Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021

College: Business Education

Campus : Bayombong Campus

DEGREE BSBA COURSE BRG 6

PROGRAM NO.
SPECIALIZATION FM/MM/HRM/BE COURSE Partnership and Corporation
TITLE Accounting
YEAR LEVEL First Year TIME WK 10- IM 05
FRAME NO. 12 NO.

I. UNIT TITLE/CHAPTER TITLE: PARTNERSHIP LIQUIDATION

II. LESSON TITLE:

Lesson 1: SETTLEMENT OF CLAIMS in case of Liquidation
Lesson 2: Partnership Liquidation-Lump Sum Method
Lesson 3: Partnership Liquidation-Installment Method
Lesson 4: Cash Priority Program

III. LESSON OVERVIEW

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.

Realization is the conversion of non-cash assets into cash. This may either result to
a gain or loss to 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 over 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.

IV. LEARNING OUTCOME

1. Discuss the nature of Partnership Liquidation.

2. State the process observed in lump sum liquidation and installment liquidation.
3. Prepare Statement of Liquidation and journal entry under each method.
4. Discuss the importance of Cash Priority Program in Partnership

V. LESSON CONTENT 

Lesson 1: SETTLEMENT OF CLAIMS in case of Liquidation

Order of Priority
 
The assets of a general partnership shall be applied in the following order:

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.

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021
The second preference above gives the partner with the loan account the option to exercise
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.  
  
Methods of Partnership Liquidation
1. Lump-sum method
-under this method, all noncash assets are realized and the related gains or losses
distributed and all liabilities are paid before a single final cash distribution is made to the
partners.

2. Installment 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 program of
safe payments or a cash priority program. This process persists until all the non-cash
assets are sold.
 
Lesson 2: Partnership Liquidation- LUMPSUM METHOD
The procedures below may be followed in lump-sum liquidation:
1. Realization of non-cash assets and distribution of gain or loss on realization among
the partners based on the 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 result), 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, 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, then the o their partners should absorb his
deficiency.
4. Payments to partners, in the order of priority:
a. Loan accounts
b. Capital accounts
 
Illustration
Princess Malaya, Milo Burgos and Ruco Marasigan are partners in a public relations firm
and share profits and losses in the ratio of 2:1:1, respectively. They decided to liquidate
their business on Dec. 30, 2020. The following is the condensed statement of financial
position prepared prior to liquidation:
Malaya, Burgos and Marasigan
Statement of Financial Position
Dec. 31, 2020
 
Assets                                                                     Liabilities and Capital
 
Cash                          P 200,000            Liabilities                               P1, 200,000
Non-cash                  3,400,000            Milo Burgos, Loan                          50,000
Total assets             P3, 600,000            Ruco Marasigan, Loan                  80,000
                                                        Princess Malaya, Capital           950,000
Milo Burgos, Capital                     600,000
Ruco Marasigan, Capital                800,000
Total Liabilities and Capital       P3, 600,000

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
reproduced for educational purposes only and not for commercial distribution,”
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021
The above given details are applicable for Cases 1-5. Only two categories for both Assets-
cash and non-cash, and Liabilities-Liabilities and loans are used to avoid excessive details
in our illustrations. 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 1. Loss on Realization Fully Absorbed by Partners’ Capital Balances
 
Assume that 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 4:4:2. The capital balance of each
partner was sufficient to fully absorb the share in the loss. The payment of cash to
partnership creditors and the final distribution of the remaining cash to the partners
presented no problem. A statement of liquidation will summarize the steps involved in the
liquidation.
 
 The entries pertinent to this case follow:

1. Sale of non-cash assets

Cash                                                                            2,500,000
        Loss on realization                                                       900,000
           Non-cash assets                                                                      3,400,000

Distribution of Gain or Loss on Realization Based on partners P/L ratio

Princess Malaya, capital                                        360,000
       Milo Burgos, capital                                                360,000
Ruco Marasigan, capital                                        180,000
  Loss on Realization                                                       900,000

2. Payment of Liabilities
          Liabilities                                                     1,120,000
Cash                                                                    1,120,000

3. Distribution of Cash to Partners

           Milo Burgos, Loan                                          50,000
        Ruco Marasigan, Loan                                   80,000
       Princess Malaya, capital                              590,000
       Milo Burgos, capital                                      240,000
Ruco Marasigan, capital                               620,000
Cash                                                               1,580,000

Case 1. Loss on Realization Absorbed by Partners’ Capital Balances

Malaya, Burgos and Marasigan

Statement of Liquidation
Dec. 31, 2020

Non-cash Burgos Marasigan Malaya, Burgos Marasigan

Cash Liabilities
Assets Loan Loan Capital Capital Capital
P/L Percentages 40% 40% 20%

Bal. before liquidation 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of Non-cash Assets
and Distribution of Losses 2,500,000 (3,400,000) (360,000) (360,000) (180,000)
Balance 2,700,000 -0- 1,120,000 50,000 80,000 590,000 240,000 620,000
Payment of Liabilities (1,120,000) (1,120,000)
Balance 1,580,000 0 50,000 80,000 590,000 240,000 620,000
Payment of Partners (1,580,000) (50,000) (80,000) (590,000) (240,000) (620,000)

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
reproduced for educational purposes only and not for commercial distribution,”
NVSU-FR-ICD-05-00 (081220) Page 3 of 16
 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021

Case 2. Loss on Realization Resulting to a Capital Deficiency with Right of Offset 

Assume that the non-cash assets are sold at P 1,850,000 with a resulting loss on
realization of P1,550,000 which was distributed in the ratio 4:4:2. The capital balance of
partner Burgos was insufficient to fully absorb his share in the loss and thus, occurred a
capital deficiency of P 20,000. Instead of making an additional investment, he exercises his
right of offset. A portion of his loan to the partnership was applied to his deficient capital.
Outside creditors were paid and a final distribution of the remaining cash to the partners
was made.
ENTRIES:
1. Sale of non-cash assets
Cash                                                              1,850,000
        Loss on realization                                        1,550,000
           Non-cash assets                                                       3,400,000

2. Distribution of Gain or Loss on Realization Based on partners P/L ratio

Princess Malaya, capital                             620,000
         Milo Burgos, capital                                         620,000
  Ruco Marasigan, capital                                  310,000
  Loss on Realization                                                    1,550,000     

3. Payment of Liabilities
Liabilities                                                        1,120,000
                 Cash                                                                             1,120,000

4. Right of Offset
 Milo Burgos, Loan                                           20,000
       Milo Burgos, capital                                             20,000

5. Distribution of Cash to Partner

Milo Burgos, Loan                                             30,000
        Ruco Marasigan, Loan                                      80,000
       Princess Malaya, capital                           330,000
Ruco Marasigan, capital                                  490,000
Cash 930,000

Case 2. Loss on Realization Resulting to a Capital Deficiency with Right of Offset

Malaya, Burgos and Marasigan
Statement of Liquidation
Dec. 31, 2020

Non-cash Burgos Marasigan Malaya, Burgos Marasigan

Cash Liabilities
Assets Loan Loan Capital Capital Capital
P/L Percentages 40% 40% 20%

Bal. before liquidation 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of Non-cash Assets
and Distribution of Losses 1,850,000 (3,400,000) (620,000) (620,000) (310,000)
Balance 2,050,000 -0- 1,120,000 50,000 80,000 330,000 (20,000) 490,000
Payment of Liabilities (1,120,000) (1,120,000)
Balance 930,000 -0- 50,000 80,000 330,000 (20,000) 490,000
Offset of Burgo's loan
against his Deficiency (20,000) 20,000
Balance 930,000 30,000 80,000 330,000 -0- 490,000
Payment of Partners (930,000) (30,000) (80,000) (330,000) (490,000)

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
reproduced for educational purposes only and not for commercial distribution,”
NVSU-FR-ICD-05-00 (081220) Page 4 of 16
 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021

Case 3. Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent

Partner

Assume that the non-cash assets are sold at P 1,700,000 with a resulting loss on
realization of P 1,700,000 which was distributed in the ratio 4:4:2. The capital balance of
partner Burgos was again insufficient to fully absorb his share in the loss and, incurred a
capital deficiency of P 80,000. Burgos exercised his right of offset but it was not enough to
cover his losses; he has must to invest additional cash of P30, 000 to fully eliminate his
deficiency.

ENTRIES:

1. Sale of non-cash assets

Cash                                                          1,700,000
        Loss on realization                                    1,700,000         
Non-cash assets                                                 3,400,000

Distribution of Gain or Loss on Realization Based on partners P/L ratio

Christopher Malaya, capital                         680,000
         Milo Burgos, capital                                       680,000
  Ruco Marasigan, capital                                340,000
  Loss on Realization                                            1,700,000

2. Payment of Liabilities
  Liabilities                                                  1,120,000
                 Cash                                                                  1,120,000

3. Right of Offses
Milo Burgos, Loan                                   50,000
       Milo Burgos, capital                                   50,000

4. Additional investment
Cash                                                              30,000
       Milo Burgos, capital                                         30,000

5. Distribution of Cash to Partner

Ruco Marasigan, Loan                                 80,000
       Princess Malaya, capital                            270,000
Ruco Marasigan, capital                             460,000
Cash                                                                   810,000

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
reproduced for educational purposes only and not for commercial distribution,”
NVSU-FR-ICD-05-00 (081220) Page 5 of 16
 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021
Case 3. Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent
Partner
Malaya, Burgos and Marasigan
Statement of Liquidation
Dec. 31, 2020
Non-cash Burgos Marasigan Malaya, Burgos Marasigan
Cash Liabilities
Assets Loan Loan Capital Capital Capital
P/L Percentages 40% 40% 20%

Bal. before liquidation 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of Non-cash Assets
and Distribution of Losses 1,700,000 (3,400,000) (680,000) (680,000) (340,000)
Balance 1,900,000 -0- 1,120,000 50,000 80,000 270,000 (80,000) 460,000
Payment of Liabilities (1,120,000) (1,120,000)
Balance 780,000 -0- 50,000 80,000 270,000 (80,000) 460,000
Offset of Burgo's loan
against his Deficiency (50,000) 50,000
Balance 780,000 -0- 80,000 270,000 (30,000) 460,000
Add'l Investment of Burgos 30,000 30,000
Balance 810,000 80,000 270,000 -0- 460,000
Payment of Partners (810,000) (80,000) (270,000) (460,000)

Case 4. Loss on Realization Resulting to a Capital Deficiency to a Personally

Insolvent Partner

Assume the same fact as in case 3 except that Burgos is personally insolvent and is unable
to make additional investment for his remaining deficiency of P30, 000. In this case, the
remaining partner should absorb this deficiency as additional loss to them in the ratio of 2:1.
ENTRIES:

1. Sale of non-cash assets

Cash                                                               1,700,000
        Loss on realization                                         1,700,000         
Non-cash assets                                       3,400,000

Distribution of Gain or Loss on Realization Based on partners P/L ratio

Princess Malaya, capital                                    680,000
         Milo Burgos, capital                                            680,000
  Ruco Marasigan, capital                                     340,000
  Loss on Realization                                               1,700,000

2. Payment of Liabilities
Liabilities                                 1,120,000
                 Cash                                                    1,120,000

3. Right of Offset
Milo Burgos, Loan                        50,000
       Milo Burgos, capital                                  50,000

4. Deficiency Absorbed By solvent Partner

Princess Malaya, capital               20,000
  Ruco Marasigan, capital               10,000
         Milo Burgos, capital                                 30,000

5. Distribution of Cash to Partner

Ruco Marasigan, Loan                 80,000
       Princess Malaya, capital             250,000
Ruco Marasigan, capital             450,000
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reproduced for educational purposes only and not for commercial distribution,”
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021
Cash                                                    780,000

Case 4. Loss on Realization Resulting to a Capital Deficiency to a Personally

Insolvent Partner

Malaya, Burgos and Marasigan

Statement of Liquidation
Dec. 31, 2020

Non-cash Burgos Marasigan Malaya, Burgos Marasigan

Cash Liabilities
Assets Loan Loan Capital Capital Capital
P/L Percentages 40% 40% 20%

Bal. before liquidation 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of Non-cash Assets
and Distribution of Losses 1,700,000 (3,400,000) (680,000) (680,000) (340,000)
Balance 1,900,000 -0- 1,120,000 50,000 80,000 270,000 (80,000) 460,000
Payment of Liabilities (1,120,000) (1,120,000)
Balance 780,000 -0- 50,000 80,000 270,000 (80,000) 460,000
Offset of Burgo's loan
against his Deficiency (50,000) 50,000
Balance 780,000 -0- 80,000 270,000 (30,000) 460,000
Defficiency Absorbed by
Solvent Partners (20,000) 30,000 (10,000)
Balance 780,000 80,000 250,000 -0- 450,000
Payment of Partners (780,000) (80,000) (250,000) (450,000)

Case 5. Partnership Insolvent but Partners Personally Solvent

Assume that the noncash assets were sold at P900, 000. The loss was P2, 500,000 that to
be distributed in the ratio 4:4:2. The cash balance after full realization in the amount of P1,
000,000 was not enough to settle all liabilities to outsiders. Also, the capital balances of
Malaya and Burgos were insufficient to fully absorb their share in the loss and thus,
incurred capital deficiencies of P50, 000 and 400,000 respectively.

Burgos exercised his right of offset but it was not enough to cover his losses; he has no
recourse but to invest additional cash of P350, 000 to fully eliminate his deficiency. Malaya
also invested p50, 000. The balance of P380, 000 is paid to Marasigan for his loan and
capital account balances of P80, 000 and P300, 000 respectively.

ENTRIES:

1. Sale of non-cash assets

Cash                                            900,000
        Loss on realization                     2,500,000         
Non-cash assets                                 3,400,000

Distribution of Gain or Loss on Realization Based on partners P/L ratio

Princess Malaya, capital             1,000,000
         Milo Burgos, capital                     1,000,000
  Ruco Marasigan, capital                 500,000
  Loss on Realization                             2,500,000

2. Payment of Liabilities
          Liabilities                                  1,100,000
                 Cash                                                 1,100,000
“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
reproduced for educational purposes only and not for commercial distribution,”
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021

3. Right of Offset
  Milo Burgos, Loan                       50,000
       Milo Burgos, capital                 50,000

4. Additional Investment By solvent Partner

Cash 400,000
Princess Malaya, capital                   50,000
  Milo Burgos, capital                         300,000

6. Full Payment of Liabilities

Liabilities 20,000
Cash 20,000
      
5. Distribution of Cash to Partners
Ruco Marasigan, Loan                             80,000
Ruco Marasigan, capital                         300,000
Cash                                                                    380,000

Case 5. Partnership Insolvent but Partners Personally Solvent

Malaya, Burgos and Marasigan

Statement of Liquidation
Dec. 31, 2020

Non-cash Burgos Marasigan Malaya, Burgos Marasigan

Cash Liabilities
Assets Loan Loan Capital Capital Capital
P/L Percentages 40% 40% 20%

Bal. before liquidation 200,000 3,400,000 1,120,000 50,000 80,000 950,000 600,000 800,000
Sale of Non-cash Assets
and Distribution of Losses 900,000 (3,400,000) (1,000,000) (1,000,000) (500,000)
Balance 1,100,000 -0- 1,120,000 50,000 80,000 (50,000) (400,000) 300,000
Payment of Liabilities (1,100,000) (1,100,000)
Balance 0 20,000 50,000 80,000 (50,000) (400,000) 300,000
Right of Offset by Burgos (50,000) 50,000
Balances 0 20,000 -0- 80,000 (50,000) (350,000) 300,000
Add'l Investment of
Defficient Partners 400,000 50,000 350,000
Balances 400,000 20,000 80,000 -0- -0- 300,000
Full Payment of Liabilioties (20,000) (20,000)
Balance 380,000 -0- 80,000 300,000
Payment of Partners (380,000) (80,000) (300,000)

Case 6. Partnership Insolvent and Partners Personally Insolvent

Nanette Virtudazo, Narciso Gabayan and Felipe Opiso are partners who have P/L ratio of
4:3:2 respectively. They agreed to liquidate on Nov. 1, 2020. The partnership and partners
Gabayan and Opiso are currently unable to meet their financial obligations. The partnership
condensed balance sheet and the personal status of the partners are as follows:

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
reproduced for educational purposes only and not for commercial distribution,”
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Virtudazo, Gabayan and Opiso

Statement of Financial Position
Nov. 1, 2020
ASSETS LIABILITIES AND CAPITAL
Cash P 5,000 Liabilities P 370,000
Non-cash 605,000 Virtudazo, Capital 100,000
Gabayan, Capital 60,000
Opiso, Capital 80,000
Total Assets P610, 000 Total Liabilities and Capital P 610,000

Personal Status of Partners

(Excluding interest in the partnership)

Partner Personal Asserts Personal liabilities

Virtudazo P310, 000 P200, 000
Gabayan 94,500 119,000
Opiso 40,000 50,000

The non cash assets are sold for P335, 000, resulting a loss of P270, 000. The cash
generation from the realization of all non cash assets is inadequate for the full payment of
the liabilities. The partnership is insolvent and will depend on its solvent partners for relief.

After the distribution of loss on realization, Gabayan is deficient by P30, 000. He cannot
make additional investment since her is personally insolvent. The two other partners absorb
the deficiency, even if Virtudazo has his own deficiency. This is possible because Virtudazo
is personally solvent. For Opiso, he is made to share in the loss due to insolvency of
Gabayan though he is already personally insolvent because in the Partnership his capital
balance is still a positive P20, 000.

In the meantime, an additional investment of P40, 000 is necessary from the solvent
Virtudazo to be used to pay the remaining liabilities and the P 10, 000 balances in Opiso’s
capital account. The P10, 000 that Opiso receive can now be used to pay off his personal
creditors. Virtudazo and Opiso can later claim from Gabayan his supposed additional
investment due to capital deficiency after he has satisfied his personal liabilities. This is if
Gabayan will become solvent in the future.

Virtudazo Gabayan Opiso

Personal Assets P310, 000 P 94, 500 P 40, 000
Less: Personal Liabilities 200, 000 119, 000 50, 000
Excess (Deficit) P110, 000 P(24,500) P(10, 000)
Amount recovered from
Liquidation of the partnership 10, 000
Loss to Personal Creditors None P 24, 500 None_

ENTRIES:

1. Sale of non-cash assets

Cash                                                            335, 000
        Loss on realization                                        270, 000         
Non-cash assets                                                       605, 000

Distribution of Gain or Loss on Realization Based on partners P/L ratio

Virtudazo, capital                                   120, 000
Gabayan, capital                                      90, 000
Opiso, capital                                        60, 000
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reproduced for educational purposes only and not for commercial distribution,”
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021
 Loss on Realization                                                 270,000

2. Partial Payment of Liabilities

          Liabilities                                     340, 000
                 Cash                                                          340, 000

3. Additional Losses to Partners with Positive Capital Balances

Virtudazo, capital                       120, 000
Opiso, capital                               90, 000
Gabayan, capital      60,000

4. Additional Investment of Partner

Cash 40, 000
Virtudazo, Capital 40, 000

5. Full Payment of liabilities

Liabilities                             30, 000
                  Cash                                              30, 000

5. Distribution of Cash to Partners

Opiso, Capital 10, 000
Cash 10, 000

Lesson 3: Partnership Liquidation-INSTALLMENT LIQUIDATION

Under this method, realization of non-cash assets is accomplished over an extended period
of time. It is the process f selling some assets, paying the creditors, paying the remaining
cash to the partners, realizing additional assets and making additional payments to
partners. The liquidation will continue until all the non-cash assets have been realized and
all available cash distributed to partnership creditors and partners.

Installment payments to partners are appropriate if necessary safeguards are used to

assure that all partnership creditors are paid in full and that no partner is paid more than the
amount to which he would be entitled after all losses on realization of assets are known.
The procedures below may be followed in installment liquidation:

1. Realization of non-cash assets and distribution of loss and gain 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 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.

Illustration: The balance sheet for Fely Ardina, Christine Resultay and Christine Gamba,
partners sharing profits in the ratio of 4:3:3 respectively, showed the following balances on
April 30, 2020, just before liquidation:
Ardina, Resultay and Gamba
Statement of Financial Position
April 30, 2020

Assets Liabilities and

Capital
Cash P 315,000 Liabilities P
435,000

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be
reproduced for educational purposes only and not for commercial distribution,”
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 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021
Non-cash Assets 1,250,000 Christine Gamba, Loan
30,000
Total Assets P1, 565,000 Fely Ardina, Capital
600,000
Christine Resultay, Capital
350,000
Christine Gamba, Capital
150,000
Total Liabilities and Capital
P1, 565,000

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In May, parts of the assets are sold at book value, P300, 000. In June, the remaining assets are
sold for P210, 000. Assume that available cash is distributed to the proper parties at the end of
May and at the end of June. Assume further that partners are solvent and that any partner who
is deficient made appropriate payment to the partnership on July 31.

Schedule A:

Ardina, Resultay and Gamba

Schedule of Safe Payments
May 31, 2020

Ardina Resultay Gamba

Cash balances before Distribution of Cash P600, 000 P350, 000 P150, 000
Loan Balance 30,000
Partners’ Total Interests P600, 000 P350, 000 P180, 000
Restricted Interests – possible loss of
P950, 000 if nothing is realized on
the remaining non-cash assets; 4:3:3 ratio (380,000) (285,000) (285,000)
Balances P220, 000 P65, 000 P (105,000)*
Restricted Interests – additional possible loss
of P105, 000* if Gamba is unable to
satisfy her possible deficiency; 4:3 ratio (60,000) (45,000) 105,000
Free Interests – amounts to be paid to partners P160, 000 P20, 000 P-0-

Schedule B:

Ardina, Resultay and Gamba

Schedule of Safe Payments
June 30, 2020

Ardina Resultay Gamba

Cash balances before Distribution of Cash P144, 000 P108, 000 P (42,000)
Restricted Interests – additional possible loss of
P42, 000 if Gamba is unable to
satisfy her possible deficiency; 4:3 ratio (24,000) (18,000) 42,000
Free Interests – amounts to be paid to partners P120, 000 P90, 000 P-0-

It can be observed that the total partners’ interests are continuously restricted for possible
losses. A partner’s restricted interest represents the portions of a partner’s interest 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 restricted interests are satisfied, the resulting balances will be
referred to as free interests which are simply the amounts to be paid to the partners. This
payment should first be applied to loan then to capital in accordance with the rules on the order
of preference in liquidation. The entries related to Figure 5-7 follow:
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

Fely Ardina, Capital 160,000
Christine Resultay, Capital 20,000

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Cash 180,000

4. Sale of Non-cash Assets and Distribution of Loss on Realization

Cash 210,000
Fely Ardina, Capital 296,000
Christine Resultay, 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

Fely Ardina, Capital 120,000
Christine Resultay, 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

Fely Ardina, Capital 24,000
Christine Resultay, Capital 18,000
Cash 42,000

Case 7. Installment Liquidation

Ardina, Resultay and Gamba

Statement of Liquidation
May 1 to July 31, 2020

Cash
Non-cash Liabilities Gamba, Ardina, Resultay, Gamba,
Assets Loan Capital Capital Capital
Balances before Liquidation P315,000 P1,250,000 P435,000 P30, 000 P600,000 P350,000 P150,000
May – sale of non-cash Assets1300,000 (300,000)_______________________________________________
Balances P615,000 P950,000 P435,000 P30, 000 P600,000 P350,000 P150,000
May –Payment of Liabilities2 (435,000) (435,000) ____________________________________
Balances P180, 000 P950,000 -0- P30, 000 P600,000 P350,000 P150,000
May – Installment to partners3
(Schedule A) (180,000) (160,000) (20,000)__________
Balances P-0- P950,000 P30,000 P440,000 P330,000 P150,000
June – Sale of non-cash assets
And distribution of losses4 210,000 (950,000) (296,000) (222,000) (222,000)
Balances P210,000 -0- P30,000 P144,000 P108,000 (72,000)
Right of Offset by Gamba5 (30,000) 30,000
Balances P210,000 -0- P144,000 P108,000 P(42,000)
June installment to partners6
(Schedule B) (210,000) (120,000) (90,000)_________
Balances -0- P24,000 P18,000 P(42,000)
July- investment7 42,000 42,000
Balances P42,000 P24,000 P18,000
July- instalment8 (42,000) (24,000) (18,000)

Lesson 4: CASH PRIORITY PROGRAM

The use of safe payment schedules in support of the illustration in Case 7 is a reliable method
of computing the amount of safe payments to partners for it prevents excessive payments to
any partner. However, the approach is inefficient if numerous installment distributions are to be

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made to partners. Let’s take the illustration in the previous section. The partnership made two
payments and for each, a schedule of safe payments is made. The procedure of preparing safe
payment schedule will go on as long as there is cash to be distributed and until the capital
balances are aligned with the P/L ratio.

Illustration: Marlbert Del Rosario, Emerita Modesto and Doris Marie Pateno divide profits 60%,
25% and 15% respectively. A balance sheet on June 30, 2020, just before partnership
liquidation, showed the following balances:

Del Rosario, Modesto and Pateno

Statement of Financial Position
June 30, 2020

Cash P 50,000 Liabilities P350, 000

Marlbert Del Rosario, Capital 450,000
Non-cash Emerita Modesto, Capital 100, 000
Assets 925,000 Doris Marie Pateno, Capital 75, 000
Total Assets P975, 000 Total Liabilities and Capital P975, 000

Certain assets are sold in July at book value of P500,000 and available cash is distributed to
appropriate parties. Remaining assets are sold in August for P150, 000 and cash is distributed
in final settlement.

Cash Priority Program

Del Rosario, Modesto and Pateno

Cash Priority Program
June 30, 2020
Cash Priority Payments to
Del Rosario Modesto Pateno Del Rosario Modesto Pateno
Capital Balances P450, 000 P100, 000 P 75, 000
Add: Loan Balances ________________________________
Partners’ Total Interests P450, 000 P100, 000 P 75, 000
Divide by: P/L Ratio 60% 25% 15%
Loss Absorption Balances P750, 000 P400, 000 P500, 000
Priority I: To Del Rosario (250, 000) P150, 000*
P500, 000 P400, 000 P500, 000
Priority II: To Del Rosario and (100, 000) (100, 000) 60, 000** P15,000**
Pateno _______________________________ ____________________________
P400, 000 P400, 000 P400,000 P210,000 P-0- P15,000_

Priority III: Amounts in excess of

P225, 000*** based on P/L Ratio
* P250, 000 x 60% = P150, 000
** P100, 000 x 60% = P60, 000; P100, 000 x 15% = P15, 000

*** P210, 000 + P15, 000 = P225, 000

Loss Absorption Balances represent the maximum loss that the partners can absorb without
reducing their equity below zero. The partner with the biggest capital exposure or loss
absorption balance should be prioritized in a cash distribution. A partner with a relatively low
loss absorption balance can be wiped out by a material realization loss.

Looking at cash priority program, Modesto has the lowest loss absorption balance and this
means that she is most vulnerable or susceptible to losses. Assume that a loss on realization
amounted to P400, 000, Modesto’s capital balance will become zero because her share in the
loss will be P100, 000 (P400, 000 x 25%) which is equivalent to her capital interest. Del Rosario
will be prioritized in a cash distribution because of his higher loss absorption balance brought
about by a larger capital interest and a higher profit and loss sharing ratio. This is being done to
be fair with her since she has the biggest capital exposure.

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 Republic of the Philippines
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INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021

For the month of July, 2020

1. Sale of Non-cash Assets

Cash 500, 000
Non-cash assets 500, 000

2. Payment of Liabilities
Liabilities 350, 000
Cash 350, 000

3. Distribution of Cash to Partners

Marlbert Del Rosario, Capital 190, 000
Doris Marie Pateno, Capital 10, 000
Cash 200, 000

Computation:
Del Rosario Pateno Total
Priority I: To Del Rosario P150, 000 P150, 000
Priority II: 60:15 ratio
Del Rosario: P50, 000 x 60/75 40, 000
Pateno: P50, 000 x 15/75 P10, 000 50,000
P190, 000 P10, 000 P200, 000

The initial balance of P50, 000 and this is increased by the P500, 000 proceeds from the sale of
non-cash assets. The balance after settlement of liabilities of P350, 000 is P200, 000. This
amount is now available for distribution. Based on the cash priority program on the previous
page, Del Rosario should be given P150, 000 being the first priority. The total allocation in
priority II is P75, 000. For the month, only P50, 000 is available after the P150, 000 allocations
to Del Rosario.

When cash is insufficient to fully satisfy the cash requirements in a particular priority, then the
available cash will be distributed in the ratio of the supposed allocation in that priority. In this
case, the P50, 000 will be allocated in the ratio of the supposed allocation in priority II – P60,
000 and P15, 000 for a total of P75, 000. The ratio is 60/75 for Del Rosario and 15/75 for
Pateno. The ratio only considered the two partners since they are the only ones included in
priority II. Meanwhile, the balance of P25, 000 in priority II will be allocated next month.

For the month of August, 2020

1. Sale of Non-cash Assets

Cash 150, 000
Loss on Realization 275, 000
Non-cash Assets 425, 000

Distribution of loss on realization based on Partners ‘P/L Ratio

Marlbert Del Rosario, Capital 95, 000
Emerita Modesto, Capital 31, 250
Doris Marie Pateno, Capital 23, 750
Cash 150, 000

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Computation:
Del Rosario Modesto Pateno Total
Priority II: Balance of P25, 000 P25, 000
Del Rosario: P25, 000 x 60/75 P20, 000
Pateno: P25, 000 x 15/75 P 5, 000
Priority III: To all partners in the
ratio of 60:25:15 125, 000
Del Rosario: P125, 000 x 60% 75, 000
Modesto: P125, 000 x 25% 31, 250
Pateno: P125, 000 x 15% 18, 750 ____
P 95, 000 P31, 250 P23, 750 P150, 000

Last month, the balance in priority II is P25, 000. This will be satisfied since there is sufficient
cash for distribution this month. After satisfaction of the first two priorities, any excess cash will
be distributed in the profit and loss ratio of the partners since there is no more priority to satisfy
other than the last priority.

Del Rosario, Modesto, Pateno, Total

Capital Capital Capital

Balances before Liquidation P450, 000 P100, 000 P75, 000 P625, 000
July- Sale of Non-cash Assets,
No gain or loss ______________________________________________
Balances P450, 000 P100, 000 P75, 000 P625, 000
July- Payment to Partners (190, 000) (10, 000) (200, 000)
Balances P260, 000 P100, 000 P65, 000 P425, 000
June- Sale of Non-cash Assets
And distribution of losses (165, 000) (68, 750) (41, 250) (275,000)
Balances P95, 000 P31, 250 P18,750 P125, 000
August- Payments to Partners,
Balance of Priority II (20, 000) (5, 000) (25, 000)
st
Balance after 1 two priorities P75, 000 P31, 250 P13, 750 P100, 000

Ratio of Capital Balances 60% 25% 15%___

VI. LEARNING ACTIVITIES

Activity 1. Lump Sum Liquidation with Gain on Realization

After several years of operations, the partnership of Ana, Bada and Cada is to be liquidated.
After making the closing entries on June 20, 2016, the following accounts remain open:
Cash 50,000
Non-Cash Assets 2,350,000
Liabilities 400,000
Ana, Capital 900,000
Bada, Capital 500,000
Cada, Capital 600,000
The non-cash assets are sold for P2,650,000. Profits and losses are shared equally.

Required:
Prepare a statement of partnership liquidation and the entries to record the following:
1. Sale of all non-cash assets.
2. Distribution of gain on realization to the partners.
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3. Payment of liabilities.
4. Distribution of cash to the partners.

Activity 2. Distribution of Cash upon Liquidation

Soria and Paras are partners sharing profits and losses equally. They decided to terminate the
business. Prior to realization, their capital balances are P150,000 and P70,000, respectively.
After all non-cash assets are sold and all liabilities are paid, there is a cash balance of
P160,000.

Required:
1. What is the amount of loss or gain on realization?
2. How should the loss or gain be divided between the partners?
3. How much cash should be distributed to each partner?

Activity 3. Installment Liquidation: Cash Priority Program

The capital and loan balances for partners Bee, Lee and Ong are shown below. They share
profits and losses in the ratio of 4:4:2, respectively.

Loans payable-Bee 100,000

Loans Payable-Lee 100,000
Loans Payable-Ong 150,000
Bee, Capital 150,000
Lee, Capital 350,000
Ong, Capital 200,000

Required:
1. Prepare a cash Priority Program.
2. Assume that P250,000 cash is available for initial distribution, prepare the entries to
record the distribution to the partners.

VII. References:

Ballada, Win. Ballada Susan, (2016). Partnership and Corporation Accounting (Made
Easy). Sampaloc, Manila: Domadane Publishers

Domingo, A. 2nd Edition. Partnership, Revised Corporation, Cooperative Law. #02

Ampucao, Itogon, Benguet: Coaching for Results Publishing

Lopez, JR., R., (2015). Learning the Basic of ACCOUNTING. Davao City, Philippines:
MS LOPEZ Printing & Publishing

Millan, Z., (2020). Financial Accounting and Reportin (Fundamentals), 2019 Edition.
Baguio City: Bandolin Exterprise

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reproduced for educational purposes only and not for commercial distribution,”
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 Republic of the Philippines
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Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021

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