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(Advanced Financial

Accounting and Reporting


Part 1)
LECTURE AID

2017

ZEUS VERNON B. MILLAN

AFAR PART 1: Zeus Vernon B. Millan


Chapter 4 - Partnership (Part 4)
Learning Objectives

• State the order of priorities in cases of


liquidation.
• Account for the liquidation of a
partnership.

AFAR PART 1: Zeus Vernon B. Millan


Partnership Liquidation

• Liquidation is the termination of business operations or the


winding up of affairs. It is a process by which
a. the assets of the business are converted into cash,
b. the liabilities of the business are settled, and
c. any remaining amount is distributed to the owners.

AFAR PART 1: Zeus Vernon B. Millan


Methods of liquidation

1. Lump-sum liquidation – the partners’ claims are settled in a


single, lump-sum payment after all non-cash assets are realized
and after all liabilities are settled.

2. Installment liquidation – the partners’ claims are settled on an


installment basis as non-cash assets are realized and as cash
becomes available, but only after all liabilities are fully settled.

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Settlement of claims

• The available cash of the partnership is used to settle claims in the


following descending order:
1. First, to outside creditors;
2. Second, to inside creditors (e.g., payables to partners);
3. Third, to owners’ interests

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Lump-sum vs. Installment liquidation
The following procedures shall be observed when accounting for lump-
sum liquidation or installment liquidation:

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Lump-sum vs. Installment liquidation (Cont’n.)

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Marshalling of assets

• A partner who is solvent, shall be required to make additional


contributions to settle any deficiency in his capital balance, subject
to the following order of priority over his personal assets:
1. The partner’s separate creditors
2. The partnership creditors
3. To the other partners by way of contribution

• The capital deficiency of an insolvent partner shall be offset to the


capital credits of the other partners.

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CLASSROOM
DISCUSSIONS &
COMPUTATIONS
PROBLEM 4 -2 – THEORY & COMPUTATIONAL

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 QUESTIONS????
 REACTIONS!!!!!

AFAR PART 1: Zeus Vernon B. Millan


IFA PART 1A: Zeus Vernon B. Millan
SEAT WORK
PROBLEM 4-4: CLASSROOM ACTIVITY

AFAR PART 1: Zeus Vernon B. Millan