ParCor – Terminologies

Chapter 3 – Partnership Dissolution

Dissolution

• is the change in the relation of the partners caused by any partner ceasing to be associated in
the carrying on as distinguished from the winding up of the business.

• It is the point in time when the partners cease to carry on the business together.

• In dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.

FOUR CAUSES OF DISSOLUTION

I. Admission of New Partner

An existing partnership may admit a new partner with the consent of all the partners. Such
admission of new partner will dissolve the old partnership business and a new association of the
partnership business is formed.

A) Admission of New Partner by Purchase of an Interest

• The admission by purchase of interest is one in which the new partner transfers assets
directly to the old partners in consideration of the interest purchased (the net assets, total
assets and liabilities of the partnerships remain the same).

• This is a personal transaction of the selling old partner and the new partner. No gain or loss
will be recorded in the books of the partnership.

B) Admission of New Partner by Investment

The admission by investment is one in which the new partner transfers cash or other assets into the
partnership (the net assets and the total assets of the partnerships increase by the amount
contributed). Admission by investment is a transaction between the new partner and the
partnership business.

• Asset revaluation – is the necessary adjustment of assets upon admission of new partner. It
is the difference of the TAC (Total Agreed Capital) and TCC (Total Contributed Capital.

 Total Agreed Capital (TAC) – is the amount of new capital after the admission of the
new partner.

 Total Contributed Capital (TCC) – the sum of old partners’ capital and new partner’s
investments.

 Positive Asset revaluation – this method increases the assets and the capital of the
old partnership. This is attributed to some assets of the partnership that are
undervalued before the admission of new partner. Under this method, TCC < TAC.

 Negative Asset revaluation – this method decreases the assets and the capital of the
old partnership. This is attributed to some assets of the partnership that are
overvalued before the admission of new partner. Under this method, TCC > TAC.


Comparison of TCC and TAC

1. If TCC = TAC, there is no asset revaluation.

2. If TCC < TAC, net assets are understated, there is an upward (positive) asset
revaluation.

3. If TCC > TAC, net assets are overstated, there is a downward (negative) asset
revaluation.

2. Bonus – is the amount of capital interest transferred by one or more partners to another
partner. Under this method TCC = TAC. The total partnership capital will remain the same
after the transfer of capital (bonus) between or among partners but the capital credit of
each partner will change.

Note: If there is no agreement as to bonus or revaluation method, the bonus method

should be used because it conforms to the cost principle of valuing assets.

• Capital credit (CC) – this refers to the interest or capital or equity that a new partner is
credited.

 It is the ownership interest of a partner in the partnership.

 It may be equal to, more than, or less than the investment by the new partner into
the partnership.

 The CC is to be computed based on TAC, not on TCC.

Comparison of New Partner’s Investment (NPI) and Capital Credit (CC)

1. If NPI = CC, there is no bonus or transfer of capital.

2. If NPI > CC, there is a bonus to old partners.

3. If NPI < CC, there is a bonus to new partner.

II. Withdrawal or retirement of a partner

The withdrawal or retirement of a partner dissolves the partnership business, but the remaining
partners may continue the operation of the business. The retiring partner may elect to:

1. Sell his interest to an outsider (new partner)

2. Sell his interest to the one or more remaining partners

3. Sell his interest to the partnership

The interest of the retiring partner must be determined upon his retirement.

The partner interest may be affected by the following:

1. Capital balance (includes additional investment and withdrawals).

2. The profit or loss from the last closing of the books (beginning of the accounting period) to
the date of retirement and distribution of such profit or loss.

3. Loan and advances to (from) the partnership.

 4. Corrections of accounting errors, if any.

5. Revaluation of partnership assets.

Sale of Interest to an Outsider

• The retiring partner may sell his interest to an outsider with the consent of the remaining
partners.

• The sale will be recorded similar to the admission by purchase of interest.

• The partnership records only the transfer of interest from retiring partner to the new
partner (outsider).

• Any gain or loss from such transfer is a personal gain or loss of the retiring partner. Under
this sale, the total assets and capital of the partnership will not be affected.

Sale of Interest to one or more Remaining Partner

• The retiring partner may sell his interest to the remaining partner.

• The sale will be recorded similar to the admission by purchase of interest.

• The partnership records only the transfer of interest from retiring partner to the buying
remaining partner.

• Any gain or loss from such transfer is a personal gain or loss of the retiring partner. Under
this sale, the total assets and capital of the partnership will not be affected.

Sale of Interest to the Partnership

The retiring partner may sell his interest to the partnership. The sale of his interest to the
partnership may be settled either by:

a. Payment of cash

b. Transfer of non-cash assets

c. Recognition of liability for the full or the balance of the unpaid total interest of the retiring
partner.

The retiring partner may receive an amount from the partnership:

a. At book value (equal to the interest of the retiring partner).

b. Less than book value (less than his interest).

c. More than book value (more than his interest).

The accounting for this sale is similar to the admission by investment, but in a reverse manner.
Instead of admitting a new partner by contributing to the partnership, a partner will leave the
partnership with the business paying the interest of the retiring partner. Under this sale, the total
assets and capital of the partnership will change.
 • Equal to the Book Value

o There is no bonus nor asset revaluation.

o More or less than the Book Value

o The difference between the cash to be paid and the book value of the
retiring partner’s total interest may be a bonus or a share in the asset
revaluation.

• If total interest = cash to be paid, no bonus nor asset revaluation.

• If total interest > cash to be paid, there may be a bonus to the

remaining partners or downward asset revaluation.

• If total interest < cash to be paid, there may be a bonus to the

retiring partner or upward asset revaluation.

III. Death or Incapacity of a Partner

The death or incapacity of a partner dissolves the partnership. The estate or his legal representative
is entitled to receive the amount of his interest in the partnership at the date of his death or
incapacity. The interest of the deceased or incapacitated partner must be determined by the
partnership in order to make necessary adjustment.

The accounting procedures to settle the interest of the deceased or incapacitated partner is similar
to retirement or withdrawal of a partner. However, if the partnership cannot pay immediately the
interest of the deceased partner, the following procedures may be followed.

a. The total profit or loss from the date the books were last closed (beginning of the period) to
the date of death or incapacity and the distribution of such profit or loss.

b. Revaluation of partnership assets.

c. Correction of the prior year’s income, if there’s any.

d. Accrue interest (if any) on the said interest of the deceased partner from the date of death to
the settlement date.

e. Settlement of interest of the deceased or incapacitated partner.

f. Closing the books of the partnership.

If payment to the estate of the deceased cannot be settled immediately, the balance in the
capital account of the deceased partner should be transferred to a liability account, payable to
the estate.

IV. Incorporation of Partnership

Partners may expand their business by converting the partnership to a corporation. Among the
benefit of being a corporation business are limited liability of the stockholders, greater ability to
acquire funds (capital), continuity of existence, interest can be transferred without the consent of
other stockholders.

When partnership is change to a corporation, the corporation takes over the assets and assumes the
liabilities of the partnership in exchange for shares of stocks. The shares of stocks receive by the
 partnership is distributed to the partners in settlement of their interest in the partnership. The
partnership is dissolved and the partner becomes the stockholders in the newly organized
corporation.

Determination of the total interest of a retiring, withdrawing or deceased partner:

Adjusted capital balance xx

Loan from partner xx
Loan to partner (xx)
Total interest xx
Reference in determining the partner’s total interest:

Account title (partnership perspective) Treatment

 Loan to partner deduct

 Loan from partner add
 Receivable from partner deduct
 Payable to partner add
 Advances to partner deduct
 Advances from partner add
 Due to partner add
 Due from partner deduct

PA-04Problem1: AdmissionbyPurchase
D was admitted in the partnership operated by A, B, and C with a 10%
interest in the partnership by purchasing25%of A's interest for a certain
amount. Capital balances of A, B, and C alongwith their profit or loss
ratio, prior to D'd admission were as follows:
A (40%) 240,000
B (40%) 240,000
C (20%) 120,000
All assets and liabilities are fairlyvalued.

Case1: DpaidAP60,000forhis 10%interestinthepartnership.

Q 1. Byhow much should the total capital of the new partnership increase after D's admission?
Q 2. What would be the capital balance and the new P/L percentage of A immediatelyafter D's admission?

Ans 1. Zero
Ans 2. 180,000; 30%
A B C D Total
Before admission 240,000 240,000 120,000 0 600,000
240,000 x25% -60,000 60,000 0
After admission 180,000 240,000 120,000 60,000 600,000

New P/L ratio:

A =30% {40%(1-.25)}
B =40%
C =20%
D =10% (40%x25%)

Chapter 4 – Partnership Liquidation

Liquidation – refers to the termination of a business operation. It is the winding up of business
activities, where partnership assets are sold, the partnership creditors (liabilities) are paid and
distribution of remaining cash to the partners.

A business is said to be liquidated when its business operations are completely terminated. It is the
phase of partnership operations, which begins after dissolution and ends with the terminations of
the partnership activities.

Rules in Settling the Accounts between Partners after the Dissolution

1. The assets of the partnership are:

a. partnership property

b. additional contributions of the partners necessary for the payment of all liabilities.

2. Order of Application of the assets. The partnership assets shall be applied in the following
orders:

a. First, those owing to partnership creditors.

b. Second, those owing to partners other than for capital and profits (i.e. partners’ loan to the
partnership or advances for business expenses).

c. Third, those owing for return of the capital contributed by the partners.

d. Finally, those owing to partners in respect of their share in profits.

Marshalling of Assets

It is a doctrine applied when the partnership assets and one or more of the partners are insolvent. It
involves the order of creditors’ claims against partnership assets and the personal assets of each
partner. This doctrine states that:

1. Partnership assets are first available for the payment of partnership debts. Any excess
assets are available for payment of the individual partner’s debts, but only to the extent of
the partner’s interest in the capital of the partnership.

2. Personal assets of a partner are applied against personal debts, ranked in order of priority,
as follows:

a. Amounts owed to personal creditors.

b. Amounts owed to partnership creditors.

c. Amounts owed to partners by way of contribution. This refers to amounts owed the
partnership as represented by the partner’s debit capital balance.

Priority Claims against the Partnership Assets

1. Partnership creditors

2. Personal creditors of the partners that did not recover their claims in full from the personal
assets of the partners.

Priority Claims against the Personal Assets of Partners

 1. Personal creditors of the partners

2. Partnership creditors on the unpaid liabilities of the partnership regardless whether or not
the partner has positive or negative (capital deficiency) capital balance.

3. Those owing to the partners by way of additional capital contribution when the partnership
assets were insufficient to settle the partnership liabilities.

Statement of Liquidation

It is a statement that summarizes all liquidation activities, including payments to

partners. It presents the procedures of liquidation from the conversion of non-cash assets to
cash, allocation of gain or loss on realization, allocation of expenses and the distributions of
cash to creditors and partners.

Realization – the process of converting non-cash assets to cash.

Types of Partnership Liquidation

1. Lump-sum liquidation – under this approach, there would be a single distribution of cash
to partners after all non-cash assets are realized and the gain or loss has been distributed and all
liabilities of the partnership are settled.

2. Installment liquidation – under this approach, there would be multiple distributions of

cash to some or all partners as cash become available. The non-cash assets of the partnership will be
realized on a piecemeal basis. Therefore, even if there are remaining non-cash assets which were
not sold but after payment in full or in part the liabilities to outside creditors, cash will be distributed
to partners in accordance with the schedule of safe payments or cash priority program.

Right of Offset

There are three accounts usually affected by the right of offset, as follows:

1. Due from partner – this account represents a receivable by the partnership from a partner.

2. Partner’s loan – this account represents a liability of the partnership to a partner.

3. Partner’s capital - this account represents the equity of a partner in the partnership.

 When the partnership has a receivable from a partner and his capital account has a credit
balance, the receivable can be offset against the partner’s capital account. On the other
hand, if a partner has a capital deficiency (debit balance of partner’s capital account) and he
has a loan account, his capital deficiency is offset against his loan account.

 A receivable account in excess of the partner’s capital balance shall be collected from the
partner if he is solvent. Otherwise, it is treated as a loss and shared by the remaining
partners in their profit and loss ratio.

 A capital deficiency in excess of the loan account balance shall be collected from the
deficient partner if the deficient partner is solvent. Otherwise, treated as a loss to be
divided among the remaining partners.
ABCD Partnership Case 1: Loss on Realization Fully Absorbed by Partners' Capital Balances
Statement of Financial Position Assume that all non-cash assets of the partnership were sold for P156,000.
1) Sale of non-cash assets 4) Payments of loans
 A partner is considered solvent if he has the abilityCashto pay all his liabilities.
December 31, 2020
156,000 This means that
B, loan 8,000
Loss on realization 40,000 D, loan 7,000
ASSETS his assets still exceed his liabilities.
LIABILITIES AND PARTNER'S EQUITY Merchandise inventory 12,000 Cash 15,000
Current assets Current liabilities Furniture & equipment-net 100,000
Cash 24,000 Accounts Payable 60,000 Equipment-net 84,000
Merchandise Inventory 12,000 36,000 Notes Payable 33,000
Non-current assets B, loan 8,000 2) Loss distribution to partners 5) Cash distribution to partners
A, capital 12,000 A, capital 32,000
Furnitures and Fixtures (net) 100,000 D, loan 7,000 108,000
B, capital 12,000 B, capital 21,500
Equipment (net) 84,000 184,000 Partners' Equity C, capital 8,000 C, capital 14,500
Total Assets 220,000 A, capital (30%) 44,000 D, capital 8,000 D, capital 4,000
B, capital (30%) 33,500 Loss on realization 40,000 Cash 72,000
C, capital (20%) 22,500
3) Payment to creditors
D, capital (20%) 12,000 112,000
Accounts payable 60,000
Total liabilities and partners' equity 220,000
Notes payable 33,000
Case 2: Loss on Realization requiring (offset) Transfer from Partners' Loan to Capital Case 3: Loss on Realization resulting in Capital Deficiency of One Partner, Personally Solvent
Assume that all non-cash assets were sold for P126,000. Assume that all non-cash assets were sold for P98,000.
1) Sale of non-cash assets 4) Offset of D's loan against debit balance of his capital account 1) Sale of non-cash assets 4) Offset of D's loan against debit balance of his capital account
Cash 126,000 D, loan 2,000 Cash 98,000 D, loan 7,000
Loss on realization 70,000 D, capital 2,000 Loss on realization 98,000 D, capital 7,000
Merchandise inventory 12,000 Merchandise inventory 12,000
Furniture & equipment-net 100,000 Furniture & equipment-net 100,000 5) Collection from D on the remaining capital debit balance
Equipment-net 84,000 Equipment-net 84,000 Cash 600
D, capital 600
2) Loss distribution to partners 5) Payments of loans 2) Loss distribution to partners
A, capital 21,000 B, loan 8,000 A, capital 29,400 6) Payments to partner's loan
B, capital 21,000 D, loan 5,000 B, capital 29,400 B, loan 8,000
C, capital 14,000 Cash 13,000 C, capital 19,600 Cash 8,000
D, capital 14,000 D, capital 19,600
Loss on realization 70,000 Loss on realization 98,000
6) Cash distribution to partners 7) Payment to partner capital balances
3) Payment to creditors A, capital 23,000 3) Payment to creditors A, capital 14,600
Accounts payable 60,000 B, capital 12,500 Accounts payable 60,000 B, capital 4,100
Notes payable 33,000 C, capital 8,500 Notes payable 33,000 C, capital 2,900
Cash 93,000 Cash 44,000 Cash 93,000 Cash 21,600

Case 4: Loss on Realization resulting in Capital Deficiency of One Partner, Personally Insolvent Case 5: Loss on Realization resulting in Capital Deficiency of more than One Partner, all Partners are Personally Solvent
Assume that all non-cash assets were sold for P98,000. Assume that all non-cash assets were sold for P82,000.
1) Sale of non-cash assets 4) Offset of D's loan against debit balance of his capital account 1) Sale of non-cash assets 4) Offset of loan against debit balance of capital account
Cash 98,000 D, loan 7,000 Cash 82,000 B, loan 700
Loss on realization 98,000 D, capital 7,000 Loss on realization 114,000 D, loan 7,000
Merchandise inventory 12,000 Merchandise inventory 12,000 B, capital 700
Furniture & equipment-net 100,000 5) Absorption of the remaining debit capital balance of D Furniture & equipment-net 100,000 D, capital 7,000
Equipment-net 84,000 A, capital 225 Equipment-net 84,000
B, capital 225
5) Collection from partners with capital deficiencies
2) Loss distribution to partners C, capital 150
2) Loss distribution to partners Cash 4,100
A, capital 29,400 D, capital 600
A, capital 34,200 C, capital 300
B, capital 29,400
B, capital 34,200 D, capital 3,800
C, capital 19,600 6) Payment to partner's loan
D, capital 19,600 B, loan 8,000
C, capital 22,800
Loss on realization 98,000 Cash 8,000 D, capital 22,800 6) Payment of partner's loan
Loss on realization 114,000 B, loan 7,300
3) Payment to creditors 7) Payment to partner capital balances Cash 7,300
Accounts payable 60,000 A, capital 14,375 3) Payment to creditors
Notes payable 33,000 B, capital 3,875 Accounts payable 60,000 7) Payment to partner capital balances
Cash 93,000 C, capital 2,750 Notes payable 33,000 A, capital 9,800
Cash 21,000 Cash 93,000 Cash 9,800

Case 6: Loss on Realization resulting in Capital Deficiency of more than One Partner, Deficient Partners are Personally Insolvent Case 7: Cash Insufficient to Pay Creditors, all Partners are Personally Solvent
Assume that all non-cash assets were sold for P82,000. Assume that all non-cash assets were sold for P64,000.
1) Sale of non-cash assets 4) Offset of loans against capital debit balances 1) Sale of non-cash assets 4) Collection from partners with remaining capital debit balances
Cash 82,000 B, loan 700 Cash 64,000 Cash 11,300
Loss on realization 114,000 D, loan 7,000 Loss on realization 132,000 C, capital 3,900
Merchandise inventory 12,000 B, capital 700 Merchandise inventory 12,000 D, capital 7,400
Furniture & equipment-net 100,000 D, capital 7,000 Furniture & equipment-net 100,000
Equipment-net 84,000 5) Solvent partners absorved the capital deficiencies of insolvent partners Equipment-net 84,000 5) Payment to creditors
A, capital 2,050 Accounts payable 60,000
2) Loss distribution to partners B, capital 2,050 2) Loss distribution to partners Notes payable 33,000
A, capital 34,200 C, capital 300 A, capital 39,600 Cash 93,000
B, capital 34,200 D, capital 3,800 B, capital 39,600
C, capital 22,800 6) Offset of B's loan against his debit capital balance C, capital 26,400 6) Payment of partner's loan
D, capital 22,800 B, loan 2,050 D, capital 26,400 B, loan 1,900
Loss on realization 114,000 B, capital 2,050 Loss on realization 132,000 Cash 1,900
7) Payment of partner's loan
3) Payment to creditors B, loan 5,250 3) Offset of partner's loan against their capital debit balances 7) Payment to partner's capital balance
Accounts payable 60,000 Cash 5,250 B, loan 6,100 A, capital 4,400
Notes payable 33,000 8) Payment to partner's capital balance D, loan 7,000 Cash 4,400
Cash 93,000 A, capital 7,750 B, capital 6,100
Cash 7,750 D, capital 7,000

Case 8: Cash Insufficient to Pay Creditors, some Deficient Partners are Insolvent 8) Payment to partner's loan balance
Assume that all non-cash assets were sold for P64,000. Partner C is insolvent. B, loan 437.50
1) Sale of non-cash assets 4) Absorption by solvent partners on capital debit balances of insolvent partner
Cash 437.50
Cash 64,000 A, capital 1,462.50
Loss on realization 132,000 B, capital 1,462.50
Merchandise 9) Payment to partner's capital balance
LUMPSUMinventoryAND INSTALLMENT LIQUIDATION 12,000 D, capital 975.00
LUMPSUM LIQUIDATION
Furniture & equipment-net 100,000 C, capital 3,900 A, capital 2,937.50
On Dec. 31, 2020, the Statement of financial Position of Jessica, Emeli and Arleen is as follows:
Cash 2,937.50
Equipment-net 84,000
5) To offset again against B's loan the resulting debit balance from
30% 30% 40%
2) LossCash
distribution to partners
A, capital
15,000 Liabilities
absorbing some C's deficiency: 50,000 Cash NCA Liab. E, Loan J, Cap. E, Cap. A, Cap.
Noncash assets 39,600 265,000 B, loan
Salary payable1,462.50
to Jessica 10,000
B, capital
Loan to Arleen 39,600 10,000 B,Emeli,
capital loan 1,462.50 20,000 Beg. balance 15,000 265,000 50,000 20,000 48,000 72,000 90,000
C, capital 26,400
D, capital 26,400
Jessica, capital
6) Collection from D to cover his capital debit balance
38,000 Disposal of NCA 160,000 -265,000 -31,500 -31,500 -42,000
Loss on realization 132,000 CashEmeli,
(7,400 +capital
975) 8,375 72,000
D,Arleen,
capital capital 8,375 100,000 Balances 175,000 0 50,000 20,000 16,500 40,500 48,000
290,000
3) Offset of partner's loan against their capital debit balances
B, loan 6,100 as follows: 7) Payment to creditors
290,000 Expense paid -10,000 -3,000 -3,000 -4,000
Profit and losses were shared
D, loan 7,000
Jessica - 30%; Arleen - 30%; Emeli - 40%
Accounts payable 60,000 Balances 165,000 50,000 20,000 13,500 37,500 44,000
B, capital 6,100 Notes payable 33,000
D, capital 7,000 Cash 93,000 Liabilities paid -50,000 -50,000
SUMMARY OF THE REALIZATION AND LIQUIDATION ACTIVITIES:
Book Value of Asset Realized Cash collected Expenses pd. Liab. Paid Cash paid to partners Balances 115,000 0 20,000 13,500 37,500 44,000
1st period 130,000 80,000 4,000 50,000 41,000 Cash paid to partners -115,000 -20,000 -13,500 -37,500 -44,000
2nd period 75,000 50,000 4,000 40,000
3rd period 60,000 30,000 2,000 34,000 0 0 0 0 0
 INSTALLMENT LIQUIDATION 30% 30% 40%
30% 30% 40% Cash NCA Liab. E, Loan J, Cap. E, Cap. A, Cap.
Cash NCA Liab. E, Loan J, Cap. E, Cap. A, Cap. 2nd Period End. Bal. of 1st period 0 135,000 0 31,800 44,228 58,971
Beg. balance 15,000 265,000 50,000 20,000 48,000 72,000 90,000 Disposal of NCA & DOL 50,000 -75,000 -7,500 -7,500 -10,000
1st Period Disposal of NCA & DOL 80,000 -130,000 -15,000 -15,000 -20,000 Balances 50,000 60,000 0 0 24,300 36,728 48,971
Balances 95,000 135,000 50,000 20,000 33,000 57,000 70,000 Expense paid -4,000 -1,200 -1,200 -1,600
Expense paid -4,000 -1,200 -1,200 -1,600 Balances 46,000 60,000 0 0 23,100 35,528 47,371
Balances 91,000 135,000 50,000 20,000 31,800 55,800 68,400 Cash paid to partners -40,000 0 -3,300 -15,728 -20,971
End. Bal. of 2nd period 6,000 60,000 0 0 19,800 19,800 26,400
Liabilities paid -50,000 -50,000
Balances 41,000 135,000 0 20,000 31,800 55,800 68,400
Schedule of Safe Payments - 2nd Period 30% 30% 40%
Cash paid to partners -41,000 -20,000 0 -11,571 -9,428
J, Cap. E, Cap. A, Cap.
End. Bal. of 1st period 0 135,000 0 31,800 44,229 58,972
Balances prior to distribution 23,100 35,528 47,371
Schedule of Safe Payments 30% 30% 40%
TPL (NCA + cash withheld over liab.)60K + 6K -19,800 -19,800 -26,400
J, Cap. E, Cap. A, Cap. Distributions 3,300 15,728 20,971
Balances prior to distribution 31,800 75,800 68,400
TPL (NCA + cash withheld over liab.)135K + 0 -40,500 -40,500 -54,000 30% 30% 40%
Balances -8,700 35,300 14,400 Cash NCA Liab. E, Loan J, Cap. E, Cap. A, Cap.
Adjustments 8,700 -3,728 -4,971
3rd Period End. Bal. of 2nd period 6,000 60,000 0 19,800 19,800 26,400
Distributions 0 31,572 9,429
Disposal of NCA & DOL 30,000 -60,000 -9,000 -9,000 -12,000
Balances 36,000 0 0 0 10,800 10,800 14,400
Expense paid -2,000 -600 -600 -800
Balances 34,000 0 0 0 10,200 10,200 13,600
Cash paid to partners -34,000 0 -10,200 -10,200 -13,600
End. Bal. of 2nd period 0 0 0 0 0 0 0

ILLUSTRATION PROBLEM:
p152: Illustrative Problem: 1) Compute the loss absorption potential of each partner.

X, Y, and Z are partners who share profits and losses as follows: X, 40%; Y, 30%; Z, 30%. X (40%) Y (30%) Z (30%)
Capital balances 100,000 112,500 125,000
They decided to liquidate the partnership, and they would like to have an advance cash Add/(Deduct): Loan account 0 0 10,000
distribution plan. Their statement of financial position before the liquidation is presented Total interests 100,000 112,500 135,000
Divide by P & L ratio 40% 30% 30%
below. Assume cash is available to the partners as follows: August, P82,500 and Sept, P107,500. Loss absorption balances 250,000 375,000 450,000
X, Y, and Z Priority 1: to Z -75,000
250,000 375,000 375,000
Statement of Financial Position Priority 2: to Y and Z -125,000 -125,000
250,000 250,000 250,000
June 30, 2022
Assets Liabilities and Capital 2) Determine the priority payments to partners.
a) The partnership should pay P22,500 available cash to Z.
Cash 20,000 Liabilities 152,500 b) The partnership should pay the next P75,000 to Y and Z in the ratio of 30:30.
c) The partnership should pay any amount exceeding P97,500 (P22,500 + 75,000) to
Other assets 480,000 Z, Loan 10,000 X, Y, and Z in the profi t and loss ratio of [Link], respectively.
X, Capital 100,000
Cash Priority Payments to
Y, Capital 112,500 X (40%) Y (30%) Z (30%)
22,500
z, Capital 125,000
Total Assets 500,000 Total Liabilities and Capital 500,000 37,500 37,500

August distribution:
Available for distribution 82,500
Priority #1 - Z -22,500
Priority #2 - Y & Z (P30K each) 60,000

Payments to partners
X (40%) Y (30%) Z (30%)
Priority 1 22,500
Priority 2 30,000 30,000
Total 0 30,000 52,500

September distribution:
Available for distribution 107,500
Priority #2 - Y, 30% & Z, 30% (75K - 60K) -15,000
Priority #3 - X, Y, & Z ([Link]) 92,500

Payments to partners
X (40%) Y (30%) Z (30%)
Priority 2 7,500 7,500
Priority 3 37,000 27,750 27,750
Total 37,000 35,250 35,250

ILLUSTRATION PROBLEM:
1) Determine the total interest of each partner. Loan to a partner and Loan from a partner , if any,
p155: Illustrative Problem: shall be added to or deducted from the capital balance to obtain each partner's total/net interest.
A, B, & C Partnership prepared the following cash priority program: A, 20% B, 30% C, 50%
Capital balances (+/- loan acct) 60,000 80,000 100,000
A B C Payments to A, B, & C will be made as follows: Loss on realization in January -6,000 -9,000 -15,000
Capital balances before liquidation 60,000 80,000 100,000 A, 20% B, 30% C, 50% Capital balances, January 54,000 71,000 85,000

Divide by profit and loss ratio 20% 30% 50% 2) Compute the total possible partnership loss to be absorbed by each partner. This loss consists of the
Loss absorption balances 300,000 266,667 200,000 total carrying value of remaining NCA and the cash withheld for possible liquidation expenses and
unrecognized liabilities, if any.
Priority I -33,333 Priority I - to A 6,667 Possible loss absorbed by:
 Priority II -66,667 -66,667 Priority II - to A & B 13,333 20,000
Schedule I - Schedule of Safe Payments for January:
Balances 200,000 200,000 200,000 Priority III - to A, B, & C ([Link]) A, 20% B, 30% C, 50%
Total Interest (Jan. balances) 54,000 71,000 85,000
Possible loss -30,000 -45,000 -75,000
Payment to partners 24,000 26,000 10,000

Illustrative Problems: (pp149 & 155)

A, B, and C
Statement of Financial Position
Illustrative Problems: (pp149 & 155)
December 31, 2022
A, B, & C Partnership prepared the following cash priority program:
Assets Liabilities and Capital
A B C Payments to A, B, & C will be made as follows:
Cash 10,000 Liabilities 80,000
Capital balances before liquidation 60,000 80,000 100,000 A, 20% B, 30% C, 50%
Other assets 310,000 Divide by profit and loss ratio 20% 30% 50%
A, Capital 60,000 Loss absorption balances 300,000 266,667 200,000
B, Capital 80,000 Priority I -33,333 Priority I - to A 6,667
C, Capital 100,000 Balances 266,667 266,667 200,000
Total Assets 320,000 Total Liabilities and Capital 320,000 Priority II -66,667 -66,667 Priority II - to A & B 13,333 20,000
Balances 200,000 200,000 200,000 Priority III - to A, B, & C ([Link])
Realization of Assets:
Carrying Value Cash Realized Loss January (cash available for distribution to partners is P60,000)
January 160,000 130,000 30,000 A B C
February 84,000 48,000 36,000 Priority I - to A 6,667
March 66,000 24,000 42,000 Priority II - to A & B 13,333 20,000
310,000 202,000 108,000 Priority III - to A, B, & C ([Link]) 60K - 40K 4,000 6,000 10,000
Total payments in January 24,000 26,000 10,000
January (cash available for distribution to partners is P60,000)
A B C
Priority I - to A 6,667
Priority II - to A & B 13,333 20,000
Priority III - to A, B, & C ([Link]) 60K - 40K 4,000 6,000 10,000
Total payments in January 24,000 26,000 10,000

February (cash available for distribution to partners is P48,000)

A B C
Priority III - to A, B, & C ([Link]) 9,600 14,400 24,000

March (cash available for distribution to partners is P24,000)

A B C
Priority III - to A, B, & C ([Link]) 4,800 7,200 12,000