Module 4 - Partnership Liquidation PDF

Preview

Summary

Notes from Zeus Vernon Millan...

Description

1. Introduction/Overview This module demonstrates an understanding of accounting for the equity of partnership liquidations. At the end of this module, the learners will be able to account for the accounting for a partnership that must comply with the relevant provisions of the Civil Code of the Philippines. Learners are also expected to describe accounting procedures and account for the liquidation of a partnership. 2. Learning Outcomes State the order of priority in the settlement of claims in cases of liquidation and account for the liquidation of a partnership. 3. Partnership Liquidation The liquidation of a partnership is the winding up of its business activities characterized by sale of all non-cash assets, settlement of liabilities and distribution of the remaining cash to the partners. The conversion of non-cash assets into cash is referred to as realization. This may either result to gain or loss on realization and shall be divided in the profit or loss ratio of the partners. A substantial loss on realization may yield for a partner a capital deficiency, which is the excess of a partner’s share in losses over the partner’s capital credit balance. Partner’s interest is the sum of his capital and loan accounts in the partnership.

Rules in Settling Accounts After Dissolution •

Civil Code of the Philippines, Art. 1839

•

Assets of the Partnership The asset of the partnership consist of the following: 1.

Partnership property

2.

Additional contributions of the partners needed for the payment of all liabilities.

Order of Preference The assets of a general partnership shall be applied in the following order: 1.

First, those owing to outside creditors,

2.

Second, those owing to inside creditors in the form of loans or advances for business expenses by the partners,

3.

Third, those owing to the partners with respect to their capital contributions,

4.

Lastly, those owing to the partners with respect to their share of the profits.

•

Right of offset- legal right of a partner to apply part or all of his loan account balance against his capital deficiency resulting from losses in the realization of the partnership assets.

•

Insufficient Partnership Assets in cases when the partnership assets are insufficient to settle all outside liabilities, the partners should make additional contributions in the partnership. Any partner who contributed in excess of his share in this liability has a right to collect the supposed additional contributions from the other partners.

Preference of Partnership Creditors and Partner’s Separate Creditors •

The creditors of the partnership shall have priority in payments over those of the partner’s separate creditors as regards the partnership properties. On the other hand, the creditors of the partners are preferred with respect to the separate or personal properties of the partners.

Distribution of separate properties of an Insolvent Partner If a partner is insolvent, his personal properties shall be distributed as follows: 1.

First, those owing to separate creditors,

2.

Second, those owing to partnership creditors

3.

Lastly, 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 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.

1.

Installment Method. Under this method, the 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 process persists until all non-cash assets are sold. 2.

3.1. 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 partners. The procedures below may be followed in lump-sum liquidation: 1.

Realization of non-cash assets ad distribution of gain or loss on realization among the partners based on their profit or loss ratio.

2.

Payment of liabilities.

3.

Elimination of partner’s capital deficiencies using one of the following methods, in the order of priority:

4.

a.

If the deficient partner has a loan balance, then exercise the right of offset

b.

If the deficient partner is solvent, then he should invest cash to eliminate his deficiency

c.

If the deficient partner is insolvent, then the other partners should absorb his deficiency.

Payments to partners, in the order of priority: a.

Loan accounts

b.

Capital accounts

3.2. Installment liquidation •

•

•

Under this method, realization of non-cash assets is accomplished over an extended period of time. It is a process of selling some assets, paying the creditors, paying the remaining cash to the partners, realizing additional assets and making additional payments to the partners. The liquidation will continue until all non-cash assets have been realized and all available cash distributed to partnership creditors and partners. Installment payments to partners are appropriate if necessary, safeguards are used to ensure that all partnership creditors are paid in full and that no partner is paid more than the amount to which he would be entitled after all losses on realization of assets are known. The procedures below may be followed in installment liquidation: a.

Realization of non-cash assets and distribution of gain or loss on realization among the partners based on their profit or loss ratio.

b.

Payment of liquidation expenses and adjustment for unrecorded liabilities; both of these items will be distributed among the partners in their profit or loss ratio

c.

Payment of liabilities to outsiders

d.

Distribution of available cash based on a schedule of safe payments which assumes possible losses due to inability of the partnership to dispose of part or all the remaining non-cash assets and failure of the partners with capital deficiencies to make additional contributions. Payments can also be made based on a cash priority program.

3.3. Illustration

Joel Feliciano, Evelyn Tria and Nick 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 Dec. 31, 2020. the following is the 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 4:4:2. The entries are as follows: a.

Sale of non-cash assets and distribution of loss on realization

b.

Payment of liabilities

c.

Distribution of cash to partners

Case 2: Loss on Realization resulting to a capital deficiency with right of offset Assume that the non-cash assets are sold at P1,850,000 with a resulting loss on realization of P1,550,000 which was distributed in the ratio 4:4:2. The entries are as follows: a.

Sale of non-cash assets and distribution of loss on realization

b.

Payment of liabilities

c. Exercise of the right of offset

d. Distribution of cash to partners

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 with a resulting loss on realization of P1,700,000 which was distributed in the ratio 4:4:2. The entries are as follows: a. Sale of non-cash assets and distribution of loss on realization

b. Payment of liabilities

c. Exercise of the right of offset

d. Additional investment by deficient partner

e. Distribution of cash to partners

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 with a resulting loss on realization of P1,700,000 which was distributed in the ratio 4:4:2. Evelyn Tria is insolvent. The entries are as follows: a.

Sale of non-cash assets and distribution of loss on realization

b.

Payment of liabilities

c. Exercise of right of offset

d. Deficiency

absorbed by solvent partners

e. Distribution

of cash to partners

Case 5: Partnership insolvent but partners personally solvent Assume that the non-cash assets are sold at P900,000 with a resulting loss on realization of P2,500,000 which was distributed in the ratio 4:4:2. Evelyn Tria is insolvent.

The entries are as follows a. Sale of non-cash assets and distribution of loss on realization

b. Payment of liabilities

c.

Exercise of right of offset

d.

Additional investment by partners

e.

Full payment of liabilities

f.

Distribution of cash to partners...