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Definition of Terms
1
7. Capital deficiency the excess of a partners share on losses
over his capital balance.
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.
12. Insolvent partner personal assets of the partner are less than
his personal liabilities.
Types of Liquidation
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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.
Pro-forma Entries
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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
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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
2. Maintain two columns for the debits one for cash and one for
non-cash assets.
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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:
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
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
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
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Candy, capital 10,000
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
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
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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
D.
ABC Partnership
Statement of Liquidation
May 1, 2016
CAPITAL
Cash Other Liabilities Andy (30%) BeL 50% Candy 20%
Assets
11
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
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1Accounts payable 125,000
Cash 125,000
Payment of liabilities
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
October 2014
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