PARTNERSHIP LIQUIDATION Accounting Principles
3 Steps in Winding Up
Steps in Preparing Simple Liquidation 1) Convert assets to cash
Legal Provisions on Liquidation: 2 Types of Liquidation
1) Adjust books—close nominal accounts 2) Discharge Liabilities
Hierarchy of payment of 1) Simple Liquidation/Lump Sum 3) Distribute to partners
and balance sheet should be prepared
partnership liabilities: Liquidation
2) Assets sold—Gain/Loss closed to
1. Creditors other than partners Realization is done over a
Partners’ capital accounts
2. Payable to Partners short period of time
3) Deficiency capital, if any, elimination
3. Partners’ Capital Balances Cash distribution is made suggested order:
4. Partners’ Share in Profits immediately Absorption of deficiency by the other
Partnership creditors have priority 2) Liquidation by Installment partner/s
over partnership properties Liquidation is carried over Right of offset
When a partner becomes insolvent, extended period of time Additional Investment
hierarchy for claims: Realization and cash 4) Payment of Liabilities
a) Personal Creditors distribution are made on 5) Distribution of remaining cash to
b) Partnership Creditors installment basis partners
c) Other Partners
Steps in Preparing Liquidation by Installment
Limited Partner Terms 3 Factors to Consider
Only liable up to the extent of his 1) Record the sale—distribute gain/loss
capital contribution in the 2) Charge liquidation expenses, if any Restricted Interest 1) Total partners’ interest
partnership 3) Payment of liabilities—remaining Used to absorb future 2) Profit & loss ratio
If there’s a loan, it has a priority in liabilities, cash should be set aside losses can’t be recovered 3) Loss absorption balance
payment of it like outside 4) Cash available but insufficient—schedule immediately Maximum amount of
liabilities Free interest partnership loss that
of safe payment
If capital is deficient—no Can be recovered could be absorbed
additional investment nor right of 5) Repeat the steps until final sale
immediately based on interest
offset
Deficiency will be absorbed by Partners’ interest Highest loss absorption
Rules in Safe Payment Sum of the partners’ loan should be given priority
other partners
Start with partners’ interest before and capital in cash distribution.
Advance Program of Cash Distribution cash distribution
Compute restricted interest
It will show how the cash will be
Balance represents free interest
distributed to the partners as it
Free interest must be equal to cash
becomes available
available for distribution
PARTNERSHIP DISSOLUTION: CHANGE IN PARTNERS’ EQUITY Cause of Dissolution
Legal Provisions on Dissolution: Admission of a New Partner
Accounting for Dissolution By purchase:
Article 1828 of the New Civil Code New Partner will buy the interest from anyone
1. Revalue the properties of the or all of the partners
partnership Current partners may buy or sell interest with
2 Kinds of Dissolution 2. Correct prior period errors one another
3. Update the partners’ capital Assets of the partnership not affected -Personal
1. With accounts
Liquidation Transaction
4. If not provided in the Articles, Total assets & total equity before = after
determine from the partners Goodwill, Bonus & Asset Revaluation
Conditions affecting Dissolution Expressed
Revised Profit and Loss Ratio By investment:
By the acts of the partner
Transaction between new partner and
By operation of Law No agreement THEN it is assumed that a partnership
By Judicial Decree
purchase of profit at the percent of Contribution is received by the partnership
transfer Total investments not the same as total agreed
Requirement: Interest is accompanied by a purchase in equity, may be adjusted by:
the profit share Revaluation of properties
Unanimous consent of all the With Agreement Recognition of goodwill
existing partners before a new Recognition of bonus
partner may be admitted. Withdrawal of a partner
Evaluation of Goodwill and Bonus Method If retirement during the year, only profit share of
Implied Goodwill or Bonus the retired partner
Advisable to use bonus method
Death or Incapacity of a Partner
TAC=TAPE & ACN=CCN a) Adheres to the cost principle in
Purchase by the remaining partners
No goodwill/bonus valuing assets
Purchase by outsider
TAC<APE & ACN=TCCN b) PAS 38 recognizes goodwill only
If no takers, the interest may be paid out of the
Goodwill for new partner as a result of an acquisition made
partnership funds
TAC>(<)TAPE & ACN=CCN by a reporting entity
If the equity of the deceased not immediately
Goodwill/Asset c) Goodwill is to be amortized; and
paid THEN “Payable to Partner’s Estate”
Reval./Impairment there’s a revision in the P&L ratio
Possible the deceased partner’s equity may
TAC=TAPE & ACN<CCN as a result of dissolution THEN
transfer to a heir subject to some specific in
Bonus for the new partner having a higher profit
Articles of Co-Partnership
partner and loss ratio will absorb a higher
Incorporation of a Partnership
TAC=APE & ACN>CCN amount of impairment loss from
Business requires more funds
Bonus for the current goodwill
partner
PARTNERSHIP: OPERATION AND DIVISION OF PROFIT AND LOSS
Legal Provisions on Division of Methods of Dividing Profit/Loss Principles of Recognition and Measurement
Profit/Loss
Arbitrary Ratio Adjusting Entries Change in Profit and Loss Agreement
1. Articles of Co-Partnership
Capital Ratio
(Partners’ Agreement) Closing Entries
1. Initial/Capital Prior period errors or Asset
2. If agreement is only on profit—
2. Beginning Recording of Profit Sales Revaluation = Original Ratios
same applies to loss
3. Ending Distribution of Profit = New Ratios
3. Absence of agreement—
4. Average (Fair&Equitable) Partners’ Equity
Partners’ contribution
Interest on Investments
4. Industrial partner ONLY shares
Salaries Capital of Partners Statement of Changes in Partners’ Equity
in profit UNLESS there is
specific agreement regarding Combination of: Interest,
losses Salary, Balance Fixed Fluctuating Balance Sheet Share in Assets
Bonus
Financial Statements
NIRC Factors for a Fair & Equitable Advantages:
Income Statement
Distribution Method
-30% Tax Limited Liability
Profit Loss
-General Professional -Render Equal Time More Capital
-Skills or Entrepreneurial ability -Salaries Bonus-NI after
Partnerships are exempted
-Bonus salaries and bonus
-Net Profit AFTER TAX—profit
-Interest Notes:
distribution
B= B(NI-S-B)
-Net income, if silent, AFTER TAC=Total Actual
Given regardless of result of Bonus Agreement Contributions
operation When Business is
NI before bonus TAPE=Total Agreed
Taxable
If total salaries withdrawn is Partners’ Equity
General Rule: NI after bonus
less than total salaries agreed B= B(NIAT-S-B) ACN=Actual
-INTEREST and SALARY are part Not applicable
then credit DRAWING contribution
of distribution and not deductible if loss
ACCOUNT Bonus-NI-Salaries, TCCN=Total capital
expenses Treated as
If salaries withdrawn regularly credit of new partner
distribution of Bonus, Tax
= Temporary account instead of Asset Revaluation only
profit
Drawing Account B= B(NI-S-B-T) affects current
T= 30%(NI-S-B) partners
