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CH 4

The document outlines the process of liquidation for a partnership, detailing the steps involved in dissolving the business, including the sale of assets, payment of liabilities, and distribution of remaining cash to partners. It provides examples of how gains and losses from asset sales are allocated to partners' capital accounts and explains the implications of insufficient capital balances. Additionally, it introduces the concept of installment liquidation, where cash is distributed to pay liabilities and partners as it becomes available.

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44 views20 pages

CH 4

The document outlines the process of liquidation for a partnership, detailing the steps involved in dissolving the business, including the sale of assets, payment of liabilities, and distribution of remaining cash to partners. It provides examples of how gains and losses from asset sales are allocated to partners' capital accounts and explains the implications of insufficient capital balances. Additionally, it introduces the concept of installment liquidation, where cash is distributed to pay liabilities and partners as it becomes available.

Uploaded by

summers
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Liquidation of a Partnership

OBJECTIVE :Prepare statement of


liquidation
Dissolution with liquidation
Dissolution with liquidation on the other hand, the partnership
business will stop to operate. It is the end of its life, so that the
business will focus on the following terminal activities: ,
✓ Sale or Conversion of non-cash assets Into cash;
✓ Paying its liabilities;
✓ Distribution of cash and the remaining unsold assets to
individual partners.
Liquidation of a Partnership
As the assets are sold, any gain or loss is distributed to the
partners according to the stated ratios.
As cash becomes available, it is applied:
✓ First, to partnership creditors (if any).
✓ Second, to partners’ loans (if any).
✓ Finally, to the partners’ capital balances.

3
Liquidation of a Partnership: Gain on Sale of Assets
Assume the Joe and Bob partnership had the following assets, liabilities, and equity:
TRIAL BALANCE
Cash $20,000
Inventory 15,000
Land 10,000
Accounts Payable $ 5,000
Joe, Capital 30,000
Bob, Capital 10,000
Assume that they share income and losses equally.
Assume they sell the inventory for $32,000 and the land for $14,000.
4
Liquidation of a Partnership: Example

Assume they sell the inventory for $32,000 and the land for $14,000.
Cash 46,000
Land 10,000
Inventory 15,000
Gain from Realization 21,000

To record sale of land and inventory upon liquidation

Cash balance is $66,000 ($20,000 + $46,000).

6
Liquidation of a Partnership: Example
(continued…)

The realized gain of $21,000 is allocated based upon the partnership


agreement (equally in this example).
Gain from realization 21,000
Joe, Capital 10,500
Bob, Capital 10,500
Joe’s Capital account is now $40,500.
Bob’s Capital account is now $20,500.

7
Liquidation of a Partnership:Example
(continued…)
The Accounts Payable are now paid off at their book value:
Accounts Payable 5,000
Cash 5,000
The Cash account now has $61,000 which is equal to the partners’ equity, $40,500 +
$20,500
(Assets = Liabilities + Partners’ Equity).
The cash is now distributed to Joe and Bob based upon their Capital account
balances.
Joe, Capital 40,500
Bob, Capital 20,500
Cash 61,000
8
Liquidation of a Partnership
• If assets are sold for losses and a partner’s capital balance is
insufficient to absorb the loss, then that partner must make up the
deficit from her or his personal assets.
• In case there is an existing loan of the partnership from that partner,
such must be offset first.
• If the partner is unable to make up the deficit, or has limited
resources to cover up the deficiency, then the remaining partner/s
must share the loss based on their stated ratios.

9
Loss on Sale of Assets: Loss Absorbed by Capital Balance

Assume the Joe and Bob partnership had the following assets, liabilities, and
equity:

Cash $20,000 Accounts Payable $5,000


Inventory 15,000 Joe, Capital 30,000
Land 10,000 Bob, Capital 10,000

Assume that they share income and losses equally.


Assume the inventory is sold for $14,000 and the land for $8,000.

Required: Prepare a statement of liquidation

10
Loss on Sale of Assets
Assume the inventory is sold for $14,000 and the land for $8,000.

Cash 22,000
Loss from Realization 3,000
Land 10,000
Inventory 15,000
To record sale of assets upon liquidation

Cash balance is now $42,000.

12
Distribution of Loss
The loss is distributed to the partners’ Capital accounts (equally in this
example.)

Joe, Capital 1,500


Bob, Capital 1,500
Loss from Realization 3,000

To distribute realized loss.

Joe’s Capital account is now $28,500.


Bob’s Capital account is now $8,500.

13
Payment of Liabilities
The Accounts Payable are now paid off at Book Value:

Accounts Payable 5,000


Cash 5,000

Cash balance is how $37,000 which is equal to the partner


equity:
Joe,capital 28,500
Bob, capital 8,500
cash 37,000
14
Loss on Sale of Assets: Loss Absorbed by Capital Balance

Assume the Joe and Bob partnership had the following assets, liabilities, and
equity:

Cash $20,000 Accounts Payable $5,000


Inventory 15,000 Joe, Capital 30,000
Land 10,000 Bob, Capital 10,000

Assume that they share income and losses equally.


Another assumption: non-cash assets are sold for $4,000

Required: Prepare a statement of liquidation

15
INSTALLMENT LIQUIDATION

Objective:
synthesize the contents of statement of
liquidation under installment method
✓Sold Merchandise Inventory on July 31 for P550,000
✓Sold Other Assets on August 31 for P450,000
✓Distribute the cash ( pay liabilities, pay partners) as soon as it is available
INSTALLMENT LIQUIDATION WITH
SCHEDULE OF SAFE PAYMENTS
See spectra problem excel

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