Partnership Liquidation
(Lump-Sum)
JENNIFER A. LAGDAAN
Partnership Liquidation (Lump-Sum)

Liquidation
 Partnership
dissolution calling for the winding
up of business affairs
Partnership Liquidation (Lump-Sum)

Liquidation
 Liquidated
completely
Partnership
terminated or ended
assets are sold, partnership
creditors are paid, and the remaining assets
are distributed as return of investment
Partnership Liquidation (Lump-Sum)

Liquidation
 Caused
by any of the following:
Accomplishment
Termination
of the purpose
of term or period
Bankruptcy
Mutual
agreement
Partnership Liquidation (Lump-Sum)

Liquidation
 Accounting
problems involved:
Determination
of profit or loss
Closing
Correction
Liquidation
of accounting errors
Partnership Liquidation (Lump-Sum)

Liquidation
 Marshaling
 Right
of assets
of offset
Partnership Liquidation (Lump-Sum)

Liquidation
 Marshaling
Order
of assets
of creditor’s rights against the
partnership’s assets and the personal assets
of the individual partners
Partnership Liquidation (Lump-Sum)

Liquidation
 Marshaling
of assets
Order
of claims against the partnership’s
assets:
1. Partnership creditors other than partners
2. Partner’s claims other than capital and profits
3. Partner’s claim to capital or profits
Partnership Liquidation (Lump-Sum)

Liquidation
 Marshaling
Order
of assets
of claims against the personal assets:
1. personal creditors
2. partnership creditors
Partnership Liquidation (Lump-Sum)

Liquidation
 Right
of offset
Offsetting
a deficit in a partner’s capital
against the loan payable to that partner
Partnership Liquidation (Lump-Sum)

Definition of Terms

Dissolution

Winding up

Termination

Liquidation

Realization

Gain on realization

Loss on realization

Capital deficiency

Deficient partner

Right of offset

Partner’s interest
Partnership Liquidation (Lump-Sum)

Types of Liquidation
 Lump-sum
liquidation or liquidation by totals
 Liquidation
liquidation
by installment or piece-meal
Partnership Liquidation (Lump-Sum)

Procedures in Lump-sum Liquidation
 Sale
of non-cash assets and distribution or
allocation of gain or loss
 Distribution
of cash to creditors and partners
Partnership Liquidation (Lump-Sum)

Cash can be distributed to partners before or after the elimination
of the deficiency.

If after…
1.
2.
Capital deficiency is eliminated by
a.
Making additional cash investment, if solvent
b.
Charging the deficiency as additional loss, if insolvent
Cash available for distribution is then paid to partners to apply first on loan
then on capital
* Final distribution of cash to partners is made based on partners’ capital
balances and not on any ratio
Partnership Liquidation (Lump-Sum)

Cash can be distributed to partners before or after the elimination
of the deficiency.

If cash is distributed to partners before eliminating the deficiency:
1. Cash available is paid based on accompanying schedule
2. Deficient partners may
(a) if solvent, make additional cash investment
(b) if insolvent, shall be absorbed by the other partners
Partnership Liquidation (Lump-Sum)

Statement of Liquidation
 Shows
the conversion of assets into cash, the
allocation of gain or loss on realization, and
the distribution of cash to creditors and
partners
Partnership Liquidation (Lump-Sum)

Illustrative Problem
The statement of financial position of the partnership of Enteng and
Estrel as of December 31, 2020 is shown below.
Enteng and estrel
Statement of Financial Position
December 31, 2020
Assets
Liabilities and Equity
Cash
P40,000
Liabilities
Other Assets
400,000
Enteng, Loan
36,000
Estrel, Loan
40,000
Enteng, Capital
80,000
Estrel, Capital
20,000
Total Assets
P440,000
Total Liabilities & Equity
P264,000
P440,000
Partnership Liquidation (Lump-Sum)

Illustrative Problem
The other assets were realized for P268,000, and cash was disbursed.
Division of profits and losses are:
Enteng
Estrel
Case 1
90%
10%
Case 2
70%
30%
Case 3
50%
50%
Instructions: Prepare the partnership liquidation statement and journal
entries to record the liquidation for each case.
Partnership Liquidation (Lump-Sum)

Illustrative Problem – Case 1
Enteng and Estrel
Statement of Liquidation
January 1 – 31, 2020
Balances before liquidation
Sale of other assets & distribution of loss
Cash
Other
Assets
P 40,000
P 400,000
268,000
Balances
P 308,000
Payment of liabilities
(264,000)
Balances
P 44,000
Offset of loan against debit balance in
the capital of Enteng
Balances
Liabilities
P 264,000
Loans_______
Estrel
Enteng
P 36,000
P 40,000
Capital______
Enteng (90%)
Estrel (10%)
P 80,000
(400,000)
(118,800)
P 264,000
Additional loss to Estrel for the deficiency of
Enteng
Balances
P 44,000
Payment to partners
( 44,000)
( 13,200)
P 36,000
P 40,000
(P 38,800)
P
6,800
P 36,000
P 40,000
(P 38,800)
P 6,800
(264,000)
( 36,000)
P 44,000
P 20,000
36,000
P 40,000
(P
2,800)
2,800
P 40,000
( 40,000)
P 6,800
( 2,800)
P 4,000
( 4,000)
Partnership Liquidation (Lump-Sum)

Illustrative Problem – Case 1
1.
Cash
268,000
Enteng, Capital
118,800
Estrel, Capital
Liabilities
Estrel, Capital
Enteng, Capital
264,000
5.
264,000
Estrel, Loan
Estrel, Capital
Cash
Enteng, Loan
Enteng, Capital
2,800
400,000
Cash
3.
2,800
13,200
Other Assets
2.
4.
36,000
36,000
40,000
4,000
44,000
Partnership Liquidation (Lump-Sum)

Illustrative Problem – Case 2 (70%, 30%)
Balances before liquidation
Sale of other assets and distribution of loss
Cash
Other
Assets
Liabilities
P 40,000
P 400,000
P 264,000
268,000
Balances
P 308,000
Payment of liabilities
(264,000)
Balances
P 44,000
Offset of loan against debit
balance in capital account
Balances
Payment to partners
Enteng
P 36,000 P 40,000
P 20,000
( 92,400)
( 39,600)
P 36,000 P 40,000
(P 12,400)
(P 19,600)
P 36,000 P 40,000
(P 12,400)
(P 19,600)
(400,000)
P 264,000
( 44,000)
Capital______
Estrel
P 80,000
( 264,000)
(12,400)
P 44,000
Loans_______
Estrel
Enteng
( 19,600)
P 23,600 P 20,400
( 23,600)
( 20,400)
12,400
19,600
Partnership Liquidation (Lump-Sum)

Illustrative Problem – Case 2 (70%, 30%)
1.
Cash
268,000
Enteng, Capital
92,400
Estrel, Capital
39,600
Other Assets
2.
Liabilities
Cash
3.
400,000
264,000
4.
264,000
Enteng, Loan
12,400
Estrel, Loan
19,600
Enteng, Capital
12,400
Estrel, Capital
19,600
Enteng, Loan
23,600
Estrel, Loan
20,400
Cash
44,000
Partnership Liquidation (Lump-Sum)

Illustrative Problem – Case 3 (50%, 50%)
Cash
Balances before liquidation
Sale of other assets & distribution of loss
P 40,000
268,000
Balances
P 308,000
Payment of liabilities
(264,000)
Balances
Offset of loan against debit balance
in the capital of Estrel
Balances
Other Assets
P 400,000
Liabilities
P 264,000
Enteng
P 36,000
Loans_______
Estrel
Enteng
P 40,000
(400,000)
P 264,000
P 80,000
Payment to partners
P 20,000
( 66,000)
( 66,000)
P 36,000
P 40,000
P 14,000
(P 46,000)
P 44,000
P 36,000
P 40,000
P 14,000
(P 46,000)
P 44,000
P 36,000
P 14,000
40,000
P ( 6,000)
( 264,000)
(40,000)
Additional loss to Enteng for the deficiency of Estrel
Balances
Capital______
Estrel
( 6,000)
P 44,000
( 44,000)
P 36,000
( 36,000)
P
8,000
( 8,000)
6,000
Partnership Liquidation (Lump-Sum)

Illustrative Problem – Case 3 (50%, 50%)
1.
Cash
268,000
Enteng, Capital
66,000
Estrel, Capital
66,000
Other Assets
2.
Liabilities
4,
Enteng, Capital
Estrel, Capital
264,000
5.
264,000
Enteng, Loan
Enteng, Capital
Cash
Estrel, Loan
Estrel, Capital
6,000
400,000
Cash
3.
6,000
40,000
40,000
36,000
8,000
44,000
Partnership Liquidation (Lump-Sum)

Illustrative Problem
Distribution of Cash to Partners
Esguerra, Esteban, Estrada and Eugenio are partners with capitals of
P11,000, P10,300, P13,700, and P9,000 respectively. Esguera has a loan
balance of P2,000. Profits are shared in the ratio of 4:3:2:1 by Esguerra,
Esteban, Estrada, and Eugenio respectively. Assets are sold, liabilities
are paid and cash of P12,000 remains.
Instructions: Show how the cash of P12,000 be distributed.
Partnership Liquidation (Lump-Sum)

Illustrative Problem
Distribution of Cash to Partners (4:3:2:1)
Esguerra
Capital balances before liquidation
P 11,000
Loan from partners
Esteban
P 13,700
P 9,000
P 13,700
P 9,000
2,000
P 13,000
P 10,300
Loss on realization (P46,000 – P12,000)
( 13,600)
( 10,200)
Balances
(P
P
Balances
600)
600
--------
Additional loss to partners
Distribution of cash to partners
Eugenio
P 10,300
Total partners’ interest
Additional loss to partners
Estrada
---------
100
(
300)
(P
( 6,800)
P 6,900
P 5,600
200)
( 100)
200)
P 6,700
P 5,500
200
(
(
---------
(
( 3,400)
133)
P 6,567
67)
P 5,433