• PARTNERSHIP LIQUIDATION

• A PARTNERSHIP IS LIQUIDATED WHEN BUSINESS OPERATIONS ARE COMPLETELY TERMINATED OR ENDED. – Assets are sold– Creditors are paid– Remaining assets are distributed to the partners

CAUSES OF LIQUIDATION

• Accomplishment of the purpose for which the partnership was organized

• Termination of the term period covered by the partnership contract

• Bankruptcy of the firm• Mutual agreement among the partners

ACCOUNTING PROBLEMS

• Determination of profit or loss from the beginning of the accounting period to the date of liquidation and he distribution of the profit and loss

• Closing of the partnership books• Correction of prior period error

Overstatement/understatement of inventories

ACCOUNTING PROBLEMS

Excessive depreciation chargesInadequate provision for unollectible

accounts•Liquidation of the business

MARSHALING OF ASSETS

• EXTERNAL CREDITORS• INTERNAL CREDITORS• PARTNERS BASED ON THE CREDIT BALANCES

OF THEIR CAPITAL ACCOUNTS

LIQUIDATION PROCEDURES

1. Realization of assets – converting all assets into cashWhen assets are sold at less than book value, a loss is incurred.

Cash xxx Loss on realization xxx

Assets xxx

When assets are sold at more than book value, a gain is realized.

Cash xxx Gain on realization xxx

Assets xxx

• The gains or the losses are distributed among the partners according to profit and loss ratio.A, capital xxx

• B, capital xxx– Loss on realization xxx

Gain on realization xxxA, capital xxxB, capital xxx

• If the distribution of losses result to a partner’s debit capital balance, he is called a deficientdeficient partner .

• A deficient partner must cover his deficiency out of his personal assets.

• If a deficient partner cannot cover his deficiency out of his personal assets, he is considered an insolvent partner

• Insolvency = Assets<Liabilities• Solvency = Assets>Liabilities• When a partner is insolvent, the other

partners will have to absorb the insolvency

2. Payment to external creditorsLiabilities xxx

Cash xxx3. Distribution of remaining cash to partners A, capital xxx

B, capital xxxCash xxx

OTHER AMANDA ARIEL ARIANNECASH ASSETS LIABILITIES CAPITAL CAPITAL CAPITAL

25,000 180,000 52,000 40,000 65,000 48,000 Realization of assets 250,000 (180,000) 28,000 28,000 14,000

275,000 - 52,000 68,000 93,000 62,000

OTHER AMANDA ARIEL ARIANNECASH ASSETS LIABILITIES CAPITAL CAPITAL CAPITAL

25,000 180,000 52,000 40,000 65,000 48,000 Realization of assets 250,000 (180,000) 28,000 28,000 14,000

275,000 - 52,000 68,000 93,000 62,000 Payment to creditors (52,000) (52,000)

223,000 - - 68,000 93,000 62,000

OTHER AMANDA ARIEL ARIANNECASH ASSETS LIABILITIES CAPITAL CAPITAL CAPITAL

25,000 180,000 52,000 40,000 65,000 48,000 Realization of assets 250,000 (180,000) 28,000 28,000 14,000

275,000 - 52,000 68,000 93,000 62,000 Payment to creditors (52,000) (52,000)

223,000 - - 68,000 93,000 62,000 Distribution of remaining (223,000) (68,000) (93,000) (62,000) cash - - - - - -

CASH OTHER ASSETS LIABILITIES

DARRYLCAPITAL

EVELYNCAPITAL

FREDRICKCAPITAL

Balances prior to realization

87,500 675000 325,000 212,500 137,500 87,500

Sale of non cash assets

247,500 (675,000) (213,750) (128,250) (85,500)

335,000 - 325,000 (1,250) 9,250 2,000

Absorption of deficiency

1,250 (750) (500)

335,000 325,000 - 8,500 1,500

Payment of liabilities

(325,000) (325,000)

Balances after payment of liaBilities

10,000 8,500 1,500

DRICK DONNACASH LAND CAPITAL CAPITAL

Balances before realization 50,000 175,000 25,000 75,000 Realization of assets 125,000 (175,000) (15,000) (15,000)

175,000 - 10,000 60,000 Payment to creditors

175,000 - 10,000 60,000 Distribution of remaining (175,000) (10,000) (60,000) cash - - - -

DRICK DONNA DAISY CASH LAND CAPITAL CAPITAL CAPITAL

Balances before realization 50,000 175,000 25,000 75,000 125,000 Realization of assets 125,000 (175,000) (15,000) (15,000) (20,000)

175,000 - 10,000 60,000 105,000 Payment to creditors

175,000 - 10,000 60,000 105,000 Distribution of remainingcash (175,000) (10,000) (60,000) (105,000)

- - - - -

RECEIVABLE- OTHER ACCOUNTS LOAN NOEL, ADRIAN MJCASH NOEL ASSETS PAYABLE PAYABLE - MJCAPITAL CAPITAL CAPITAL

45,000 15,000 410,000 105,000 20,000 150,000 100,000 95000Realization of assets435,000 (410,000) 10,000 7,500 7500

480,000 15,000 - 105,000 20,000 160,000 107,500 102,500 Payment to creditors(105,000) (105,000)

375,000 15,000 - - 20,000 160,000 107,500 102,500 Distribution of remaining(375,000) (15,000) (20,000) (160,000) (107,500) (102,500) cash - - - - - - - -

Noel will receive P145,000 computed as follows:Noel, capital 160,000 Receivable-Noel (15,000) Due to Noel 145,000