INTEGRATED REVIEW II: ADVANCED FINANCIAL ACCOUNTING AND REPORTING

MODULE 4: PARTNERSHIP LIQUIDATION

I. NOTES

1. The liquidation process entails (a) converting partnership property into cash, (b) paying off liabilities and
liquidation expenses, and (c) conveying any remaining property to the partners based on their final capital
balances. As a means of reporting these transactions, a schedule of liquidation should be produced at periodic
intervals. This statement discloses all recent transactions, the assets and liabilities still being held, and the
current capital balances. Distribution of this schedule on a regular basis allows the various parties involved in the
liquidation to monitor the progress being made.
2. During a liquidation, negative capital balances can arise for one or more of the partners, especially if the
partnership incurs material losses in disposing of its property. In such cases, the specific partner or partners
should contribute enough additional assets to eliminate their deficits. If payment is slow in coming, the partners
who have safe capital balances can immediately divide any cash still held by the partnership. A safe balance is
the amount of capital that would remain even if maximum future losses occur: Noncash assets are lost in total
and all partners with deficits fail to fulfill their legal obligations. In making these computations, the remaining
partners absorb negative capital balances based on their relative profit and loss ratio.
3. Completion of the actual liquidation of a partnership can take an extended period. Often, cash is generated
during the early stages of this process in excess of the amount needed to cover liabilities and liquidation
expenses. The accountant should propose a fair and immediate distribution of these available funds. A proposed
schedule of liquidation can be created as a guide for such cash distributions. This statement is based on a
simulated series of transactions: sale of all noncash assets, payment of liquidation expenses, and so on. At every
point, maximum losses are assumed: Noncash assets have no resale value, liquidation expenses are set at the
maximum level, and all partners are personally insolvent. Any safe capital balance remaining after incurring such
losses represents a distribution that can be made at the present time. Even after this payment, the capital
account will still be large enough to absorb all potential losses.

II. STRAIGHT PROBLEMS

PROBLEM 1: (Lump-sum Liquidation) A local partnership has only two assets (cash of P10,000 and land with a cost of
P35,000). All liabilities have been paid and the following capital balances are currently being recorded. The partners
share profits and losses as follows. All partners are insolvent.

Brown, capital (40%) . . . . . . . . . . P25,000

Fish, capital (30%) . . . . . . . . . . . . 15,000

Stone, capital (30%) . . . . . . . . . . 5,000

Required:
a. If the land is sold for P25,000, how much cash does each partner receive in a final settlement?
b. If the land is sold for P15,000, how much cash does each partner receive in a final settlement?
c. If the land is sold for P5,000, how much cash does each partner receive in a final settlement?

PROBLEM 2: (Installment Liquidation) The following condensed balance sheet is for the partnership of Hardwick,
Saunders, and Ferris, who share profits and losses in the ratio of 4:3:3, respectively:

Cash P90,000 Accounts payable P210,000

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Other Assets 820,000 Ferris, loan 40,000
Hardwick, loan 30,000 Hardwick, capital 300,000
Saunders, capital 200,000
Ferris, capital 190,000
Total assets P940,000 Total liabilities and capital P940,000

The partners decide to liquidate the partnership. Forty percent of the other assets are sold for P200,000. Prepare a
proposed schedule of liquidation.

a. How much is the loss on realization of other assets?

b. How much cash Ferris received on the first settlement?

III. MULTIPLE CHOICE QUESTIONS

1. The partnership of Peter, Paul and Mary share profits and losses in the ratio of 4:4:2, respectively. The partners
voted to dissolve the partnership when its assets, liabilities and capital were as follows:
Assets Liabilities and Capital
Cash P250,000 Liabilities P200,000
Non-cash assets 1,000,000 Peter, Capital 300,000
Paul, Capital 350,000
Mary, Capital 400,000
Total assets P1,250,000 Total liabilities and capital P1,250,000
The partnership will be liquidated over a prolonged period. As cash is available, it will be distributed to the
partners. The first sale of non-cash assets having a book value of P600,000 realized P475,000. How much cash
should be distributed to each partner after this sale?
a. Peter, P90,000; Paul, P140,000; Mary, P295,000
b. Peter, P210,000; Paul, P290,000; Mary, P145,000
c. Peter, P290,000; Paul, P210,000; Mary, P105,000
d. Peter, P150,000; Paul, P175,000; Mary, P200,000
2. A partnership is currently holding P400,000 in assets and P234,000 in liabilities. The partnership is to be
liquidated, and P20,000 is the best estimation of the expenses that will be incurred during this process. The four
partners share profits and losses as shown. Capital balances at the start of the liquidation follow:
KK, capital (40%) P59,000 BB, capital (10%) P34,000
MM, capital (30%) 39,000 JJ, capital (20%) 34,000
The partners realize that BB will be the first partner to start receiving cash. How much cash will BB receive before
any of the other partners collects any cash?
a. P12,250 b. P14,750 c. P17,000 d. P19,500
3. CC, PP, MM, and HH are partners who share profits and losses on a 4:3:2:1 basis, respectively. They beginning
to liquidate the business. At the start of this process, capital balances are as follows:
CC, capital P60,000 MM, capital P43,000
PP, capital 27,000 HH, capital 20,000
Which of the following statements is true?
a. The first available P2,000 will go to HH
b. CC will be the last partner to receive any available cash
c. The first available P3,000 will go to MM
d. CC will collect a portion of any available cash before HH receives money

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Questions 4 and 5 are based on the following information:
A statement of financial position for the partnership of D, S and L who share profits in the ration of 2:1:1, show the
following balances just before liquidation:
Cash P12,000 D, capital P22,000
Other assets 59,500 S, capital 15,500
Liabilities 20,000 L, capital 14,000
On the first month of the liquidation, certain assets are sold for P32,000. Liquidation expenses of P1,000 are paid, and
additional liquidation expenses are anticipated. Liabilities are paid amounting to P5,400, and sufficient cash is retained to
insure the payment to creditors before making payments to partners. On the first payment to partners, Dy receives
P6,250
4. The total cash distributed to partners in the first installment is
a. P20,000 b. P12,500 c. P25,000 d. P10,000
5. The amount of cash withheld for anticipated liquidation expenses and unpaid liabilities is
a. P14,600 b. P2,000 c. P16,600 d. P17,600
6. Jacob, Santos and Herras, partners, share net income and losses in the ratio of 5:3:2. The partners decide to
liquidate the partnership. The statement of financial position prior to liquidation are as follows
Assets Liabilities and Equity
Cash P40,000 Liabilities P60,000
Other assets 210,000 Jacob, Loan 8,000
Jacob, Capital 40,000
Santos, Capital 72,000
Herras, Capital 70,000
Total Assets P250,000 Total Liabilities and Equity P250,000
The partnership is to be liquidated by installment. The first sale of non-cash assets with a carrying amount of
P120,000 realized P90,000. Liquidation expenses paid amounted to P2,000. How much cash should be distributed
to each partner?
Jacob Santos Herras Jacob Santos Herras
a. None P35,400 P45,600 c. None P9,600 P28,400
b. P32,000 P62,400 P63,600 d. None P27,600 P40,400
7. As of December 31, 2014, the books of A,B, and C partnership showed capital balance of A, P40,000, B, P25,000,
and C, P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to dissolve and
liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all liabilities amounting to
P12,000, they still have P28,000 cash left for distribution. The loss on realization of the non-cash assets was
a. P42,000 b. P40,000 c. P45,000 d. P21,000
8. Based on #7, assuming that any debit balance of partners’ capital is uncollectible, the share of A on P28,000
cash for distribution was
a. P19,000 b. P16,000 c. P18,000 d. P17,800
9. The statement of financial position of the firm of A, B, C and D, just prior to liquidation shows:
A, Loan P1,000 C, Capital P6,850
A, Capital 5,500 D, Capital 4,500
B, Capital 5,150
A,B, C, and D share profits 4:3:2:1 respectively. Certain assets are sold for P6,000 and this is distributed to
partners. How much cash should C receive?
a. P3,283 b. P 0 c. P2,717 d. P6,000

END