PARTNERSHIPS (INTRODUCTION)  Increases and decreases in capital that are interpreted as permanent capital changes

are recorded directly in the capital account.

Partnership – is a contract whereby two or more persons bind themselves to contribute money,  Withdrawals, which are considered equivalent to salaries, made by the partner in
property, or industry to a common fund with the intention of dividing the profits among anticipation of profits, and other increases and decreases of relatively minor amounts
themselves are recorded in the drawing account.
Note:  Individual partner’s capital and drawing balances are combined to reporting each
partner’s interest in the statement of financial position.
 Any natural person who possesses the right to enter into a contract can become a
CAPITAL ACCOUNT
partner.
 Permanent withdrawal of capital  Original investment
 All partners are co-owners of partnership property and are co-owners of the profits or
 Debit balance of the drawing account at  Additional investment
losses of the partnership
the end of the period  Partner’s share in the profits
 The partnership must attempt to make a profit; therefore, non-profit organizations may
 Partner’s share in the losses (sometimes (sometimes this is closed to the drawing
not be partnerships.
this is closed to the drawing account) account)
Characteristics of a Partnership

1) Separate Legal Personality – Partnership Law states that the partnership has a juridical DRAWING ACCOUNT
personality separate and distinct form that of each of the partners.  Withdrawal of assets by the partners in  Partnership obligations assumed or paid
2) Ease of Formation – the partnership may be created by oral or written agreement anticipation of the net income by the partner
between two or more persons, or merely by inferences from the implication of their  Partner’s personal indebtedness paid or  Personal funds or claims of partner
conduct. assumed by the partnership collected and retained by the
3) Co-ownership of Partnership Property and Profits – the right of each partner to possess  Funds of claims of partnership collected partnership
partnership property for partnership purposes is equal to the right of each of the other and retained by the partner  Periodic partner’s salaries depending on
partners. the accounting and disbursement
4) Limited Life – any change in the agreement and relationship of the partners terminates procedures agreed upon
the partnership contract. Such as:
a. Death of a partner
b. Withdrawal of a partner LOANS TO PARTNERS/RECEIVABLE FROM PARTNER/DUE FROM PARTNERS
c. Bankruptcy of a partner
 A withdrawal by a partner of a substantial amount with the assumption of its
d. Incapacity of a partner
repayment to the firm. (w/ interest)
e. Admission of a new partner
f. Expiration of the period specified in the partnership contract LOANS FROM PARTNERS/LOANS PAYABLE TO PARTNERS/NOTES PAYABLE/DUE TO PARTNERS
5) Mutual Agency – each partner has an equal right to act for the partnership and to enter
into contracts binding upon it, as long as he acts within the normal scope of business  An advance to the partnership by a partner with the assumption of its ultimate
operations. repayment by the partnership is viewed as a loan rather than as an increase in the
6) Unlimited Liability – each partner may be held personally liable for all the debts of the capital account. (w/ interest)
partnership. Except in Limited Partnership, wherein certain partners are allowed to limit
their personal liabilities to the to the extent of their capital contributions only.

Partnership Agreement

 The formulation of a partnership agreement must be done at the inception of

organization of the partnership.
 This agreement is the framework within which the partners are to operate or conduct
partnership business – from formation to operations then to the eventual dissolution
and liquidation of the partnership.
 The partnership agreement may be oral, implied or written.
 Partnership agreements are usually with the aid of or in consultation with lawyers and
certified public accountants.

Partner’s Ledger Accounts

PARTNERSHIP (FORMATION) Two Proprietors Form a Partnership

Partnership Formation for the First Time – Initial Investments Use the Books of one of the Sole Proprietors (SP1)
Books of SP2
Cash Investment
1) Adjusts the assets and liabilities of the proprietor to their agreed value (or FMV if
 Recorded at face value of the investment. there is no agreed value) by the partners. Adjustments are to be made to his capital
account.
Cash xxx 2) Close the books.
Partner, Capital xxx
Books of SP1 (New partnership books)
Property or Noncash Investment 1) Adjusts the assets and liabilities of the proprietor to their agreed value (or FMV if
 The fair value of the noncash asset is determined by the agreement of the partners. there is no agreed value) by the partners. Adjustments are to be made to his capital
 If there is no agreement, the fair value of the noncash asset at the time of the account.
investment shall prevail. 2) Record the investment of the other partner.
 Recording partners’ noncash investment at their current fair value ensures that any
gains and losses on the subsequent sale of the property will be equitably distributed in New Books are Opened for the Partnership
accordance with the partnership agreement. Books of Both Partners
1) Adjusts the assets and liabilities of the proprietor to their agreed value (or FMV if
Industry there is no agreed value) by the partners. Adjustments are to be made to his capital
 A memorandum entry is prepared. account.
2) Close the books.
A partner is admitted into the partnership as an industrial partner to share a certain
portion in the partnership profit. New Book of the Partnership
1) Record the investment of both partners.
Valuation
Cash Face Value on the date of formation Bonus Method vs. Goodwill Method
Property or Noncash Agreed Value/FMV/Book Value/Carrying Value
 Valuation problem arises when partners agree in capital interests that are not equal to
Industry or Services Memorandum Entry
their net asset invested.
Liability Present Value/Book Value
Note:
Sole Proprietor and Another Individual Form a Partnership
 The recognition of goodwill method poses definite theoretical problems.
Sole Proprietorship’s Books are Retained for the Partnerships  Because the business recognized asset even though no funds have been spent.
1) Adjusts the assets and liabilities of the proprietor to their agreed value (or FMV if
 Thus, although partnership goodwill is sometimes encountered in actual practice, the
there is no agreed value) by the partners. Adjustments are to be made to his capital
authors believe that this asset should be viewed with skepticism.
account.
 A decision to use one method over the other will depend on the partner’s agreement.
2) Record the investment of the other partner.
In the absence of any agreement, the bonus method is preferable over the goodwill
method.
New Books are Opened for the Partnership
Books of the Sole Proprietor
Bonus Method
1) Adjusts the assets and liabilities of the proprietor to their agreed value (or FMV if
 No assets is recorded in the partnership books.
there is no agreed value) by the partners. Adjustments are to be made to his capital
 This approach recognizes only the assets that are physically contributed to the
account.
business.
2) Close the books.
 Example: Pedro capital = 70,000; Jose capital = 50,000
New Book of the Partnership
Pedro capital 10,000
1) Record the investments of the sole proprietor.
Jose capital 10,000
2) Record the investment of the other partner.
Goodwill Method
  This approach is based on the assumption that an implied value can be estimated
mathematically and recorded for any intangible contribution made by a partner.
 Example: Pedro capital = 70,000; Jose capital = 50,000

Goodwill 20,000
Jose capital 20,000

Goodwill Resulting from the Acquisition of a Sole Proprietorship by a Partner

 Capital Credit > Agreed Value/Fair Value of Assets Contributed

 PFRS 3 does not allow the amortization of goodwill acquired in a combination and
instead requires the goodwill to be tested for impairment annually, or more
frequently, if events or changes in circumstances indicate that the asset might be
impaired.

Capital Interest/Capital Credit (CI) vs. Capital Contribution (CC)

 Capital Interest – it is the percentage of equity that each of them will have in the net
assets of the newly formed partnership
 Generally, the capital share of a partner is proportionate to his/her capital
contribution.
 However, in recognition of intangible factors such as partners’ special expertise,
established clientele or necessary business connections, partners may agree to a
division of capital that is not proportionate to their capital contributions.

Capital Interest = Capital Contribution

 Use the Net Investment Method (also use if the problem is silent)

Capital Interest ≠ Capital Contribution

Method Relation of TCC & TAC

Bonus TCC = TAC
Revaluation Positive TCC < TAC Under revaluation (Understated asset)
Negative TCC > TAC Over revaluation (Overstated asset)
TCC – total capital contribution
TAC – total agreed capital

Note:

 No accumulated depreciation is carried forward to the partnership. Therefore, assets

are recorded net of depreciation.
 All liabilities are recognized and recorded.
 Each partner’s capital interest recorded does not necessarily have to equal his capital
contribution.
 The partners may allocate the capital contributions in any manner they desire.
 The accountant must be sure that all partners agree to the allocation and must then
record it accordingly.
 It is a common practice that a new set of books are open for any new business
undertaking.
 When the problem is silent as to the recognition of the mortgage that is attached to
the property, it is assumed that the mortgage is “assumed” by the partnership.
PARTNERSHIP (OPERATIONS) Salary and Bonus Allowances

Division of Profit and Losses  When the services rendered by the individual partners to the partnership are not
Capitalist Partner Industrial Partner equal, due to differing abilities of partners or differences in time spent on partnership
Profits  Agreement Agreement business, it is not proper to provide for such differences through the use of profit and
 Original Capital Contribution Just/Equitable loss sharing ratios.
Losses  Agreement Agreement  The best way to provide for these differences is to allow salaries to a partner who
 Profit Ratio (if there is no agreement) No share (if there is no agreement) devotes time to the partnership business.
 Original Capital Contribution (if there
is no agreement in profit a Salary Allowances
 Partner salary allowances like interest allowances on capital account balances are not
 In using the capital balances as a basis in determining the share in profit or loss, the an expense in the determination of partnership net income.
use of average capital balances is preferable because it reflects the capital actually  The salaries are debited in the drawing account if it is distributed monthly and closed
available for use by the partnership during the year. to the capital account at the end of the period.
 In the absence of an agreement, salaries are automatically allowed even when losses
Division of Profit and Loss in the Ratio of Partners’ Capital Account Balances are incurred. But if partnership agreement provides that salaries are allowed to the
extent of the earnings only, then no salaries are allowed when a loss occurs.
1. Ratio of Original Capital Contributions
Bonus Allowances
2. Ratio of Beginning Capital Balances
3. Ratio of Ending Capital Balances  When bonuses are to be allowed, the agreement must clearly specify the basis of the
4. Ratio of Average Capital Balances (use if the problem is silent) bonus.
a. Simple Average Method
- average of the beginning and ending capital balances Financial Statements for a Partnership

b. Peso-Month/Peso-day Method Statement of Comprehensive Income

- partners drawing account balances up to the amount specified in the  Explanations of the division of net income among the partners may be included in the
agreement would not be deducted in determining the partners’ average or partnership’s statement of comprehensive income or in a note to the financial
year-end capital balances statements.
- drawings in excess allowable amounts are deducted from the partners’ Statement of Cash Flows
capital accounts
 It is prepared for the partnership as it is for a corporation.
- the partnership contract should also state whether capital account balances
are to be computed to the nearest month or to the nearest day
Changes in the Profit and Loss Ratio
1 – 15 assume it is made on the 1st day of the month
16 – 31 assume it is made on the 1st day of the following month
Two approaches can be used for a fair valuation of the partners’ interest
Interest Allowed on Partners’ Capital with Remaining Profit or Loss Divided in an Agreed 1. Adjust all assets and liabilities to reflect their fair values. Also record any unrecorded
Ratio assets or liabilities, if any. These should be made to the partners’ capital account in
accordance with their old profit and loss ratio.
 Partnership contract may provide for interest allowances on partners’ capital in order 2. Calculate all the effects of all the differences between the book values and fair values
to encourage capital investment. as well as the unrecorded assets and liabilities, and adjust only the partners’ capital
 Partnership contract should therefore provide that specific interest rate shall be account for the net effect of these adjustments using the old profit and loss ratio.
allowed to a partner based on his beginning capital balances, ending capital balances, Under this approach, no adjustment of assets and liabilities are recorded in the books
or average capital balances. of the partnership.
 Interest on partners’ capital account is not an expense of the partnership.
 If the agreement provides to allow interest on capital account balances, the provision Correction of Partnership Net Income of Prior Period
must be enforced regardless of whether operating results is a profit or loss.
1. Determine the correct net profit of the prior period.
 The interest allowance is not applicable during a loss year only if the partners
2. Compute the proper share of each partner using the profit or loss ratio in the year in
agreement contains a specific provision requiring such omission.
which the error occurred.
3. Compute the differences between the share in the profit that each partner actually
received and the share each would have received from No. 2.
4. Adjust the partners’ capital accounts by the amount in No. 3.
PARTNERSHIP (DISSOLUTION) be paid by the incoming partner and his fraction of interest.
2nd. Deduct the capital of the old partnership from the capital of the
Dissolution – it is the change in the relation of the partners caused by any partner ceasing to be new partnership. The difference is the asset revaluation.
associated in the carrying out of the business. 3rd. Allocate the asset revaluation among the old partners in
accordance with their residual profit and loss sharing agreement.
Liquidation – it refers to the termination of the business activities carried on by the partnership 4th. Add the share of each partner on the asset revaluation to their
capital balances after the asset revaluation.
and the winding up of partnership affairs preparatory to going out of business.
5th. Compute the amount of interest transferred by the old partners to
the new partner based on their capital after the asset revaluation.
 Dissolution does not always result to liquidation although liquidation is always 6th. Prepare the entry to record the admission of the new partner.
preceded by dissolution.
b. By investment (contributes)
Note:
In most cases, when a change in ownership occurs, the market values of individual Agreed capital (AC, new firm capital, total capital and agreed capitalization) – is the
partnership assets and liabilities are different from their book values. These differences amount of new capital set by the partners for the partnership.
can be accounted for by recording them on the partnership books either by adjusting the
assets and liabilities – in many cases, goodwill is recorded in the process – or by adjusting Total Contributed Capital (CC) – it is the investment of all the partners, both old and
the partners’ capital accounts. new, to the partnership.

Reasons for Dissolution - The partnership receives cash or other assets, thereby increasing its total
1. Admission of a partner assets as well as the total capital.
2. Retirement/Withdrawal of a partner - It is a transaction between the partnership and the incoming partner.
3. Death/Incapacity of a partner - Cases
4. Incorporation of a partnership
CC = AC 1. No revaluation but there might be bonus.
Admission of a Partner CC > AC 1. Revalue net assets up to fair value and allocate to old
 Upon the admission of a new partner, a new agreement covering partners’ interests, (negative partners.
profit and loss sharing and other consideration should be drawn because the revaluation) 2. Record unrecognized goodwill and allocate to old
dissolution of the original partnership cancels the old agreement. partners.
3. Allocate bonus to old partners.
a. By purchase (sells, pays, bought, sold, and transferred) CC < AC 1. Revalue net assets down to fair value and allocate to
old partners.
- The partnership assets and capital remain unchanged because no cash or
2. Recognize goodwill brought in by new partner.
other assets flow from the new partner to the partnership.
3. Assign bonus to new partner.
- A personal transaction between the old partner and the incoming partner
- Rights conveyed:
Methods in accounting for the difference in the CC and AC
the right of co-ownership in the business property
the right to share in profits and losses
the right to participate in the management in the business Method
- No gain and loss arising from the sale of interest is to be recorded in the Revaluation Method The historical cost bases of the partnership’s
partnership books. (personal transaction) net assets are adjusted during the admission of
- The net assets of the partnership may be revalued when the purchase of the new partner.
interest from all the partners is for the amount more than the interest Bonus Method Involves the capital transfer among the
acquired. partners to align the total resulting capital of
- Goodwill should not be recorded until all identifiable assets have been the partnership.
adjusted to their fair values.
- Asset Revaluation procedures Bonus Method (used if the problem is silent)
a. Bonus to the old partners – a reduction in the capital of the new partner and an
1st. Compute the new partnership capital using as basis the amount to increase in the capital of the old partners.
 b. Bonus to the new partner – a reduction in the capital of the old partners and an
increase in the capital of the new partner.
Cases
Sales of interest to outsider
Like admission of a new partner by purchase
Procedures Sales of interest to remaining partners
1st. Multiply the agreed capital by the fraction of interest of the new partner. The Sales of interest to the partnership Total assets & total capital decreases
result is the capital credit of the new partner in the new partnership.
2nd. Compare the capital credit with the investment of the new partner. Sales of Interest to a New Partner/ Sale of Interest to Continuing Partners
a. If the credit capital is more than the investment of the new partner, the  The partnership recognizes only the transfer of capital interest from the retiring
difference is bonus to the new partner. partner to the new or acquiring partner/partners.
b. If the credit capital is less than the investment of the new partner, the  Any gain or loss from the sale is a personal gain or loss of the retiring partner.
difference is bonus to the old partners.
(personal transaction)

Asset Revaluation
Sale of Interest to the Partnership
 The adjustment in assets may be determined as the difference between the agreed
 A retiring partner may sell his capital interest to the continuing partners through the
capital and the total contributed capital.
partnership.
 Generally, asset revaluations upon partnership formation relate only to the partners
 The purchase price or amount of settlement may be:
of the old partnership.
a. at book value
 Capital Credit – it is the interest or equity of a partner in the firm. (Agreed Capital x
b. at less than book value
fraction of interest = Capital Credit)
c. at more than book value
 The balances of the partnership assets and the partners’ capital must be adjusted
 When the payment to the retiring partner is less than or more than his capital
prior to the admission of a new partner.
interest, the difference between the purchase price and the capital interest may be
 2 kinds of asset revaluation accounted for using:
Negative Asset Revaluation (Asset Overvalued assets a. bonus method (used if the problem is silent) – the difference between the
Revaluation Decrease) CC > AC payment and the total interest is the total bonus
Positive Asset Revaluation (Asset Undervalued assets b. asset revaluation method – the difference between the payment and the total
Revaluation Increase) CC < AC interest is only a portion of the asset revaluation

Calculation of Retiring Partner’s Interest

Profit and Loss Ratios and Capital Ratios are Different  The following are considered in the determination of such interest: investments,
 If profit and loss ratio and capital ratio are both given: withdrawals, share in profits and losses to the date of retirement, loans, advances
and the revaluation of partnership assets to current values.
Ratio Uses  The following schedule will be helpful in determining the interest of a retiring
Profit and Loss Ratio  used to distribute the bonus to the partners partner:
 used to distribute the share of the old partners in
the asset revaluation        
 used in the liquidation process if the liquidation    
Investments
ratio is not given
 used in the allocation of the liquidation expense
  - Withdrawals  
 used in the allocation of the excess cash in the cash   + Share in partnership profits to date of retirement or  
priority program   - Share in partnership losses to date of retirement  
Capital Ratio  used to get the capital interest of the new partner   + Loans and advances to the partnership or  
and in the computation of the implied goodwill or    
- Loans and advances from the partnership
the bonus
Liquidation Ratio  used in the liquidation process
  + Revaluation of assets increasing their recorded values or  
  - Revaluation of assets decreasing their recorded values  
Retirement/Withdrawal of a Partner   Interest upon retirement/ Total Interest  
        

Death/Incapacity of a Partner
 The death or incapacity of a partner legally dissolves the old partnership.
 The remaining partners may continue operations based on a new contract or Articles
of Co-Partnership.
 The interest of the deceased or incapacitated partner must be determined by the
partnership in order to make necessary settlement with his legal representatives.
 In case the business is continued without immediate settlement, the legal
representative of the deceased is considered as an ordinary creditor and is to receive
an amount equal to the interest and profits attributable to this interest.
 Accounting for settlement to the deceased or incapacitated partner is the same as
that of withdrawal or retirement.
PARTNERSHIP (LUMP-SUM LIQUIDATION) - The loan payable to a partner has a higher priority in liquidation than a partner’s
capital balance but a lower priority than liabilities to outside creditors.
 In liquidation, the association of the partners for purposes of carrying on activities in
the usual manner is considered ended. Procedures in Lump-Sum Liquidation
 Partners can only engage in activities leading to final settlement of business affairs.

Lump-sum Liquidation or Liquidation by Totals – this is a type of liquidation whereby the Initial Procedures
distribution of cash to the partners is done only after all the non-cash assets have been 1st. Adjust the books
realized, the total amount of gain or loss on realization is known, and all liabilities have 2nd. Close the nominal accounts
3rd. Transfer the resulting profit or loss to the partners’ capital account
been paid.
4th. Close the advances and withdrawals to the partners’ capital account
Causes of Partnership Liquidation
1. The accomplishment of the purpose for which the partnership was organized. Liquidation Process
2. The termination of the term/period covered by the partnership contract. 1st. Realization of non-cash assets and distributions of gains and losses
3. The bankruptcy of the firm. 2nd. Payment of liquidation expenses & unrecorded liabilities
4. The mutual agreement among the partners to close the business. 3rd. Payment of liabilities
4th. Eliminate capital deficiency
Marshalling of Assets a. Right of offset
- it involves the order of the creditors’ rights against the partnership’s assets and the b. Solvent (PA > PL)
personal assets of the individual partners. c. Insolvent (PA < PL , PA = PL)
- The order in which claims against the partnership’s asset will be marshaled is as 5th. Payment to partners
a. Inside liabilities
follows:
b. Capital
1. Partnership creditors other than partners;
2. Partners’ claims other than capital and profit, such as loans payable and accrued
 Cash can be distributed to partners before or after the elimination of the deficiency.
interest payable; and
 In the elimination of capital deficiency, if after the distribution of loss on realization, a
3. Partners’ claim to capital or profits, to the extent of credit balances in capital
partner incurs a capital deficiency, this deficiency must be eliminated by using one of
accounts.
the ff. methods, in the order of priority.
a. If the deficient partner has a loan balance, exercise the right of offset.
Note:
b. If the deficient partner is solvent, make him invest cash to eliminate his
The rule indicating priority of partner’s capital is supported by an established
deficiency.
legal doctrine called the right of offset.
c. If the deficient partner is insolvent, let the other partners absorb his deficiency.
- The order of claims against the personal assets of the individual partners is as follows:
Cash is distributed after the elimination of the deficiency
1. Personal creditors of individual partners; and
1. Capital deficiency is eliminated by
2. Partnership creditors on unpaid partnership liabilities regardless of a partner’s
a. Making additional cash investment, if the deficient partner is solvent.
capital balance in the partnership.
b. Charging the deficiency as additional loss to the remaining partners, if the
deficient partner is insolvent.
Right of Offset
2. Cash available for distribution is then paid to partners to apply first on loan then on
- The legal right to apply part or all of the amount owing to a partner on a loan balance
capital.
against deficiency in his capital account resulting from losses in the process of
liquidation.
Note:
- it involves offsetting a deficit in a partner’s capital (debit balance in the capital
The final distribution of cash to partners is made based on partners’ capital balances and
account of a partner) against the loan payable to that partner.
not on any ratio.
- The amount to be offset shall be the lower of the amount of the loan or the amount
of the deficiency.
Cash is distributed before the elimination of the deficiency
 1. Cash available for distribution is paid to partners based on an accompanying schedule
to determine amounts to be paid to partners.
2. Deficient partners may
a. If solvent, make additional cash investment; to be paid to partners as second
cash distribution, or the deficient partner may make direct cash settlement to
the other partners.
b. If insolvent, the deficiency shall be absorbed by the other partners as additional
loss according to their profit and loss ratio.

Note:
 There may be instances when the cash realized from the sale of other assets is not
sufficient to pay partnership liabilities. In such cases, remaining liabilities are satisfied by:
a. The additional cash investment by deficient solvent partners.
b. Direct collection by the partnership creditors from any one of the partners and the
latter making cash settlement among themselves.
 Partners loan account is not close to partners capital account. But partner capital
balances before realization should be after closing the following account, if any:
a. Partner’s drawing
b. Partnership goodwill
c. Receivable from partners
d. Payable to partners (question: hindi ba ang loan to partners and payable to partner
ay iisa?)
 According to the Partnership Law, the assets of the partnership are first available to
creditors of the partnership, and that the personal assets of the partners are first
available to his personal creditors.
 If after the debts of the partnership have been paid in full and some assets still remain in
the partnership, the creditors of a partner have a claim against the assets of the
partnership only to the extent of his share.
 After the creditors of a partner have been paid in full from his personal assets, any
remaining asset is available to partnership creditors regardless of whether the partner’s
capital account shows a credit or a debit balance.
 The claims of creditors of the partnership on the separate property of a partner are
permitted only when these creditors are unable to obtain payment from the partnership.
 Format

  Cash Partner A Partner B

Balances before liquidation ₱ xxx ₱ xxx ₱ xxx
Add/Less: Realization of non-cash and Distribution of Gain/Loss xxx xxx xxx
Less: Liquidation expenses & unrecorded liabilities xxx xxx xxx
Less: Payment for liabilities xxx    
Balances before final settlement ₱ xxx ₱ xxx ₱ xxx
Add/Less: Additional cash paid by solvent partner / Absorption of deficiency xxx xxx xxx
Total ₱ xxx ₱ xxx ₱ xxx
Less: Final payment to partners xxx xxx xxx
Balances - - -
       
PARTNERSHIP (INSTALLMENT LIQUIDATION) - The book value of unsold noncash assets together with the cash withheld for future
liquidation expenses are treated as theoretical losses or restricted interest which are
Installment Liquidation or Piece-meal Liquidation – this is the type of liquidation whereby assets allocated to all the partners as possible losses in accordance with their P/L ratio.
are realized on a piecemeal basis and cash is distributed to partners on a periodic basis as - The negative amounts of capital must be allocated to the remaining partners with
it becomes available, that is, even before all non-assets are converted into cash. positive equity in their relative P/L ratio.
- After absorption of capital deficiency, the amount shown for each partner with equity
 Non-cash assets are sold on a piece-meal basis over an extended period of time. balance will be equal to the cash to be received by each .
 Cash realized is immediately distributed to partners after fully satisfying creditors’
claims or after setting aside sufficient cash for these liabilities. Cash Priority Program/Cash Distribution Plan
 It is necessary that each cash distribution to partners be considered as if it were the - Steps in the preparation of a Cash Priority Program
last.
 Remaining unsold assets are assumed to be worthless.
1st. Determine the Loss Absorption Balance of each partner by dividing the

total interests by their P/L ratio. Priority 1: To get the amount to be paid
 Debit balances in capital and potential capital deficiencies are assumed uncollectible.
to a partner with the highest loss absorption balance, get the difference
between the highest loss absorption balance and the next; multiply the
Procedures in Piece-meal Liquidation amount by the P/L ratio.
2nd. Repeat the procedure until the loss absorption balances are equal.
Priority 2
Liquidation Process 3rd. Once equal, any cash available may now be distributed according to
1st. Realization of non-cash assets and distributions of gains and losses their P/L ratio.
2nd. Payment of liquidation expenses & unrecorded liabilities
3rd. Payment of liabilities
Statement of Liquidation
4th. Payment to partners
a. Inside liability or Loan liability   Partner A Partner B
b. Capital balances
Capital before liquidation xxx xxx
Add/Less: Loans xxx xxx
The liquidation procedures shall be the same as in lump sum liquidation except that:
Total interest xxx xxx
1. Cash is distributed to partners even before fully realizing non-cash assets and
Add/Less: Gain/Loss on realization (1st installment) xxx xxx
determining total gain or loss on realization.
Less: Expenses & Unrecorded Liabilities xxx xxx
2. Restricted interest, in the Accompanying Schedule to Determine Amounts to be Paid
Balances before payment xxx xxx
to Partners, shall consist of:
Less: Payment to partners (Periodic Schedule of Payment) xxx xxx
a. Remaining unsold assets
Balances xxx xxx
b. Cash withheld (for possible expenses)
Add/Less: Gain/Loss on realization (2nd installment) xxx xxx
c. Debit balances in capital
Less: Expenses & Unrecorded Liabilities xxx xxx
Balances before payment xxx xxx
Periodic schedule of safe payments
Less: Payment to partners (Periodic Schedule of Payment) xxx xxx
- This schedule is prepared every time there is cash available for payment.
- The schedule begins with the total equity of each partner at the time of distribution. Balances xxx xxx
     
Capital balance before distribution xxx
add/less: credit/debit loan balances xxx
add/less: credit/debit drawing balances xxx
Total Equity xxx
   
Periodic Schedule of Payment

      Partner A Partner B
Total Interest xxx xxx
Actual Losses  
  Gain/Loss on realized assets xxx  
  Liquidation expense and unrecorded liabilities xxx  
  Total xxx (xxx) (xxx)
Balance before payment xxx xxx
Restricted Interest/Theoretical Loss:  
  Unsold assets xxx  
  Restricted for expenses xxx  
  Total xxx (xxx) (xxx)
Balances xxx xxx
Less: Additional loss to other partners (from Deficient
partner) (xxx) (xxx)
Balances - for payment xxx xxx
         

Cash for Distribution

Beginning cash   xxx

Proceeds from realization xxx
Payment to liabilities - outside (xxx)
Payment of liquidation expense (xxx)
Cash before payment to partners xxx
Unpaid liabilities - outside (xxx)
Cash withheld for liquidation expense:  
  Future liquidation expense xxx  
  Unrecorded liabilities xxx  
  Total xxx (xxx)
Payment to partners xxx
       
CORPORATION LIQUIDATION
Components of the asset side of the statement
A financially distressed company is one: a. Book value of the asset;
1. whose ability to continue existence is doubtful; b. Name of the asset;
2. that is in the process of reorganization; c. Appraised value of the asset;
3. that is a reorganized company; d. Estimated amount that will become available for unsecured creditors as a result of
4. that contemplates or plans liquidation; or the realization of the asset; and
5. that is under liquidation e. Estimated gain or loss on the realization of the asset.

A financially distressed company may undertake a Liabilities and Equity

1. quasi-reorganization
2. troubled debt restructuring  Liabilities are classified according to their legal priority and secured status and are
3. liquidation followed by capital items.

Statement of Affairs 1. Preferred Creditors

 The insolvent’s financial position and the status of its creditors is shown and analyzed - These are claims that, by law, must be provided in full before anything may be
in a statement of affairs. paid to remaining unsecured claims.
 It is in effect a statement of position from “quitting concern” or a “non-going 2. Fully Secured Creditors
concern” point of view. - These are claims that have been pledged certain assets that are expected to
 The assets are reported at their estimated realizable value instead of book value. realize as much as more than the amount of the claims.
 The assets are not classified as current and noncurrent but reported as either pledged 3. Partially Secured Creditors
with certain creditors or free and thus available to general creditors. - These are claims that have been pledged certain assets that are expected to
 The liabilities are reported at their statement of financial position amounts listed in realize less than the amount of the claim.
terms of their rank as obligations preferred, secured or unsecured instead of current 4. Unsecured Creditors
and noncurrent. - These are claims that carried no legal priority and on which there is no asset
pledged.
Necessities before constructing the Statement of Affairs 5. Contingent Liabilities
1. Statement of Financial Position - These are any contingent liabilities which are expected to develop into an actual
2. Supplementary information such as: liability.
a. Estimates and appraisals from reliable sources of the amounts that will be 6. Capital
realized upon each asset. - These are balances summarizing the interests of owners of the business such as
b. Pledges of assets that have been made on specific obligations. capital or Shareholders’ equity.
c. Obligations that are expected to emerge in the course of liquidation but are not
reflected in the balance sheet. Components of the asset side of the statement
a. Book value of the liabilities or capital item;
Assets b. Name of the liability or capital item; and
c. Amount of the liability that is unsecured.
1. Assets Pledged with Fully Secured Creditors
- Assets that have been pledged and that are expected to realize an amount equal Preferred creditors
to or in excess of the claims on which they have been pledged. a. Administrative expense (such as liquidation expense)
2. Assets Pledged with Partially Secured Creditors b. Salaries and Wages
- Assets that have been pledged but are expected to be realized at less than the c. Benefit Plans
amount of the claims on which they have been pledged. d. Anything that is payable to the gov’t
3. Free or Unpledged Assets
- Assets that have not been pledged and are not related to individual liability Note:
terms.
 Valuation accounts are deducted from the related accounts and only the net values
are indicated.
 When an item that does not appear in the statement of financial position but is
presented in the statement of affairs, the book value column is left blank.
 Preferred creditors are listed and summarized, but their balances are not extended to
the amount Unsecured column.