LIQUIDATION When a partnership goes out of business, it ordinary sells most of the assets, pays the creditors and

distributes the remaining cash or other assets to the partners in accordance with their claims. The conversion of assets into cash is referred to as realization; the payment of liabilities is referred to as liquidation. The latter term is also used in a broader sense to refer to the complete winding-up process. Procedure in Liquidation When a partnership is to be liquidated, the books should be adjusted and closed and the net income or loss for the period should be carried to the partners capital accounts. The partnership is then ready to proceed with liquidation. As assets are converted into cash, any differences between the book values and the cash realized represent gains or losses to be divided among partners in the profit and loss ratio. Such gains or losses are carried to the capital accounts. The capital balances then become the basis for settlement. In the course of liquidation, when a partners capital account reports a debit balance and such partner has a loan balance, the law permits exercise of the right of offset, that is, the offset of a part or all of the loan against the capital deficiency. A debit balance indicates the need for a contribution by the deficient partner. The inability of a partnership to recover a capital deficiency will mean that remaining partners will have to absorb such an amount. As cash becomes available for distribution, it is first applied to the payment of outside creditors. It may then be applied in settlement of partners loan and capital balances. It may be observed that the Philippine Partnership Law provides that the partners loans shall rank ahead of partners capital in order of payment. Loss on Realization Case 1 Loss on realization fully absorbed by partners capital balances Case 2 Loss on realization requiring transfer from partners loan account to capital Case 3 Loss on realization resulting in a capital deficiency for one partner Case 4 Loss on realization resulting in capital deficiencies for more than one partner. Illustrative Problem: A, B, and C, who share profits and losses in the ratio of 2:2:1 respectively, decide to liquidate on December 31, 2010. Below is a condensed Statement of Financial Position prepared just prior to liquidation.

A, B, and C Statement of Financial Position December 31, 2010 Assets Cash Other Assets P 20,000 340,000 Liabilities & Capital Accounts Payable P112,000 B, Loan 5,000 C, Loan 8,000 A, Capital 95,000 B, Capital 60,000 C, Capital 80,000 Total Equities P360,000 =======

Total Assets

P360,000 =======

Required: For each below prepare a statement of liquidation, assuming that cash is realized for the other assets as indicated and that all available cash is immediately distributed to the proper parties. Assume further that deficient partners are personally insolvent. a) b) c) d) P250,000 P185,000 P170,000 P125,000