BSA 3101 Module 4 Partnership Liquidation PDF

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BSA 3101 MODULE 4 PARTNERSHIP LIQUIDATIONLEARNING OBJECTIVES: At the end of the lesson , the learner will be able to: 1. Differentiate dissolution from liquidation 2. Enumerate the causes of liquidation 3. Explain the difference between lump-sum liquidation from installment liquidation 4. Apply the ...

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BSA 3101 MODULE 4 PARTNERSHIP LIQUIDATION LEARNING OBJECTIVES: At the end of the lesson , the learner will be able to: 1. Differentiate dissolution from liquidation 2. Enumerate the causes of liquidation 3. Explain the difference between lump-sum liquidation from installment liquidation 4. Apply the concepts of “marshalling of assets” and the “right of offset” in solving selected problems 5. Prepare the statement of partnership liquidation 6. Prepare the schedule of cash distribution to partners.

I.

DISSOLUTION WITH LIQUIDATION

LIQUIDATION = termination of the business operation or the winding up of affairs. It is a process by which: 1. non-cash assets are converted into cash ( referred to as “REALIZATION,” 2. liabilities are settled, and ( LIQUIDATION, however, the term is used in a broader sense to include the entire winding up process). 3. any remaining amount is distributed to the partners. II.

CAUSES OF LIQUIDATION 1. The accomplishment of the purpose for which the partnership was organized.

2. The termination of the period covered by the partnership contract 3. The bankruptcy of the firm 4. The mutual agreement among the partners to close the business 5. By court decree III. PARTNERSHIP LIQUIDATION  Methods of liquidation 1. Lump-sum ( onetime or single payment) 2. Installment (partners’ claim are settled as cash becomes available, but only after all partnership liabilities are fully settled.)  MARSHALLING OF ASSETS involves the order of creditor’s right against the partnership asset and the personal assets of individual partners. 1. Partnership creditors other than partners 2. Partner’s claim other than capital and profits, such as loan payable and accrued interest payable 3. Partner’s claim to capital and profits, to the extent of credit balance in their capital accounts.  The order of claims against the personal asset of the individual partners is as follows: 1. Personal creditors of individual partners. 2. Partnership creditors for unpaid partnership liabilities, regardless of partner’s capital balance in the partnership.

 RIGHT OF OFFSET involves offsetting a deficit in a partner’s capital(debit balance in the capital account of a partner) against the loan payable to that partner.  LUMP-SUM versus INSTALLMENT The following are the procedures in the accounting for lumpsum and installment liquidation: LUMP-SUM 1. All of the non-cash assets are converted to cash. 2. The total gain or loss on the sale is allocated to the partners’ capital balances based on their P & L ratios. Actual liquidation 3. expenses are allocated to the partners’ capital balances on their P & L ratios 4. The liabilities to outside creditors are fully settled. 5. The liabilities to inside creditors are fully settled.

6. Any remaining cash is

INSTALLMENT 1. Some of the non-cash assets are converted to cash 2. The carrying amount of any unsold non-cash asset is considered as a loss. This is allocated to the partners’ capital balances based on their P & L ratios. 3. Actual and estimated future liquidation expenses are allocated to the partner’s capital balances based on their P & L ratios. 4. The liabilities to outside creditors are partially or fully settled. 5. The liabilities to inside creditors are partially or fully settled but only after the full settlement of the liabilities to outside creditors. 7. If both the liabilities to

distributed partners settlement interest.

to in of

the outside and inside creditors full are fully settled, any their remaining cash less cash set aside for future liquidation expenses is distributed to the owners as partial settlement of their interest.

ILLUSTRATION: On January 2, 2020, the partners of XYZ Co. decided to liquidate their partnership. The following information was made available: Cash 20,000 Accounts Payable 30,000 Accounts 60,000 Payable to Y 20,000 Receivable Inventory 120,000 X, Capital (20%) 100,000 Equipment 300,000 Y, Capital(30%) 150,000 Z, Capital(50%) 200,000 Total 500,000 Total 500,000 Information on the conversion of non-cash assets is as follows: 1. P50,000 was collected on the accounts receivable, the balance is uncollectible. 2. P70,000 was received for the entire inventory 3. The equipment was sold for P250,000 4. P2,000 liquidation expenses were paid. Requirement: Determine the amounts of cash distributed to the partners in the final settlement of their interest. Step 1 = Compute for the gain or loss on the sale 1.

Collection of Accounts Receivable

50,000

2. Sale of inventory 70,000 3. Sale of equipment 250,000 4. Liquidation expenses (2,000) NET PROCEEDS 368,000 Less: Carrying amount of non-cash assets 480,000 (60+120+300) TOTAL LOSS ON SALE (112,000) Step 2 = Allocate the gain or loss to the partners’ capital balances ( include the right of offset).

Capital balances before liquidation Payable to Y TOTAL Allocation of Loss of P112,000

Amounts received by the partners

X Y (30%) Z (50%) (20%) 100,000 150,000 200,000

TOTAL 450,000

20,000 20,000 100,000 170,000 200,000 470,000 (22,400) (33,600) (56,000) (112,000) 77,600 136,400 144,000

358,000

Proof: Total distributed to partners = Cash

available for distribution to partners. Beginning cash balance Net proceeds from the sale of noncash assets

20,000 368,000

Less: Payments to outside creditors Cash available for distribution to partners

(30,000) 358,000

ILLUSTRATION 2; On January 2, 2020, the partners of XYZ Co. decided to liquidate their partnership. The following information was made available: Cash 20,000 Accounts Payable 30,000 60,000 Payable to Y 20,000 Accounts Receivable Inventory 120,000 X, Capital (20%) 100,000 Equipment 300,000 Y, Capital(30%) 150,000 Z, Capital(50%) 200,000 Total 500,000 Total 500,000 Information on the conversion of non-cash assets is as follows: 1. 75% of the accounts receivable was collected for only P30,000 2. ½ of the inventory was sold for P40,000 3. Equipment with carrying amount of P200,000 was sold for P120,000. 4. Actual liquidation expenses of P2,000 were paid. 5. Estimated future liquidation expenses totaled P1,000. 6. P9,000 cash was retained in the business for potential unrecorded liabilities and anticipated expenses.

Requirement: Determine the amounts of cash distributed to the partners from the partial realization of partnership assets. Solution: Step 1 - Compute for the gain or loss 1.

Collection of Accounts 30,000 Receivable 2. Sale of inventory 40,000 3. Sale of equipment 120,000 4. Actual liquidation expenses (2,000) 5. Estimated liquidation (1,000) expenses 6. Cash retained for future (9,000) expenses NET PROCEEDS 178,000 Less: Carrying amount of all noncash assets (480,000) (60+120+300) TOTAL LOSS (302,000) Step 2 = Allocate the gain or loss to the partners’ capital balance ( include the right of offset).

Capital balances before liquidation Payable to Y TOTAL

X Y (30%) (20%) 100,000 150,000

20,000 100,000 170,000

Z (50%)

TOTAL

200,000

450,000

200,000

20,000 470,000

Allocation of Loss of P302,000

Amounts received by the partners

(60,400) (90,600) (151,000) (302,000) 39,600

79,400

49,000

168,000

Proof: Total distributed to partners = Cash

available for distribution to partners. Beginning cash balance Net proceeds from the sale of noncash assets( net of all costs and cash retentions) Less: Payments to outside creditors Cash available for distribution to partners

20,000 178,000 (30,000) 168,000

SUMMARY: Step 1 = Compute for the net proceeds. Deduct all expenses, whether paid or not, as well as any cash retentions for future costs. Step 2 = Compute for the gain or loss by comparing the net proceeds with the total carrying amount of non-cash assets, whether sold or not. Step 3 = Allocate the gain or loss to the partners’ interest. Any residual amount in a partner’s capital balance represents the settlement of his interest in the partnership.

SELF CHECK: At December 31, 2020, the capital balances of partners GOMEZ,GARCIA and GALANG are P60,000, P100,000 and P20,000, respectively, sharing profits and losses in the ratio 3:2:1. The partners decided to liquidate, and sold all the non-cash assets for P148,000 cash. After paying all the liabilities amounting to P48,000, they still have P112,000 cash left for distribution. Question 1 = How much is the loss on realization? Question 2 = How much each partners received as cash settlement?...