Accounting for Partnership Liquidation - Installment Method PDF

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MODULE 5 Partnership and Corporation Accounting SESSION TOPIC 5 : Accounting for Partnership Liquidation - Installment Method LEARNING OUTCOMES: The following specific learning objectives are expected to be realized at the end of the session: 1. Understand the definition of dissolution 2. Understand the causes of dissolution 3. Preparation of journal entries for partnership dissolution KEY POINTS Dissolution

Winding up

Termination

Incorporation

CORE CONTENT Introduction: This module covers the discussion of definition of dissolution, causes of dissolution and the preparation of journal entries for partnership dissolution. IN-TEXT ACTIVITY Definition of Liquidation Liquidation of a partnership is the winding up of its business activities characterized by sale of all non-cash assets, settlement of all liabilities and distribution of the remaining cash to the partners.  The conversion of non-cash assets into cash is referred to as realization.  Gain or loss on realization shall be divided in the profit and loss ration of the partners. Order of Preference: The assets of a general partnership shall be applied in the following order: 1. Those owing to outside creditors. 2. Those owing to inside creditors in the form of loans or advances for business expenses by the partners. 3. Those owing to the partners with respect to their capital contribution. 4. Those owing to the partners with respect to their share of the profits. Illustration: Apalisoc, Onate and Geron are partners in a prawn export business. Initially, Apalisoc contributed P300,000; Onate, P200,000; and Geron, P100,000. On the date of dissolution, the remaining assets of the partnership amounted to P1,000,000. The partnership has outstanding obligations with Pido, P140,000; Tuddao, P100,000 and loans payable to Apalisoc, P40,000. The accounts of Apalisoc, Onate and Geron partnership shall be settled as follows: 1. First, Pido and Tuddaowho are outside creditors shall be paid the total sum of P240,000; thus leaving a balance of P760,000 (P1,000,000 - PP240,000) in partnership assets; 2. Second, Apalisoc who is an inside creditor shall be paid his loan to the partneship of P40,000; balance at P720,000 (P760,000 - P40,000); 3. Third, the total contributions of Apalisoc, Onate and Geron to the initial partnership capital in the amount of P600,000 will be paid; balance of assets at P120,000 (P720,000 - P P600,000); 4. Lastly, the balance of P120,000 shall be distributed to the partners in the ratio of their capital contributions since there was no mention of an agreement governing the division of prifits or losses. Therefore, Apalisoc shall entitled to 3/6 of P120,000 or P60,000; Onate, 2/6 or P40,000 and Geron, 1/6 or P20,000. Distribution of Separate Properties of an Insolvent Partner If a partner is insolvent, his personal properties shall be distributed as follows:

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1. Those owing to separate creditors 2. Those owing to partnership creditors 3. Those owing to the partners by way of additional contributions when the assets of the partnership were insufficient to settle all obligations. Methods of Partnership Liquidation The following methods may be used when a partnership is liquidated: 1. Lump-sum Method - Under this method, all non-cash assets are realized and the related gains or losses distributed and all liabilities are paid before a single final cash distribution is made to the partners. 2. Installment Method - Under this method, realization of non-cash assets is accomplished over an extended period of time. When cash is available, creditors may be partially or fully paid. Any excess may be distributed to the partners in accordance with a program of safe payments or a cash priority program. This persists until all the non-cash assets are sold. Lump-sum Liquidation Under this method, all non-cash assets are realized and all liabilities are settled before a single final cash distribution is made to the partners. The procedures below may be followed in lump-sum liquidation: 1. Realization of non-cash assets and distribution of gain or loss on realization among the partners based on P/L ratio. 2. Payment of liabilities. 3. Elimination of partner's capital deficiencies. 4. Payments to partners. Illustration: Malaya, Tria and Marasigan are partners in a public relations firm and share profits and losses in the ratio of 2:2:1, respectively. They decided to liquidate their business on December 31, 2019. The following condensed statement of financial position prepared prior to liquidation:

Case 1: Loss on Realization fully absorbed by Partner's Capital Balances Assume that the non-cash assets are sold at P2,500,000 with a resulting loss on realization of P900,000 which was distributed in the ratio 2:2:1. 



Sale of Non-cash Assets: Cash Loss on realization Non-cash assets

2,500,000 900,000

Distribution of Loss on Realization based on Partner’s P/L Ratio Malaya, Capital 360,000 Tria, Capital 360,000 Marasigan, Capital 180,000 Loss on Realization

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3,600,000

900,000





Payment of Liabilities Liabilities Cash

1,120,000

Distribution of Cash to Partners Tria, Loan Marasigan, Loan Malaya, Capital Tria, Capital Marasigan, Capital Cash

50,000 80,000 590,000 240,000 620,000

1,120,000

1,580,000

Case 2: Loss on Realization Resulting to a Capital Deficiency with Right to Offset Assume that the non-cash assets are sold at P1,850,000. 









Sale of Non-cash Assets: Cash Loss on realization Non-cash assets

1,850,000 1,550,000 3,400,000

Distribution of Loss on Realization based on Partner’s P/L Ratio Malaya, Capital 620,000 Tria, Capital 620,000 Marasigan, Capital 310,000 Loss on Realization

1,550,000

Payment of Liabilities Liabilities Cash

1,120,000 1,120,000

Exercise Right of Offset Tria, Loan Tria, Capital

20,000

Distribution of Cash to Partners Tria, Loan Marasigan, Loan Malaya, Capital Marasigan, Capital Cash

30,000 80,000 330,000 490,000

20,000

930,000

Case 3: Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent Partner Assume that the non-cash assets are sold at P1,700,000. 



Sale of Non-cash Assets: Cash Loss on realization Non-cash assets

1,700,000 1,700,000

Distribution of Loss on Realization based on Partner’s P/L Ratio Malaya, Capital 680,000 Tria, Capital 680,000 Marasigan, Capital 340,000 Loss on Realization

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3,400,000

1,700,000









Payment of Liabilities Liabilities Cash

1,120,000

Exercise Right of Offset Tria, Loan Tria, Capital

50,000

Additional Investment by Deficient Partner Cash Tria, Capital

30,000

Distribution of Cash to Partners Marasigan, Loan Malaya, Capital Marasigan, Capital Cash

80,000 270,000 460,000

1,120,000

50,000

30,000

810,000

Case 4: Loss on Realization Resulting to a Capital Deficiency to a Personally Insolvent Partner Assume that the non-cash assets are sold at P1,700,000. Partner Tria is personally insolvent. 











Sale of Non-cash Assets: Cash Loss on realization Non-cash assets

1,700,000 1,700,000 3,400,000

Distribution of Loss on Realization based on Partner’s P/L Ratio Malaya, Capital 680,000 Tria, Capital 680,000 Marasigan, Capital 340,000 Loss on Realization

1,700,000

Payment of Liabilities Liabilities Cash

1,120,000 1,120,000

Exercise Right of Offset Tria, Loan Tria, Capital

50,000

Deficiency Absorbed by Solvent Partners Malaya, Capital Marasigan, Capital Tria, Capital

20,000 10,000

Distribution of Cash to Partners Marasigan, Loan Malaya, Capital Marasigan, Capital Cash

80,000 250,000 450,000

50,000

30,000

Case 5: Partnership Insolvent but Partners Personally Solvent Assume that the non-cash assets are sold at P900,000. 

Sale of Non-cash Assets:

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780,000

Cash Loss on realization Non-cash assets 











900,000 2,500,000 3,400,000

Distribution of Loss on Realization based on Partner’s P/L Ratio Malaya, Capital 1,000,000 Tria, Capital 1,000,000 Marasigan, Capital 500,000 Loss on Realization

2,500,000

Partial Payment of Liabilities Liabilities Cash

1,100,000 1,100,000

Exercise Right of Offset Tria, Loan Tria, Capital

50,000

Additional Investment by Partners Cash Malaya, Capital Tria, Capital

50,000

400,000 50,000 350,000

Full Payment of Liabilities Liabilities Cash

20,000

Distribution of Cash to Partners Marasigan, Loan Marasigan, Capital Cash

80,000 300,000

20,000

380,000

Illustration: Cardenas, Go and Balocating are partners who are sharing P/L in the ratio of 4:3:2 respectively. They decided to liquidate their business on December 31, 2018 because of constant credit problems.

Case 6: Partnership Insolvent and Partners Personally Insolvent Assume that the non-cash assets are sold at P335,000. 

Sale of Non-cash Assets:

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Cash Loss on realization Non-cash assets 











335,000 270,000 605,000

Distribution of Loss on Realization based on Partner’s P/L Ratio Cardenas, Capital 120,000 Go, Capital 90,000 Balocating, Capital 60,000 Loss on Realization

270,000

Partial Payment of Liabilities Liabilities Cash

340,000

340,000

Additional Losses to Partners with Positive Balances Cardenas, Capital 20,000 Balocating, Capital 10,000 Go, Capital

30,000

Additional Investment by Partners Cash Cardenas, Capital

40,000 40,000

Full Payment of Liabilities Liabilities Cash

30,000

Distribution of Cash to Partners Balocating, Capital Cash

10,000

30,000

Illustration: The balance sheet of the partnership showed the following balances:

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10,000

Additional information: Gamba, Mulles and Pitular share profit and loss in the ratio of 4:3:3, respectively. In May, part of the assets are sold at book value, P300,000. In June, the remaining assets are sold for P210,000. Assume that available cash is distributed to the proper parties at the end of May and at the end of June. Assume further that partners are solvent and that any partner who is deficient made appropriate payment to the partnership on July 31. Schedule A

Schedule B

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Illustration Del Rosario, Manalo and Pateno divide profits 60%, 25% and 15% respectively. A balance sheet on June 30, 2018, just before the partnership liquidation, showed up the following balances:

Additional information: Certain assets are sold in July at book value of P500,000 and available cash is distributed to appropriate parties. Remaining assets are sold in August P150,000 and cash is distrubuted in final settlement. Cash Priority Program

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Statement of Liquidation

SESSION SUMMARY  Any change in the membership of this form of business organization will result to dissolution.  Dissolution of the partnership does not necessarily imply that business operations will come to an end.  Most changes in the ownership of a partnership are accomplished without interruptions of its normal operations. SELF-ASSESSMENT Assignment : Computation of partners’ capital balances in partnership liquidation

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Quiz : Problem on partnership liquidation REFERENCES Refer to the references listed in the syllabus of the subject.

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