of a
partner while a loss on realization decreases the capital
balance of a partner.

3. If partners capital balance results in a debit balance (deficient


balance), the following may happen:
a. If a partner has a loan balance exercise the right of offset
(apply the loan balance against the debit balance).

b. If there is no loan or if capital balance still results in a debit


balance:

If partner is solvent deficient partner pays.

If partner is insolvent deficient partner is unable to


pay; the remaining partners will absorb the
deficiency. The absorption of deficiency will be
based on residual profit and loss.

4. Cash is to be distributed in the following order of priority:

a. Those owing to partnership creditors.


b. Those owing to partners with respect to loans.
c. Those owing to partners with respect to capital.

Note that the final distribution of cash to partners is


made based on the partners capital balances and not on
any ratio.

5. When cash is not sufficient to pay creditors, the solvent general


partners shall contribute the difference using their loss ratio.

Pro-forma Entries

Realization of Cash xxx


asset at a gain Allowance for bad debts xxx
Accumulated depreciation xxx
Gain or loss on realization xxx
Asset xxx

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Realization of Cash xxx
asset at a loss Allowance for bad debts xxx
Accumulated depreciation xxx
Gain or loss on realization xxx
Asset xxx

Close gain or loss Gain or loss on realization xxx


on realization A, Capital xxx
B, Capital xxx
OR xxx
A, Capital xxx
B, Capital xxx
Gain or loss on realization xxx

Note: Gain or loss on realization


is closed to partners capital
accounts using profit and loss
ratio.

Payment of Liabilities xxx


partnership debts Cash xxx

Payment of Liability Partner xxx


partners loan Cash xxx

Return of A, Capital xxx


partners capital B, Capital xxx
Cash xxx
Note: Return of capital is based
on partners final capital
balances.

Right of offset Liability Partner xxx


A, Capital xxx

Payment of Cash xxx


deficient partner A, Capital xxx

Absorption of B, Capital xxx


deficiency C, Capital xxx
A, Capital xxx

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Pro-forma Statement of Liquidation (Lump-Sum
Method)

Name of Partnership
Statement of Liquidation
Date Covered by the Liquidation
Cash Non- Liabilities Loans A, Capital B, Capital C, Capital
cash Payable,
assets Partner A
Balances
before
realization
Realization of
non-cash
assets and
distribution of
gain or loss on
realization
Balances
Payment of
liabilities
Balances
Payment of
partners loan
Balances
Return of
partners
capital

Special Notes

1. Make sure that the balances before liquidation show equality of


debits and credits. This will always be true after each liquidation
transaction.

2. Maintain two columns for the debits one for cash and one for
non-cash assets.

3. Maintain separate columns for liabilities to outside creditors and


liabilities to partners.

4. Gain on realization increases capital while loss on realization


decreases capital.

5. Figures in parentheses represent reduction in the account.

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6. Double rule all columns when all columns are brought to zero
balance.

SAMPLE PROBLEM:

Assume that partners Andy, Bel and Candy decided to liquidate the partnership on May 1, 2016.
The statement of financial position is provided below:

The partners divide profit or loss in the ratio of 3:5:2 respectively.

ASSETS LIABILITIES & PARTNERS EQUITY

Cash P 40,000Accounts Payable P 125,000

Other Assets 460,000Andy, Capital 100,000

Bel ,Capital 125,000

Candy, Capital 150,000

Total Assets P 500,000Total Equities 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 P510,000

ABC Partnership
Statement of Liquidation
May 1, 2016

CAPITAL

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Cash Other Liabilities Andy BeL 50% Candy
Assets (30%) 20%
Balances 40,000 460,000 125,000 100,000 125,000 150,000
before
realization

Sale of non- 510,000 (460,000) 15,000 25,000 10,000


cash assets
and
distribution
of gain

Balances 550,000 0 125,000 115,000 150,000 160,000

Payment of -125,000 -125,000


liabilities

Balances 425,000 0 0 115,000 150,000 160,000


Payment to -425,000 -115,000 -150,000 -160,000
partners

NOTE:
Asset realization P510,000
Less,Cost of Asset 460,000
Gain on Realization P 50,000
========
The P50,000 gain was distributed to partners according to their profit and loss of
30:50:20

JOURNAL ENTRIES
May 1 Cash 510,000
Other Assets 460,000
Gain or Loss on Realization 50,000
Sale of non-cash assets

1Gain or Loss on Realization 50,000


Andy, capital 15,000
Bel, capital 25,000

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Candy, capital 10,000

Distribution of gain to partners

1Accounts payable 125,000


Cash 125,000
Payment of liabilities

1Andy, capital 115,00


Bel, capital 150,000
Candy, capital 160,000
Cash 425,000
Final cash settlement to partners

B. Other assets were sold for P400,000


ABC Partnership
Statement of Liquidation
May 1, 2016

CAPITAL
Cash Other Liabilities Andy (30%) BeL 50% Candy 20%
Assets
Balances before realization 40,000 460,000 125,000 100,000 125,000 150,000
Sales of non-cash assets and dist. 400,000 (460,000) (18,000) (30,000) (12,000)
Of gain
Balances 440,000 0 125,000 82,000 95,000 138,000
Payment of liabilities (125,000) (125,000)
Balances 315,000 0 0 82,000 95,000 138,000
Payment to partners (315,000) (82,000) (95,000) (138,000)
================================================

NOTE:
Asset realization P400,000
Less,Cost of Asset 460,000
Loss on Realization P 60,000
========
The P60,000 loss was distributed to partners according to their profit and loss of
30:50:20

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JOURNAL ENTRIES
May 1 Cash 400,000
Gain or Loss on Realization 60,000
Other Assets 460,000
Sale of non-cash assets

1
Andy, capital 18,000
Bel, capital 30,000
Candy, capital 12,000
Gain or Loss on Realization 60,000
Distribution of loss to partners

1Accounts payable 125,000


Cash 125,000
Payment of liabilities

1Andy, 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 partners are solvent.

ABC Partnership
Statement of Liquidation
May 1, 2016

CAPITAL

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Cash Other Liabilities Andy (30%) BeL 50% Candy 20%
Assets
Balances before 40,000 460,000 125,000 100,000 125,000 150,000
realization
Sales of non-cash 100,000 (460,000) (108,000) (180,000) (72,000)
assets and distribution
of loss
Balances 140,000 0 125,000 (8,000) (55,000) 78,000
Payment of liabilities (125,000) (125,000)
Balances 15,000 0 0 (8,000) (55,000) 78,000
Additional investment 63,000 8,000 55,000
Balances 78,000 0 0 0 0 78,000
Payment to Candy (78,000) (78,000)

NOTE 1:
Asset realization P100,000
Less,Cost of Asset 460,000
Loss on Realization P 360,000
========
The P360,000 loss was distributed to partners according to their profit and loss of
30:50:20

Note 2 After sharing the loss on realization, Andy and Bel incurred capital deficiencies
of P8,000 and P55,000 respectively. Since the partners are solvent (have capacity to
pay their deficiencies), the partners made additional cash investments of P8,000 and
P55,000.

JOURNAL ENTRIES
May 1 Cash 100,000
Gain or Loss on Realization 360,000
Other Assets 460,000
Sale of non-cash assets

1Andy, capital 108,000


Bel, capital 180,000
Candy, capital 72,000
Gain or Loss on Realization 360,000
Distribution of loss to partners

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1Accounts payable 125,000
Cash 125,000
Payment of liabilities

1Cash 63,000
Andy, capital 8,000
Bel, capital 55,000
Additional investment by deficient partners

1Candy, capital 78,000


Cash 78,000
Final cash settlement to partner

D.

E. Other assets were sold for P100,000. Deficient partner is insolvent

ABC Partnership
Statement of Liquidation
May 1, 2016

CAPITAL
Cash Other Liabilities Andy (30%) BeL 50% Candy 20%
Assets

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Balances before 40,000 460,000 125,000 100,000 125,000 150,000
realization
Sales of non-cash 100,000 (460,000) (108,000) (180,000) (72,000)
assets and distribution
of gain
Balances 140,000 0 125,000 (8,000) (55,000) 78,000
Payment of liabilities (125,000) (125,000)
Balances 15,000 0 0 (8,000) (55,000) 78,000
Absorption of loss 8,000 55,000 -63,000
Balances 15,000 15,000
Paymnet to Candy (15,000)
(15,000)

NOTE 1:
Asset realization P100,000
Less,Cost of Asset 460,000
Loss on Realization P 360,000
========
The P360,000 loss was distributed to partners according to their profit and loss of
30:50:20

Note 2 After sharing the loss on realization, Andy and Bel incurred capital deficiencies
of P8,000 and P55,000 respectively. Since the partners are insolvent (no capacity to
pay their capital deficiencies) , Candy absorbed the deficiencies of Andy and Bel.

JOURNAL ENTRIES
May 1 Cash 100,000
Gain or Loss on Realization 360,000
Other Assets 460,000
Sale of non-cash assets

1Andy, capital 108,000


Bel, capital 180,000
Candy, capital 72,000
Gain or Loss on Realization 360,000
Distribution of loss to partners

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1Accounts payable 125,000
Cash 125,000
Payment of liabilities

1Candy, capital 63,000


Andy, capital 8,000
Bel, capital 55,000
Solvent partner absorbs the def. of insolvent partners

1Candy, capital 15,000


Cash 15,000
Final cash settlement to partner

Classroom Exercises Lump Sum Liquidation

DLS Partnership has the following statement of financial position:

DLS PARTNERSHIP
Statement of Financial Position
December 31, 2016
Assets
Cash P40,000
Furniture and fixtures P250,000

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Less: Acc. depreciation 50,000 200,000
Total Assets P240,000
Liabilities
Accounts Payable P70,000
Loans Payable Diane 20,000
Loans Payable Lily 10,000 P100,000
Partners Equity
Diane, Capital P40,000
Lily, Capital 50,000
Sue, Capital 50,000 140,000
Total Equities P240,000

P&L ratio is 5:3:2.

Prepare a statement of liquidation and journal entries under the


following independent cases:
1. Case 1 Furniture and fixtures is sold for P140,000.
2. Case 2 Furniture and fixtures is sold for P110,000.
3. Case 3 Furniture and fixtures is sold for P70,000.

October 2014

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