Problem Solving
Lump-Sum Liquidation
I – Statement of Liquidation – Lump-sum
Assume the following data for QRS Partnership had the following condensed balance sheet just before
liquidation on November 1, 20x4, reports the following balances:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . P 24,000
Noncash assets . . . . . . . . . . . . . .
84,000
________
P108,000
Liabilities and Capital
Liabilities . . . . . . . . . . . . . . . . . . P 12,000
Q, loans . . . . . . . . . . . . . . . . . .
2,400
Q, capital(30%) . . . . . . . . . . . .
9,600
R, capital (50%) . . . . . . . . . . . .
48,000
S, capital (20%) . . . . . . . . . . . .
36,000
P108,000
Required: Prepare statement of liquidation, assuming:
1. The noncash assets were realized at P96,000.
2. The noncash assets were realized at P48,000.
3. The noncash assets were realized at P36,000. The personal assets and liabilities of the partners on
this date are as follows:
Personal Assets
Partnership Liabilities
Q………………………………… P 288,000
P240,000
R………………………………….
216,000
228,000
S………………………………….
108,000
108,000
4. The noncash assets were realized at P42,000.
5. The noncash assets were realized at P24,000. The personal assets and liabilities of the partners
on this date are as follows:
Q…………………………………
R………………………………….
S………………………………….
6.
Personal Assets
P 288,000
216,000
117,600
Partnership Liabilities
P284,400
228,000
108,000
The noncash assets includes goodwill of P54,000 and prepaid expenses of P18,000. The partners
agreed to write-off these accounts since they are valueless. The remaining noncash assets were
realized at P1,200 with liquidation expenses paid amounting to P14,400. The personal assets and
liabilities of the partners on this date are as follows:
Q…………………………………
R………………………………….
S………………………………….
Personal Assets
P 240,000
216,000
108,000
Partnership Liabilities
P204,000
192,000
112,800
7. Following are the data available before liquidating the partnership:
a. Prepaid expenses amounted to P8,400 were refunded to the partnership with the exception
of P1,440 that was forfeited.
b. R agreed to personally take certain equipment having a P6,000 book value. (The partners
estimated its current value at P7,200)
c. S agreed to personally take certain furniture having a P3,600 book value. ((The partners
estimated its current value at P3,000)
d. The remaining noncash assets were realized at P32,400.
Answer – Problem I
1: Gain on Realization Fully Allocated to Partner’s Capital Balances.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Payment to partners - loan
Balances after payment of
partners’ loans
Payment to partners capital
Cash
24,000
NonCash
Assets
84,000
Q,
Capital
30%)
9,600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
Liabilities
12,000
Q, Loan
2,400
_____
12,000
(12,000)
______
2,400
3,600
13,200
6,000
54,000
2,400
38,400
2,400
(2,400)
13,200
______
54,000
______
38,400
_______
105,600
13,200
54,000
38,400
(105,600)
(13,200)
(54,000)
(38,400)
96,000
120,000
(12,000)
(84,000)
108,000
(2,400)
2: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset deficit versus loans
Balances after offsetting
Payment to partners – loan
Balances after payment of
partners’ loans
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
_____
12,000
(12,000)
______
2,400
(10,800)
(1,200)
(18,000)
30,000
(7,200)
28,800
2,400
(1,200)
1,200
(1,200)
(1,200)
1,200
30,000
_______
30,000
_______
28,800
_______
28,800
______
58,800
30,000
28,800
(58,800)
(30,000)
(28,800)
Cash
24,000
48,000
72,000
(12,000)
60,000
_______
60,000
(1,200)
NonCash
Assets
84,000
(84,000)
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
3: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised and Additional Capital Investment is Required and
Made).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan versus deficit –
Balances after offsetting
partner’s loan
Additional investment by Q
Balances after additional
Investment
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
________
12,000
(12,000)
________
2,400
________
(14,400)
( 4,800)
_______
(24,000)
24,000
_______
(9,600)
26,400
_______
2,400
(2,400)
( 4,800)
2,400
24,000
_______
26,400
_______
(2,400)
2,400
24,000
_______
26,400
_______
50,400
24,000
26,400
(50,400)
(24,000)
(26,400)
Cash
24,000
36,000
60,000
(12,000)
NonCash
Assets
84,000
(84,000)
48,000
_______
48,000
__2,400
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
4: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan versus deficit
Balances after offsetting
Additional loss due to
insolvency of Q
Balances after additional ,
Loss
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
_______
12,000
(12,000)
________
2,400
_______
(12,600)
( 3,000)
_______
(21,000)
27,000
_______
(8,400)
27,600
_______
2,400
(2,400)
(3,000)
2,400
( 600)
27,000
______
27,000
27,600
______
27,600
( 429)
( 171)
54,000
26,571
27,429
(54,000)
(26,571)
(27,429)
Cash
24,000
42,000
66,000
(12,000)
54,000
_______
54,000
_______
NonCash
Assets
84,000
(84,000)
600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
5: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan versus deficit
Balances after offsetting
Additional investment by Q
Balances after additional
investment
Additional loss due to
insolvency of Q
Balances after additional
Loss
Payment to partners capital
Cash
24,000
NonCash
Assets
84,000
Q,
capital
(30%)
9,600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
Liabilities
12,000
Q, Loan
2,400
_______
12,000
(12,000)
_______
2,400
_______
(18,000)
( 8,400)
_______
(30,000)
18,000
_______
(12,000)
24,000
_______
2,400
(2,400)
( 8,400)
2,400
(6,000),
_ 3,600
18,000
______
18,000
______
24,000
_______
24,000
_______
39,600
(2,400)
18,000
24,000
______
2,400
(1,714)
( 686)
39,600
16,286
23,314
(39,600)
(16,286)
(23,314)
24,000
48,000
(12,000)
(84,000)
36,000
______
36,000
_3,600
6: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Payment of liquidation
expenses
Balances after payment of
liquidation expenses
Write-off goodwill and
prepaid expenses
Balances after write-offs
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
Liabilities
Offset loan versus deficit
Balances after offsetting
Additional investment by Q
and R
Balances after additional
Investment
Payment of liabilities
Balances after payment of
Liabilities
Payment to partners Capital
Cash
24,000
NonCash
Assets
84,000
Liabilities
12,000
(14,400)
______
________
9,600
84,000
_______
9,600
1,200
10,800
(10,800)
Q, Loan
2,400
Q,
capital
(30%)
9,600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
________
(4,320)
(7,200)
(2,880)
12,000
2,400
5,280
40,800
33,120
(72,000)
12,000
_______
12,000
________
2,400
(21,600)
(16,320)
(36,000)
4,800
(14,400)
18,720
(12,000)
_______
12,000
(10,800)
________
2,400
________
( 3,240)
( 19,560)
_______
( 5,400)
( 600)
________
( 2,160)
16,560
_______
-0______
-0-
1,200
_______
1,200
2,400
(2,400)
(19,560)
2,400
(17,160)
( 600)
_______
( 600)
16,560
_______
16,560
17,760
_______
17,760
(1,200)
1,200
(1,200)
17,160
600
______
16,560
_______
16,560
16,560
(16,560)
(16,560)
7: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) with Revaluation of Assets.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Increase in equipment
Decrease in furniture
Balances after revaluation
Refund of prepaid
expenses
Balances after refunds
Received noncash assets
Balances after receipt
of noncash assets
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan versus deficit
Balances after offsetting
Payment to partners loan
Balances after payment
of loans
Payment to partnerscapitals
______
24,000
NonCash
Assets
84,000
1,200
(600)
84,600
_6,960
30,960
______
(8,400)
76,200
(10,200)
_______
12,000
_______
______
2,400
______
_(432)
9,348
_____
(720)
47,580
(7,200)
(288)
35,832
(3,000)
30,960
66,000
12,000
2,400
40,380
32,832
32,400
63,360
(12,000)
(66,000)
_______
12,000
(12,000)
______
2,400
_______
9,348
(
10,080)
( 732)
_______
( 16,800)
23,580
_______
( 8,064)
26,112
_______
23,580
______
23,580
26,112
______
26,112
______
_______
49,692
23,580
26,112
(49,692)
(23,580)
(26,112)
Cash
24,000
Liabilities
12,000
Q, Loan
2,400
_______
12,000
______
2,400
Q,
capital
(30%)
9,600
360
_(180)
9,780
51,360
_______
51,360
2,400
( 732)
1,668
(1,668)
(1,668)
(
732)
732
R,
Capital
(50%)
48,000
600
(300)
48,300
S,
Capital
(20%)
36,000
240
(120)
36,120
III – Simple Liquidation
The CC, DD, and GG (CDG) Partnership has decided to liquidate as of December 1, 20x4. A balance
sheet as of December 1, 20X4, appears below:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 25,000
Accounts Receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . .
75,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,000
Property, Plant and Equipment (net) . . . . . . . . . . . . . . . . .
300,000
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P500,000
Liabilities and Capital
Liabilities:
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P270,000
Capital:
CC, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P120,000
DD, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,000
GG, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,000
Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
230,000
Total Liabilities and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . .
P500,000
Additional Information
1. The personal assets (excluding partnership capital partner as of December 1, 20X4, follow:
CC
DD
GG
Personal assets . . . . . . . . . . . . . . . . . .
P250,000 P300,000 P350,000
Personal liabilities . . . . . . . . . . . . . . . .
230,000
240,000
325,000
Personal net worth . . . . . . . . . . . . . . .
P20,000
P60,000
P25,000
2. CC, DD, and GG share profits and losses in the ratio 20:40:40.
3. All of the non-cash assets were sold on December 10, 20x4, for P260,000
Required:
1. Prepare a statement of realization and liquidation for the CDG Partnership on December 10,
20x4.
2. Prepare a schedule of the net worth of each of the three partners as of December 10, 20x4, after
the liquidation of the partnership is completed.
Answer – Problem III
1.
CDG Partnership
Statement of Realization and Liquidation
Lump-sum Liquidation on December 10, 20X6
Liabilities
Carlos
20%
25,000
475,000
(270,000)
(120,000)
(50,000)
(60,000)
260,000
285,000
(475,000)
-0-
(270,000)
43,000
(77,000)
86,000
36,000
86,000
26,000
25,000
310,000
-0-
(270,000)
(77,000)
36,000
(25,000)
1,000
Cash
Preliquidation balances
Sale of assets and distribution
of P215,000 loss
Cash contributed by Gail to
extent of positive net worth
Distribution of deficit of
insolvent partner:
20/60(P1,000)
40/60(P1,000)
Contribution by
remedy deficit
Dan
333
310,000
to
Capital Balances
Dan
Gail
40%
40%
Noncash
Assets
-0-
(270,000)
(76,667)
36,667
(1,000)
667
36,667
-0-
(36,667)
346,667
-0-
(270,000)
(76,667)
-0-
-0-
Payment to creditors
(270,000)
76,667
-0-
270,000
-0-
(76,667)
-0-
-0-
Payment to partner
(76,667)
-0-
-0-
Post-liquidation balances
-0-
76,667
-0-
0-
-0-
2.
CDG Partnership
Net Worth of Partners
December 10, 20X6
Carlos
Personal assets, excluding
partnership capital interests
Personal liabilities
Personal net worth, excluding
partnership capital interests, Dec. 1, 20X6
Contribution to partnership
Liquidating distribution from partnership
Net worth, December 10, 20X6
Dan
Gail
250,000
(230,000)
300,000
(240,000)
350,000
(325,000)
20,000
60,000
(36,667)
-023,333
25,000
(25,000)
-0-0-
76,667
96,667
This computation assumes that no other events occurred in the 10-day period that changed any of the
partners’ personal assets and personal liabilities. In practice, the accountant must be sure that a
computation of net worth is current and timely.
The table shows the effects of the transactions between the partnership and each partner. A
presumption of this table is that the personal creditors of Dan or Gail would not seek court action to
block the settlement transactions with the partnership. Upon winding up and liquidation, the partnership
does not have any priority to the partner’s personal assets. Thus, the personal creditors may seek to
block the transactions with the partnership in order to provide more resources from which they can be
paid. A partner who fails to remedy his or her deficit can be sued by the other partners who had to
make additional contributions or even by a partnership creditor if the failed partner is liable to the
partnership creditor. But those claims are not superior to the other claims to the partner’s individual
assets.
When accountants provide professional services to partnerships and to its partners, the accountant
should expect, at some time, legal suits involving the partnership and/or individual partners. A strong
and thorough understanding of the legal and accounting foundations of partnerships will be very
important to that accountant.
VI – Journal Entries and Distribution to Partners
The partners of Arthur, Baker & Casey Partnership decided to liquidate on April 1, 20x4. The balance
sheet of the partnership on April 1, 20x4, follows, with the income-sharing ratio indicated parenthetically:
Assets
Liabilities & Partners’ Capital
Cash . . . . . . . . . . . . . . . . . . . . . . P 30,000
Trade accounts payable. . . . P 65,000
Loans receivable from Arthur . .
20,000
Loans payable to Baker. . . . .
30,000
Other assets. . . . . . . . . . . . . . . .
250,000
Arthur, capital (2). . . . . . . . .
70,000
Baker, capital (5). . . . . . . . .
80,000
________
Casey, capital (3). . . . . . . . .
55,000
Total. . . . . . . . . . . . . . . . . . . . . .
P300,000
Total. . . . . . . . . . . . . . . . . . . .
P300,000
On April 1, 20x4, the disposal of other assets with a carrying amount of P100,000 realized P70,000, and all
available cash was distributed.
Required: Prepare journal entries for Arthur, Baker & Casey Partnership on April 1, 20x4, to record the
realization of the other assets and the distribution of available cash to creditors and to partners.
Answer – Problem VI
Cash
Arthur, Capital
Baker, Capital
Casey, Capital
Other Assets
70,000
6,000
15,000
9,000
Trade Accounts Payable
Cash
To record payment of liabilities.
65,000
Arthur, Capital
Loan Receivable from Arthur
To offset Arthur's loan account against Arthur's capital
account.
20,000
Arthur, Capital
Loan Payable to Baker
Casey, Capital
Cash
14,000
20,000
1,000
To record realization of assets at a loss of $30,000, divided
among Arthur, Baker, and Casey in 2:5:3 ratio, respectively.
100,000
To record payments to partners, computed as follows:
Capital account balances
Add: Loan payable to Baker
Less: Loan receivable from Arthur
Loss on realization of assets,
P30,000
Balances
Maximum potential additional loss
of P150,000 (P250,000 – P100,000 =
P150,000) divided in 2:5:3 ratio
Cash payments
Arthur
P70,000
Baker
P80,000
30,000
Casey
P55,000
(6,000)
P44,000
(15,000)
P95,000
(9,000)
P46,000
(30,000)
P14,000
(75,000)
P20,000
(45,000)
P 1,000
(20,000)
65,000
20,000
35,000