ACCOUNTING.

FOR PARTNERSHIPS
Liquidation

rn;ng Objectives:
· LtO
dying this chapter, you should be able to:
After stu
1. Define liquidatio n.
2. Distinguish dissolution from liquidation.
3. Unde�stand and apply the rulE:s in settling acc�unts after dissolution.
4. Explain the �oncept of right of offset.
s. Detail the treatment of capital deficiency.
6. Differentiate lump-sum method from installment method of liquidation.
7. Show the procedures in lump-sum liquidation.
s. Prepare a statement of liquidation.
9. Prepare entries for lump-sum liquidation.
10. State the procedures in installment liquidation.
11. Determine cash distribution to partners using schedule of safe payments ·o r a
cash priority program .
. 12. Prepare a statement of liquidation.
13. Prepare entries for installment liquidation.

.The partnership of Detoya, Pozon and Diaz (DPD & Co.) flourished because of their
pioneering efforts to establish their firm as the alternative professional firm after the
front-running Ayala establishment. Their clientele list now includes the new entrants
into the East Asean Growth Area, 40% of the top 500 Philippine corporations, 60% of the
next 500 and innumerable Middle East accounts among others. Their service revenues
have reached historic highs despite the currency turmoil affecting the region. The firm is
now employing 1,520 professiona ls from varied· disciplines. Everything is on the
uptr end.

All these years, Gloria Detoya, Bartolome Pozon and Elisa Diaz have been working very
hard. Dur ing one of the top-level management meetings, the three founding partners
?lad e known their plans of taking an early retirement. The members of the
�anagement committee were dumbfounded by the news. The three felt that they had
enough of the ge in their hard-earned fortune.
world's troubles and just wanted to indul
DP D wi• shes to dissolve and term inate the b us1 ess qf the firm. The partners ,..,,iui
o-...
upon thi m otion
t not vote
s
submission
of a study by a technical committee d�d
llt

The request of the three founding partners is both sin cere an� urgent. What are
U1f
options? What will happen to the unfinished engagements ? Is ,t n�cessary for the firrii
t o dissolve and liquidate just to accommodate the request of the Big Three? In case
Of
liquidation how will the firm's assets be distributed? Perhaps t_he fi�m may just a&r
ee
that the to'unding partners retire and give them a settlement price w,th a considerablt
b onus . Whatever the decision will be, the firm will have to endure _ the lo_ ss of its thr
�
p artners who believed and lived by hardwork, discipline and profesSionahsm.

DEFINITION

The liquidation of a partnership is the winding up of its busine ss activities characteriied

by sale of all non-cash assets, settlement of all liabilities and distribution of the
remaining cash to the partners. The conversion of non-cash assets into cash is referred
to as realization. This may either result to a gain or lo ss on realization and shall be
divided in th e profit and loss ratio of the partners. In some cases, a substantial loss on
realization roay yield for a partner a capital deficiency, which is the ex cess of a partner's
shar� !n losses over the partner's capital credit balance. This deficiency will certainly
affect the partner's interest-the sum of his capital and loan accounts-in the
partnership.

RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION

The following rules are subject to revisions by the agreement of the _partners, either in
their original partnership agreement or in a dissolution agreement (Civil Code of the
Philippines, Article 1839).
Assets of the Partnership

The assets of the partnership consist of the following:

1. partnership property,
2. additional contributions of the partners needed for the payment of all liabilities
consistent with the discussions below.

Order of Preference

The assets of a general par tnership shall be applied in the following order:
1. First, those owing to outside creditors,
2. Second, those owing to inside creditors in the form of loans or advances tor
business expenses by the partners,
 jhird , those owing to the partners with re Ons'
3. spect to their capital c ontn'bu ti
tly, those owing to the pa rtners with
.
4. La s respect to their share of the p ro fits·
ond preference above gives the pa ne opti0 n to
e e c . ri ht of offset · . . rt r with the loan acc ou nt the
fh s hts I T his privilege is or
is leg al right ot a partner to a pply p art
eJ,.erc h'eS loan account ba1 ance against ' the . ·
of 1 . h ts capital deficiency resulting from losses m the
an . a tio n of the partnership assets.
reahz
, ratiO"· Winst0n ��alisoc, Beatriz Onate
.. st · and Emerita Geron are partners in a prawn
1· 1'"
ipOrt b
us·m ess Initi
.
al ly·
' w· 10 st0n Apallsoc co
ntribut ed P300,00 0; Beatriz Onate,
epzOO,OOo and Eme rita ron, Pl00,000. On the date of disso ion, the remaining
�� lut
ssets of the. partnership amounted to Pl,000,000. The partnership has outstan ding
.
�liga tions wi_th Neo Aglugub, Pl 40,000; Placido Tuddao, Pl0 0,000 and loans p ayable to
ns o altsoc, P40,000 . The accounts of
Wj t n Ap the Apalisoc, Onate and Geron partnership
ett led s follows:
shall be s
a

1. First, Neo }\glugub and Placido Tuddao who are outside creditors shall be paid
the total sum of P240,000; thus, leaving a balance of P760,00 0 (Pl,000,0 00 -
. P240,000 ) in partnership assets; .
2. Second, Winston Apalisoc who is an inside creditor shall be paid his loan to the
partnership of P40,000; balance at P720,000 (P760,000 - P40,000 );
3. Third, the t otal contributions of Apalisoc, Onate and Geron to the. initial
partnership capital in the amount of PG00,000 will be paid; balance of assets a t
P1 20,000 (P720,000 - P600,00 0);
4. Lastly, the balance of P1 20,000 shall be distributed to the partners in the ra tio
of their capit al contributions since there was no mention of an agreement
governing the division of profits or losses . Therefore, Winston Apalisoc shall be
entitled to 3/6 of P120,000 or P60,000; Beatriz Onate, 2/6 or P40,000 and
Emerit a Geron, 1 /6 or P20,000.

lnsuffldent Partnership Assets

In cases when the partnership assets are insufficient to settle all outside liabilities, the
partners should make additional contributions in the partnership. Any partner who
contributed in excess of his share In this liability has a right to collect the supposed
additional contributions from the other partners.

Illustration. Assume in the illustration above that the outstanding oblig a tions of the
paftnership,· a n accruing to outside creditors, amounted to Pl, 12�,�·. The partnership
assets of Pl QOO 000 will be insufficient to fully settle these llab1ht1es. The unpaid '
balance will be p�2 o,ooo. Therefore. the p�rtners should_ contribute �ufficien t assets to
. ent, the basis of the addition al
cover the defiIcIency or 1 oss. In the absenc e of an agreem
. .
contributions tions.
shall be the ratio of their capital contribu
 . properties in the an, O
As a result, Winston Apalisoc is still liable from h·Is separate lJ
G ero n, P20 , ooo· , these contribut·io ntQf
PGO ,000; Beatriz Onate, P40,000, an Emen·ta n s Wil
�.. llO,OO O. T hi s sum of money is Pro l
be used to settle the remaining 1iab1hties of P a P e tt y
. payment by Emerit Geron of the f
consider ed as partnership assets. In the event of amou nt that she has Pai tJII
amount P120,000, s h, e will have the n.ght to recover the
.inst0n Apalisoc, PG0,000 and fron, B d 1.n
excess of her share of the liability from W eatriz
Onate, P40,000.
Creditors
Preference of Partnership Creditors and Partners, Separate
m nts over th0se of t e
The creditors of the partnership shall have priority in pay � h
er hip prop ert ies. On the other h n
partners ' separate creditors as regards the partn s a d'
· · h re pec o the separate or per n
the credi tors of the partners are pref erred WI t s t t so a1
rated in Ca e 6 - the Cardenas, Go n
properties of the partners. This will be !llust s
ad
Balocating partnership later in the chapter.

Distribution of Separate Properties of an Insolvent Partner

If a partner is insolvent, his personal pro�erties shall be distributed as follows :
1. First, those owing to separate creditors,
2. Second, those owing to partnership creditors,
3. Lastly, those owing to the partners by way of additional contributions when the
assets of the partnership were insufficient to settle all obligations.

Illustration. Assuming that because of the total partnership liabilities amounting to

Pl,120,000, Emerita Geron is still personally liable to partnership creditors in the
amount of P20,000. Her s eparate properties in the amount of P9 0,000 shall first be
applied to settle her personal obligations of PS0, 000 to Patrocinio Abad and the balance
of Pl 0,00 0 to pay one-half of her liability of P20,000 to the creditors of the partnership.
This is in consonance with the rule that separate creditors are preferred over
partnership creditors as regards separate properties of a partner.

The procedures in liquidation after the adjustmen t and closing of books will be
dependent on the above rules. It will be advisable to have a mastery of these principles
to be able to fully understand the liquidation of partnerships.

The use of a statement of liquidation will greatly aid the liquidating partner summarize
the events and transactions associated with the liquidation of the partnership.
 OF PARTNERSHIP LIQUID
t-tODS ATION
r,4£1'
ow et
ll in g m hods may be used when a partn ership
fo
f �e is liquidated:
mp- sum method
1. Lu
under this method, 011 non-cash
assets are realized and the related ga ins o
tosses d.istr'. bute� and all liabi r
lities are paid before a single final cash
distribution 1s made to the partners.

2. installment method
u nder this methpd, realization of
non-cash assets is acc omplished over an
extended period of time. When cash
is available creditors may be pa rtially or
fully paid. Any excess may be distributed to the �
artners in accordanc e with �
program of safe payments or a cash priority
program. This process persists until
all the non-cash assets are sold.

S TED TO LIQUIDATIO N
ENTRIE RELA
rtie s teps in the liquidation of a partnership will need the fo llowing
pr o-forma entries:
1. Sale of Non-Cash Assets
a. At Book Value
Cash xx
Non-Cash Assets xx

b. Above Book Value

Cash xx
Non-Cash Assets xx
Gain on Realization xx

c. Below Book Value

Cash xx
Lo�s on Realization xx
Non-Cash Assets xx:

2. Distribution of Gain or Loss on Realization based on Partners' P/L Ratio

a. Distribution of Gain on Realizatio n
Gain on Rea•ization xx
El izabeth Figueroa, Capital
xx
xx
Carmelita Mercado, Capital xx
Lovell Abella, Capital
 b. Distribution of Loss on Realization
xx
Elizabeth Figueroa, Capital xx
Carmelita Mercado, capital xx
Lovell Abello, Capital xx
Loss on Realization

3. Payment of Liabilities
xx
Liabilities
cash

4. Exercise of Right of Offset

Elizabeth Figueroa, Loan xx
xx
Elizabeth Figueroa, capital

5. Additional Investment by Deficient Partner

cash xx
xx
Elizabeth Figueroa, Capital

6. Deficiency Absorbed by Solvent Partner

Carmelita Mercado, capital xx
Elizabeth Figueroa, Capital xx

7. Distribution of cash to Partners

Elizabeth Figueroa, Capital xx
carmelita Mercado, capital xx
Lovell Abello, Capital xx
Cash xx

LUMP-SUM LIQUIDATION

Under this method, all non-cash assets are realized and all liabilities are settled before a
single final cash distribution is made to the partners. The procedures below may be
followed in lump-sum liquidation:
1. Realization of non-cash assets and distribution of gain or loss on realization·
among the partners based on their profit and loss ratio.
2. Payment of liabilities.

3. Elimination of partners' capital deficiencies. If after the distribution of loss on

realization a partner incurs a capital deficiency (i.e., partner's share of
realization loss exceeds his capital credit), this deficiency must be eliminated by
using one of the following methods, in the order of priority:
 1. If the deficient partner has
a loan bat ance, the
n exercise the right of offset .
b. If the deficient p artner is solvent
deflclency. ' then he should invest cash to eliminate his

c. If the deficient Partner 1s .

Inso lvent, then the other partners should absorb his
deficiency.
payments to partners, in the
4. order of priority:
a. Loan accounts
b. capital accounts

111,strttl
on, Joel Feliciano, Evelyn Tna .
. and Nick · a publ",c
· an are partners ,n
1,... and • Maras1g
ns firm share· p rofit s and
latio 1 ses m the ratio of 2:2:1, respectively. They
�
to liquidate their busi ness on
�ided e�. 31, 20l9. The following is the condensed
nt of financial position p rep
stateme ared Pnor to liquidation:
Feliciano, Tria and Marasigan
Statement of Financial Position
Dec. 31, 2019

Assets
Cash P 200,000
Non-Cash Assets 3,400,000
TotaI Assets P3,600,000

liabilities and Capital

liabilities Pl,120,000
Evelyn Tria, Loan 50,000
Nick Marasigan, Loan 80,000
Joel Feliciano, Capital 950,000
Evelyn Tria, Capital 600,000
N i ck Marasigan, Capital 800,000
Total liabilities and Capital P3,600,000

The above given details will be applicable for Cases 1 to 5. Only two categories for both
Assets-Cash and Non-Cash Assets, and li abilities-liab ilities and Loans, are used to
avoid excessive details in our illustrations. To avoid omissions in postings to the
statement of liquidation, the equality of the accounting equation should be verified
after every step in the l i quidation process.

Case 1. Loss on Realization Fully Absorbed by Partners' Capital Balances

sold at P2, 500,000 with a resulting loss on
Assume that the non-cash assets are
realization of P900,000 which was distributed in the ratio 4:4:2. The capital balance of
t c s t
eacti partner was suf ficient to fully absorb the share in the loss. The paymen of a h o
stribution of the remaining cash to the partners
Partnership creditors and the final di
 Figure 4-1 Loss on Realization Fully Absorbed by Partners' capital Balances

Feliciano, Tria and Marasigan

..,,, Statement of Liquidation
Dec. 31, 2019

Cash Non-Cash Liabilities Tria, Marasigan, Feliciano, Tria, Marasigan,

Assets Loan Loan Capital Capital Capital

P\L Percentages 40% 40% 20%

Balances before
Liquidation P 200,000 P3,400,000 Pl,120,000 PS0,000 PS0,000 P950,000 PG00,000 PS00,000
Sale of Non-Cash
Assets and
Distribution of
Losses1 2,-?00,000 (3,400,000) (360,000) (360,000) (180,000)
Balances P2,700,000 Pl,120,000 PS0,000 PS0,000 PS90,000 P�40,000 P620,000
Payment of
Liabilities to
Outsiders 2 (1,120,000) (1,120,000)
Balances Pl,580,000 PS0,000 PS0,000 PS90,000 P240,000 P620,000
Payments to
Partners3 (1,580,000) (50,000) (80,000) (590,000) (240,000) (620,000)
 •
oblem. A statement
ted no pr f . qu . at on ari e
s
::
pre p ins volv ed in the liqu i d ation. h�ien ,� , (refer to Figure 4-1) will summ z
;
tilt s tries Pertinent to this case follow:
of Non-Cash Assets
!, s,te
. Ca sh
LOS S on Realization 2,500,000
Non-Cash Assets 900,000
3,400,000
bution of Loss on Realizat
pistrf ion based on Pa
rtners' P/l Ratio
Joel Feliciano, Capital
Evelyn Tria, Capital 390,000
36 0,000
Nick Marasigan, Capital
180,000
Loss on Realization
900,000

yment of Liabilities
2. Pa
Liabilities
1,120,0 00
Cash
1,120,000

3, Distribution of Cash to Partners

Evelyn Tria, Loan 50,000

Nick Marasigan, loan 80,000
Joel Feliciano, Capital 590,000
Evelyn Tria, Capital 240,000
Nick Marasigan, Capital 620,000
Cash 1,580,000

case 2. Loss on Realization Resulting to a Capital Deficiency with Right of Offset

Assume that the non-cash assets are sold at Pl,850,000 with a resulting loss on
realization of Pl,550,000 which was distributed in the ratio 4:4:2. The capital balance of
partner Evelyn Tria was insufficient to fully absorb her share in the loss and thl(s,
incurred a capital deficiency of P20,000. Instead of making an additional investment,
Tria opted to exercise her right of offset. A portion of her loan to the partnership was
applied to her deficient capital. Outside creditors were paid and a final distribution of
the remaining ca-sh to the partners was made. A statement of liquidation (see Fi�ure 4-
2) will summarize the steps involved in the liquidation.

The entries are shown below:

t Sale of Non-Cash Assets
1,850,000
Cash
1,550,000
Loss on Realization
3,400, 000
Non-Cash Assets
 Dist ribution of loss on Realization b ase
. . . d on Partners' P/l Ratio
Joel Fellc,ano, Capital I

Evelyn Tria, Cap ital 620,000

Nick Marasigan, Capital 620,000
Loss on Realization 310,00 0
1,550,000
1> yment of liabilities
2_ a
Liabilities
cash 1,120,000
1,120,000

3 ' ex' ercise of Right of Offset

Evelyn Tria, Loan
20,000
Evelyn Tria, Capital
20,000

4. Distribution of Cash to Partners _

Evelyn Tria, Loan
30,000
Nick Marasigan, Loan
80,000
Joel Feliciano, Capital
. 330,000
Nick Marasigan, Capital .490,000
Cash 930,000

ease 3. Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent

'Partner.

Assume that the non-cash assets are sol·d at Pl, 700,000 with a resultrng loss on
realiz ation of Pl, 700, 000 which was distributed in the ratio 4:4:2. The capital balance of
partner Evelyn Tria was again insufficient to fully absorb her share in the loss arid thus,
incurred a capital deficiency of P80,000. Tria exercised her right of o�set but it was not
enough to cover her losses; she has no recourse but to invest additional cash of P30,000
to fully eliminate her deficiency. A statement of liquidation (see Figure 4-3) will
summarize the steps involved in the liquidation.

The entries to illustrate the steps in liquidation are given bel'ow:

1. Sale of Non-Cash Assets
Cash 1,700,000
1,700,000
. loss on Realizat1on
3,400,000
Non-Cash Assets •

Distribution of loss on Realization based on Pa�ners' P/L Ratio

680,000
Joel Feliciano, Capital
680,000
Evelyn Tria, Capital
340,0Q0
Nick Marasigan, Capital 1,700,000
Loss on Realization
 Ftaure 4- 3 Loss on Realization Resulting to a Ca�ltal Deficiency to a Personally Solvent Partner

Feliciano, Trla and Marasigan

Statement of Liquidation
Dec.31, 2019

Cash Non-Cash llabllltles Tria, Marasigan, Feliciano, Tria, Marasigan,

Assets Loan Loan Capital Capital Capital
P\L P�rcentages 40% 40% 20%.
Balances before •
liquidation P 200,000 P3,400,000 Pl,120,000 PS0,000 PS0,000 P950,000 PG00,000 PS00,000
Sale of Non-Cash
Assets and Dist.
j. of Losses 1
Balances
1,700,000
Pl,900,000
t3,400,000)
Pl,120,000 PS0,000 PS0,000
(680,000)
P270,000
(680,000).
P(80,000)
(340,000)
P460,000
Payment of
Llabllltles to
g. Outslders 2 (1,120,000) (1,120,000)
Balances P780,000 PS0,000 PS0,000 P270,000 P(80,000) P460,000
Right of Offset by
Tria3 (50,000) 50,000
Balances P780,000 PS0,000 P270,000 P(30,000) P460,000
Additional
Investments by
Trla4 30,000 30,000
Balances P810,000 PB0,000 P270,000 P460,000
Payments to
Partners� (810,000) (80,000) (270,000) (460,000)
 a ment of liabilities
2. p y •
,I

Liabilities
Cash 1,120,000
1,120,000
se of Right of Offset
3_ f,cerci
Evelyn Tria, Loan
50,000
Evely_n Tria, Capital
50,000

4_ Additio
nal Investment by Deficient Partner
Cash
30,000
Evelyn Tria, Capital
30,000

s. Distribution of Cash to Partners

Nick Marasigan, Loan
80,000
Joel Feliciano, Capital 270,000
Nick Marasigan, Capital 460,000
Cash 810,000

case 4. Loss on Realization Resulting to a Capital Deficiency to a Personally Insolvent

Partner

Assume the same facts as in case 3 except that Evelyn Tria is pe(sonally insolvent and is
unable to make additional investments for l;ler remaining deficiency of P30,000. In this
case, Joel Feliciano and Nick Marasigan have to absorb this deficiency as additional loss
to th em in the ratio of 4:2. A statement of liquidation (see Figure 4-4) will summarize
the steps involved in the liquidation.

The entries to summarize the results of the liquidation process follow:

Entry nos. 1 to 3 is the same as those in Case 3.

4. Deficiency Absorbed by Solvent Partners

Joel Feliciano, Capital 20,000

Nick Marasigan, Capital 10,000
Evelyn Tria, Capital 30,000

S. Distribution of Cash to Partners

Nick Marasigan, Loan 80,000

Joel Feliciano, Capital 250,000
Nick Marasigan, Capital 450,000
780,000
Cash l
 D s ribution of Cash to P art ners
6. i t
Nick Marasiga·n, loan
Nick Marasigan, Capital 80,000
Cash 300,000
380,00 0
rtnership Insolvent and partners Pe
case 6· Pa rsonally Insolvent
· C rdenas, Aristotle · Go and Re nante
L01d3 a . Balo cating · are partners who are sharing
osses m th e ratio of 4 .
profit1 s or -3
· · 2, respectively. They decided to liquidat e their
1 • •
· N ov.
· 1 , 201 9 b .
1 ess on ecause of constant credit
bll5·n . ' proplems. The partnership and
Go an d 8 a 1 ocatmg are current! Y una b le to meet
partners . , their financial obligations. The
p s con d ense d bala nce
partn er sh1 sh ee t and the personal status of the partne rs are as
follow : s
Carden�s, Go and Balo cating
statement of Financial Position
Nov. 1, 20·19
Assets liabilities and Capital
cash P 5,000 liabilities P370,000
Non-Cash Assets 605,000 Loida Cardenas, Capital 100,000
Aristotle Go, Capital 60,000
Renante Balocating, Capital 80,000
Total Assets P610,000 Total Liabilities and Capital P610,000

Personal Status of Partners

(Excluding Interests in the Partnership)

Partner Personal Assets Personal Liabilities

Loida Cardenas . P310,000 P200,000
Aristotle Go 94,500 119,000
Renante.,Balocating 40,000 50,000

The non-cash assets are sold for P335,000, resulting to a loss on realization of P270,000.
The cash generated from the realization of all non-cash assets is inadequate for the full
Paym ent of the liabilities. The partnership is insolvent and will depend on its solvent
Partners for relief.

· After the distribution of loss on realization, Aristotle Go is deficient by P30,000. He

can
not m ake additional investments since he is personally insolvent-his' current personal
defidt is P 24, 500 {P94,500 minus P119,000). T�e two other partners absorbed the
�eficiency , even if Cardenas has her own deficiency. This is possible because Cardenas
15 �till per
sonally solvent. In the case of .Balocating,. he is made to sh�re in the loss due
t� insolvency of Go though he is already personally insolvent because m the partnership.
h,S'capital bal
ance is still a positive P20,000.
• tn the meantime, an additional investm� 0f p40 ooo
. .'. . is necess 0
ary from the SOh...-.
and the P1 '000 bala -··�
Cardenas to be used to the remainJng bab1lmes
000 t Batocat:J ng rec e iv e d ca n now be Usect in nee
al
B ocating's capital accoun:� 0, P1 tha _1m to
.
pay off h1s personal a-editors. carden as an d Baloca ting c an later cla . from c._ ,
. .enc after he has ,QI) hi$

supposed additional investmeff.t due to capital det,a v satisfied his

personal liabilities. This is if Go bec.omes solvent in the future . The
Of statement
tiquidation is as follows;

Partnership fnsofvent and Partners Personally lnsowent

cardenas, Go and Baloarting

Statement of Liquidation
Nov.1,2019

Cash Hoo-Cash Liabilities Cardenas, Go, �

Assets eap;taJ Capital Capitaf

P\L Ratio 4/9 3/9 2/9

Balances before
Liquidation p 5,000 ?605,000 P370,000 P100,DOO P60,000 P80,000
Sale of Hon-Cash
Assets and Dist.
oflossesl 33 5,000 {605,000, (120,ooo) (90,000) (f,O,fn))
Balanc.es P340,000 P370,000 P(20,ooo) P(30, 000) P20_.00)
hymentof
Liab,1ffies2
(partial) {340,()00) (340,000)
Balances P-0- P30,000 P(20,000) P{30,000) P20_.00)
Addmona.l Losses
to Cardenas &
Baloeating3, 4:2 (20,ooo} 30,000 (10,000)
Balances P-0- P30,000 P(40,ooo} P10,00)
AdditionaJ
tnvestments by
Car(ienas'I 40,000 40,000
..
Balances P40,000 P30,000 PlO,(XX)
Payment of
Liabifities5 (ful) . (30,000) (30,ooo)
Balances Pl0,000 PlO,LXXl
Payment to
Ba� (10,DOO)
Cardenas Go
Personaf Assets P310,000 p 94,500
less: � IiabJities 200,000 119,000
.Excess (Deficit) Pll0,000 P(24,500)
Amount reaM:!red from liquidation
afthepattnel5hip
toss to Personal Creditors p 24,500
 lated entries follow:
r�e re
te of Non-Cash Assets
1_ sa
Cash
'toss on Realization 335,000
Non-Cash Assets 270,000
605,000
Distribution of loss on Realization base d on Partners' P/L Ratio
Loida Cardenas, Capital
120,000
Aristotle Go, Capital 90,000
Renan te Balocating, Capital 60,000
Loss on Realization 270,000
2. Pa rtial Payment of liabilities
Liabilities 340,000
Cash 340,000
3. Additional losses to Partners with Positive Capital Balances
Loida Cardenas, Capital 20,000
Renante Balocating, Capital , 10,000
Aristotle Go, Capital 30,000

4. Add�tional Investment by Partner

Cash 40,000
Loida Cardenas, Capital 40,000

5. Full Payment of Liabilities

Liabilities 30,000
Cash 30,000

6. Distribu tion of Cash to Partner

Renante Balocating, Capital 10,000
Cash 10,000

INSTALLMENT LIQUIDATION
Under this method realization of non-cash assets is accomplished over an
extend ed
Period of time. It i� a process of selling some assets, paying the creditors, paying the
rernaining cash to the partne�, realizing additional assets and making addit ional
Pavments to the
partners. The' liquidation will continue until all the non-cash assets
a e
h v been realized and all a vailable cash distributed to par· tnership creditors and
Partners.
 . te 'f1 necessarv safeguards are used t
na
op .
I nsta I lment payments to partners are ap .pr
f II and th at no partner Is paid n, o
ensure that all partnership creditors are pai. d
losses on re�liz�tion of as s:e
than the amount to which he would be entitle; a�er all ent 1iqu1dat1on: s
ed · In inst all m
are known. The procedures below may be follow
of gain or 1 oss on reallz atio11
1. Realization of non-cash assets and d'I�tribution
s ratio.
among the partners based on their profit and los
2. Payment of liquidation expenses and adJUS ' tment for unrecorded liabilities; both
ers in their profit and 1 0ss
of these items will be distributed among the Partn
ratio.
3. Payment of liabilities to outsiders .
s
4. Distribution of avajlable cash based on a schedule 0�. afe d� ymen�s Which
a

ners ,p to ispose. 0, Part or

assumes possible losses due to inability of the part
all the remaining non-cash asset s and fai·1 ure of the partners with capita1
deficiencies to make additional contributions (see Figure 4-7) . . Payments to
partners c�n also be made based on a cash priority program (see Figure 4-8).

Illustration. The balance sheet for Christine Gamba, Nancy Mulles and Ma. Vic to ria
Mones, partners sharing profits in the ratio of 4:3:3 respectively, showed the following
balances on April 30, 2019, just before liquidation:

Gamba, Mulles and Mones

Statement of Financial Position
April 30, 2019
Assets Liabilities and Capital
Cash P 315,000 Liabilities p 435,000
Non-Cash Assets 1,250,000 · Ma. Victoria Mones, Loqn 30,000
Christine Gamba, Capital 600,000
Nancy Mulles, Capital 350,000
----- Ma. Victoria Mones, Capital 150,000
Total Assets Pl,565,000 Total Liabilities and Capital Pl,565,000

In May, part of the assets are sold at book value, P300,000 . In June, the remaining
assets are sold for P210, 0,00 . Assume that available cash is d.istributed to the proper
parties c!t the end of May and at the end of June. Assume furthe r that partners are
solvent and that any partner who is deficient made appropriate payment to the
partnership on July 31.
t
 , yrnent of Uabllltles
2 p1
LIabilities
Cash 435,000
435,000
istribution of Cash to
3 · M•Y D Partners
Christine Gamba, Capital
Nancy Mulles, Capital 160,000
Cash 20,000
180,000
of Non-Cash Assets and 01
4. sale 5trlbutlon of l
_ oss on Realiz ation
Cash
Christine Gamba, Capital 210,000
Nancy Mulles, Capital 296,000
Ma. Victoria Mones, Capital 222,000
Non-Cash Assets 222,000
950,000
s. exercise of Right of Off set
Ma. Victoria Mones, Loan
30,000
Ma. Victoria Mones, Capital
30,000
6. June Distribution of Cash to PartMrs
Christine Gamba, Capital
120,000
Nancy Mulles, Capital 90,000
Cash
210,000
7. Additional Investment by a Partner
Cash 42,000
Ma. Victoria Mones, Capital 42,000
I
8. July Distribution of Cash to Partners
Christine Gamba, Capital 24,000
Nancy Mulles, Capital 18,000
Cash 42,000

CASH PRIORITY PROGRAM

The use of safe payment schedules in support of the illustration in Figure 4-7 is a reliable
method of computing the amount of safe payments to partners for it prevents excessive
t
payments to any partner. However, the approach is inefficient if numerous installmen
ious
distributions are to be made to partners. Let's take the illustration in the prev
ts
section. The partnership made two payments and for each, a schedule of safe paymen
long as there
is made. The procedure of preparing safe payment schedules will go on as
P/L ratio.
is ca sh to be distributed and until the capital balances are aligned with the
 . . ion of an alternative dev
This repetitious procedure can be avoi �ed with the introduct ared at the t of ice
wh ch is p rep st ar
all:d t�e cash priority program. This pro�ram i
e
� an e x pec t to b e i nclude t�
l i qurdat,on process w i ll help the partners proJect when they c
nt of c a sh received f o d "
1
the cash distribution. If the program is prepared, any. amou t�e
.
re a r1za t1on of p a rtnership ssets m ay b e P aid i mme di a
telY to p artnership credi;orlll s an
. program is illustrated in Figure 4 d
s
a
later, the partners as specified in the progra m. Tht ·8.
. Rosemarie Espanol d iv-1
Illustration. Cecille Laguna, Ma . Concepci on M analo and . d
nce she. et on J une 30' 201�' JUSt before
profits 60%, 25% and 15% respecti vely. A bal a e
pa rtnership liquidati on, showed the following b a l a nces:

Laguna, Manalo and Espa��I

Statement of Financial Position
Jun� 30, 2019

Assets Liabilities and Capital

Liabilities P 350,000
Cash P 50,000
Non-Cast) Assets 925,000
Cecille Laguna, Capital 4 50,000
Ma. Concepcion Manalo, 100,000
Capital
Rosemarie EspaAol, Capital 75,000

Total Assets P975,000 Total Liabilities and Capital P975,000

Certa in assets are sold In July at book value of PS00,000 and availa ble c ash is dis�ri buted
to a ppropriate p a rties. Remain i ng assets are sold in August for PlS0, 000 and cash is
distri buted in final settlement.

Loss absorption balances represent the maximum loss that the p a rtners can absorb
without reducing their equi ty below zero. The partner with the bi ggest ca pital exposure
or loss absorption balance shquld be prioritized i n a cash di stributi on. A partner with a
relatively low toss absorpt i on b alance can be wi ped out by a m aterial reali zation loss.

Looking at Figure 4-8, Manalo h as the lowest loss a bsorpti on b alance and th i s means
that she i s most vulnera ble or suscept i ble to losses·. Assume that a loss on re alizati on
amounted to P400,000, Manalo's cap i tal balance will become zero because her share i n
the loss will be Pl00,00 0 (P400,000 x 25%) which is equiv alent to her ca pit al interest.
Laguna w i ll be prioritized in a cash distri buti on because of her higher loss a bsorption
ba lance brought about by a larger capital interest and a higher prof i t and loss sharing
'ratio. This is being done to be fair wi th her since she has the biggest c apit al exposure.
 ' ram would be
to m a ke the high est I
The next step in the prepar ation of the pr og
nce will be the basis fo Oia
abs orption balance equal to the next higheSt The differe
The c ash priority Pay� tilt
computation.of the cash priority payments to the. artners.
o r t� differ enc e in the loss absor ellts
can be obta ined by multiplying the excess
� p artner The above proce
d Ptlon
balances by the profit and loss ra tio of the r es e �'�� ei
� p a r tn�rs a re equal. If thell� s
continued until the loss absorption ba la nce s
to the par tners .n t Oss
a 1

absorption balances are already equal, cash may be d�1�t "buted

O
t heir
• I ustra
profit and loss ratio. The entries rela ted to· th'1s ·11 t1onn f o 11 O w·
•

For the month of July, 2019

1. Sale of Non-Cash Assets
Cash 500,000
Non-Cash Assets
500,000

2. Payment of _Liabilities
liabilities 350,00 0
Cash · 350,000

3. Distribution of Cash to Partners

Cecille Laguna, Capital 190,000

Rosemarie Espanol, Capital 10,000
Cash 200,000

Computation:
Laguna Espanol Total

Priority J: To Laguna P150,000 P150,000

Priority II: 60:15 ratio 50,000

Laguna: P50,000 x 60/75 40,000

Espanol: P50,000 x 15/75 Pl0,000
P190,000 Pl0,000 P200,000

The initia l cash ba la nce is P50, 000 and this is incre ased by the P500, 000 proceeds frbm
the sale of non-cash a ssets. The balance a fter settlement of liabilities of P350,000 is
P200, 000 . This a mount is now available for distribution. Ba sed on the cash priority
program in Figure 4-8, Laguna should be given P150,0 00 being the first priority. The
total cash for a llocation in priority II is P75,000. For this month, only P50,000 is available
after the P150, 000 ·a llocation to Laguna.

When cash is insufficient to fully satisfy the cash requirements in a particular priority,
then the available cash will be distributed in the ratio of the supposed allocation in that
priority. In this instant ca se, the P50, 000 will be allocated in the ratio of the supposed
allocation in priority 11-PGO, OOO and P15,0 00 for a total of P75,000 . The ratio is 60/75
for Laguna and 15/75 for Espa nol. The ratio only considered the two partners since theY

4-26 I WIN Ba/Jada's Partnership and Corporation Accounting