Вы находитесь на странице: 1из 34

REVIEWER

in
ADVANCE
ACCOUNTING

SUBMITTED BY:
ABAGA, Jolina Grace
DUMALANTA, Leo Angelo L.
ROMULO, Patricia Jen C.
TANINGCO, Kient M.

SUBMITTED TO:
ALFRED CHRISTOPHER M. AGOOT, CPA
CHAPTER 1:
PARTNERSHIP
Partnership is a type of business organization where two or more
persons bind themselves to contribute money, property or industry to a
common fund with the intentions of dividing the profits among themselves.
a. Types of Partnership
1. General Partnership- may be formed expressly with a written
agreement or, in some states, impliedly from the conduct of the
parties. All partners in a general partnership are personally liable
for acts of the other partners.
2. Limited partnership- has at least one general partner and at least
one limited partner and usually must be registered with the state.
The general partners have management authority but are
personally liable for acts of the partnership, while limited
partners have limited liability but no management authority.
3. Limited-liability Partnerships- are the most popular of the
partnerships because all partners have the right to manage the
business directly.
b. Characteristics of a General Partnership( UMALESS)
1. Unlimited Liability – The term “general partnership” as presented
refers to a firm in which all the partners are responsible for
liabilities and have all the authority to act on his behalf.
Partnership creditors having difficulty in collecting from the
partnership may request from any other partner who has
personal assets in excess of their personal liability.
2. Mutual Agency- the partners are agents for the partnership. As
such, one partner may legally bind the partnership to a contract
or agreement that appears to be in line with the partnership's
operations.
3. Assignment of Partner’s Interest-Assignment of partner’s interest
does not automatically dissolve a partnership. Since a partner’s
relationship to the other partner is a personal one, an assignment
of a partner’s interest does not automatically admit the assignee
into the partnership. The asignee has no right to participate in
managing the affairs of the partnership, their right are only
limited in the allocation of profit and loss and the right to receive
the assignor’s interest in the event of dissolution.
4. Limited Life- The possibility that the operations of the
partnership could not continue after the withdrawal or death of
a partner was considered a major downside of this form of
business organization.
5. Ease of Formation- The partners merely put their agreement into
writing concerning who contributes assets or services, their role
and functions, and how profits and losses are allocated. This
written contract is called partnership agreement. Partnership can
also be formed through oral agreement.
6. Separate Legal Personality- Partnership law provides that
partnership has a juridical personality separate and distinct from
that of each partner.
7. Sharing Profits and Losses- Profit and losses are shared among
the partners in any manner to which they agree.
c. Accounting for Partnership Formation
Cash Investment- The invested capital of each partner is equal to
their initial cash investment.
Non-cash Investment- When non-cash assets are invested the
invested capital of the partners is equal to the current fair market
value of the assets invested less any liabilities to be assumed by the
partnership.
Sample Problem
Maria, Leonora and Theresa are friends and decided to
form a partnership engaging in selling furnitures named
FERNIES. Maria contributed cash in the amount of
P200000.00, Leonora also contributed P250000.00 cash and
Theresa contributed a delivery truck with a fair market value
of P290000.00 on the date of transfer.
Q1. How much is the total contributed capital of all partners?
Ans: P740000 (P200000.00+250000.00+290000.00)
Sample Problem
April 2, 2017, San and Gabriel formed a partnership
with each contributing the following assets:
San Gabriel

Cash P30,000 P70,000


Equipment 25,000 75000
Building - 225000
Furniture 10,000 -
The building is subject to a mortgage loan of P80000,
which is to be assumed by the partnership. The partnership
agreement provides that San and Gabriel share profits and
losses 30% and 70% respectively. On April 2, 2017 the
balance in Gabriel’s capital account should be?
Answer:
Assets contributed by Pablo P370000
Less Mortage Assumed by Partnership 80000
Capital Balance o Pablo P270000

d. Admission of a New Partner


A new partner may be admitted to the partnership either by
purchasing the interest of one or more of the existing partners or by
investing cash or non-cash assets in the partnership.
1. Purchase of Interest
Note1. The price paid is not recorded in the partnership books.
Note2. The admission is recorded by merely transferring the interest
purchased from the selling (existing/ old) partner to the buying (new)
partner.
2. Investment of Cash or Non-cash Assets
A new partner is given an interest in the partnership in
exchange for his contributed assets. The computation of the
capital balances after admission will depend on whether (a)
partnership assets are revalued (b) recognize goodwill (c)
partnership assets are not revalued (bonus method). Follow
computation below
1. Compute the new partner’s proportion of the partnership’s
book value (agreed capital).
Agreed = Prior Capital of + Investment of * Percentage of
Capital Old Partners the new Capital to
partner new partner

2. Compare the new partner’s contributed capital


(investment) with his agreed capital to determine the
procedures to be followed in accounting for his admission.
3. Determine the specific admission method. There are three
methods that may be used to account for the admission of
a new partner when a difference exists between the new
partner’s investment and his agreed capital. See table
below.

Investment Cost = Agreed Capital a. No revaluation of assets


goodwill or bonus.
Investment Cost > Agreed Capital a. Revalue net assets up to fair
value and allocate to old
partners.
b. Record unrecognized
goodwill and allocate to old
partners.
c. Allocate bonus to old
partners
Investment Cost < Agreed Capital a. Revalue net assets down to
fair value and allocate to old
partners.
b. Record goodwill brought in
by new partners.
c. Allocate bonus to old
partners

Sample Problem
Maria sold ¼ of her capital interest to Anabelle who is willin
to pay P65000.00.
Q1. How much is the total gain by the partnership from the sale of
capital interest by Maria to Anabelle?
Ans: -0-
Sample Problem
Maria, Leonora, Theresa and Anabelle with capital balances of
P150000, 250000.00, 290000.00 and 50000.00 respectively decided
to admit Billy as their new partner. (Profit and Loss Ratio,
Maria=20%, Leonora=30%, Theresa=40%, Anabelle=10%)
Case1: Billy will contribute cash of P85000 and computer with
a book value of P100000.00 and fair market value of the same
amount for a 20% interest on the total capital.
Case 2: Billy will contribute cash of P85000 and computer
with a book value of P100000.00 and fair market value of
P115000.00 for a 20% interest on the total capital.
Case 3: Billy will contribute cash of P85000 and computer
with a book value of P100000.00 and fair market value of P60000.00
for a 20% interest on the total capital.
Case 4: Billy will contribute cash of P85000 and computer
with a book value of P100000.00 and fair market value of
P115000.00 for a 20% interest on the total capital. During the
admission of Billy the entity revalued the delivery truck with a
current fair market value of P350000.00.
Q: Compute for the total capital of the partnership after admission
of Billy using each assumption.
Answer Case1.
Total Contributed Capital Total Agreed Capital
Maria P 150000.00 Maria P
Leonora Leonora 150000.00
Theresa 250000.00 Theresa
Anabelle Anabelle
Billy 290000.00 = Billy 250000.00

50000.00
290000.00
185000.00

50000.00

185000.00
P 925000.00 P 925000.00

(Since Billy will receive 20% interest on partnership capital, it is


assumed that the total capital of Maria, Leonaa, Theresa and
Anabelle which is 740000.00 constitutes 80% so by dividing it by
80% we will get the total agreed capital of 925000.00. Then multiply
it by 20% to get the agreed capital of Billy of 185000.00 which is
equal to its contributed capital.)
Answer Case 2:
Total Contributed Bonus Total Agreed
Capital Capital
Maria P 150000.00 3000.00 P 153000.00
Leonora 4500.00
Theresa 250000.00 6000.00 254500.00
Anabelle 1500.00
Billy 290000.00 (15000.00) 296000.00

50000.00 51500.00

200000.00 185000.00

(Since Billy will receive 20% interest on partnership capital, it is


assumed that the total capital of Maria, Leonaa, Theresa and
Anabelle which is 740000.00 constitutes 80% so by dividing it by
80% we will get the total agreed capital of 925000.00. Then multiply
it by 20% to get the agreed capital of Billy of 185000.00.The
investment of Billy is greater than his agreed capital which leads to
bonus to old partners. The difference is distributed to old partners
using their P&L Ratio.)
Answer Case 3:
Total Contributed Bonus Total Agreed
Capital Capital
Maria P 150000.00 (8000.00) P 142000.00
Leonora (12000.00)
Theresa 250000.00 (16000.00) 238000.00
Anabelle (4000.00)
Billy 290000.00 40000.00 274000.00

50000.00 46000.00

145000.00 185000.00
(Since Billy will receive 20% interest on partnership capital, it is
assumed that the total capital of Maria, Leonaa, Theresa and
Anabelle which is 740000.00 constitutes 80% so by dividing it by
80% we will get the total agreed capital of 925000.00. Then multiply
it by 20% to get the agreed capital of Billy of 185000.00.The
investment of Billy is less than his agreed capital which leads to
bonus to new partner.)
Answer Case 4:
Total Revaluation Capital Bonus Total
Contributed After Agreed
Capital Revaluation Capital
Maria 150000.00 12000.00 162000.00 (11000.00) P151000.00
Leonora 18000.00 268000.00 (16500.00) 251500.00
Theresa 24000.00 314000.00 (22000.00) 292000.00
Anabelle 250000.00 6000.00 56000.00 ( 5500.00) 50500.00
Billy -0- -0- 55000.00 200000.00

290000.00

50000.00

145000.00

e. Accounting for Partnership Operation


1. Journal Entries
Closing the books at the end of the accounting period
Merchandise Inventory xx
Income Summary xx
To set up ending inventory
All Nominal Accounts with Credit Balances xx
Income Summary xx
To close all nominal accounts with credit
balances to income summary.
Income Summary xx
All Nominal Accounts with Debit Balances xx
To close all nominal accounts with debit
balances to income summary.
NET Income
Income Summary xx
Partners’ drawing xx
To distribute profits to partners
NET Loss
Partners’ drawing xx
Income Summary xx
To distribute losses to partners

Summary of the Effects of Partnership Operation


CAPITAL DRAWING
Decrease Increase Increase Decrease
-Permanent -Initial Investment -Temporary -Share in Net
Wihdrawal -Additional Withdrawal Income
-Sale of Equity Investment -Share in Net Loss
-Payment -Partnership pays
ofpartnership the Personal
liability from Liability of a
-Debit Balance in personal funds partner
Drawing -Credit Balance in
Drawing

2. Division of Profit or Loss

The computation of the profit or loss share of the


partners will depend on the method agreed upon by the
partners and these are:
1. Equally or in an agreed ratio.
2. According to the capital ratio which may be:
a. Beginning capital ratio
b. Ending capital ratio
c. Average capital ratio
3. By allowing salaries, interests and bonuses to
partners.
NOTE1.Payment of salaries, interests and bonuses to
partners should be treated as part of profit distribution not
as expense.
NOTE2. If there is a bonus agreement, determine the basis
of computing the bonus which may be based either on the
net income before deducting the bonus or on the net income
after deducting the bonus (as expense). Bonus agreement
is not applicable if there is a loss.
NOTE3. If there is no agreement regarding the division of
profits and losses, they should be divided according to the
original capital ratios. If the original capital contributions are
not given, use the beginning capital ratios.
NOTE4. If the agreement specifies how profits are to be
divided but is silent as to losses, losses are to be divided in
the same manner as profits.
NOTE5. If the partners agree to divide losses only, profits if
any shall be divided according to the original capital
contributions.
COMPUTATION OF BONUS
Where:
B=Bonus BR= Bonus Rate
S= Salaries I= Interest
T= Tax( INC* Tax Rate) INC= Income
1. Bonus on net income before Bonus
B= BR*INC
2. Bonus on net income after Bonus
B= BR*(INC-B)
3. Bonus on net income after bonus and salaries but before
interest.
B= BR*( INC-B-S)
4. Bonus is based on net income after bonus, salaries and
interest.
B= BR*( INC-B-S-I)
5. Bonus is based on net income after salaries but before
bonus and interest.
B= BR*( INC-S)
6. Bonus is based on net income after interest but before
bonus and salaries.
B= BR*( INC-I)
7. Bonus is based on net income before bonus but after
income tax.
B= BR*( INC-T)
8. Bonus is based on net income after bonus and income tax.
B= BR*(INC-B-T)
NOTE: It should be noted that the term “before” used in
the allocation of net income particularly in the
computation of bonus does not give any sense at all
because the general rule as to the interpretation of net
income means it is before deduction of bonus, salaries to
partners and interests on capital. These three elements
(bonus, salaries, interest on capital) of allocation of net
income are not expenses of the partnership but merely as
a distribution or allocation of net income.

Sample Problem
On January 1, 2017, Zeep and Beep have capital
balances of P20000 and P16000 respectively. On July
1, 2017 Zeep invests an additional P4000 and Beep
withdraws P1600. Profit and Losses are divided as
follows:
i. Beep is the managing partner and as such shall
receive P16000 salary and Zeep shall receive
P7200.
ii. Both partners shall receive interest of 10% on
their beginning capital balances to offset
whatever difference in capital investments they
have and any remainder shall be divided equally

Income of the partnership for the year is P9600.

Compute for their share in net income.

Answer:
Zeep Beep Total
Salaries P7200 P16000 P23200
Interests 2000 1600 3600
Balance (8600) (8600) (16600)
Total P600 P9000 P9600
Sample Problem
On January 1, 2017 David and Enrile decided to
form a partnership. At the end of the year, the
partnership made a net income of P120000. The capital
accounts of the partnership show the following
transactions.
David, Capital Enrile, Capital
Dr Cr Dr Cr
Jan 1 - P40000 - P25000
Apr 1 P5000 - - -
Jun 1 - - - 10000
Aug 1 - 10000 - -
Sep 1 - - P3000 -
Oct 1 - 5000 1000 -
Dec 1 - 4000 - 5000
They receive interest of 20% per annum based on
their average capital and the balance of the profits is
divided equally, the sharing of the profits will be?
Answer:
Capital Months Peso Months
Balances Unchanged
David
Jan 1 P40000 3 P120000
Apr 1 35000 4 140000
Aug 1 45000 2 90000
Oct 1 50000 2 100000
Dec 1 54000 1 54000
P224000 P504000
Enrile
Jan 1 P25000 5 P125000
Jun 1 35000 3 105000
Sep 1 32000 1 32000
Oct 1 31000 2 62000
Dec 1 36000 1 36000
P139000 P360000

Average Capital:
David: P504000/12= P42000
Enrile: P360000/12= P30000
Then disribute the profit as follows:
David Enrile Total
20%interest on P8400 P6000 P14400
average capital
Balance, Equally 52800 52800 105600
Total P61200 P58800 P120000

Sample Problem
L, M, and N are partners in an accounting firm.
Their capital account balances at year- end were: A,
P90000; B, P110000; C, P50000. They share profits and
losses in a 4:4:2 ratios, after the following special terms:
(1) Partner N is to receive a bonus of 10% of net income
after bonus
(2) Interest of 10% shall be paid on that portion of a
partner’s capital in excess of P100000.
(3) Salaries of P10000 and P12000 shall be paid to
partners L and N, respectively.
Assume a net income of P44000 for the year what
are the profit shares of L, M and N?

Answer:
A B C Total
Bonus to C - - P4000 P4000
Interest - 1000 - 1000
Salaries 10000 - 12000 22000
Balance, 4:4:2 6800 6800 3400 17000
Total P16800 P7800 P19400 P44000

f. Withdrawal or Retirement of a Partner

To compute for the capital balances of the remaining partners


after withdrawal or retirement of a partner, the following procedures
are to be followed.
1. On the date of the withdrawal or retirement of a partner,
compute and distribute profit or loss to the partners in
their profit and loss ratio.
2. Adjust the assets and liabilities to their current fair values.
Adjustments are made to the partners’ capital in their
profit and loss ratio.
3. Make the cash settlement to the retiring partner.
Settlement may be:
3.1 Equal to the interest (capital plus loan balances) of
the retiring partner.
3.2 Less than the interest of the retiring partner. In
which case the difference is treated as bonus to the
remaining partners.
3.3 More than the interest of the retiring partner. The
resulting difference may be treated as:
i. Bonus to retiring partner
ii. Goodwill to the retiring partner (partial
goodwill method)
iii. Total implied goodwill of the partnership.

Sample Problem
Jaime Dizon, a partner in an accounting firm, decided
to withdraw from the partnership. Dizon’s share of the profits
and losses was 20%. Upon withdrawing from the partnership
he was paid P74000 in final settlement of his interest. The
total of the partners’ capital accounts before recognition of
partnership goodwill prior to Dizon’s withdrawal was
P210000. After his withdrawal the remaining partners’ capital
accounts, excluding their share of goodwill, totaled P160000.
The implied goodwill of the firm was?

Answer:

Partnership capital before withdrawal by Dizon P 210000


Less: Partnership Capital after withdrawal( excluding
goodwill) 160000
Book value of Dizon’s Interest P 50000

Price paid Dizon for 20% interest P74000


Less: Book value of interest 50000
Implied goodwill on 20% interest P 24000
Implied goodwill on entire firm (P24000/ 20%) P 120000

Sample Problem
Rita, Sisa and Tina are partners with capital balances
on June 30, 2017 of P60000, P60000 and P40000
respectively. Profits and losses are shared equally. Tina
withdraws from the partnership. The partners agree that Tina
is to take certain furniture at their second hand value of
P2400 and cash for the balance of her interest. The furniture
is carried on the books as fully depreciated.
The amount of cash to be paid to Tina and the capital balances
of the remaining partners after retirement of Tina are?
Rita Sisa Tina
Capital balances P60000 P60000 P40000
Adjustment of
furniture,P2400 800 800 800
Total Interest P60800 P60800 P40800
Settlement:Furniture (2400)
Cash P38400
CHAPTER 2:
PARTNERSHIP LIQUIDATION

PARTNERSHIP LIQUIDATION

Lump-Sum Liquidation- one in which all assets are converted into cash
within a very short time, outside creditors are paid, and a single, lump-
sum payment is made to the partners for their total interests.

Lump-Sum Liquidation procedures:


1. Realization of assets and distribution of gain or loss on realization
among the partners based on the profit and loss ratio.
2. Payment of expenses.
3. Payment of liabilities
4. Elimination of partner’s deficiencies. If after the distribution of loss
on realization, a partner incurs a capital deficiency, this deficiency
must be eliminated by using one of the following methods, in order
of priority.
a) If the deficient partner has a loan balance, exercise the right
of offset.
b) If the deficient partner is solvent, make him invest cash to
eliminate his deficiency.
c) If the deficient partner is insolvent, let the other partners
absorb his deficiency.
5. Payment to partners (in order of priority)
a) Loan accounts
b) Capital accounts

Partnership is Insolvent and Partners are Personally Insolvent


As governed by Partnership Law, assets of the partnership are first
available to creditors of the partnership, and that the personal assets of
the partners are first available to his personal creditors. If after the debts
of the partnership have been paid in full and some assets still remain in
the partnership, the creditors of a partner have a claim against the assets
of the partnership only to the extent of his share.
After the personal creditors of the partner have been paid in full, any
remaining asset is available to partnership creditors regardless of whether
the partner’s capital account shows a credit or a debit balance.

Instalment Liquidation- cash distribution to the partners are authorized


even before all the losses that may be incurred and charged against the
partners are known.

Instalment liquidation Procedures:


1. Record the realization of assets and distribute the realized gains and
losses among the partners using the profit and loss ratio.
2. Pay liquidation expenses and unrecorded liabilities, if there are any,
and distribute these among the partners using the profit and loss
ratio.
3. Pay the liabilities to outsiders.
4. Distribute cash to the partners after possible future losses have
been apportioned to partners or in accordance with a cash
distribution program.

Example
Partners W, X, Y, and Z have conducted business together for a
number of years; they divide all profits and losses in the ratio 5:2:2:1. On
October 31, 2015, they decide to wind up the partnership by collecting
their receivables and selling all of the remaining assets of the business. A
summarized balance sheet of the partner-ship on this date in the next
page:
WXYZ COMPANY

BALANCE SHEET
October 31, 2015

Cash P 5,000 Liabilities P10,000


Misc. assets 60,000 Partner’s equity:
W capital 16,000
X capital 18,500
Y capital 13,000
Z capital 7,500 55,000
P65,000 P65,000

During the month of November the miscellaneous assets realize P48, 000
in cash, the resulting P12, 000 loss is allocated to the partners, the
liabilities are paid in full, and the remaining P43,000 in cash is
distributed to the partners. The liquidation schedule for WXYZ Company
is shown below.

After all noncash assets are sold, and after any losses or gains are
distributed to the partners and after all liabilities have been paid in full,
the cash on hand is equal to the total of the partners’ capital accounts.
Cash is distributed to the partners in accordance with the credit balances
in their capital accounts and not in accordance with their profit and loss
sharing ratios.
WXYZ COMPANY
SCHEDULE OF PARTNERSHIP LIQUIDATION
Month of November, 2015

Asset
Cash s Liab. W X Y Z
Balance before
liquidation 5,000 60,000 10,000 16,000 18,500 13,000 7,500
Sale of assets and
distribution of loss 48,000 (60,000) — (6,000) (2,4000) (2,400) (1,200)
Pay liabilities (10,000) — (10,000) — — — —
Balances 43,000 –0– –0– 10,000 16,100 10,600 6,300
Final payment to
partners (43,000) — — (10,000) (16,100) (10,600) (6,300)
Balances –0– –0– –0– –0– –0– –0– –0–

The journal entries to record the November events:

Cash 48,000
W capital (50% × 12,000) 6,000
X capital (20% × 12,000) 2,400
Y capital (20% × 12,000) 2,400
Z capital (10% × 12,000) 1,200
Miscellaneous assets 60,000
Sale of assets and distribution of P12,000 loss to partners

Liabilities 10,000
Cash 10,000
Payment made to creditors

W capital 10,000
X capital 16,100
Y capital 10,600
Z capital 6,300
Cash 43,000
Cash distribution to partners

Debit Balances in Capital Accounts

If a partner’s capital account is not large enough to absorb his or


her share of the loss from the sale of assets, the account ends up
with a debit balance. The partner involved has an obligation to pay
an amount of cash into the partnership equal to the amount of the
debit balance because he or she has not maintained a capital
balance sufficiently large to absorb losses in accordance with the
partnership agreement. If this cash is not paid into the partnership,
the remaining partners with credit balances in capital will have to
absorb this debit balance in their relative profit and loss sharing
ratios. For example, consider the following trial balance of a
partnership after all assets have been sold and all liabilities have
been paid.

Debit Credit
Cash P10,000 —
L capital (50%) 6,000 —
M capital (30%) — 9,000
O capital (20%) — 7,000
P16,000 P16,000
Partner L has refused to invest enough cash into the business to
bring his capital balance to zero. Partners M and O will have to
absorb the debit balance of L in the ratio of 6:4, after which they
can individually take legal action against L for recovery of their
share of the loss. The journal entry to allocate L’s debit balance is
as follows:

M capital (60% × 6,000) 3,600


O Capital (40% × 6,000) 2,400
L capital 6,000

The journal entry to record the distribution of the cash to the


partners would be:
M capital 5,400
O capital 4,600
Cash 10,000
Partners’ Loan Account
The partnership acts list the order of cash payment in
liquidation as (1) partnership creditors, (2) partners’ loans, and (3)
partners’ capitals. In other words, after the outside creditors have
received full payment, partners’ loans must be paid in full before any
cash can be distributed to partners on behalf of their capital. This
concept has to be modified in situations where a particular partner’s
capital account has a debit balance, and the partnership also has a
liability to this partner. Obviously, it does not make sense to pay out
cash to discharge the liability to a partner and to then request an
investment by the partner to cover the debit balance. Instead, the
legal doctrine of the right of offset applies so that a loan account is
combined with a debit balance in a capital account. If the result is
a credit balance in capital, this amount is paid to the partner. If the
result is a smaller debit balance in capital, this amount is allocated
to the remaining partners (assuming that no further investment is
made by the partner with the deficiency in capital). In preparing a
schedule of liquidation, this right of offset should be assumed and
the amount shown in each partner’s column should be a
combination of that partner’s capital and loan accounts. When the
schedule indicates a payment to a partner, the payment reduces the
loan account first; any payment in excess of the amount of the loan
reduces the capital account.
In the examples that follow, we will assume that partners with
debit balances in capital will not make any additional investment,
and that as a result the debit balance will have to be allocated to
partners with credit balances in capital.
Example

EFGH COMPANY
BALANCE SHEET
March 31, 2006

Cash P 6,500 Liabilities P13,000


Misc. assets 68,000 E loan 20,000
Goodwill 10,000 Partner’s equity

E capital 800
F capital 24,050
G capital 16,900
H capital 9,750 51,500
P84,500 P84,500

The four partners, who share profits and losses in the ratio of
5:2:2:1, have decided to wind up their business and sell the assets
on a piecemeal basis. The goodwill is considered to be worthless.
During April, 2006, the sale of all of the miscellaneous assets yielded
cash of P31,000, and the amount owing to outside creditors was
paid in full. After expenses incurred in the liquidation process of P4,
200 were paid, the remaining cash of P20, 300 was distributed to
the partners.
SCHEDULE OF PARTNERSHIP LIQUIDATION
Month of April, 2006

Cash Assets Liab. E F G H


Balance before
liquidation 6,500 78,000 13,000 20,800 24,050 16,900 9,750
Balance before
liquidation 6,500 78,000 13,000 20,800 24,050 16,900 9,750
Sale of assets and
distribution of loss 31,000 (78,000) (23,500) (9,400) (9,400) (4,700)
Payment of
liabilities (13,000) (13,000)
Payment of
expenses (4,200) (2,100) (840) (840) (420)
20,300 –0– –0– (4,800) 13,810 6,660 4,630
Allocate E’s debit
balance — (4,800) (1,920) (1,920) (960)
Balances 20,300 –0– 11,890 4,740 3,670
Final payment to
partners 20,300* –0– (11,890) (4,740) (3,670)
Balances –0– –0– –0– –0– –0–

The following points about this schedule bear


mentioning:
• The amount for partner E is made up of the summation
of E’s capital (P800) and loan (P20, 000) accounts.
• The expenses were allocated to the partners in their profit
and loss ratio.
• Journal entries must be made for each event depicted on
the schedule.
• Even though partner E had a loan account of P20, 000,
no cash was distributed to this partner, because this
partner’s share of the losses and expenses was greater
than the combined loan and capital accounts.
Instalment Liquidation
In most cases it probably takes much longer to sell all of the
assets, and in such situations the partners may request that
payments be made to them as the cash becomes available.
There is no problem with making instalment payments to partners
provided that (a) all creditors have been paid in full or enough
cash has been set aside to fully cover all liabilities, and (b) the
payments to partners are calculated in such a way that no
partner will later be asked to return a payment received
because, in retrospect, it should not have been made. This
latter provision is satisfied by making a safe payment
calculation. Such a calculation is based on two assumptions: all
assets still on hand will bring in zero; and any partner’s debit
balances will have to be allocated to the remaining partners with
credit balances. In addition, it is often prudent to assume that
there will probably be some future expenses involved with the
liquidation, or that there are unrecorded liabilities, and enough
cash should be held back to cover these items. When the safe
payment calculation is made, the cash holdback for expenses and
unrecorded liabilities should be treated in the same manner as a
possible loss on assets and should be allocated to the partners in
their profit and loss ratio.

Example
Let us now return to the EFGH Company example. The cash sale
proceeds and expenses are the same as before, but this time we
assume that the assets are sold over a two-month period as follows:
Cash Book
proceeds value Loss
Month of April, 2006 P16,400 P22,000 P 5,600
Month of May, 2006 14,600 56,000 41,400
P31,000 P78,000 P47,000

At the end of April, outside creditors were paid P4,000, future


expenses were estimated as P5,100, and a cash instalment was paid
to partners in accordance with a safe payment schedule.
At the end of May, the remaining creditors were paid, the actual
liquidation expenses turned out to be P4, 200, and the cash on hand
was distributed to the partners.

Because the total proceeds from the sale of assets (P31,000) are the
same as in the previous example, the total cash distributed to the
partners over the two-month period should be identical to the
previous single distribution.

EFGH COMPANY
SCHEDULE OF PARTNERSHIP LIQUIDATION
Months of April and May, 2006

Cash Assets Liab. E F G H


Balance before
liquidation 6,500 78,000 13,000 20,800 24,050 16,900 9,750
April transactions:
Sale of assets and
distribution of loss 16,400 (22,000) — (2,800) (1,120) (1,120) (560)
Payment of liabilities (4,000) — (4,000) — — — —
Balances before
payment 18,900 56,000 9,000 18,000 22,930 15,780 9,190
Safe payment to
partners (see
Safe payment
schedule) 4,800* — — — (4,717) — (83)
Balances, end of April 14,100 56,000 9,000 18,000 18,213 15,780 9,107
May transactions:
Sale of assets and
distribution of loss 14,600 (56,000) — (20,700) (8,280) (8,280) (4,140)
Payment of liabilities (9,000) — (9,000) — — — —
Payment of expenses (4,200) — — (2,100) (840) (840) (420)
15,500 –0– –0– (4,800) 9,093 6,660 4,547
Allocate E’s debit
balance — 4,800 (1,92) (1,920) (960)
Balances 15,500 –0– 7,173 4,740 3,587
Final payment to
partners 15,500* –0– (7,173) (4,740) (3,587)
Balances –0– –0– –0– –0– –0–
April, 2006 entries
Cash 16,400
E capital 2,800
F capital 1,120
G capital 1,120
H capital 560
Miscellaneous assets (in detail) 22,000
Sale of assets and distribution of loss to partners

Liabilities 4,000
Cash 4,000
Partial payment of liabilities

F capital 4,717
H capital 83
Cash 4,800
Instalment payment to partners

SAFE PAYMENT CALCULATION

Cash Assets Liab. E F G H


Account balances 18,900 56,000 9,000 18,000 22,930 15,780 9,190
Possible future loss — (56,000) — (28,000) (11,200) (11,200) (5,600)
Cash holdbacks:
For future expenses (5,100) — (2,550) (1,020) (1,020) (510)
For liabilities (9,000) — (9,000) — — — —
Balances 4,800 –0– –0– (12,550) 10,710 3,560 3,080
Allocate E’s debit
balance — 12,550 (5,020) (5,020) (2,510)
Balances in capital — –0– 5,690 (1,460) 570
Allocate G’s
debit balance — — (973) (1,460) (487)
Safe payment 4,800 –0– 4,717 –0– 83

May,2006 entries:
Cash 14,600
E capital 20,700
F capital 8,280
G capital 8,280
H capital 4,140
Miscellaneous assets 46,000
Goodwill 10,000
Sale of assets, write-off of goodwill, and distribution of resulting loss to partners

Liabilities 9,000
Cash 9,000
Payment of balance of liabilities
E capital 2,100
F capital 840
G capital 840
H capital 420
Cash 4,200
Allocation and payment of liquidation expenses

F capital 1,920
G capital 1,920
H capital 960
E capital 4,800
Allocation of partner E’s debit balance

F capital 7,173
G capital 4,740
H capital 3,587
Cash 15,500
Final payment to partners

Explanation of Safe Payment Schedule

The account balances on the first line of the calculation are carried
forward from the schedule of liquidation. The possible future losses from
asset sales and liquidation expenses are allocated to the partners, and
cash equal to the liabilities is held back. This leaves the P4, 800 cash on
hand equal to total partners’ capitals; but E has a debit balance of P12,
550 that is allocated to F, G, and H in the ratio of 2:2:1. This allocation
results in a debit balance of P1,460 in the capital of partner G, which is
allocated to part-ners F and H in the ratio of 2:1. The cash instalment is
paid in accordance with the credit balances remaining in partners’ capital
accounts.

Cash Distribution Plan

There is an alternative method available under which a complete cash


distribution plan can be determined before the liquidation process
commences. This plan of cash distribution to partners is described next
using the EFGH Company as the example. There are two basic steps
involved with a cash distribution plan.
In step 1, each partner’s ability to absorb future losses is evaluated.
The capital and loan balances of each partner are combined; this total is
then divided by the partner’s profit and loss ratio. The result indicates
each partner’s ability to absorb future losses. For example, Partner E
could only absorb a loss of P41,600, while partner F could absorb a loss
of P120,250. These are relative amounts based on each partner’s current
balance in equity in conjunction with the partners’ profit and loss sharing
ratio. Next, each partner is rank ordered as least able to absorb losses.
A basic assumption involved with these calculations is that any debit
balances will have to be allocated to partners with credit balances.

EFGH COMPANY
PLAN OF CASH DISTRIBUTION TO PARTNERS
March 31, 2006

Step 1

Partners’ Profit and Ability


capital loss to absorb Rank
and loans ratio losses order
E 20,800 ÷ .5 = 41,600 1
F 24,050 ÷ .2 = 120,250 4
G 16,900 ÷ .2 = 84,500 2
H 9,750 ÷ .1 = 97,500 3
71,500

Step 2

Individual Equity Balances


Total
equity E F G H
Balance before liquidation 71,500 20,800 24,050 16,900 9,750
Loss to eliminate E 41,600 20,800 8,320 8,320 4,160
Balance 29,900 –0– 15,730 8,580 5,590
New ratio 4 4 2
Loss to eliminate G 21,450 8,580 8,580 4,290
Balance 8,450 7,150 –0– 1,300
New ratio 2 1
Loss to eliminate H 3,900 2,600 1,300
Balance 4,550 4,550 –0–
Having determined the rank orderings, we now proceed to step 2. We
prepare a column for total equity (capital plus loan balances) and a
column for the equity of each partner; we then proceed in the order of
the rankings determined from step 1. We deduct the P41, 600 loss that
would reduce E’s equity to zero from total equity and allocate it to the
individual partners in their profit and loss ratio. This leaves a balance
in equity of P29, 600. If there were any losses greater than P41, 600, E
would have a debit balance that we are assuming would have to be
allocated to the remaining partners with credit balances. Because of
this, any additional losses will have to be shared by F, G, and H in the
ratio 4:4:2. Partner G is next in the rank order, and so we make a
calculation that indicates that a further loss of P21, 450 (8,580 ÷ .4)
would eliminate G’s equity balance. This loss is allocated to F, G, and H
in their relative profit and loss ratios. With G eliminated, any additional
losses will be allocated two-thirds to partner F and one-third to partner
H. Partner H is the next to be eliminated if a further loss of P3, 900
occurs. After this loss is allocated, the only partner left with equity is F.

After a cash sum has been set aside to discharge all obligations to
outside creditors and any estimated future expenses, payments to
partners can be made as follows:

E F G H
First P 4,550 0 100% 0 0
Next 3,900 0 2 0 1
Next 21,450 0 4 4 2
Above 29,900 5 2 2 1

Remember that the basic idea behind partnership liquidation is to


arrive at a situation where cash to be distributed is equal to the credit
balances of the partner’s equity accounts. The cash distribution plan
indicates that after P29,900 has been distributed in accordance with
the plan, any further cash is distributed to all of the partners in their
profit and loss ratio. In such a situation, the partners’ capital balances
would be aligned in accordance with their profit and loss ratio.

We can demonstrate that this plan will produce the desired results by
returning to our example of EFGH Company. The April and May
payments to partners can be determined as shown in the following
tables
April

Opening cash P 6,500

Proceeds from asset sale 16,400

22,900

Liabilities paid 4,000

18,900

Cash held back for:

Liabilities 9,000

Expenses 5,100 14,100

Paid to partners as

follows P 4,800

E F G H

First P 4,550 –0– P4,550 –0– –0–

Balance into next layer 250 –0– 167 –0– 83

Total paid P 4,800 –0– P4,717 –0– P83

May

Opening cash P14,100

Proceeds from asset sale 14,600

28,700

Payments:

Liabilities 9,000

Expenses 4,200 13,200

Paid to partners as follows P15,500

Balance of second layer P 3,650 –0– P2,433 –0– P1,217

Balance into next layer 11,850 –0– 4,740 4,740 2,370

Total paid P15,500 –0– P7,173 P4,740 P3,587

Вам также может понравиться