The document provides details about the liquidation of the partnership firm of Encina, Endrada, and Elina. It includes their statement of financial position before liquidation begins and statements of liquidation showing the realization of assets, distribution of gains or losses, payment of liabilities, and distribution of cash to partners under different scenarios of asset sale prices and treatment of capital deficiencies.

1. MIRIAM COLLEGE
College of Business, Entrepreneurship and Accountancy
College of Business, Entrepreneurship
and Accountancy
Business Administration Department
BSA – 102
Principles of Accounting Part 2
2nd Semester, SY 2012-2013

2. 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)

3. 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

4. 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

5. 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.

6. 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.

7. 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.

8. 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.

9. PROCEDURES IN LUMP-SUM
LIQUIDATION
College of Business, Entrepreneurship and Accountancy
1. Sale of non-cash assets
2. Distribution or allocation of gain or loss on
realization among the partners according to
their residual profit and loss ratios (salary and
interest factors disregarded) unless liquidation
ratios are specified in the partnership
agreement.

10. 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.

11. PROCEDURES IN LUMP-SUM
LIQUIDATION
College of Business, Entrepreneurship and Accountancy
3. Distribution of cash to creditors
4. Distribution of cash to partners. In this
procedure, the provisions of the marshalling of
assets and the exercise of the right of offset are
applied.

12. 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.

13. DEFINITION OF TERMS
College of Business, Entrepreneurship and Accountancy
1. 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.

14. DEFINITION OF TERMS
College of Business, Entrepreneurship and Accountancy
5. Realization — the process of converting non-
cash assets into cash.
6. Gain on realization - the excess of the selling
price over the cost or book value of the assets
disposed or sold through realization.
7. Loss on realization — the excess of the cost or
book value over the selling price of the assets
disposed or sold through realization.
8. Capital deficiency — the excess of a partner’s
share on losses over his capital.

15. DEFINITION OF TERMS
College of Business, Entrepreneurship and Accountancy
9. Deficient partner - a partner with a debit balance
in his capital account after receiving his share on
the loss on realization.
10.Right of offset — the legal right to apply part or all
of the amount owing to a partner on a loan
balance against deficiency in his capital account
resulting from losses in the process of liquidation.
11.Partner’s interest — the sum of a partner’s
capital, loan balance and advances to the
partnership.

16. 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.

17. 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.

18. 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 before
Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Assets
and distribution
of gain 140,000 (136,000) 1,600 1,600 800
Balances 148,000 - 44,800 2,000 3,200 39,600 25,600 32,800
Payment of
Liabilities (44,800) (44,800)
Balances 103,200 - - 2,000 3,200 39,600 25,600 32,800
Payment to
partners (103,200) (2,000) (3,200) (39,600) (25,600) (32,800)

19. 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 before
Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Assets
and distribution
of gain 74,000 (136,000) (24,800) (24,800) (12,400)
Balances 82,000 - 44,800 2,000 3,200 13,200 (800) 19,600
Payment of
Liabilities (44,800) (44,800)
Balances 37,200 - - 2,000 3,200 13,200 (800) 19,600
Offsetting of
Loan 800 800
Balances 38,000 - - 2,000 3,200 13,200 - 19,600
Payment to
partners (38,000) (2,000) (3,200) (13,200) (19,600)

20. 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 before
Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Assets
and distribution
of gain 68,000 (136,000) (27,200) (27,200) (13,600)
Balances 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,400
Payment of
Liabilities (44,800) (44,800)
Balances 31,200 - - 2,000 3,200 10,800 (3,200) 18,400
Offsetting of
Loan (2,000) 2,000
Balances 31,200 - - - 3,200 10,800 (1,200) 18,400
Additional Cash 1,200 1,200
Balances 32,400 - - - 3,200 10,800 - 18,400
Payment to
partners (32,400) (3,200) (10,800) (18,400)

21. 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 before
Liquidation 8,000 136,000 44,800 2,000 3,200 38,000 24,000 32,000
Sale of Assets
and distribution
of gain 68,000 (136,000) (27,200) (27,200) (13,600)
Balances 76,000 - 44,800 2,000 3,200 10,800 (3,200) 18,400
Payment of
Liabilities (44,800) (44,800)
Balances 31,200 - - 2,000 3,200 10,800 (3,200) 18,400
Offsetting of
Loan (2,000) 2,000
Balances 31,200 - - - 3,200 10,800 (1,200) 18,400
Additional Cash (800) 1,200 (400)
31,200 - - - 3,200 10,000 - 18,000
Payment to
partners (31,200) (3,200) (10,000) (18,000)