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

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

    • MIRIAM COLLEGE College of Business, Entrepreneurship and AccountancyCollege of Business, Entrepreneurship and Accountancy Business Administration Department BSA – 102 Principles of Accounting Part 2 2nd Semester, SY 2012-2013
    • Partnership College of Business, Entrepreneurship and Accountancy PREVIEW OF THE CHAPTER PARTNERSHIP LIQUIDATION Nature of Partnership Liquidation Accounting Procedures in Lump-Sum Liquidation• Definition• Causes of liquidation • Realization• Accounting problems in partnership • Distribution of gain or loss on liquidation realization• Types of liquidation • Payment to creditors • Distribution of cash to partners • Lump-Sum • Instalment (piece-meal)
    • Dissolution of a Partnership College of Business, Entrepreneurship and Accountancy• Is defined in Article 1825 of the Civil Code of the Philippines as the change in the relation of the partners caused by any partner ceasing to be associated in the carrying out of the business• Dissolution refers to the termination of the life of an existing partnership and may be followed by: 1. Formation of a New Partnership 2. Liquidation
    • Conditions Resulting to Partnership Dissolution College of Business, Entrepreneurship and Accountancy• Admission of a New Partner• Retirement or withdrawal of a partner• Death, Incapacity or bankruptcy of a partner• Incorporation of Partnership
    • Formation of a New Partnership College of Business, Entrepreneurship and Accountancy• Refers to the dissolution of a partnership by a change in the capital or ownership structure of the business.• The newly create partnership continues the business activities of the dissolved partnership without interruption.
    • Partnership Liquidation College of Business, Entrepreneurship and Accountancy• Refers to dissolution of the partnership leading to the termination of the business activities carried on by the partnership• and the winding up of partnership’s business affairs to going out of business.
    • College of Business, Entrepreneurship and Accountancy• Partnership dissolution with liquidation may be caused by any of the following factors: 1. The accomplishment of the purpose for which the partnership was organized 2. The termination of the term/period covered by the partnership contract. 3. The bankruptcy of the firm. 4. The mutual agreement among the partners to close the business.
    • TYPES OF LIQUIDATION College of Business, Entrepreneurship and Accountancy• Lump-sum liquidation or liquidation by totals. – This is a type of liquidation whereby the distribution of cash to the partners is done only after all the non-cash assets have been realized, the total amount of gain or loss on realization is known, and all liabilities have been paid.• Liquidation by instalment or piece-meal liquidation – This is a type of liquidation whereby assets are realized on a piecemeal basis and cash is distributed to partners on a periodic basis as it becomes available, that is, even before all non-assets are converted into cash.
    • PROCEDURES IN LUMP-SUM LIQUIDATION College of Business, Entrepreneurship and Accountancy1. Sale of non-cash assets2. Distribution or allocation of gain or loss on realization among the partners according to their residual profit and loss ratios (salary and interest factors disregarded) unless liquidation ratios are specified in the partnership agreement.
    • College of Business, Entrepreneurship and Accountancy• When realization of assets results in a loss, the loss is carried to the capital accounts of the partners as a deduction.• If a partner’s capital account results in a debit balance (called capital deficiency), the deficiency can be eliminated by – Making additional cash investment, if the deficient partner is solvent. – Charging the deficiency as additional loss to the remaining partners, if the deficient partner is insolvent.
    • PROCEDURES IN LUMP-SUM LIQUIDATION College of Business, Entrepreneurship and Accountancy3. Distribution of cash to creditors4. Distribution of cash to partners. In this procedure, the provisions of the marshalling of assets and the exercise of the right of offset are applied.
    • STATEMENT OF LIQUIDATION College of Business, Entrepreneurship and Accountancy• The statement of liquidation is a prepared to summarize the liquidation process.• It is the basis of the journal entries made to record liquidation.
    • DEFINITION OF TERMS College of Business, Entrepreneurship and Accountancy1. Dissolution - the termination of a partnership as a going concern; it is the termination of the life of a partnership.2. Winding up - the process of settling the business Or partnership affairs; it is synonymous to liquidation.3. Termination - the point in time when all partnership affairs are ended.4. Liquidation - the interval of time between dissolution and termination of partnership affairs; it is also the process of winding up a business which normally consists of conversion of assets into cash, payment of liabilities and distribution of remaining cash among the partners.
    • DEFINITION OF TERMS College of Business, Entrepreneurship and Accountancy5. Realization — the process of converting non- cash assets into cash.6. Gain on realization - the excess of the selling price over the cost or book value of the assets disposed or sold through realization.7. Loss on realization — the excess of the cost or book value over the selling price of the assets disposed or sold through realization.8. Capital deficiency — the excess of a partner’s share on losses over his capital.
    • DEFINITION OF TERMS College of Business, Entrepreneurship and Accountancy9. Deficient partner - a partner with a debit balance in his capital account after receiving his share on the loss on realization.10.Right of offset — the legal right to apply part or all of the amount owing to a partner on a loan balance against deficiency in his capital account resulting from losses in the process of liquidation.11.Partner’s interest — the sum of a partner’s capital, loan balance and advances to the partnership.
    • Marshalling of Assets College of Business, Entrepreneurship and Accountancy• involves the order of creditors’ rights against the partnership’s assets and the personal assets of the individual partners.• The order in which claims against the partnership’s assets will be marshalled is as follows: 1. Partnership creditors other than partners 2. Partners’ claims other than capital and profits, such as loans payable and accrued interest payable 3. Partners’ claim to capital or profits, to the extent of credit balances in capital accounts.
    • Illustrative Problem College of Business, Entrepreneurship and Accountancy Encina, Endrada, and Elina Statement of Financial Position December 01, 2010 Assets Liabilities and Equity Cash 8,000 Liabilities 44,800 Other Assets 136,000 Endrada, Loan 2,000 Elina, Loan 3,200 Encina, Capital 38,000 Endrada, Capital 24,000 Elina, Capital 32,000 Total Assets 144,000 Total Liabilities and Equity 144,000(1) The other assets were sold for P 140,000.(2) The other assets were sold for P74,000.(3) The other asses were sold for P68,000. Deficient partner was solvent.(4) The other assets were sold for P68,000. Deficient partner was insolvent.
    • Encina, Endrada, and Elina Statement of Liquidation College of Business, Entrepreneurship and Accountancy December 1 - 31, 2012 Other Loan Capital Encina - Endrada Elina - Cash Assets Liabilities Endrada Elina 40% - 40% 20%Balance beforeLiquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000Sale of Assetsand distributionof gain 140,000 (136,000) 1,600 1,600 800Balances 148,000 - 44,800 2,000 3,200 39,600 25,600 32,800Payment ofLiabilities (44,800) (44,800)Balances 103,200 - - 2,000 3,200 39,600 25,600 32,800Payment topartners (103,200) (2,000) (3,200) (39,600) (25,600) (32,800)
    • Encina, Endrada, and Elina Statement of Liquidation College of Business, Entrepreneurship and Accountancy December 1 - 31, 2012 Loan Capital Other Encina - Endrada Elina - Cash Assets Liabilities Endrada Elina 40% - 40% 20%Balance beforeLiquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000Sale of Assetsand distributionof gain 74,000 (136,000) (24,800) (24,800) (12,400)Balances 82,000 - 44,800 2,000 3,200 13,200 (800) 19,600Payment ofLiabilities (44,800) (44,800)Balances 37,200 - - 2,000 3,200 13,200 (800) 19,600Offsetting ofLoan 800 800Balances 38,000 - - 2,000 3,200 13,200 - 19,600Payment topartners (38,000) (2,000) (3,200) (13,200) (19,600)
    • Encina, Endrada, and Elina Statement of Liquidation December 1 - 31, 2012 College of Business, Entrepreneurship and Accountancy Loan Capital Other Encina - Endrada - Cash Assets Liabilities Endrada Elina 40% 40% Elina - 20%Balance beforeLiquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000Sale of Assetsand distributionof gain 68,000 (136,000) (27,200) (27,200) (13,600)Balances 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,400Payment ofLiabilities (44,800) (44,800)Balances 31,200 - - 2,000 3,200 10,800 (3,200) 18,400Offsetting ofLoan (2,000) 2,000Balances 31,200 - - - 3,200 10,800 (1,200) 18,400Additional Cash 1,200 1,200Balances 32,400 - - - 3,200 10,800 - 18,400Payment topartners (32,400) (3,200) (10,800) (18,400)
    • Encina, Endrada, and Elina Statement of Liquidation December 1 - 31, 2012 College of Business, Entrepreneurship and Accountancy Loan Capital Other Encina - Endrada - Cash Assets Liabilities Endrada Elina 40% 40% Elina - 20%Balance beforeLiquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000Sale of Assetsand distributionof gain 68,000 (136,000) (27,200) (27,200) (13,600)Balances 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,400Payment ofLiabilities (44,800) (44,800)Balances 31,200 - - 2,000 3,200 10,800 (3,200) 18,400Offsetting ofLoan (2,000) 2,000Balances 31,200 - - - 3,200 10,800 (1,200) 18,400Additional Cash (800) 1,200 (400) 31,200 - - - 3,200 10,000 - 18,000Payment topartners (31,200) (3,200) (10,000) (18,000)