AC102 PPT8 - Partnership Liquidation Lump Sum (PPT from Sir Leandro Fua)

College of Business, Entrepreneurship and Accountancy

MIRIAM COLLEGE


Business Administration Department

BSA – 102Principles of Accounting Part 2

2nd Semester, SY 2012-2013


PartnershipPREVIEW OF THE CHAPTER

PARTNERSHIPLIQUIDATION

Nature of Partnership Liquidation

• Definition• Causes of liquidation• Accounting problems in partnership

liquidation• Types of liquidation

• Lump-Sum• Instalment (piece-meal)

Accounting Procedures in Lump-Sum Liquidation

• Realization• Distribution of gain or loss on

realization• Payment to creditors• Distribution of cash to partners


Dissolution of a Partnership

• Is defined in Article 1825 of the Civil Code of the Philippines as the change in the relation of the partners caused by any partner ceasing to be associated in the carrying out of the business

• Dissolution refers to the termination of the life of an existing partnership and may be followed by:1. Formation of a New Partnership2. Liquidation


Conditions Resulting to Partnership Dissolution

• Admission of a New Partner

• Retirement or withdrawal of a partner

• Death, Incapacity or bankruptcy of a partner

• Incorporation of Partnership


Formation of a New Partnership

• Refers to the dissolution of a partnership by a change in the capital or ownership structure of the business.

• The newly create partnership continues the business activities of the dissolved partnership without interruption.


Partnership Liquidation

• Refers to dissolution of the partnership leading to the termination of the business activities carried on by the partnership

• and the winding up of partnership’s business affairs to going out of business.


• Partnership dissolution with liquidation may be caused by any of the following factors:

1. The accomplishment of the purpose for which the partnership was organized

2. The termination of the term/period covered by the partnership contract.

3. The bankruptcy of the firm.4. The mutual agreement among the partners to close

the business.


TYPES OF LIQUIDATION• Lump-sum liquidation or liquidation by totals.– This is a type of liquidation whereby the distribution of

cash to the partners is done only after all the non-cash assets have been realized, the total amount of gain or loss on realization is known, and all liabilities have been paid.

• Liquidation by instalment or piece-meal liquidation– This is a type of liquidation whereby assets are realized on

a piecemeal basis and cash is distributed to partners on a periodic basis as it becomes available, that is, even before all non-assets are converted into cash.


PROCEDURES IN LUMP-SUM LIQUIDATION

1. Sale of non-cash assets

2. Distribution or allocation of gain or loss on realization among the partners according to their residual profit and loss ratios (salary and interest factors disregarded) unless liquidation ratios are specified in the partnership agreement.


• When realization of assets results in a loss, the loss is carried to the capital accounts of the partners as a deduction.

• If a partner’s capital account results in a debit balance (called capital deficiency), the deficiency can be eliminated by

– Making additional cash investment, if the deficient partner is solvent.

– Charging the deficiency as additional loss to the remaining partners, if the deficient partner is insolvent.


PROCEDURES IN LUMP-SUM LIQUIDATION

3. Distribution of cash to creditors 4. Distribution of cash to partners. In this

procedure, the provisions of the marshalling of assets and the exercise of the right of offset are applied.


STATEMENT OF LIQUIDATION

• The statement of liquidation is a prepared to summarize the liquidation process.

• It is the basis of the journal entries made to record liquidation.


DEFINITION OF TERMS1. Dissolution - the termination of a partnership as a going

concern; it is the termination of the life of a partnership.2. Winding up - the process of settling the business Or

partnership affairs; it is synonymous to liquidation.3. Termination - the point in time when all partnership

affairs are ended.4. Liquidation - the interval of time between dissolution

and termination of partnership affairs; it is also the process of winding up a business which normally consists of conversion of assets into cash, payment of liabilities and distribution of remaining cash among the partners.


DEFINITION OF TERMS

5. Realization — the process of converting non-cash assets into cash.

6. Gain on realization - the excess of the selling price over the cost or book value of the assets disposed or sold through realization.

7. Loss on realization — the excess of the cost or book value over the selling price of the assets disposed or sold through realization.

8. Capital deficiency — the excess of a partner’s share on losses over his capital.


DEFINITION OF TERMS

9. Deficient partner - a partner with a debit balance in his capital account after receiving his share on the loss on realization.

10.Right of offset — the legal right to apply part or all of the amount owing to a partner on a loan balance against deficiency in his capital account resulting from losses in the process of liquidation.

11.Partner’s interest — the sum of a partner’s capital, loan balance and advances to the partnership.


Marshalling of Assets

• involves the order of creditors’ rights against the partnership’s assets and the personal assets of the individual partners.

• The order in which claims against the partnership’s assets will be marshalled is as follows:1. Partnership creditors other than partners2. Partners’ claims other than capital and profits, such

as loans payable and accrued interest payable3. Partners’ claim to capital or profits, to the extent of

credit balances in capital accounts.


Illustrative Problem

(1) The other assets were sold for P 140,000.(2) The other assets were sold for P74,000.(3) The other asses were sold for P68,000. Deficient partner was solvent.(4) The other assets were sold for P68,000. Deficient partner was insolvent.

Assets Liabilities and EquityCash 8,000 Liabilities 44,800 Other Assets 136,000 Endrada, Loan 2,000

Elina, Loan 3,200 Encina, Capital 38,000 Endrada, Capital 24,000 Elina, Capital 32,000

Total Assets 144,000 Total Liabilities and Equity 144,000

Encina, Endrada, and ElinaStatement of Financial Position

December 01, 2010


Encina, Endrada, and Elina Statement of Liquidation December 1 - 31, 2012

Other Loan Capital

Cash Assets Liabilities

Endrada Elina Encina -

40% Endrada

- 40% Elina - 20%

Balance before Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000 Sale of Assets and distribution of gain 140,000 (136,000) 1,600 1,600 800

Balances 148,000 - 44,800 2,000 3,200 39,600 25,600 32,800

Payment of Liabilities (44,800) (44,800)

Balances 103,200 - -

2,000 3,200 39,600 25,600 32,800

Payment to partners (103,200) (2,000) (3,200) (39,600) (25,600) (32,800)



Cash Other Assets Liabilities

Loan Capital


40% Endrada

- 40% Elina - 20%

Balance before Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000 Sale of Assets and distribution of gain 74,000 (136,000) (24,800) (24,800) (12,400)

Balances 82,000 -

44,800 2,000 3,200 13,200 (800) 19,600


Balances 37,200 -

-

2,000 3,200 13,200 (800) 19,600

Offsetting of Loan 800 800

Balances 38,000 -

- 2,000 3,200 13,200 - 19,600

Payment to partners (38,000) (2,000) (3,200) (13,200) (19,600)




Loan Capital


40% Endrada -

40% Elina - 20%


Balances 76,000 -

44,800 2,000 3,200 10,800 (3,200) 18,400


Balances 31,200 -

-

2,000 3,200 10,800 (3,200) 18,400 Offsetting of Loan (2,000) 2,000

Balances 31,200 -

-

-

3,200 10,800 (1,200) 18,400

Additional Cash 1,200 1,200

Balances 32,400 -

-

-

3,200 10,800 -

18,400 Payment to partners (32,400) (3,200) (10,800) (18,400)




Loan Capital


40% Endrada -

40% Elina - 20%


Balances 76,000 -

44,800 2,000 3,200 10,800 (3,200) 18,400


Balances 31,200 -

-

2,000 3,200 10,800 (3,200) 18,400 Offsetting of Loan (2,000) 2,000

Balances 31,200 -

-

- 3,200 10,800 (1,200) 18,400

Additional Cash (800) 1,200 (400)

31,200 - -

- 3,200 10,000 - 18,000 Payment to partners (31,200) (3,200) (10,000) (18,000)

Date post:	09-Feb-2015
Category:	Entertainment & Humor
Upload:	carla
View:	7,127 times
Download:	1 times

AC102 PPT8 - Partnership Liquidation Lump Sum (PPT from Sir Leandro Fua)

Entertainment & Humor