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Partnership Liquidation Statement Guide

1. The Leisure Resort partnership decided to dissolve. Its assets and capital balances are provided. Other assets were sold for $90,000 less expenses, and half of liabilities were paid in June. 2. In July, half of the remaining other assets were sold at a loss, expenses were paid, and remaining liabilities and partners were paid with available cash except $2,000 reserved. 3. In August, the remaining other assets were sold at a gain, expenses were paid, and a final distribution was made to partners.

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584 views5 pages

Partnership Liquidation Statement Guide

1. The Leisure Resort partnership decided to dissolve. Its assets and capital balances are provided. Other assets were sold for $90,000 less expenses, and half of liabilities were paid in June. 2. In July, half of the remaining other assets were sold at a loss, expenses were paid, and remaining liabilities and partners were paid with available cash except $2,000 reserved. 3. In August, the remaining other assets were sold at a gain, expenses were paid, and a final distribution was made to partners.

Uploaded by

Christian Martin
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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  • Exercise 1: Liquidation Evaluation
  • Exercise 2: SOL Resort Liquidation
  • Exercise 3: Leisure Resort Liquidation
  • Exercise 4: Liquidation Statement Preparation
  • Exercise 5: Priority Program

CFAS – Review Problem

EVALUATION: LIQUIDATION

1. Cindy, Rolly and Willy are partners who share profits and losses in the ratio of 5:3:2,
respectively. Just before the partners decided to liquidate, its financial position is as follows:
#9
Cash P 300,000 Acc. Pay. P 210,000
Other Assets (net) 800,000 Cindy, Loan 50,000
Cindy, Cap. 150,000
Rolly, Cap. 250,000
________ Willy, Cap. 440,000
P1,100,000 P1,100,000

Other Assets were sold for P440,000.


Direction:
a. Prepare a statement of partnership liquidation with journal entries.
b. Prepare a statement of partnership liquidation supported by a schedule of safe payments
and entries assuming deficient partner makes investment which is given as a second cash
distribution.
1. Cash 440,000
Cindy Cap. 180,000
Rolly Cap 108,000
Willy Cap 72,000
Other Assets 800,000

2. Acc. Pay. 210,000


Cash 210,000

3. Loans due to Cindy 30,000


Cindy, Cap. 30,000

4. Loans due to Cindy 20,000


Cash 20,000

5. Rolly, Cap. 142,000


Willy, Cap 368,000
Cash 510,000

Cindy, Rolly and Willy PARTNERSHIP


Statement of Partnership Liquidation
March 1, 2020

Cash Other Accounts Loan due Capital Balances


Assets Payable To Cindy Cindy(5) Rolly(3) Willy(2)
Balances before liq. P300,000 P800,000 P210,000 P50,000 P150,000 P250,000 P440,000
1. OA sold at a loss 440,000 (800,000) (180,000) (108,000) (72,000)
Balances after sale 740,000 - 210,000 50,000 (30,000) 142,000 368,000
2. Liabilities paid ( 210,000) - (210,000)________________________________
Balances after payment 530,000 - - 50,000 (30,000) 142,000 368,000
3. Right of Offset (30,000) 30,000_________________
Bal. after right of offset 530,000 - - 20,000 - 142,000 368,000
4. Payment of loan (20,000) (20,000) -__________________
Bal after deficiency 510,000 - - - - 142,000 368,000
5. Partners paid (510,000) - - - - (142,000) (368,000)
0 0 0 0 0 0 0

2. SOL Resort is a partnership wherein the partners decided to liquidate in March 1, 2020.
#7
Assets Liabilities & Owner’s Equity
Cash P 10,000 Liabilities P 90,000
Other Assets 190,000 Loan due to Opal 10,000
Sidro, Cap. 55,000
Opal, Cap. 25,000
__ Lorie, Cap. 20,000
Total P200,000 Total P200,000

P/L is distributed equally. The other assets were sold for P100,000. Their personal assets and
liabilities are as follows: Sidro- P75,000 (50,000); Opal-P80,000 (120,000); Lorie-55,000 (50,000)

Direction: Prepare a St. of Part. Liq. with supporting journal entries. Deficient partners pay
depending on personal financial status.

SOL PARTNERSHIP
Statement of Partnership Liquidation
March 1, 2020

Cash Other Accounts Loan due Capital Balances


Assets Payable To Opal Sidro Opal Lorie

Balances before liq. P 10,000 P190,000 P 90,000 P10,000 P55,000 P25,000 P20,000
1. OA sold at a loss 100,000 (190,000) (30,000) (30,000) (30,000)
Balances after sale 110,000 - 90,000 10,000 25,000 (5,000) (10,000)
2. Liabilities paid ( 90,000) - (90,000)________________________________
Balances after payment 20,000 - - 10,000 25,000 (5,000) (10,000)
3. Right of Offset ( 5,000) ________5,000_________
Bal. after right of offset 20,000 - - 5,000 25,000 - (10,000)
4. Addl. Inv. by Lorrie 5,000 5,000
Bal. after addl. Inv. 25,000 - - 5,000 25,000 - (5,000)
5. Abs. by Sidro ( 5,000) 5,000
Bal. after abs. 25,000 - - 5,000 20,000 - -
[Link] of loan (5,000) (5,000) ______________________
Bal after pay. Of loan 20,000 - - - 20,000 - -
5. Partners paid ( 20,000) - - - (20,000)_______________
0 0 0 0 0 0 0

3. The Leisure Resort, a health spa, decided to dissolve the partnership when its financial
position showed the ffg: #14

Debit Credit

Cash P 40,000
Other Assets 210,000
Acc. Pay. P 60,000
Kuok, Cap. 48,000
Tong, Cap. 72,000
Lau, Cap. 70,000
P250,000 P250,000

P/L sharing ratio is 5:3:2 respectively. The partnership will be liquidated over an estimated
period of three months. As the assets are realized and liabilities liquidated, distribution will be
made to the partners as soon as there is cash available.

Kuok was the only solvent partner. The ffg. are the activities for the month of June.

Sale of NCA having a book value of P120,000 for P 90,000 less P2,000 liquidation expenses. ½ of
the liabilities were paid. Cash withheld for future liquidation proceedings was estimated at
P3,000.

Direction: a. Prepare a Statement of Liquidation.


b. Support with a schedule of cash distribution considering:
1. Partners’ interest (capital plus loan balance)
2. Computation of restricted interest for possible loss if the remaining NCA will
not be sold and cash reserved for future liquidation expenses.
3. Computation of restricted interest for possible loss representing partners’
capital deficiency, if any, deducted from the balances of the partners’ interests
4. Free interest which must be equal to the cash available for distribution.

4. To continue with #3, the ffg. Transactions took place for July and August:
July – Sale of half of the remaining other assets at a loss of P8,000.
Liquidation exp. Were paid, P2,000.
Remaining liabilities were paid.
Partners were paid with the cash available except for P2,000 reserved for future liq. exp.

Aug. - Sale of the remaining other assets at a gain of P3,000.


Liq. Exp. Paid amounted to P3,000.
Final distribution was made to the partners.

Direction: Using the June 30 balances of the St. of Liq. in #3, prepare a St of Liq. for July and
August. Support with a Schedule
5. Using the same information:
a. prepare a priority program
b. prepare 2 schedules of safe payment for the months of June and July using the
priority program assuming that the cash available for distribution are P65,000 and P36,000,
respectively.

3 & 4. Statement of Liquidation

Cash Assets Acct Pay Kuok -5 Tong-3 Lau-2


June balances before liq. 40,000 210,000 60,000 48,000 72,000 70,000
Sale at a loss 90,000 (120,000) _______ (15,000) (9,000) (6,000)
130,000 90,000 60,000 33,000 63,000 64,000
Liquidation expenses paid (2,000) _______ _______ (1,000) (600) (400)
128,000 90,000 60,000 32,000 62,400 63,600
Partial payment of liab (30,000) ________ (30,000) ______ ________ _______
98,000 90,000 30,000 32,000 62,400 63,600
Cash Dist See Sch 1 (65,000) ________ _______ _______ (25,800) (39,200)
33,000 90,000 30,000 32,000 36,600 24,400
July sale at a loss 37,000 (45,000) _______ (4,000) (2,400) (1,600)
70,000 45,000 30,000 28,000 34,200 22,800
Liquidation Expenses paid (2,000) (1,000) (600) (400)
Payment of liabilities (30,000) ________ (30,000) _______ _______ _______
38,000 45,000 0 27,000 33,600 22,400
Cash dist see sch 2 (36,000) ________ _______ (3,500) (19,500) (13,000)
2,000 45,000 0 23,500 14,100 9,400
Aug sale at a gain 48,000 (45,000) _______ 1,500 900 600
50,000 0 0 25,000 15,000 10,000
Final cash distribution (50,000) 0 0 (25,000) (15,000) (10,000)

Alternative Schedules:
Schedule 1) Cash balance P40,000
Add Proceeds net of liq exp 88,000
Total 128,000
Less: Restricted interest 63,000
Cash available to partners P65,000
Schedule 1) K T L
a. Capital balances 32,000 62,400 63,600
Possible loss if non-
cash assets of P90,000
will not be sold + 3,000 (46,500) (27,900) (18,600)
Balances P(14,500) P34,500 P45,000
Possible loss of 14,500 14,500 (8,700) ( 5,800)
Free Interest P25,800 P39,200

Schedule 2)
K T L
Balances 27,000 33,600 22,400
Possible loss of 47,000 (23,500) (14,100) (9,400)
Free Interest P 3,500 P 19,500 P 13,000

5. Priority Program Loss Absorption Ability Payment Plan


K T L K T L
Partners’ Interest 48,000 72,000 70,000
Profit and Loss Ratio 50% 30% 20%
LAB 96,000 240,000 350,000
Priority 1 (110,000) 22,000
LAB balances 96,000 240,000 240,000
Priority 2 (144,000) (144,000) 43,200 28,800
Balances 96,000 96,000 96,000 43,200 50,800

94,000
Further cash distribution to all based on
P and L ratio.

Cash distribution for June based on the priority program:


Ava. Cash K T L
A. Priority 1 22,000 22,000
Priority 2 43,000 25,800 17,200
Total 65,000 25,800 39,200
94,000 – 65,000 = 29,000
B. Available Cash 36,000 Priority 2 17,400 11,600
(29,000) Priority 3
7,000 3,500 2,100 1,400
3,500 19,500 13,000

Common questions

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A right of offset allows a partner's loan payable to offset against their capital balance, reducing both the partner's loan payable and their capital account simultaneously. This action facilitates an effective reduction in liabilities without requiring immediate cash outflow and adjusts the net capital position of the partner. For example, in the SOL Resort liquidation, Opal's loan was offset by P5,000 against her capital, resulting in a reduction of liabilities .

The personal assets and liabilities of partners influence the liquidation process significantly when partners have deficient capital accounts. Solvent partners may need to contribute additional assets to cover deficiencies. Meanwhile, insolvent partners may limit recovery from personal sources. For instance, Opal's personal insolvency affected contribution abilities, requiring adjustments in the liquidation balance to account for her negative capital standing .

Realizing non-cash assets during liquidation poses challenges such as valuation uncertainty, market illiquidity, and significant sale losses. These issues can hinder partners' capital recovery and complicate creditor settlements. Methods to mitigate include ensuring transparent asset appraisals, strategic marketing for better sale outcomes, and negotiated absorption of losses through pre-arranged partner agreements. In the Leisure Resort, non-cash asset sales at a loss required preemptive financial adjustments and reallocation strategies following set priorities and balancing interests .

Withholding cash for future proceedings is crucial to cover unforeseen liquidation expenses, potential creditor claims, or to manage legal obligations, ensuring the partnership can meet its quietus commitments. The amount withheld is often estimated based on projected expenses or a rule-of-thumb percentage of remaining liabilities. In Leisure Resort, P3,000 was reserved for future proceedings, reflecting cautious financial planning during liquidation .

Equitable liquidation settlements can be managed by employing methods such as preparing schedules of cash distribution, considering partners' capital interests and potential losses, and prioritizing based on profit-sharing ratios. Furthermore, utilizing priority programs to absorb losses according to each partner's loss absorption ability (LAB) ensures fairness. In the Leisure Resort's liquidation, a priority program outlined the sequence of distributions based on LAB to ensure fair settlements .

After the sale of non-cash assets at a loss, partner capital balances are adjusted according to their loss absorption abilities and profit-sharing ratios. For instance, in the Leisure Resort liquidation, a non-cash asset sale resulted in a decrease of Cap. balances by P15,000 for Kuok, P9,000 for Tong, and P6,000 for Lau, corresponding to their P/L sharing ratios of 5:3:2 .

A schedule of safe payments provides a framework to ensure creditors are satisfied before distributing cash to partners, maintaining equitable distribution according to partners' capital priorities. It accounts for potential future losses and reserves cash for outstanding liabilities and expenses. In SOL Resort's liquidation, the schedule defined distribution after liabilities and potential losses were covered, protecting creditor interests and allowing fair partner settlements .

Accounting entries during partnership liquidation include recording the sale of non-cash assets, payment of liabilities, loan offsets, and cash distributions to partners. For instance, when other assets were sold, the journal entry debits cash and credits other assets with the net amount received. Liabilities paid adjust the accounts payable by debiting the account and crediting cash. These entries holistically update financial statements to reflect the liquidation activities .

A priority program dictates the sequence of cash distributions based on loss absorption abilities (LAB) and pre-agreed profit and loss sharing ratios, particularly useful when partners face financial distress. It prioritizes creditor payment, adjusts for absorption of hypothetical losses, and sectionally allocates remaining cash, thereby ensuring orderly and equitable liquidation. This was apparent in the Leisure Resort liquidation process that utilized LAB for distribution priorities based on 5:3:2 sharing ratios .

Partners' P/L sharing ratios directly influence the allocation of liquidation gains or losses to their capital accounts, maintaining equity in the dissolution process. Losses reduce each partner's capital based on their share ratio, as seen with other assets sales in the Leisure Resort where losses were apportioned to Kuok, Tong, and Lau according to their respective ratio of 5:3:2 . This affects the final cash available to each partner and the requirement for additional investment or offsetting amounts.

CFAS – Review Problem EVALUATION: LIQUIDATION 1. Cindy, Rolly and Willy are partners who share profits and losses in th
Balances before liq. P300,000 P800,000 P210,000 P50,000 P150,000 P250,000 P440,000 1. OA sold at a loss
Bal. after addl. Inv. 25,000 - - 5,000 25,000 - (
July – Sale of half of the remaining other assets at a loss of P8,000. Liquidation exp. Were paid, P2,000. Remaining
Schedule 1) K T L a. Capital balances 32,000 62,400 63,600 Possible loss if non-

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