LIQUIDATION

The process of winding up the affairs of the business The process of converting all assets of the business into cash (realization), followed by the final payments of creditors claims and the partners capital balances in the partnership Must observe the Principle of Equitable Distribution of the Assets Between partnership creditors and partners legal rights

MARSHALING OF ASSETS
A legal doctrine that refers to the segregation of assets owned by the partnership AND the personal assets owned by the several partners. It defines the PRIORITY OF CLAIMS against the assets of the partnership and of the partners WHEN the partnership and/or one or more of the partners are insolvent As to Partnership assets debts of partnership shall apply to 1. outside creditors 2. partners claims As to Personal assets of the partner (insolvent), applied in the order of priority 1. 2. 3. Settlement of debts to personal creditors To partnership creditors To other partners by way of contribution

METHODS OF LIQUIDATION
1. Liquidation by Total or Lump sum Method 2. Liquidation by Installment or Piecemeal Liquidation

LUMP SUM LIQUIDATION

1. Adjustments of accounts and closing of nominal accounts
2. The non-cash assets are converted into cash by selling it to 3rd parties When resulted to Gain on realization = increase on partners capital When resulted to Loss on realization = decrease on partners capital 3. Any Gain or Loss on Realization will be distributed to the partners capital balances BASED ON P/L ratio 4. Any capital DEFICIENCY resulting from distribution of loss from realization must be eliminated by: a. Applying Right of Offset if the deficient partner has loans receivable from partnership (Loans Payable to Partner) b. Make Additional Investment - if such partner is a solvent general partner c. Absorption method based on P/L ratio when a deficient partner is a LIMITED partner or is INSOLVENT 5. Available cash will be distributed according to priority:

a.Payment of liabilities to outside creditors (Liabilities) b.Payment of payable to partners (Loans Payable, partner) c. Payment of partners capital

Ken, Sol, & Pat are partners who share P/L ratio of 5:3:2, respectively. They decided to liquidate their partnership. The following is their statement of financial position: KSP PARTNERSHIP Statement of Financial Position Cash P500,000 AP 550,000

AR
Inventories Equipment Accu. Depr.

100,000
800,000 700,000 (100,000)

Loan due to Ken

Ken, Capital Sol, Capital Pat, Capital

50,000
300,000 600,000 500,000

P 2,000,000

P 2,000,000

Non-cash assets are sold for: P70,000 for AR; P810,000 for Inventories; and P320,000 for Equipment. Liquidation Expenses paid amounted to P3,000.

APPLICATION OF RIGHT OF OFFSET

Ken, Sol, & Pat are partners who share P/L ratio of 5:3:2, respectively. They decided to liquidate their partnership. The following is their statement of financial position: KSP PARTNERSHIP Statement of Financial Position Cash AR Inventories Equipment Accu. Depr. P500,000 100,000 800,000 700,000 (100,000) P 2,000,000 AP Loan due to Ken Ken, Capital Sol, Capital Pat, Capital 525,000 75,000 300,000 600,000 500,000 P 2,000,000

Assuming that all non-cash assets are sold for P750,000 to EPS Comp.

RIGHT OF OFFSET, ADDITIONAL INVESTMENT

Ken, Sol, & Pat are partners who share P/L ratio of 2:3:1 respectively. They decided to liquidate their partnership. The following is their statement of financial position:
KSP PARTNERSHIP Statement of Financial Position Cash P20,000 AP 25,000

AR
Inventories Equipment Accu. Depr.

50,000
40,000 105,000 (15,000)

Loan due to Sol

Ken, Capital Sol, Capital Pat, Capital

5,000
50,000 45,000 75,000

P 200,000

P 200,000

Assuming that all the non-cash assets are sold for P72,000 and that all of the partners are solvent. 1. Show the application of right of offset & additional investment

ABSORPTION OF CAPITAL DEFICIENCY

Ken, Sol, & Pat are partners who share P/L ratio of 2:3:1 respectively. They decided to liquidate their partnership. The following is their statement of financial position: KSP PARTNERSHIP Statement of Financial Position

Cash
AR Inventories Equipment Accu. Depr.

P20,000
50,000 40,000 105,000 (15,000) P 200,000

AP
Loan due to Sol Ken, Capital Sol, Capital Pat, Capital

25,000
5,000 50,000 45,000 75,000 P 200,000

Assume that all non-cash assets are sold for P68,000; Sol becomes insolvent.

PARTNERSHIP IS INSOLVENT AND PARTNERS ARE SOLVENT

Ken, Sol, & Pat are partners who share P/L ratio of 2:1:1 respectively. They decided to liquidate their partnership. The following is their statement of financial position: KSP PARTNERSHIP Statement of Financial Position Cash AR Inventories P16,000 40,000 44,000 ________ P 100,000 AP Ken, Capital Sol, Capital Pat, Capital 60,000 18,000 10,000 12,000 P 100,000

1. Assume that non-cash assets are sold for P40,000 to FPJ Company. All the partners are General partners 2. Using the same problem, only Sol is the limited partner; the partnership creditor collects their remaining claim from Ken

LIQUIDATION BY INSTALLMENT
Ken, Sol, & Pat are partners who share P/L ratio of 2:1:2 respectively. They decided to liquidate their partnership. The following is their statement of financial position: KSP PARTNERSHIP Statement of Financial Position Cash AR Inventories Equipment Accu. Depr. P35,000 15,000 20,000 20,000 (10,000) P 80,000 AP Loan due to Sol Ken, Capital Sol, Capital Pat, Capital 18,000 5,000 10,000 20,000 27,000 P 80,000

The partners agreed that the cash distribution be made monthly. The following are the liquidation transaction: Month Proceeds BV of Assets Sold Liquidation Exp. AP paid Estimated Liquidation Exp.

Jan.
Feb March

10,000
16,000 8,000

15,000
20,000 10,000

3,000
2,000 2,000

15,000
3,000

1,000
2,000