St. Paul University Philippines
Tuguegarao City, Cagayan 3500
Financial Accounting and Reporting
Topic: Partnership Liquidation - Lump sum Liquidation
Learning Outcome: At the end of the discussion, the student must be able to:
1.
2.
3.
4.
5.
understand the concept of liquidation
differentiate lump sum method of liquidation from instalment method
illustrate the process in liquidation
journalize the different transactions undertaken in the lump sum liquidation.
prepare the statement of liquidation under lump sum method
Lesson Proper:
What is a Partnership Liquidation?
You have learned from the previous chapter that dissolution refers to the termination of the life
of an existing partnership and may be followed by:
a. Formation of a new partnership (Chapter 3)
b. Liquidation (Chapter 4)
Partnership liquidation is the process of closing the partnership and distributing its assets. Many
times partners choose to dissolve and liquidate their partnerships to start new ventures. Other
times, partnerships go bankrupt and are forced to liquidate in order to pay off their creditors.
Either way, the partnership liquidation process is similar.
The partnership liquidation process starts with the partnership selling off all of its noncash assets
at auction. Most of the time these assets will create a loss because they will be sold for less than
what the partnership purchased them for, but some assets, like building, can appreciate and be
sold at a gain. Both the losses and gains from these sales are allocated to the partners’ capital
accounts based on the partnership agreement or profit and loss ratio.
Next the partnership uses the cash it made from the sale of its assets and the remaining cash in its
bank account to pay off all remaining liabilities. Sometimes partnerships will have enough cash
to pay off their liabilities, but in bankruptcy situations partnerships most often don’t. It this
would be the case, then the partners who are personally solvent would contribute additional cash
to pay for the remaining liabilities after all assets were sold and all cash were already used to pay
for liabilities
If there any assets remaining after all the liabilities are paid off, these assets are distributed to the
partners based on their capital accounts. Once all the partnership has no remaining assets or
liabilities, the partners can close the bank accounts and file dissolution papers with the applicable
government agencies to legally dissolve the partnership.
Causes of Liquidation
1.
2.
3.
4.
The accomplishment of the purpose to which the partnership was organized.
The termination of the term/period covered in the partnership contract.
Bankruptcy of the partnership
By mutual agreements of the partners to terminate the partnership.
Accounting for Partnership liquidation
There are two types of liquidation – lump sum liquidation and instalment liquidation.
Lump sum liquidation
This is a type of liquidation whereby the distribution of cash to the partners is done only after all the noncash assets have been realized, the total amount of gain or loss on realization is known, and all liabilities
have been paid. From the word lump sum, it means “as one”.
Instalment Liquidation or Piecemeal Liquidation
This involves the selling of some assets, paying the liabilities of the partnership, dividing the available
cash to the partners, selling additional assets and making further payments to partners. The process of
selling non cash assets, payment to creditors and partners are done in piece meal or instalment basis.
Lump sum Liquidation
Accounting procedures in lump sum liquidation
1. Realization of non cash assets – the sale could be at gain or loss. The gain or loss would be
distributed to the partners according to their capital ratio.
2. Payment to creditors
3. Distribution of cash to partners.
Example:
The partners of DOREMI decided to terminate their partnership. The following are the ledger balances
of accounts DOREMI prior to the liquidation process:
Cash
Accounts receivable
Inventories
Land
Building
Furniture
P15,000
20,000
65,000
50,000
80,000
40,000
Accounts payable- Domingo
Liabilities
Domingo, Capital (30%)
Remy, Capital(40%)
Mila, Capital(30%)
P5,000
75,000
40,000
80,000
70,000
Required: Prepare the statement of liquidation and the journal entries for each of the following
assumption.
1.
2.
3.
4.
5.
6.
All non cash assets are sold at book value.
All non cash assets were sold at P355,000.
All non cash assets are sold at P205,000.
All non cash assets are sold at P110,000.
Non cash assets were sold at P80,000 and Domingo was solvent
Non cash assets were sold at P80,000 and Domingo was insolvent
Note: Solvent means the person or entity have enough assets to cover for his liabilities
Example: Below is the personal assets and liabilities of Domingo
Assets
Liabilities
Equity
Case A
P1,000,000
600,000
P400,000
=Solvent
Case B
1,000,000
1,200,000
P(200,000)
= Insolvent
Solution
1. All non cash assets are sold at book value.
Doremi Partnership
Statement of Liquidation
May 30, 2019
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Payment of Loans to
Domingo
Balance
Distribution of cash to
partners
Balance
Non Cash
Assets*
(NCA)
255,000
(255,000)
0
Loan
Payable Domingo
5,000
5,000
0
5,000
(5,000)
190,000
(190,000)
0
0
0
0
0
15,000
255,000
270,000
(75,000)
195,000
(5,000)
Liabilities
75,000
75,000
(75,000)
0
0
Domingo,
Capital
30%
40,000
40,000
Remy,
Capital
40%
80,000
80,000
Mila,
Capital
30%
70,000
70,000
40,000
80,000
70,000
40,000
(40,000)
80,000
(80,000)
70,000
(70,000)
0
0
0
Notes:
1. Book value of NCA = all assets except cash (20,000 +65,000+50,000+80,000+40,000)
= P255,000
2. The order priority for distributing cash is
1. To creditors
2. Loans payable to partners
3. To partner
The outside creditors is to be prioritized first in the distribution of cash to be followed by loans payable
to partners and the final distribution would be made to partners as a return for their capital.
Journal Entries
1.
To sale of non cash assets
2.
To record sale payment of liabilities
3.
To record payment of loan payable to Domingo
4.
To record distribution of cash to partners
Solution
2. All non cash assets were sold at P305,000.
Doremi Partnership
Statement of Liquidation
May 30, 2019
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Payment of Loans to
Domingo
Balance
Distribution of cash to
partners
Balance
Non Cash
Assets*
(NCA)
255,000
(255,000)
0
Loan
Payable Domingo
5,000
Liabilities
5,000
0
5,000
(5,000)
75,000
(75,000)
0
240,000
(240,000)
0
0
0
0
0
15,000
305,000
320,000
(75,000)
245,000
(5,000)
Domingo,
Capital
30%
40,000
15,000
55,000
Remy,
Capital
40%
80,000
20,000
100,000
Mila,
Capital
30%
70,000
15,000
85,000
55,000
100,000
85,000
0
55,000
(55,000)
100,000
(100,000)
85,000
(85,000)
0
0
0
0
75,000
Notes:
1. Gain or Loss = Selling Price – book value of NCA
= 355,000 - 255,000
= P100,0000
2. The gain/loss would be distributed to the partners according to their profit and loss ratio (P& L
ratio)
Domingo, Capital = 100,000 x 30%
= P30,000
Remy, Capital = 100,000 x 40%
= P40,000
Mila, Capital = 100,000 x 30%
= P30,000
3. In the final distribution the remaining cash balance must be equal to the remaining capital balance
of the partners
P290,000 = 70,000 +120,000+100,000
P290,000 = P290,000
Journal Entries
1.
To record sale of non cash assets
2.
3.
To record sale payment of liabilities
4.
To record payment of loan payable to Domingo
5.
To record distribution of cash to partners
Solution
.
3. All non cash assets are sold at P205,000.
Doremi Partnership
Statement of Liquidation
May 30, 2019
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Payment of Loans to
Domingo
Balance
Distribution of cash to
partners
Balance
Non Cash
Assets*
(NCA)
255,000
(255,000)
0
Loan
Payable Domingo
5,000
Liabilities
5,000
0
5,000
(5,000)
75,000
(75,000)
0
140,000
(140,000)
0
0
0
0
0
15,000
205,000
220,000
(75,000)
145,000
(5,000)
Notes:
1. Gain or Loss = Selling Price – book value of NCA
= 205,000 - 255,000
75,000
0
Domingo,
Capital
30%
40,000
(15,000)
25,000
Remy,
Capital
40%
80,000
(20,000)
60,000
Mila,
Capital
30%
70,000
(15,000)
55,000
25,000
60,000
55,000
25,000
(25,000)
60,000
(60,000)
55,000
(55,000)
0
0
0
= (P50,0000)
2. The gain/loss would be distributed to the partners according to their profit and loss ratio (P& L
ratio)
Domingo, Capital = 50,000 x 30%
= P15,000
Remy, Capital = 50,000 x 40%
= P20,000
Mila, Capital = 50,000 x 30%
= P15,000
3. In the final distribution the remaining cash balance must be equal to the remaining capital balance
of the partners
P140,000 = 25,000 +60,000+55,000
P140,000 = P140,000
Journal Entries
1. Cash
Domingo, Capital
Remy, Capital
Mila, Capital
Non cash assets
To record sale of non cash assets
2. Liabilities
Cash
P205,000
15,000
20,000
20,000
P255,000
P75,000
P 75,000
To record sale payment of liabilities
3. Loan Payable - Domingo
Cash
P5,000
P 5,000
To record payment of loan payable to Domingo
4. Domingo, Capital
Remy, Capital
Mila, Capital
Cash
To record distribution of cash to partners
P25,000
60,000
55,000
P140,000
Solution
.
4. All non cash assets are sold at P110,000 and Domingo is solvent
Doremi Partnership
Statement of Liquidation
May 30, 2019
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Right to off set
Balance
Distribution of cash to
partners
Balance
15,000
110,000
125,000
(75,000)
50,000
Non Cash
Assets*
(NCA)
255,000
(255,000)
0
Loan
Payable Domingo
5,000
Liabilities
5,000
0
75,000
(75,000)
0
50,000
(50,000)
0
5,000
(5,000)
0
0
0
0
75,000
0
0
Domingo,
Capital
30%
40,000
(43,500)
(3,500)
Remy,
Capital
40%
80,000
(58,000)
22,000
Mila,
Capital
30%
70,000
(43,500)
26,500
(3,500)
5,000
1,500
(1,500)
22,000
26,500
22,000
(22,000)
26,500
(26,500)
0
0
0
Notes:
1. Loss = 110,000 - 255,000
= 145,000 - to be distributed using P& L ratio
2. Right to offset happens when a partner would have a capital deficiency as a result in having a loss
on the realization of non cash assets and the partnership have a loan to the deficient partner. The
loans payable would be offset to the capital deficiency.
Journal Entries
1. Cash
Domingo, Capital
Remy, Capital
Mila, Capital
Non cash assets
To record sale of non cash assets
2. Liabilities
Cash
P110,000
43,500
58,000
43,500
P255,000
P75,000
P 75,000
To record sale payment of liabilities
3. Loan Payable - Domingo
Domingo, Capital
P5,000
P 5,000
To record the offset of loans payable to Domingo
4. Domingo, Capital
Remy, Capital
Mila, Capital
Cash
To record distribution of cash to partners
P1,500
22,000
26,500
P140,000
5
All non cash assets are sold at 80,000 and Domingo is solvent
Doremi Partnership
Statement of Liquidation
May 30, 2019
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Right to off set
Balance
Additional cash investment
Balance
Distribution of cash to
partners
Balance
15,000
80,000
95,000
(75,000)
20,000
Non Cash
Assets*
(NCA)
255,000
(255,000)
0
Loan
Payable Domingo
5,000
Liabilities
5,000
75,000
(75,000)
0
75,000
Domingo,
Capital
30%
40,000
(52,500)
(12,500)
Remy,
Capital
40%
80,000
(70,000)
10,000
Mila,
Capital
30%
70,000
(52,500)
17,500
10,000
17,500
10,000
17,500
10,000
(10,000)
17,500
(17,500)
0
0
20,000
7,500
27,500
(27,500)
0
5,000
(5,000)
0
0
0
0
(12,500)
5,000
(7,500)
7,500
0
0
0
0
0
0
0
Domingo Personal Assets and labilities
A
Assets
Liabilities
Additional Cash
Investment
200,000
150,000
7,500
B
200,000
220,000
0
C
200,000
195,000
5,000
Notes:
1. Since Domingo has a capital deficiency than he could offset the loans payable of the partnership
to him. If there is still a capital deficiency after the offset, than he is to contribute additional cash
to eliminate his capital deficiency if he is solvent.
Journal Entries
1. Cash
Domingo, Capital
Remy, Capital
Mila, Capital
Non cash assets
To record sale of non cash assets
P80,000
52,500
70,000
52,500
P255,000
2. Liabilities
Cash
P75,000
P 75,000
To record sale payment of liabilities
3. Loan Payable - Domingo
Domingo, Capital
P5,000
P 5,000
To record the offset of loans payable to Domingo
4. Cash
P7,500
Domingo, Capital
P 7,500
To record additional cash investment by Domingo to eliminate his capital deficiency
5. Remy, Capital
Mila, Capital
Cash
To record distribution of cash to partners
10,000
17,500
P27,500
6. All non cash assets are sold at 80,000 and Domingo is insolvent
Doremi Partnership
Statement of Liquidation
May 30, 2019
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Right to off set
Balance
Absorption of the deficiency
by the partners
Balance
Distribution of cash to
partners
Balance
15,000
80,000
95,000
(75,000)
20,000
20,000
Non Cash
Assets*
(NCA)
255,000
(255,000)
0
0
Loan
Payable Domingo
5,000
Liabilities
5,000
75,000
(75,000)
0
5,000
(5,000)
0
75,000
0
20,000
(20,000)
0
0
0
0
Domingo,
Capital
30%
40,000
(52,500)
(12,500)
Remy,
Capital
40%
80,000
(70,000)
10,000
Mila,
Capital
30%
70,000
(52,500)
17,500
(12,500)
5,000
(7,500)
7500
10,000
17,500
10,000
(4,286)
17,500
(3,214)
0
5,714
(5,714)
14,286
(14,286)
0
0
0
Notes:
1. Since Domingo has a capital deficiency than he could offset the loans payable of the partnership
to him. If there is still a capital deficiency after the offset, the other partners is to absorb the
deficiency if he is insolvent.
2. The deficiency is to be distributed to them using their P & L ratio
P7,500 x 4/7 = P4,286
P 7,500 x 3/7 = P2,314
2. to eliminate his capital deficiency if he is solvent.
Journal Entries
1. Cash
Domingo, Capital
P80,000
52,500
Remy, Capital
Mila, Capital
Non cash assets
To record sale of non cash assets
70,000
52,500
P255,000
2. Liabilities
Cash
P75,000
P 75,000
To record sale payment of liabilities
3. Loan Payable - Domingo
Domingo, Capital
P5,000
P 5,000
To record the offset of loans payable to Domingo
4. Remy, Capital
Mila, Capital
Domingo, Capital
P5,000
2,314
P 7,500
To record the absorption of capital deficiency of Domingo by the two partners
5. Remy, Capital
Mila, Capital
Cash
To record distribution of cash to partners
5,714
14,286
P20,000
Activities: The term of existence of ORR Partnership has come to an end and they decided to
terminate the partnership. Below is the balance sheet prior to the liquidation.
Cash
P60, 000
Accounts payable- Reybert
P10,000
Accounts receivable
Inventories
Land
Building
Furniture
50,000
60,000
100,000
200,000
20,000
Liabilities
Orlando, Capital (50%)
Rachelle, Capital(30%)
Reybert, Capital(20%)
100,000
200,000
150,000
30,000
Required: Prepare the statement of liquidation and the journal entries for each of the following
assumption.
1.
2.
3.
4.
5.
6.
All non cash assets are sold at book value.
All non cash assets were sold at P500,000.
All non cash assets are sold at P350,000.
All non cash assets are sold at P255,000.
Non cash assets were sold at P190,000 and Reybert was solvent
Non cash assets were sold at P190,000 and Reybert was insolvent
Solution
1. All non cash assets are sold at book value.
Doremi Partnership
Statement of Liquidation
May 30, 2019
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Payment of Loans to
Domingo
Balance
Distribution of cash to
partners
Balance
2
Non Cash
Assets*
(NCA)
430,000
(430,000)
0
Loan
Payable Reybert
10,000
10,000
0
10,000
(10,000)
380,000
380,000
0
0
0
0
0
60,000
430,000
490,000
(100,000)
390,000
(10,000)
Liabilities
Orlando,
Capital
50%
200,000
200,000
Rachel,
Capital
30%
150,000
150,000
Reybert,
Capital
20%
30,000
30,000
200,000
150,000
30,000
200,000
(200,000)
150,000
(150,000)
30,000
(30,000)
0
0
0
0
Liabilities
Orlando,
Capital
50%
200,000
35,000235,000
Rachel,
Capital
30%
150,000
21,000
171,000
Reybert,
Capital
20%
30,000
14,000
44,000
235,000
171,000
44,000
235,000
171,000
44,000
100,000
100,000
(100,000)
0
All non cash assets were sold at P500,000.
May 30, 2019
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Payment of Loans to
Domingo
Balance
60,000
500,000
560,000
(100,000)
460,000
(10,000)
450,000
Non Cash
Assets*
(NCA)
430,000
(430,000)
0
Loan
Payable Reybert
10,000
10,000
0
10,000
(10,000)
0
0
100,000
100,000
(100,000)
0
Distribution of cash to
partners
Balance
450,000
0
0
(235,000)
(171,000)
(44,000)
0
0
0
0
0
Non Cash
Assets*
(NCA)
430,000
(430,000)
0
Loan
Payable Reybert
10,000
10,000
Liabilities
Orlando,
Capital
50%
200,000
(40,000)
160,000
Rachel,
Capital
30%
150,000
(24,000)
126,000
Reybert,
Capital
20%
30,000
(16,000)
14,000
0
10,000
(10,000)
160,000
126,000
14,000
300,000
450,000
0
0
160,000
(160,000)
126,000
(126,000)
14,000
(14,000)
0
0
0
0
0
0
0
Non Cash
Assets*
(NCA)
430,000
(430,000)
0
Loan
Payable Reybert
10,000
10,000
Liabilities
Orlando,
Capital
50%
200,000
(87,500)
112,500
Rachel,
Capital
30%
150,000
(52,500)
97,500
Reybert,
Capital
20%
30,000
(35,000)
(5,000)
0
10,000
112,500
97,500
215,000
215,000
0
0
112,500
(112,000)
97,500
(97,000)
(5,000)
10,000
5,000
(14,500)
0
0
0
0
0
0
Orlando,
Capital
50%
200,000
(120,000)
80,000
Rachel,
Capital
30%
150,000
(72,000)
78,000
Reybert,
Capital
20%
30,000
(48,000)
(18,000)
80, 000
78,500
80,000
(5,000)
78,000
(3,000)
(18,000)
10,000
(8,000)
8,000
75,000
75,000
0
3. All non cash assets were sold at P350,000.
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Payment of Loans to
Domingo
Balance
Distribution of cash to
partners
Balance
60,000
350,000
410,000
(100,000)
310,000
(10,000)
100,000
100,000
(100,000)
0
4. All non cash assets are sold at P255,000
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Right to off set
Balance
Distribution of cash to
partners
Balance
6
60,000
255,000
315,000
(100,000)
215,000
100,000
100,000
(100,000)
0
0
Non cash assets were sold at P190,000 and Reybert was insolvent
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Right to off set
Balance
Absorption of the deficiency
by the partners
Balance
60,000
255,000
315,000
(100,000)
215,000
20,000
20,000
Non Cash
Assets*
(NCA)
430,000
(430,000)
0
Loan
Payable Reybert
10,000
10,000
0
10,000
(5,000)
0
0
Liabilities
100,000
100,000
(100,000)
0
0
Distribution of cash to
partners
Balance
(20,000)
0
0
0
0
(75,000)
(75,000)
0
0
0
0
Orlando,
Capital
50%
200,000
(120,000)
80,000
Rachel,
Capital
30%
150,000
(72,000)
78,000
Reybert,
Capital
20%
30,000
(48,000)
(18,000)
80, 000
78,500
80,000
(5,000)
78,000
(3,000)
(18,000)
10,000
(8,000)
8,000
75,000
(75,000)
75,000
(75,000)
0
0
0
0
0
1. Non cash assets were sold at P190,000 and Reybert was solvent
Cash
Balances
Realization/Sale of NCA
Balance
Payment to creditors
Balance
Right to off set
Balance
Absorption of the deficiency
by the partners
Balance
Distribution of cash to
partners
Balance
60,000
255,000
315,000
(100,000)
215,000
20,000
Non Cash
Assets*
(NCA)
430,000
(430,000)
0
Loan
Payable Reybert
10,000
10,000
0
10,000
(5,000)
0
0
Liabilities
100,000
100,000
(100,000)
0
0
20,000
(20,000)
0
0
0
0