ACCT 2A&B: Accounting for Partnership & Corporation

BCSV

ACCT 2A&B: Accounting for Partnership & Corporation I

Accounting for Partnership Liquidation
I. CONCEPTUAL SKILLS.
A. TRUE OR FALSE
Write A if the statement is true otherwise, write B.
1. Partnership dissolution is always followed by liquidation.
2. In a statement of liquidation, there are only two classes of assets – cash and other assets.
3. If the deficient partner is insolvent, his deficiency will be absorbed by the other partners distributed
according to their profit and loss ratio.
4. Non-cash assets that are not sold should be written off as a loss and such loss is divided to the partners
equally.
5. The amount of offset in exercising the right of offset shall be the amount of a partner’s loan to the
partnership or the amount of his deficiency, whichever is lower.
6. A deficient but solvent partner has to still share on the deficiency of an insolvent partner in case of final
liquidation.
7. A partner’s claim from the partnership, upon liquidation, increases the amount available for the partner’s
personal debts.
8. In a statement of liquidation, the accounting equation is observed throughout the liquidation process.
9. Personal creditors of individual partners have priority over partnership creditors in the order of claims
against the personal assets of a partner.
10. Liquidation expenses which are incurred to facilitate the immediate realization of non-cash assets affect
cash but not capital.
11. A deficient partner is automatically an insolvent partner.
12. A partner with the lowest loss absorption balance has the first priority on cash distributions.
13. Priority of claims is the order of creditors’ rights against the partnership’s assets and the personal assets of
each partner.
14. Cash priority program represents cash payments to partners which are computed on the assumption that
nothing will be realized on the remaining non-cash assets.
15. Partner’s loss absorption capacity is computed by multiplying the sum of a partner’s capital and loan
balances by that partner’s profit and loss sharing ratio.

B. MULTIPLE CHOICES
Choose the letter of the best answer.

16. In accounting for the liquidation of a partnership, cash payments to partners after all outside creditors’
claims have been satisfied, but before the final cash distribution, should be made according to
A. Safe payments computation
B. The partners’ profit and loss sharing ratio
C. The final balances in partners’ capital accounts
D. Partners’ share of the gain or loss on liquidation

17. In a partnership liquidation, a gain on sale of non cash assets is

A. Allocated to the partners based on their capital balances
B. Allocated to the partners based on their profit and loss sharing ratio
C. Allocated to the partner with the lowest capital balance
D. Allocated to partnership liabilities

18. Liquidation of a partnership includes all of the following steps, except

1|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

A. Obtaining court approval

B. Selling the partnership’s noncash assets
C. Paying the partnership liabilities
D. Distributing the remaining cash to partners

19. Settlement of a partner’s personal liabilities may come from

A. Personal assets
B. Partner’s claim on partnership assets
C. Claims of co-partners
D. A and B only

20. Liquidation losses would include

A. Loss on realization of non cash assets
B. Liquidation expenses
C. Share on the deficiency of an insolvent partner
D. All of the above

21. A capital deficiency can be eliminated by the following except

A. Offsetting against a partner’s loan
B. Additional investment
C. Selling non cash assets at a gain
D. Loss to the other partners

22. A partner’s interest includes

A. Capital balance
B. Partner’s loan to the partnership
C. A only
D. A and B

23. A capital deficiency in a partner’s capital that is uncollectible is

A. The result of a sale of non cash asset at a profit
B. The result of a loss in operations
C. A loss to the other partners
D. A gain to the other partners

24. The other partners must absorb the deficiency in a partner’s capital account in liquidation because of
A. Limited life and mutual agency
B. Mutual agency and unlimited liability
C. Limited life and co-ownership of property
D. Mutual agency and partnership’s taxability

25. When a partnership is liquidated, all of the following may occur, except
A. A partner erases his deficiency by declaring bankruptcy
B. The other partners absorb a partner’s deficiency
C. A partner erases his deficiency by contributing property
D. A partner erases his deficiency by contributing cash

26. The order of partnership liquidation process is

A. Sell assets, disburse cash to partners, pay liabilities
B. Disburse cash to partners, pay liabilities, sell assets

2|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

C. Pay liabilities, sell assets, disburse cash to partners

D. Sell assets, pay liabilities, disburse cash to partners

27. In a partnership liquidation, a loss from sale of non cash assets is

A. Allocated to the partner with the highest capital balance
B. Allocated to the partnership liabilities
C. Allocated to the partners based on their capital balances
D. Allocated to the partners based on their profit and loss sharing ratio

28. Which of the following statement is incorrect?

A. Partnership creditors are preferred as to partnership assets
B. Partnership creditors are preferred as to each partner’s separate assets
C. A partner’s separate creditors are preferred as to the partner’s separate assets
D. A partner’s separate creditors may attach a partner’s share in the partnership assets

29. The process of converting non cash assets into cash is called
A. Winding up of assets
B. Disposal of property
C. Realization
D. Dissolution

30. The partner with the _____ loss absorption capacity is the least priority on cash distributions.
A. Highest
B. Lowest
C. A and B
D. Neither A nor B

II. COMPUTATIONAL AND ANALYTICAL SKILLS

Problem 1:
Nico, Ricardo, Jack, & Esperanta are partners, sharing earnings in the ratio of 3:4:6:7, respectively. The balance of
their capital accounts on December 31, 2012 are as follows: Jack – P 23,500 ; Nico – P 6,000 ; Esperanta – P 9,250 ;
Ricardo - P 22,250. The partners decided to liquidate and they accordingly convert the noncash assets into P 25,000
cash. After paying the liabilities amounting to P 6,900, they have P 23,100 to divide. Assume that a debit balance in
any partner’s capital is uncollectible.

Determine the following:

1. The book value of the non cash assets.
2. The gain (loss) on realization.
3. The share of Ricardo in the gain (loss) upon conversion of the non cash assets into cash.
4. The amount of cash received by Jack.

Problem 2:
Pudge, Nessaj, Omni, & Slark share profits in the ratio of 1:1:2:1, respectively. The partnership cannot meet its
obligations to creditors and dissolution is authorized on Sept. 30, 2013. A statement of financial position for the
partnership on this date shows balances as follows:

Assets Liabilities and Equity

Cash P 65,000 Liabilities P 280,000
Other assets 875,000 Pudge, Capital 174,000

3|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

Nessaj, Capital 181,000

Omni, Capital 165,000
Slark, Capital 140,000
Total Liabilities & Equity P 940,000
Total assets: P 940,000

The liabilities include a P 40,000 loan from Omni.

The personal status of partners on this date is determined to be as follows:

Partners Cash and cash value of personal assets Personal liabilities

Pudge P 290,000 P 150,000
Nessaj 100,000 160,000
Omni 150,000 120,000
Slark 210,000 275,000

The other assets of the partnership are sold and realized P 450,000.

Determine the following:

5. Share of Pudge in the gain (loss) on realization
6. Share of Omni in the gain (loss) on realization
7. The amount that will be paid to the personal creditors of Slark
8. The amount that will be received by Nessaj from the distribution of cash
9. the amount that will be paid to the personal creditors of Pudge
10. the amount that will be paid to the personal creditors of Omni

Problem 3:
The partnership accounts of Kevin, Rosi, and Pia who share earnings in a 4:3:3 ratio are as follows on Dec. 31, 2010
Kevin, drawing (debit) P 30,000
Rosi, drawing (credit) 10,000
Pia, Loan 50,000
Kevin, Capital 160,000
Rosi, Capital 130,000
Pia, Capital 140,000

Total assets amounted to P 700,000 including P 80,000 cash and liabilities total P 240,000. The partnership was
liquidated in January 2011 and Rosi received 110,000 cash payment in the liquidation.

Determine the following:

11. The loss on realization.
12. The amount of cash received by Pia.

Problem 4:
The statement of financial position shown below was prepared just prior to the liquidation of the Ibasco Partnership.
The partners shared in the profits and losses in the ratio of 4:2:1:1.

Ibasco Partnership
Statement of Financial Position
September 30, 2013
Assets Liabilities and Equity
Cash P 50,000 Liabilities P 450,000

4|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

Other Assets 950,000 JR, Loan 37,500

Receivable from Khinne 62,500 Khinne, Capital 381,250
Miz, Capital 93,750
JR, Capital 50,000
Annie, Capital 50,000
TOTAL ASSETS: P 1,062,500 TOTAL LIABS & EQUITY P 1,062,500

Other assets are sold for P 1,150,000 and available cash is distributed to the proper parties. Cash is distributed in
final settlement.

Questions to answer:
13. How much is the share of Annie in the gain?
14. How much cash did Khinne received?
15. Who among the partners received the smallest amount of cash?

Problem 5:
The Chen Partnership has just completed a very unprofitable year. The partners agree to liquidate. The financial
statements of the partnership have been prepared for the fiscal year ending July 31, 2012. And the yearend
statement of financial position is shown below:

Assets
Cash P 1,000
Accounts Receivable P 80,000
Less: Allow. for bad debts 20,000 60,000
M. Inventory 52,000
Machinery & Equipment 100,000
Less: Accum. Depreciation 60,000 40,000
TOTAL ASSETS: P 153,000

Liabilities and Equity

Accounts payable P 20,000
Notes payable (Due 2013) 86,000
AA, Capital 30,000
BV, Capital 17,000
TOTAL LIABS & EQUITY P 153,000

The partners desired to complete the liquidation process as quickly as possible. Information concerning the
liquidation follows:
1. Accounts receivable equal to the net carrying value plus 20% of the estimated doubtful accounts were
collected.
2. M. Inventory were realized for P 25,000.
3. Machinery and Equipment were realized equal to 60% of their book value.
4. Unrecorded expense vouchers totaling P 2,000 were discovered. this was not yet paid.
5. The bank charged the partnership P 1,000 for paying the note earlier than the due date; the amount is
added to the note.

AA is personally insolvent. However, BV’s personal assets exceed his personal liabilities by P 4,000. AA and BV
share on earnings in the ratio of 4:6, respectively.

Questions to answer:

5|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

16. How much is the gain (loss) on realization?

17. How much cash did AA received?

Problem 6:
A and B share earnings in a 60:40 ratio. They have decided to liquidate their partnership. A portion of the assets has
been sold but other assets with a carrying amount of P 84,000 still must be realized. All liabilities have been paid, and
cash of P 50,000 is available for distribution to partners. The capital accounts show balances of P 90,000 for A and P
44,000 for B.

Questions to answer:
18. How much cash did A received from the first distribution?

Problem 7:
When Zee and Dee, partners who share earnings equally, were incapacitated in an airplane accident, a liquidator
was appointed to wind up their business. The accounts showed cash, P 70,000; other assets, P 220,000; liabilities, P
40,000; Zee’s capital, P 142,000; and Dee’s capital, P 108,000. Because of the highly specialized nature of the non
cash assets, the liquidator anticipated that considerable time would be required to dispose them. The expenses of
liquidating the business are estimated at P 20,000.

Questions to answer:
19. If Zee’s guardian, since Zee is incapacitated, received Zee’s share of P 39,625 from the first
distribution of cash, How much cash was realized from the initial sale of assets?
20. Using the information in # 19, What is the balance of Dee’s capital after the first distribution of cash?

Problem 8:
The assets and equities of the Dobby Partnership at the end of its fiscal year on Oct. 31, 2013 are as follows:

Assets Liabilities and Equity

Cash P 75,000 Liabilities P 250,000
Receivables – net 100,000 Loan from G 50,000
Inventory 200,000 E, Capital (30%) 225,000
Plant assets – net 350,000 F, Capital (50%) 150,000
Loan to F 25,000 G, Capital (20%) 75,000
P 750,000 P 750,000

The partners decide to liquidate the partnership. They estimate that the non cash assets other than the loan to F can
be converted into P 500,000 cash over the two-month period ending December 31, 2013. Cash is to be distributed to
the appropriate parties as it becomes available during the liquidation process.

Questions to answer:
21. Who among the partners is the most vulnerable to partnership losses on liquidation?
22. Assuming that P 325,000 was realized from the initial sale of assets, How much did G received?
23. Assuming that a total amount of P 37,500 is available for distribution to partners after all non partner
liabilities are paid, How much did E received?
24. Assuming that E received a total of P 180,000, how much must have been received by G?
25. Assuming that F received a total of P 180,000, how much must have been received by E?
26. Using the information in # 25, How much is the total cash distributed?
27. Using the information in # 22, and the final sale of assets realized P 220,000, How much cash did F
received?

6|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

28. Using the information in # 22 & 27, Compute for the total cash received by E throughout the
liquidation.

Problem 9:
AL, AC, GF, & EM are partners engaged in the business of selling product XY. They agreed to dissolve their
partnership as of January 31, 2012.

The partners agreed that distribution of cash to the partners were to be made on the last day of each month during
liquidation staring Feb. 29, 2012. Provided sufficient cash was withheld. EM was designated as the partner in charge
of liquidation.

The partnership agreement provided that profits and losses were to be divided on the following basis: AL, 20%; AC,
30%; GF, 30%; and EM, 20%.

The following was the condensed statement of financial position of the firm as of Jan. 31, 2012:

Assets Liabilities and Capital

Cash P 100,320 Accounts payable P 21,360
Other assets 193,530 AL, loan 15,000
AL, Capital 24,120
AC, Capital 96,480
GF, Capital 109,020
EM, Capital 27,870
TOTAL ASSETS: P 293,850 TOTAL LIABS & EQUITY P 293,850

Transactions during liquidation other than cash distribution to partners are summarized as follows:
February March April
Liquidation of assets with a
book value of:
P 52,010 P 39,210
P 78,880 P 90,520
--remainder-- P 73,100
Paid to creditors on
account P 10,250 11,110 ---
Paid liquidation expense P 9,250 10,220 8,690

Questions to answer:
29. How much cash did AC received from the February distribution?
30. How much cash did EM received from the February distribution?
31. What is the cash balance after the initial distribution?
32. What is the balance of AL’s interest in the partnership after the initial distribution?
33. How much cash did EM received from the March distribution?
34. How much cash did AL received from the March distribution?
35. What is the balance of GF’s capital after the 2nd distribution?
36. What is the balance of EM’s capital just before the final distribution of cash?
37. Compute the total cash received by GF throughout the liquidation.

Problem 10:
G, H, and I share profits in the ratio of 5:3:2, respectively. Capital and loan balances from the partnership just prior to
liquidation are:

7|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

H G I
Capital balances P 120,000 90,000 40,000
Loan balances 45,000 30,000 13,000

Assets totaled P 702,000 including P 4,000 cash and liabilities (excluding loans above) totaled P 364,000.
Questions to answer:
38. Assuming G received P 12,500 from the first distribution of cash, How much cash is available for
distribution?
39. Using the information in # 38, How much cash was realized from the initial sale of assets?
40. Assuming I received P 3,900 from the first distribution of cash, How much must have been received
by H?

Problem 11:
Q, O, and P decided to dissolve the partnership on November 30, 2012. Their capital balance balances and profit
ratio on this date, follow:
Q (40%) – P 50,000
O (30%) – P 60,000
P (30%) – P 20,000

The net income from Jan. 1 – Nov. 30, 2012 is P 44,000. Also, on this date, cash and liabilities are P 40,000 and P
90,000, respectively.

Question to answer:
41. For Q to receive P 55,200 in full settlement of his interest in the firm, how much must be realized
from the sale of the firm’s non cash assets?

Problem 12:
A local partnership was considering the possibility of liquidation since one of the partners (Z) is solvent and others
are insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis,
respectively.
W, capital – P 60,000
X, capital – 67,000
Y, capital – 17,000
Z, capital – 96,000

W’s creditors filed a P 30,000 claim against the partnership’s assets. At that time, the partnership held assets
reported at P 360,000 and liabilities of P 120,000.

Question to answer:
42. If the assets could be sold for P 228,000, what is the minimum amount that W’s creditors would have
received?

Problem 13:
The partnership of A, B, and C was dissolved on July 31, 2012 and account balances after non cash assets were
converted into cash on October 30, 2012 are:
Assets:
Cash – P 50,000
Liabilities and Equity:
Accounts payable – P 120,000
A, Capital (30%) – P 90,000

8|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

B, Capital (30%) – (60,000)

C, Capital (40%) – (100,000)

Personal assets and liabilities of the partners at October 30, 2012 are:
Personal assets: Personal debts:
A P 80,000 P 90,000
B 100,000 61,000
C 192,000 80,000

Question to answer:
43. If C contributes P 70,000 to the partnership to provide cash to pay the creditors, what amount of A’s
P 90,000 partnership equity would appear to be recoverable?

***Problem 14:***
On Jan. 1, 2009, X and Y agreed to combine their talents and capital and form XY Partnership. X contributed P
60,000 cash, merchandise with a book value of P 120,000; a current market value of P 145,000; and an average
value of P 132,000 and equipment (net) with a book value of P 171,000; a discounted value of P 173,500; fair value
of P 185,000 and a dissolution value of P 140,000. Y gave P 90,000 cash and Land with a book value of P 300,000;
an assessed value for tax purposes of P 286,000; an appraised value of P 330,000; and original value of P 290,000.
The partners agreed to invest or withdraw cash in order their capital to be at par with each other. On Dec. 31, 2009,
before the books are closed, the drawing account of X shows a debit balance of P 6,636; and for Y, debit balance, P
1,604. The partnership agreement with regards to division of profits and losses provides that X and Y is to be allowed
of 7% and 6% interest on capital balance (at the inception of the partnership) in excess of P 300,000; each partner is
to be allowed of an annual salary of P 30,000; X is to receive bonus of 15% and Y, 25% of the income after
allowance for interests, salaries, and bonuses; and the remainder is to be divided to X and Y in the ratio of 65:35,
respectively. The income summary account on Dec. 31, has a credit balance of P 88,150 before any entry for the
allowance of interests, salaries, and bonuses, and this balance is closed into the partners’ capital account. The
balances of the drawing accounts are also closed into the capital accounts. On Jan. 3, 2010, Z is admitted as a
partner upon investment of P 360,000 in the firm. X and Y sharing in the ratio 65:35 give a bonus to Z so that Z may
have a 30% interest in the firm. The new agreement provides that profits and losses are to be distributed as follows:
X, 35%; Y, 25%; Z, 40%. Interests, salaries, and bonuses are not allowed. On Dec. 31, 2010, the partners’ drawing
accounts have debit balance as follows: X, P 4,118; Y, P 3,509; Z, P 4,173. The income summary account has a P
115,000 debit balance. Accounts are closed. In Jan. 2011, the partners decide to liquidate. The assets are realized
on a piece-meal basis and the partners decided to distribute cash as it becomes available. In Feb., after creditors are
fully paid, cash of P 142,000 remains available for partners. This is distributed to the proper parties. In Apr., cash
realized from sale of non cash assets is P 135,600 and this is distributed to the partners. In May, cash realized from
the sale of non cash assets is P 169,500. The remaining non cash assets were unrealizable and were written off as a
complete loss.

Questions to answer:
44. What is the balance of X, capital upon formation?
45. How much is the share of X in the 2009 net income?
46. How much is the bonus of Y in the net income?
47. What is the capital balance of X immediately after the admission of Z?
48. How much is the share of Z in the 2010 loss?
49. What is the capital balance of Y prior to liquidation?
50. Who among the partners is the most invulnerable to losses?
51. How much cash did Y received from the February distribution?
52. What is the capital balance of X after the first distribution?
53. How much cash did Z received from the April distribution?

9|Page
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

54. How much cash did X received from the April distribution?
55. How much cash did Y received from the final distribution?
56. How much cash did Z received from the final distribution?
57. How much was left in X’s capital after the final distribution?
58. How much must have been the total loss on realization?
~~~~
“Don’t lose hope. When the sun goes down, the stars come out.”

10 | P a g e
ACCT 2A&B: Accounting for Partnership & Corporation
BCSV

*Suggested key*
I. CONCEPTUAL SKILLS.
A. True or False.
1. B 9. A
2. A 10. B
3. A 11. B
4. B 12. B
5. A 13. A
6. A 14. B
7. A 15. B
8. A
B. Multiple Choices.
16. C 24. B
17. B 25. A
18. A 26. D
19. D 27. D
20. D 28. B
21. C 29. C
22. D 30. B
23. C
II. COMPUTATIONAL & ANALYTICAL SKILLS.
1. P 62,900 30. P -0-
2. (P 37,900) 31. P 11,110
3. (P 7,580) 32. P 29,515
4. P 9,910 33. P 11,216
5. P 85,000 34. P 17,271
6. P 170,000 35. P 18,792
7. P 265,000 36. P 12,882
8. P 96,000 37. P 103,362
9. P 150,000 38. P 123,000
10. P 120,000 39. P 483,000
11. P 100,000 40. P 91,350
12. P 160,000 41. P 193,000
13. P 25,000 42. P 2,500
14. P 418,750 43. P 81,000
15. ANNIE 44. P 405,000
16. (P 39,000) 45. P 45,636
17. P 10,000 46. P 2,589
18. P 39,600 47. P 434,268
19. P 35,250 48. P 46,000
20. P 102,375 49. P 408,410
21. F 50. Y
22. P 45,000 51. P 134,947.50
23. P 37,500 52. P 382,847.50
24. P 95,000 53. P -0-
25. P 258,000 54. P 79,100
26. P 585,000 55. P 47,960
27. P 72,500 56. P 54,396
28. P 193,500 57. P 236,603.50
29. P 45,592.50 58. P 676,010

11 | P a g e