3
Partnership and Corporation
ACCTG 1 A & B
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Discipline Business Administration Program BSBA– HDRM III
Course Code ACCTNG 1 A & B Course Title Accounting for Partnership and Corporation
Credit Units 3 Units Duration MWF 8:00-9:00 AM; MWF 9:00-10:00 AM
Placement 3rd and 2nd Year, 2ndSemester Pre-requisite NONE
COURSE DESCRIPTION
The course provides Accounting Education related to Partnership and Corporation to BSBA students. Cover topics about Partnership
Contracts and Corporation Codes, the disadvantages and advantages of these forms of business, the Partnership and Corporation For-
mation Process, Operations, Dissolution and Liquidation Procedures.
It deals with Partnerships and Corporations which are artificial beings created by operation of law, having the right of succession and
powers, attributes and properties expressly authorized by the Corporation Code of the Philippines, Sec. 2 and Partnership Agreements.
COURSE INTENDED LEARNING OUTCOME
6.2.2 Display and demonstrate capability by using the basic concepts that underlie the application of the Generally
Accepted Accounting Principles (GAAP)
6.2.3 Adapt and apply appropriate quantitative tools to address accounting case problems in finding solutions
6.2.9 Analyze business environment for strategic direction
6.3.4 Simulate strategic business unit management to have economic sustainability
6.1.4 Acquiring competencies and correct values to support national, regional and local development
Midterm Finals
COURSE REQUIREMENT COURSE GRADING SYSTEM
At the end of the semester, what is expected on your part as
students to must comply with the following:
1. Written, Oral ,Demonstration of Learned Attitude, Skills, and
Knowledge thru passing Quizzes, Assignments Assigned Projects
or Outputs and Major Exams.
2. Active Participation in Group Dynamics and Activities
3. Submission of written, video and graphic works to online The Cut-off or required grade to the course/ program
platforms used : MOODLE, EDMODO , GOGGLE FORMS, etc.
standard “retention policy” is 83%.
The students’ responsibility is to come to virtual class prepared,
to be academically honest ,and to monitor his/her performances.
List of References/Reading Materials
[Link]
[Link]
Partnership and Corporation Made Easy, W. Ballada , S Ballada, 2015 Edition
Page 1
This Module aims to provide business students Accounting Education for Partnership and
Corporation. It deals with Partnership Contracts and Corporation Codes, the disadvantages
and advantages of these forms of businesses, the Partnership and Corporation Formation
Process, Operations, Dissolution and Liquidation Procedures.
It deals with Partnerships and Corporations which are artificial beings created by operation
of law, having the right of succession and powers, attributes and properties expressly author-
ized by the Corporation Code of the Philippines, Sec. 2 and the Partnership Agreements.
The course is about teaching business students how to perform systematic and compre-
hensive recordings of financial transactions to these two different forms of businesses. It de-
velops students’ competence in summarizing, analyzing and reporting transactions and pre-
paring financial statements for regulators and tax collection entities (6.2.2).
Moreover, it challenges students to select proper decision making tools to critically, analyti-
cally and creatively solve accounting problems and drive satisfactory results (6.2.3) while exer-
cising high personal moral and ethical standards (6.2.9) in recognition of professional, social
and ethical responsibility of the business to its stakeholders (6.1.4) for the purpose of attaining
economic sustainability (6.3.4).
Display and demonstrate capability by using the basic concepts that underlie the application of
6.2.2
the Generally Accepted Accounting Principles GAAP
Adapt and apply appropriate quantitative tools to address accounting case problems in finding
6.2.3
solutions
6.2.9 Analyze business environment for strategic direction
6.3.4 Simulate strategic business unit management to have economic sustainability
6.1.4 Acquiring competencies and correct values to support national, regional and local development
page 2
This module contains the following lessons:
Lesson 1: Journalizing Partnership Business Adjustments (Dissolution)
Lesson 2: Journalizing Partnership Business Settlement (Liquidation)
Directions on How to Use the Module Properly:
In order to benefit profoundly from this module, please be guided:
1. This module contains two (2) lessons. Each lesson is explained substantively. Read the
explanations thoroughly so that you could understand the lessons fully.
2. On the first page of each lesson, you will find the specific learning outcomes of each les-
son. Specific learning outcomes are knowledge and skills you are expected to acquire at
the end of the lesson. Read them heartily.
3. You must answer the Learning Activities/Exercises that are designed to help you acquire
the specific learning outcomes.
4. Feel free to chat, call, text or send an email messages to me if you have questions, reac-
tions, or reflections about the contents or activities in the module. Our Facebook Group is
where you can get books and references for your practical usage.
5. The Practice Task/Assessment and Assignment shall be checked by the Instructor.
LESSON 1 – Journalizing Partnership Business Adjustments (Dissolution)
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Specific Learning Outcomes:
1. Respond by seeking to clarify what is Dissolution and the Causes of Dissolution
2. Analyze by making Journal Entries on the various Types of Dissolution Transaction
3. Embody by solving different accounting cases of Partnership business Dissolutions
Motivation/Prompting Activity: (50 points)
Express Yourself!
Provide your answers to the following questions
1. What happens when there is Dissolution in the Partnership Business?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
2. What is the principles behind “delectus personae”?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
3. How is Total Capital Credited computed or what is its formula?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
4. What is the Journal Entries for Bonus Method both for the Old and the New Partner?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
5. What is the Journal Entries for Goodwill Method both for the Old and the New Partner?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
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Dissolution - Changes in Ownership
The dissolution of a partnership is the change in the relation of the partners caused
by any partner ceasing to be associated in continuing on as differentiated from the liquidation or
winding up of business (Civil Code of the Philippines, Article 1828).
On dissolution, the partnership is not terminated, but continues. (Article 1829). Wind-
ing up is the process of settling or liquidating the business or partnership affairs after dissolution.
Termination is that point in time when all partnership affairs are wound up or completed, and is
the end of the partnership life.
Limited life is one of the characteristics of a Partnership. Any change in the membership of
this form of business organization will result in dissolution. Dissolution of the partnership does not
necessarily imply that business operations will come to an end. Most changes in the ownership of
a partnership are accomplished without interruption of its normal operations.
Dissolution should be distinguished from Liquidation of a Partnership. A partnership is said
to be liquidated when the business is terminated; a partnership may be dissolved without being
terminated but liquidation always happens after dissolution.
When dissolution occurs, the old partnership should first adjust its books so that all ac-
counts are properly stated at the date of dissolution.
Example:
When the large international accounting firm, Sycip Gorres Velayo & Co. retires and admits
partners during the year, the former partnership is dissolved and a new partnership begins with
little outward evidence of any change. In fact, the new partnership may retain the dissolved part-
nership's name.
From the legal viewpoint, a partnership is dissolved by admission or by retirement of a part-
ner. However, accountants are more concerned with the substance of an event rather than with
its legal form. Therefore, the accountants must evaluate all the circumstances of the individual
case to determine how a change in partners should be recorded.
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CAUSES OF DISSOLUTION
Partnership dissolution due to changes in ownership occurs when there are/is:
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of the partnership
ADMISSION OF A PARTNER
A new partner can only be admitted into a partnership with the consent of all the continuing
partners. This is based on the principle of 'delectus personae'. No one becomes a member of the
partnership without the consent of all the members. This is because a partnership is based on mutual
trust and confidence of the partners.
By admission of a new partner, the old partnership has been dissolved but continued its oper-
ations, so it is important that a new agreement be formulated to govern the continuing business oper-
ations. A person may become a partner by either of the following:
1. Purchase of an interest from one or more of the existing partners. The partnership
receives no new resources because the New Partner just purchased an interest
directly from existing partners.
2. Investment of assets in the partnership by the new partner. The Partnership does
receive new resources when a New Partner becomes a partner by investing in the
partnership.
The old partnership agreement is legally dissolved and a new partnership agreement is formed; the
capital, profit and loss ratio will be based on that new partnership agreement.
Liability of Incoming Partner for Existing Obligations of the Partnership
A person admitted as a partner into an existing partnership is liable for all the obligations of
the partnership incurred before his admission as though he had been a partner when such obliga-
tions were incurred. Such liability is limited to his capital contribution, unless otherwise agreed.
Case 1.
Castro, Pural and Bernal formed a general professional partnership with a capital of P50,000 each
on Feb. 14, 2006. On Apr. 8, the partnership incurred an obligation of P200,000 to Tuy which will be
payable on Dec. 16. On June 13, Khant was admitted into the partnership; she contributed P20,000.
page 6
Answer 1.
Even if the obligation was incurred before Khant's admission into the partnership, she is still
liable to Tuy but only to the extent of her contribution. Total partnership capital upon admission is
P170,000 leaving a balance of P30,000 (deficit) which will be shared by the old partners equally.
PURCHASE OF AN INTEREST FROM EXISTING PARTNERS
With the consent of all continuing partners, a person may be admitted into an existing part-
nership by purchasing an interest directly from one or more of the existing partners. Payment is
made personally to the partner from whom the interest is obtained resulting to mere transfers
among capital accounts.
This type of admission will only result in a debit to the capital account of the selling partner
for the interest sold and a credit to the capital account of the buying partner for the interest pur-
chased. The amount debited and credited can be different to the actual price of the equity or capital
credited. In this type of admission, the total assets, total liabilities and total partners' equity account
balances are not changed upon admission.
Case 2.
Given:
Deogracia Corpuz and Magdalena Solis are partners with capital balances of P400,000 and
P200,000, respectively. They share profits or losses in the ratio of 3:1.
Partners Deogracia Corpuz and Magdalena Solis received an offer from Leopoldo Medina to
purchase directly one-fourth of each of their interest in the partnership for P150,000. The
partners agreed to admit Leopoldo Medina as a member of the partnership business.
Deogracia Corpuz, Capital 100,000
Magdalena Solis, Capital 50,000
Leopoldo Medina, Capital 150,000
To record Medina's admission.
Computation:
Corpuz : P400,000 x ¼ = P 100,000
Solis : P200,000 x 1/4 = P 50,000
Equity Interest part transferred to Medina = P 150,000
One-fourth of each partner's capital was transferred to the new partner. The partnership did
not receive the cash paid because the transaction is between Medina and partners Corpuz and
Solis personally, not between Medina and the partnership business.
page 7
INVESTMENT OF ASSETS IN A PARTNERSHIP
A person may be admitted into a partnership by investing cash or other assets in the
business. The assets are invested into the partnership and not given to the individual part-
ners. The investment will increase the total assets and the total partners' equity account total
balances after admission.
Definition of Terms
Total Contributed Capital. It is the sum of the capital balances of the old partners and the actual
investment of the new partner.
Total Agreed Capital. It is the new total capital of the partnership. This capitalization may be
equal to, greater than or less than the total contributions of both the old and new partners. (TAC)
Bonus. It is the amount of capital or equity transferred by one partner to another partner.
Goodwill. It is an asset without physical characteristics whose value lies in rights, privileges and
competitive advantages, intangible assets to the business. This intangible asset is a combination
of many factors including efficient management, good labor relations, superior product quality and
brand name recognition. This asset allows a company to earn a higher-than-market rate of return
on its assets.
Businesses record goodwill when they pay for it as part of the purchase price to acquire an-
other company. Per Philippine Financial Reporting Standards (PFRS) No. 3, Business Combina-
tions, goodwill is the future economic benefits arising from assets. Goodwill is to be measured and
recognized as the excess of the fair value of net amount of the recognized identifiable assets ac-
quired and liabilities assumed. Philippine Accounting Standards (PAS) No. 38, Intangible Assets,
states that goodwill shall not be amortized because its useful life is indefinite.
Capital Credited. It is the equity or capital of the partner in the new partnership and is obtained by
multiplying the total agreed capital by the applicable percentage interest of the partner.
Admission: Bonus or Goodwill Method
At the time of dissolution, the fair market values of the partnership assets and liabilities may
be different from their book values ( original acquisition values). A question now arises whether the
assets of the continuing partnership should be revalued. Since the old partnership
was already dissolved, all assets should be transferred to the new partnership books at their cur-
rent market prices. Therefore, there should be a revaluation.
The revaluation approach is referred to as the goodwill method. The no-revaluation approach
is referred to as the bonus method. The decision as to whether the goodwill or bonus method
should be used rests with the partners involved and depends on the terms of admission.
page 8
When investing in a partnership, a new partner may receive an equity interest in the busi-
ness equal to, greater than or less than the amount of the investment. If the new partner's equity
interest is equal to the investment, then the capital account was credited for the fair market value
of the investment. If the new partner's equity interest is not equal to the investment, then either
the goodwill or bonus method was used to account for the difference.
The bonus method is used when the total contributed capital is equal to the total agreed
capital. It implies that the old partners either received a bonus from the new partner, or gave a
bonus to the new partner.
Therefore, the old partners' capital accounts are either credited to reflect the bonus received
or debited to reflect the bonus given.
Admission: Bonus or Goodwill Allowed to Old Partners
A partnership may be exceptionally attractive because of a superior earnings record such
that the old partners may demand a premium (top-up charge) from the new partner. This premium
increased the capital accounts of the old partners by crediting the premium based on the old part-
ners' profit and loss ratio.
Admission: Bonus given to Old Partners
Case 3.
Virginia Yacapin and Marivis Gangoso are partners with capital balances of P400,000 and
P200,000, respectively. They share profits in the ratio of 3:1. The partners agreed to admit Leo
Paolo Perez as a member of the firm.
The total agreed capital is P850,000. Leo Paolo Perez invested P250,000 for a one-fourth
interest in the business. The partners decided not to revalue the assets of the partnership and
that the total agreed capital is P850,000.
page 9
The investment of Perez resulted in a bonus because the total contributed capital of P850,000
is equal to the total agreed capital. The partnership net assets can be increased only by the amount
of the new investment. Perez's capital credit of P212,500 is P37,500 less than his actual investment.
The difference represented the bonus allocated to the old partners in their profit and loss ratio.
Admission: Goodwill given to Old Partners
When the amount invested by a new partner implies that the old partnership has unrecorded
asset values (goodwill), the total valuation of the business should be based on the investment of the
new partner.
Case 4.
Leo Paolo Perez invested P275,000 for a one-fourth interest in the business. The total
agreed capital is P1,100,000. Since Perez is willing to invest P275,00 for a one-fourth or
twenty-five percent interest in the P875,000 total contributed capital of the partnership, there
is an implication that the old partnership has unrecorded asset values. The amount of unre-
corded assets is calculated based on Perez's investment and referred to as Goodwill given to
Old Partners.
Total capital of the new partnership is P1,100,000. The value of goodwill is computed
P225,000 (P1,100,000 less P875,000) shared by old partners by profits or losses ratio of 3:1.
page 10
Perez's capital credit of P275,000 is equal to his actual investment. The excess of the total
agreed capital over total contributed capital represented the goodwill distributed to the old partners
in their profit and loss ratio.
Admission: Bonus or Goodwill Allowed to New Partner
A new partner may be admitted into the partnership because of his vast financial resources,
extensive business network, distinctive reputation, unique management and/or technical skills. The
old partners may be willing to give a premium for all of these exceptional qualifications by allowing
a capital credit greater than the actual partner's investments.
This premium may be treated as a bonus reducing the capital or equities of the old partners
or as goodwill to be recognized and credited to the new partner.
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Admission: Bonus given to New Partner
Case 5.
Leo Paolo Perez invested P240,000 for a one-third interest in the business. The total agreed
capital is P840,000.
Perez's capital credit of P280,000 is P40,000 more than his actual investment. This difference
represented a bonus to the new partner because the total contributed capital is equal to the total
agreed capital, and the capital credit to the new partner is more than his actual investment. The eq-
uities of the old partners are decreased by P40,000 in their profit and loss ratio. The old part-
ners' share profits in the ratio of 3:1.
WITHDRAWAL OR RETIREMENT OF A PARTNER
A partner may withdraw or retire from a partnership for various reasons. Disputes with other
partners, old age, and pursuit for better opportunities are among the possible explanations. The with-
drawal of a partner dissolves the old partnership.
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Dissolution through withdrawal or retirement is done by the following ways:
1. by selling his equity interest to the remaining partners or outsiders - TRANSFER
2. by selling his equity interest to an outsider- ADMISSION
3. by selling his equity interest to the partnership - DEMANDS PAYMENT
Sale of Equity Interest to a Partner or an Outsider
When a partner's interest is sold to another partner or an outsider, the withdrawing partner
is paid from the personal assets of the buyer. Accounting for this sale is similar to admission by
purchase of interest. The total assets of the partnership are not affected by the consideration
involved. The required entry will only be a debit (decreased) of the seller's capital account for his
capital balance and a credit (increased) of the buyer's capital account for the same amount.
There are times when a partner withdraws in the middle of the accounting period; in such
a case, the books of the partnership should be updated to determine the retiring partner's capital
balance. Profits or losses should be measured from the last closing of books to the date of with-
drawal and distributed according to their profit or loss sharing agreement.
Sale of Equity Interest to the Partnership
When a withdrawing partner sells his interest to the partnership, the partner is paid from
the cash assets of the partnership. He may receive an amount equal to, greater than or less
than the balance of his capital account. The effect of withdrawal is to reduce the cash assets
and the owners' equity total of the partnership.
Note that the withdrawing partner may receive his share of the business in partnership
assets other than cash.
Case 6.
Bienvenida Alvaro is retiring in midyear from the partnership of Dizon. Magsino and Alvaro
because of family relocation. Physical distance will prevent her from coping with the daily rigors of
their fashion and beauty consulting business. After the books have been adjusted for the semi-
annual profits but before revaluation, their capital balances are as follows:
Minda Dizon, Capital. P 540,000
Amado Magsino, Capital 430,000
Bienvenida Alvaro, Capital 210,000
An independent appraiser revalued their cosmetics inventory to P380,000 (a decrease of P60,000)
and their land to P1,010,000 (an increase of P460,000). The profit and loss ratio of the partners is
[Link]. The entries to record the revaluation of assets follow:
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DEATH OF A PARTNER
The death of a partner dissolves a partnership. When the death of a partner does not result in
liquidation, the accounting procedures to be followed are similar to those discussed in the withdrawal
of a partner. The deceased partner may be considered to have retired from the partnership and his
heirs or estate can expect to receive the amount of his interest from the business. If payment to the
estate of the deceased cannot be made immediately, the balance in the capital account of the de-
ceased partner should be transferred to a liability account, payable to the estate.
INCORPORATION OF A PARTNERSHIP
A partnership may decide to incorporate after evaluating the various advantages of having a
corporate form of business organization. After the necessary adjusting and closing entries, the as-
sets and liabilities of the partnership are transferred to the corporation in exchange for shares of
stock for each partners.
In the books of the corporation, the receipt of transferred assets and liabilities will be recorded in the
new books of the corporation with the issuance of share capital to the incorporators. The shares re-
ceived by the partnership are distributed to the partners based on their Profit and Loss Ratio.
page 14
Case 7.
Given:
Partners Elisa Diaz and Pamela Castillo, who share equally in profits and losses, have the
following items in their partnership's statement of financial position as at Dec. 31, 2006:
They agreed to incorporate their partnership, with the new corporation absorbing the
net assets after the following adjustments: providing for allowances for doubtful accounts of
P10,000; restatement of the inventory to its current fair value of P160,000; and, additional
recognition of depreciation on the equipment of P3,000.
The corporation's share capital will have a par value of P100, and the partners will be
issued the shares equivalent to their adjusted capital balances. The journal entries to incor-
porate the partnership are stated above.
page 15
Mobile Game Challenge 1 ! Let’s Play! (50 points)
Instruction: Click the link in the Class FB Group Account and Play the „GAME 1: Dissolution”.
Screen shot your Highest Score, if you have completed and finished the game. Good Luck!
CM 3: Dissolution of a Partnership Business Game 1 :
[Link]
For further clarifications and inquiries, kindly contact the Instructor thru cellular phone number at
09171633912 or email at norsuphoenixpamela@[Link] or chat and send private message at our Facebook
Group , Messenger Group Chat or else, see the Instructor in person via an appointment schedule at NORSU-
Mabinay Campus.
Try Calculating six (6) Dissolution Case Transactions! (300 points)
Do it your self . Try to Find Out how much is the Capital Balance in the New Agreement
Case Transactions provided in Dissolution Accounting Cases 1-6
Accounting Cases 1-6 Link: [Link]
The Practice Task/Assessment and the Assignment shall be checked by the Instructor. You will be given
feedback after your work has been evaluated thru Class Group Chat messaging via FB.
page 16
Mobile Game Challenge 2 ! Let’s Play! (50 points)
Instruction: Click the link in the Class FB Group Account and Play the „GAME 2: Dissolution”.
Screen shot your Highest Score, if you have completed and finished the game. Good Luck!
CM 3: Dissolution of a Partnership Business Game 2 :
[Link]
LESSON 2 – Journalizing Partnership Business Settlement (Liquidation)
Specific Learning Outcomes:
1. Value by Contrasting the Procedures involve in Dissolution and Liquidation Process
2. Remember and Understand by Clarifying the Procedures of Lump-Sum and Installment Method
3. Perfect by Demonstrating Know-Hows on making Schedules for Cash Settlements/ Payments
Motivation/Prompting Activity: (50 points)
Express Yourself!
Provide your answers to the following question.
1. What is the difference in Process between the Dissolution and the Liquidation of Partnership?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
page 17
Liquidation, Settlement or Winding Up
The liquidation of a partnership is the winding up of its business activities
characterized by sale of all non-cash assets, settlement of all liabilities and
distribution of the remaining cash to the partners .
The conversion of non-cash assets into cash is referred to as “Realization”. This
may either result in a gain or loss on realization and shall be divided in the profit
and loss ratio of the partners. In some cases, a substantial loss on realization may
yield for a partner a capital deficiency, which is the excess of a partner's share in
losses in comparison to the partner's capital credit balance.
This deficiency will certainly affect the partner's interest -the sum of his capital
and loan accounts in the partnership.
Rules in Settling Accounts after Dissolution
The following rules are subject to revisions by the agreement of the partners,
either in their original partnership agreement or in a dissolution agreement (Civil
Code of the Philippines, Article 1839).
Asset Distribution of the Partnership
The assets of the partnership consist of the following:
1. partnership property,
2. additional contributions of the partners needed for the payment of all liabilities consistent
with the discussions below.
Order of Preference in the Distribution of Assets
The assets of a general partnership shall be paid in the following order:
page 18
1. First, those owing to outside creditors,
2. Second, those owing to inside creditors in the form of loans or advances for business
expenses by the partners,
3. Third, those owing to the partners with respect to their capital contributions,
4. Lastly, those owing to the partners with respect to their share of the profits.
The second preference above gives the partner with the loan account the option to exer-
cise his Right of Offset. This privilege is the legal right of a partner to apply part or all of his
loan account balance against his capital deficiency resulting from losses in the realization of the
partnership assets.
Case 8.
Winston Apalisoc, Beatriz Onate and Emerita Geron are partners in a prawn export busi-
ness. Initially, Winston Apalisoc contributed P300,000; Beatriz Onate, P200,000 and Emerita
Geron, P100,000. On the date of dissolution, the remaining assets of the partnership amounted to
P1,000,000.
The partnership has outstanding obligations with Alevir Pido, P140,000; Sandy Gonzales,
P100,000 and loans payable to Winston Apalisoc, P40,000. The accounts of the Apalisoc, Onate
and Geron partnership shall be settled as follows:
1. First, Alevir Pido and Sandy Gonzales who are outside creditors shall be
paid the total sum of P240,000; thus, leaving a balance of P760,000
(P1,000,000 - P240,000) in partnership assets;
2. Second, Winston Apalisoc who is an inside creditor shall be paid his
loan to the partnership of P40,000; balance at P720,000 (P760,000 -
P40,000);
3. Third, the total contributions of Apalisoc, Onate and Geron to the initial
partnership capital in the amount of P600,000 will be paid; balance of
assets at P120,000 (P720,000 - P600,000);
4. Lastly, the balance of P120,000 shall be distributed to the partners in
the ratio of their capital contributions since there was no mention of an
agreement governing the division of profits or losses. Therefore, Winston
Apalisoc shall be entitled to 3/6 of P120,000 or P60,000; Beatriz Onate,
2/6 or P40,000 and Emerita Geron, 1/6 or P20,000.
page 19
Case 9.
In Case 8, the outstanding obligations of the partnership, all accruing to outside creditors, amounted
to P1,120,000. The partnership assets of P1,000,000 will be insufficient to fully settle these liabilities. The
unpaid balance will be P120,000. Therefore, the partners should contribute sufficient assets to cover the
deficiency or loss. In the absence of an agreement, the basis of the additional contributions shall be the ratio
of their capital contributions.
Answer Case 9:
Winston Apalisoc is still liable from his separate properties in the amount of P60,000; Beatriz Onate,
P40,000, and Emerita Geron, P20,000; these contributions will be used to settle the remaining liabilities of
P120,000. This sum of money is properly considered as partnership assets. In the event of payment by
Emerita Geron of the full amount P120,000, she will have the right to recover the amount that she has paid in
excess of her share of the liability from Winston Apalisoc, P60,000 and from Beatriz Onate, P40,000.
Preference of Partnership Creditors and Partners' Separate Creditors
The creditors of the partnership shall have priority in payments over those of the partners' separate
creditors as regards the partnership properties. On the other hand, the creditors of the partners are preferred
with respect to the separate or personal properties of the partners.
Distribution of Separate Properties of an Insolvent Partner If a partner is insolvent,
his personal properties shall be distributed as follows:
1. First, those owing to separate creditors,
2. Second, those owing to partnership creditors,
3. Lastly, those owing to the partners by way of additional contributions when the assets
of the partnership were insufficient to settle all obligations.
Case 10.
In Case 9, if the total partnership liabilities amounting to P1,120,000, Emerita Geron is still personally liable
to partnership creditors in the amount of P20,000. Her separate properties in the amount of P90,000 shall be
applied first to settle her personal obligations of P80,000 to Christine Labag and the balance of P10,000 to
pay one-half of her liability of P20,000 to the creditors of the partnership.
The procedures in liquidation after the adjustment and closing of books will be dependent on the above
rules. The use of a statement of liquidation will greatly aid the liquidating partner to summarize the events
and transactions associated with the liquidation or settlement of the partnership.
METHODS OF PARTNERSHIP LIQUIDATION
1. Lump-sum Method
Under this method, all non-cash assets are realized and the resulting gains or losses distributed and all liabil-
ities are paid before a single final cash distribution is made to the partners.
2. Instalment Method
Under this method, realization of non-cash assets is accomplished over an extended period of time. When
cash is available, creditors may be partially or fully paid. Any excess may be distributed to the partners in
accordance with a program of safe payments or a cash priority program. This process continues until all the
non-cash assets are sold and cash collected or received are distributed.
JOURNAL ENTRIES RELATED TO LIQUIDATION / SETTLEMENT
The steps in the liquidation of a partnership will need the following pro-forma entries:
1. Sale of Non-cash Assets Debit Credit
a. Sale at Book Value (acquisition cost)
Cash xx
Non-cash Assets xx
b. Sale above Book Value (acquisition cost)
Cash xx
Non-cash Assets xx
Gain on Realization xx
c. Sale below Book Value
Cash xx
Loss on Realization xx
Non-cash Assets xx
2. Distribution of Gain or Loss on Sale based on Partners' P/L Ratio
a. Distribution of Gain on Sale
Gain on Realization xx
Teresita Galang. Capital xx
Cristina Mirabueno, Capital xx
Jesus Armenta, Capital xx
b. Distribution of Loss on Sale
Teresita Galang, Capital xx
Cristina Mirabueno, Capital xx
Jesus Armenta, Capital xx
Loss on Realization xx
3. Payment of Liabilities
Liabilities xx
Cash xx
4. Exercise of Right of Offset
Teresita Galang, Loan xx
Teresita Galang, Capital xx
5. Additional Investment by Deficient Partner
Cash xx
Teresita Galang, Capital xx
Page 21
6. Deficiency Absorbed by Solvent Partner Debit Credit
Cristina Mirabueno, Capital xx
Teresita Galang, Capital xx
7. Distribution of Remaining Cash to Partners
Teresita Galang, Capital xx
Cristina Mirabueno, Capital xx
Jesus Armenta, Capital xx
Cash xx
LUMP-SUM LIQUIDATION
Under this method, all non-cash assets are realized and liabilities are settled before a single final cash distri-
bution is made to the partners. The procedures below may be followed in lump-sum liquidation:
1. Sale of non-cash assets and distribution of gain or loss to partners based on profit and
loss ratio.
2. Payment of liabilities.
3. Elimination of partners' capital deficiencies. If after the distribution of loss on realization a
partner incurs a capital deficiency (i.e., partner's share of realization loss exceeds his capital
credit), this deficiency must be eliminated by using one of the following methods, in
the order of priority:
a. If the deficient partner has a loan balance ( receivable from partnership), then exercise
the Right of Offset.
b. If the deficient partner is solvent, then he should invest cash to eliminate his deficiency.
c. If the deficient partner is insolvent, the other partners absorb his deficiency by paying it
on his behalf.
4. Payments to partners, in the Order of Priority (which is Paid first):
a. Loan accounts ( receivable from partnership)
b. Capital account balance
Case 11.
Ernesto Lindo, Nilo Burgos and Nick Marasigan are partners in a public relations firm and share prof-
its and losses in the ratio of [Link], respectively. They decided to liquidate their business on Dec. 31, 2006.
The following is the condensed statement of financial position prepared prior to liquidation:
Only two categories for both Assets-Cash and Non-cash Assets, and Liabilities-Liabilities and Loans,
are used to avoid excessive details. To avoid omissions in postings to the statement of liquidation, the
equality of the accounting equation should be verified after every step in the liquidation process.
Case 11. Loss on Realization Fully Absorbed by Partners' Capital Balances
If the non-cash assets are sold at P2,500,000 with a resulting loss on realization of P900,000 which
was distributed in the ratio [Link]. The capital balance of each partner was sufficient to fully absorb the share
in the loss so the payment of cash to partnership creditors and the final distribution of the remaining cash to
the partners presented no problem.
Journal entries of Case 11: Debit Credit
1. Sale of Non-cash Assets
Cash 2,500,000
Loss on Realization 900,000
Non-cash Assets 3,400,000
2. Distribution of Loss on Realization based on Partners' P/L Ratio
Ernesto Lindo, Capital 360,000
Nilo Burgos, Capital. 360,000
Nick Marasigan, Capital 180,000
Loss on Realization. 900,000
3. Payment of Liabilities
Liabilities 1,120,000
Cash. 1,120,000
3. Distribution of Cash to Partners
Nilo Burgos, Loan. 50,000
Nick Marasigan, Loan. 80,000
Ernesto Lindo, Capital. 590,000
Nilo Burgos, Capital. 240,000
Nick Marasigan, Capital 620,000
Cash. 1,580,000
Page 23
Worksheet of Account Balances (Lump-Sum Liquidation Method)
In summary the take-home pay , Capital Account and Loan Accounts of the partners that are paid:
*Ernesto, Lindo received P590,000, Nilo Burgos received P240,000 and Nick Marasigan received
P700,000 (P80,000 loan payment of partnership + P620,000)*
INSTALLMENT LIQUIDATION
Under this method, realization of non-cash assets is accomplished over an extended period of time.
It is a process of selling some assets, paying the creditors, paying the remaining cash to the partners, selling
additional assets and making additional payments to the partners. Theliquidation will continue until all the
non-cash assets have been realized or sold out and all available cash distributed to partnership creditors and
partners at the end.
Instalment payments to partners are appropriate if necessary safeguards are used to ensure that all part-
nership creditors are paid in full and that no partner is paid more than the amount to which he would be enti-
tled after all losses on realization of assets are known. The procedures below are for the instalment liquida-
tion method.
1. Realization of non-cash assets and distribution of gain or loss on realization among the partners
based on their profit and loss ratio.
2. Payment of liquidation expenses and adjustment for unrecorded liabilities; both of these items will be
distributed among the partners in their profit and loss ratio.
3. Payment of liabilities to outsiders.
4. Distribution of available cash based on a schedule of safe payments (*with restricted capital) which
assumes possible losses due to inability of the partnership to dispose of part or all the remaining non
-cash assets and failure of the partners with capital deficiencies to make additional contributions.
Payments to partners can also be made based on a cash priority program.
Case 12.
The balance sheet for Dante Calingasan, Helen Tugade and Christine Gamba, partners sharing profits in
the ratio of [Link] respectively, showed the following balances on April 30, 2006, just before liquidation:
In May, part of the assets were sold at book value, P300,000. In June, the remaining assets were
sold for P210,000. The available cash is distributed to the partners at the end of May and at the end of June,
so.. two (2) schedules of payment need to be prepared. All partners are solvent (with sufficient cash) and
that any partner who is capital deficient made appropriate payment to the partnership on July 31.
Schedule Payment End of May:
It can be observed that the total partners' interests are continuously restricted for possible losses. A
partner's restricted interest represents the portion of a partner's equity or capital which should remain
available to absorb possible future losses. Restricted interests are provided for assumed non-sale of
remaining non-cash assets and for assumed insolvency of deficient partners. When all of these re-
stricted interests are satisfied, the resulting balances will be referred to as free interests which are simply the
amounts to be paid to the partners. Payments are prioritized first to be applied to loan then to capital in ac-
cordance with the rules on the Order of Preference in Liquidation Process.
Page 25
Journal entries of Case 12: Debit Credit
1. Sale of Non-cash Assets
Cash 300,000
Non-cash Assets 300,000
2. Payment of Liabilities
Liabilities 435,000
Cash 435,000
3. May Distribution of Cash to Partners
Dante Calingasan, Capital 160,000
Helen Tugade, Capital. 20,000
Cash 180,000
4. Sale of Non-cash Assets and Distribution of Loss on Realization
Cash 210,000
Dante Calingasan, Capital 296,000
Helen Tugade, Capital 222,000
Christine Gamba, Capital 222,000
Non-cash Assets 950,000
5. Exercise of Right of Offset
Christine Gamba, Loan 30,000
Christine Gamba, Capital 30,000
6. June Distribution of Cash to Partners
Dante Calingasan, Capital 120,000
Helen Tugade, Capital 90,000
Cash 210,000
7. Additional Investment by a Partner
Cash 42,000
Christine Gamba, Capital 42,000
8. July Distribution of Cash to Partners
Dante Calingasan, Capital 24,000
Helen Tugade, Capital 18,000
Cash 42,000
Therefore at the End of May, the partners Dante and Helen received P160,000 and P20,000 respec-
tively in cash, based on Schedule A.
Therefore at the End of June, the partners Dante and Helen received additional cash of P120,000
and P90,000 respectively , based on Schedule B.
Therefore at the End of July, the partners Dante and Helen received reimbursement cash of P24,000
and P18,000 respectively as payment of Christine for her Capital Deficiency of total 42,000.
Mobile Game Challenge 3 ! Let’s Play! (50 points)
Instruction: Click the link in the Class FB Group Account and Play the „GAME 3: Liquidation”.
Screen shot your Highest Score, if you have completed and finished the game. Good Luck!
CM 3: Liquidation of Partnership Business Game 3:
[Link]
Make Schedule of Payments in Lump-Sum and Installment Method! (200 points)
Do it your self . Try to Find Out how much is the Cash Settlement per Schedules.
Case Transactions provided in Liquidation Accounting Cases 1-3
Accounting Cases 1-3 Link: [Link]
Page 27
The Practice Task/Assessment and the Assignment shall be checked by the Instructor. You will
be given feedback after your work has been evaluated thru Class Group Chat messaging via FB.
Mobile Game Challenge 4 ! Let’s Play! (50 points)
Instruction: Click the link in the Class FB Group Account and Play the „GAME 4: Liquidation”.
Screen shot your Highest Score, if you have completed and finished the game. Good Luck!
CM 3: Liquidation of Partnership Business Game 4:
[Link]
Partnership and Corporation Made Easy, W. Ballada , S Ballada, 2015 Edition
Financial Accounting Volume Two, [Link], J. Peralta, [Link], 2015 Edition
[Link]
[Link]
fintechnews.ph_.pdf
[Link]
[Link]
game-1
Page 28
