MIRIAM COLLEGE

College of Business, Entrepreneurship and Accountancy

College of Business,
Entrepreneurship and
Accountancy

Business Administration Department

BSA 102
Principles of Accounting Part 2
2nd Semester, SY 2012-2013
 Partnership
College of Business, Entrepreneurship and Accountancy

PREVIEW OF THE CHAPTER

PARTNERSHIP
LIQUIDATION

Nature of Partnership Liquidation Accounting Procedures

in Lump-Sum Liquidation
Definition
Causes of liquidation Realization
Accounting problems in Distribution of gain or loss
partnership liquidation on realization
Types of liquidation Payment to creditors
Distribution of cash to
Lump-Sum partners
Instalment (piece-meal)
 Dissolution of a Partnership
College of Business, Entrepreneurship and Accountancy

Is defined in Article 1825 of the Civil Code

of the Philippines as the change in the
relation of the partners caused by any
partner ceasing to be associated in the
carrying out of the business

Dissolution refers to the termination of the

life of an existing partnership and may be
followed by:
1. Formation of a New Partnership
2. Liquidation
 Conditions Resulting to Partnership
Dissolution
College of Business, Entrepreneurship and Accountancy

Admission of a New Partner

Retirement or withdrawal of a partner
Death, Incapacity or bankruptcy of a
partner
Incorporation of Partnership
 Formation of a New
Partnership
College of Business, Entrepreneurship and Accountancy

Refers to the dissolution of a

partnership by a change in the capital
or ownership structure of the business.

The newly create partnership

continues the business activities of the
dissolved partnership without
interruption.
 Partnership Liquidation
College of Business, Entrepreneurship and Accountancy

Refers to dissolution of the

partnership leading to the
termination of the business
activities carried on by the
partnership

and the winding up of

partnerships business affairs to
going out of business.
 College of Business, Entrepreneurship and Accountancy

Partnership dissolution with liquidation

may be caused by any of the following
factors:
1. The accomplishment of the purpose for
which the partnership was organized
2. The termination of the term/period
covered by the partnership contract.
3. The bankruptcy of the firm.
4. The mutual agreement among the
partners to close the business.
 TYPES OF LIQUIDATION
College of Business, Entrepreneurship and Accountancy

Lump-sum liquidation or liquidation by totals.

This is a type of liquidation 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 paid.

Liquidation by instalment or piece-meal

liquidation
This is a type of liquidation whereby assets are
realized on a piecemeal basis and cash is distributed
to partners on a periodic basis as it becomes
available, that is, even before all non-assets are
converted into cash.
 PROCEDURES IN LUMP-SUM
LIQUIDATION
College of Business, Entrepreneurship and Accountancy

1. Sale of non-cash assets

2. Distribution or allocation of gain or
loss on realization among the
partners according to their residual
profit and loss ratios (salary and
interest factors disregarded) unless
liquidation ratios are specified in the
partnership agreement.
 College of Business, Entrepreneurship and Accountancy

When realization of assets results in a loss,

the loss is carried to the capital accounts of
the partners as a deduction.
If a partners capital account results in a
debit balance (called capital deficiency), the
deficiency can be eliminated by
Making additional cash investment, if the
deficient partner is solvent.
Charging the deficiency as additional loss to the
remaining partners, if the deficient partner is
insolvent.
 PROCEDURES IN LUMP-SUM
LIQUIDATION
College of Business, Entrepreneurship and Accountancy

3. Distribution of cash to creditors

4. Distribution of cash to partners. In
this procedure, the provisions of the
marshalling of assets and the exercise
of the right of offset are applied.
 STATEMENT OF LIQUIDATION
College of Business, Entrepreneurship and Accountancy

The statement of liquidation is a

prepared to summarize the liquidation
process.
It is the basis of the journal entries
made to record liquidation.
 DEFINITION OF TERMS
College of Business, Entrepreneurship and Accountancy

1. Dissolution - the termination of a partnership as a

going concern; it is the termination of the life of a
partnership.
2. Winding up - the process of settling the business Or
partnership affairs; it is synonymous to liquidation.
3. Termination - the point in time when all partnership
affairs are ended.
4. Liquidation - the interval of time between dissolution
and termination of partnership affairs; it is also the
process of winding up a business which normally
consists of conversion of assets into cash, payment
of liabilities and distribution of remaining cash
among the partners.
 DEFINITION OF TERMS
College of Business, Entrepreneurship and Accountancy

5. Realization the process of converting

non-cash assets into cash.
6. Gain on realization - the excess of the
selling price over the cost or book value of
the assets disposed or sold through
realization.
7. Loss on realization the excess of the cost
or book value over the selling price of the
assets disposed or sold through realization.
8. Capital deficiency the excess of a
partners share on losses over his capital.
 DEFINITION OF TERMS
College of Business, Entrepreneurship and Accountancy

9. Deficient partner - a partner with a debit

balance in his capital account after receiving
his share on the loss on realization.
10.Right of offset the legal right to apply part
or all of the amount owing to a partner on a
loan balance against deficiency in his capital
account resulting from losses in the process
of liquidation.
11.Partners interest the sum of a partners
capital, loan balance and advances to the
partnership.
 Marshalling of Assets
College of Business, Entrepreneurship and Accountancy

involves the order of creditors rights

against the partnerships assets and the
personal assets of the individual partners.
The order in which claims against the
partnerships assets will be marshalled is
as follows:
1. Partnership creditors other than partners
2. Partners claims other than capital and
profits, such as loans payable and accrued
interest payable
3. Partners claim to capital or profits, to the
extent of credit balances in capital accounts.
 Illustrative Problem
College of Business, Entrepreneurship and Accountancy

(1) The other assets were sold for P 140,000.

(2) The other assets were sold for P74,000.
(3) The other asses were sold for P68,000. Deficient partner
was solvent.
(4) The other assets were sold for P68,000. Deficient partner
 Encina, Endrada, and Elina
Statement of Liquidation
College of Business, Entrepreneurship and Accountancy

December 1 - 31, 2012

Other Loan Capital

Liabiliti Endra Encina Endrad Elina -

Cash Assets es da Elina - 40% a - 40% 20%
Balance
before
Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Assets
and (136,00
distribution of
gain 140,000 0) 1,600 1,600 800

Balances 148,000 - 44,800 2,000 3,200 39,600 25,600 32,800

(44,80
Payment of
Liabilities (44,800) 0)

Balances 103,200 - - 2,000 3,200 39,600 25,600 32,800

(103,20 (2,00 (3,200 (39,60 (25,60 (32,80

Payment to
partners 0) 0) ) 0) 0) 0)
 Encina, Endrada, and Elina
Statement of Liquidation
College of Business, Entrepreneurship and Accountancy
December 1 - 31, 2012
Loan Capital

Other Liabiliti Endrad Encina Endrad Elina -

Cash Assets es a Elina - 40% a - 40% 20%

Balance 136,00
before
Liquidation 8,000 0 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Assets
and (136,00 (24,800 (24,800 (12,400
distribution of
gain 74,000 0) ) ) )

Balances 82,000 - 44,800 2,000 3,200 13,200 (800) 19,600

(44,800 (44,800
Payment of
Liabilities ) )

Balances 37,200 - - 2,000 3,200 13,200 (800) 19,600

Offsetting of
Loan 800 800
 Encina, Endrada, and Elina
Statement of Liquidation
December 1 - 31, 2012
College of Business, Entrepreneurship and Accountancy

Loan Capital
Other Encina - Endrada Elina -
Cash Assets Liabilities Endrada Elina 40% - 40% 20%
Balance
before
Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of
Assets and (136,00 (27,200 (27,200 (13,600
distribution
of gain 68,000 0) ) ) )

Balances 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,400

(44,800 (44,800
Payment of
Liabilities ) )

Balances 31,200 - - 2,000 3,200 10,800 (3,200) 18,400

Offsetting of
Loan (2,000) 2,000

Balances 31,200 - - - 3,200 10,800 (1,200) 18,400

Additional
Cash 1,200 1,200
 Encina, Endrada, and Elina
Statement of Liquidation
December
College of Business, Entrepreneurship and Accountancy 1 - 31, 2012
Loan Capital
Other Encina - Endrada Elina -
Cash Assets Liabilities Endrada Elina 40% - 40% 20%
Balance
before
Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of
Assets and
distribution
(136,000
of gain 68,000 ) (27,200) (27,200) (13,600)

Balances 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,400

Payment of
Liabilities (44,800) (44,800)

Balances 31,200 - - 2,000 3,200 10,800 (3,200) 18,400

Offsetting of
Loan (2,000) 2,000

Balances 31,200 - - - 3,200 10,800 (1,200) 18,400

Additional
Cash (800) 1,200 (400)

31,200 - - - 3,200 10,000 - 18,000

Payment to