Week 2 – Partnership Dissolution and Liquidation

Partnership Dissolution

Part I: Theory of Accounts

1. The following are related to Partnership Dissolution except

a. admission by purchase of interest

b. admission by investment

c. retirement of a partner

d. the winding up of the partnership business by selling the noncash assets, paying the creditors and
distributing the remaining cash to the partners

2. When an incoming partner purchases an interest of the partnership, which of the following is/are
TRUE?

a. the partnership assets remain unchanged

b. no cash or other assets flow from the new partner to the partnership

c. the cash paid by the incoming partner is not recorded in the partnership books because it is a personal
transaction between the selling partners and buying partner

d. all of the above

3. Under admission by investment and the bonus method is used, what is the result when the amount
invested by the incoming partner is less than the capital credited to him?

a. bonus to the new partner

b. bonus to existing partners

c. the new partner will invest additional capital

d. the existing partners' capital will increase

4. Under admission by investment and the total contributed capital is greater than the total agreed
capital, which of the following is/are TRUE?

a. the capital balances of the existing partners will increase

b. the capital balances of the existing partners will decrease

c. a certain asset is undervalued

d. both B and C

5. When a retiring partner was paid more than his interest and resulted to an increase in the capital
balances of the remaining partners, which of the following is/are TRUE?

a bonus to retiring partner

b. bonus to remaining partners

c. a certain asset was undervalued and was adjusted to all partners before retirement

d. both B and C

Part II: Problem Solving

Problem 1

The following were the capital balances of Partners' A, B, and C before admitting incoming partner D:
P100,000; P150,000; P300,000 respectively. There was also an undistributed net income in the amount
of P75,000. Profit and loss agreement was 30:20:50 respectively.

Assume the following INDEPENDENT cases:

1. Incoming partner D purchased 40% capital interest from the partnership by paying P200,000. What is
the capital balance of Partner C after admitting incoming Partner D?

a. 202,500

b. 180,000

c. 337,500

d. 300,000

A (30%) B (20%) C (50%) D

100,000 150,000 300,000
22,500 15,000 37,500
122,500 165,000 337,500 625,000 TCC
(49,000) (66,000) (135,000)
73,500 99,000 202,500 250,000 625,000 TAC

Share in Net income:

A: 75,000 x 30% = 22,500

B: 75,000 x 20% = 15,000

C: 75,000 x 50% = 37,500

Transfer of capital to D from:

A: 122,500 x 40% = 49,000

B: 165,000 x 40% = 66,000

C: 337,500 x 40% = 135,000

TCC:/122,500 + 165,000 + 337,500) = 625,000

Capital Credit to D: (625,000 x 40%) = 250,000

2. A certain asset was undervalued by P85,000 and incoming Partner D purchased 40% capital interest
from the partnership. What is the capital balance of Partner A after admitting incoming Partner D?

a. 148,000

b. 122,500

C. 88,800

d. 100,000

A (30%) B (20%) C (50%) D

122,500 165,000 337,500 625,000 TCC
25,500 17,000 42,500 85,000
148,500 182,000 380,000
(59,200) (72,800) (152,000)
88,800 109,200 228,000 284,000 710,000 TAC

Share in undervaluation:

A: 85,000 x 30% = 25,500

B: 85,000 x 20% = 17,000

C: 85,000 x 50% = 42,500

Transfer of capital to D from:

A: 148,000 x 40% = 59,200

B: 182,000 x 40% = 72,800

C: 380,000 x 40% = 152,000

Capital Credit to D: (710,000 x 40%) = 284,000

Problem 2

The following were the capital balances of Partners' A, B and C before the retirement of Partner B:
P230,000; P120,000; P340,000 respectively. The following also were the loan balances: Loan to A,
P45,000 and Loan from B, P50,000. They share profits and losses 20:20:60 respectively.

Assume the following INDEPENDENT cases:

1. Partner B was given P200,000 in exchange for his interest. What is the capital balance of Partner A
after retirement of Partner B?

a. 230,000

b. 222,500

c. 177,500

d. 224,000

A (20%) B (20%) C (60%)

230,000 120,000 340,000
50,000
230,000 170,000 340,000
(7,500) 30,000 (22,500)
222,500 200,000 317,500
(200,000)

Interest of B before retirement:

(120,000+ 50,000) = 170,000

Share in the BONUS to B:

A: 30,000 x 2/8 = 7,500

C: 30,000 x 6/8 = 22,500

2. There was implied under/over valuation of another certain asset and Partner B was given P150,000 in
exchange for his interest. What is the capital balance of Partner C after retirement of Partner B?

a. 280,000

b. 400,000

c. 325,000

d. 355,000
 A (20%) B (20%) C (60%)
230,000 170,000 340,000
(20,000) (20,000) (60,000)
210,000 150,000 280,000

Total overvaluation:

(20,000+20%) = 100,000

Share in the overvaluation:

A: (100,000 x 20% ) = 20,000

C: (100,000 x 60%) = 60,000

Problem 3

Partners A and B have the following capital balances before admitting incoming Partner C: P350,000 and
P400,000 respectively. They share profits and losses 70:30 respectively. C was admitted in the
partnership by purchasing 1/5 capital interest from Partner B by paying him P100,000 and investing
P170,000 for a total of 20% capital interest in the partnership.

What is the capital balance of Partner B after admission of incoming Partner C?

a. 320,000

b. 300,200

c. 419,800

d. 339,800

A (70%) B (30%) C
350,000 165,000
(80,000) 80,000
170,000
350,000 320,000 250,000 920,000 TCC
(46,200) 19,800 (66,000)
396,200 339,800 184,000 920,000 TAC

Transfer of capital to C from B:

(400,000 x 1/5)= 80,000

Share of BONUS from C:

A: (66,000 x 70%) = 46,200

B: (66,000 x 30%) = 19,800

Capital credit to C:

(920,000 x 20%) = 184,000

Partnership Liquidation

Part I: Theory of Accounts

1. Statement 1. In a partnership installment liquidation, using either a safe payment or cash

distribution plan, cash is distributed to partners based on their ability to absorb losses.

Statement 2. In the cash distribution plan the partner with the lowest amount of total interest the
non-priority partner.

a. Only the first statement is true

b. Only the second statement is true

c. Both statements are true

d. Both statements are false

2. Statement 1. In the preparation of a schedule of safe payments to partners, cash withheld for
liquidation expenses that may be incurred and unrecorded liabilities that may be discovered are
treated as total loss on realization.

Statement 2. In a partnership liquidation, cash withheld for payment of liabilities to outside

creditors is not part of the maximum possible loss under the safe payment to partners.

a. Only the first statement is true

b. Only the second statement is true

c. Both statements are true

d. Both statements are false

3. Statement 1. In an installment liquidation, a partner whose share in the maximum possible loss is
greater than his total interest will not receive cash for that period but may receive distributions from
the partnership by the next period.

Statement 2. In a partnership liquidation, with more than one deficient partner, the deficient
partner who is also insolvent is the first to be eliminated in the distribution of cash.

a. Only the first statement is true

 b. Only the second statement is true

c. Both statements are true

d. Both statements are false

4. Statement 1. In a total liquidation, a partner with a debit balance pre-liquidation capital shall not
receive any distribution from the partnership.

Statement 2. In a total liquidation, gain or loss on realization of non-cash assets is distributed to all
partners with a credit capital balance only.

a. Only the first statement is true

b. Only the second statement is true

c. Both statements are true

d. Both statements are false

Part II: Problem Solving

Problem 1. On December 31, 2022, the Statement of Financial Position of DEF Partnership with profit or
loss ratio of 1:4:5 of partners D, E and F respectively revealed the following data:

Cash 2,500,000

Non Cash assets 6,250,000

Liabilities 5,000,000

D, Capital 1,750,000

E, Capital 1,250,000

F, Capital 750,000

On January 1, 2023, the partners decided to liquidate the partnership. All partners are legally declared
to be personally insolvent. The noncash assets were sold for P4,500,000. Liquidation expenses
amounting to P750,000 were incurred and paid.

Compute the amount of cash received by Partner D after liquidation

a. 1,750,000

b. 1,400,000

c. 1,500,000

d. 1,250,000
Solution:

D 1,750 – 250 = 1,500 – 100 = 1,400-150 = 1,250

E 1,250 - 1,000 = 250 – 400 = (150) +150 = 0

F 750 - 1,250 = (500) + 500 = 0

Cash 2.5M + 4.5M -750,000 - 5M = 1,250,000

Problem 2. On December 31, 2023, the accounting records of T, V and C Partnership included the
following ledger account balances:

Receivable from T P264,000

Loan to C 81,000

Salary payable to V 270,000

T, Capital P1,107,000

V, Capital 905,000

C, Capital 972,000

Total assets include cash amounting to P469,000. The partnership was liquidated on December 31, 2023,
and T received P703,000 cash pursuant to the liquidation. T, V and C share net income and losses in a
5:3:2 ratio, respectively.

In the settlement to partners, compute the amount of cash paid to V

a. 1,175,000

b. 1,084,000

c. 1,091,000

d. 0

Total interest Cash settlement Loss absorbed

T 843,000 703,000 140,000 / 50% = 280,000 * 30%
V 1,175,000 1,091,000 84,000
C 891,000 835,000 56,000
Problem 3.

On December 31, 2022, the Statement of Financial Position of LMN Partnership shows the following
data with profit or loss sharing of 2:3:5:

Cash P 3,750,000

Other Non Cash asset 10,000,000

Liabilities to others P5,000,000

L, Capital 3,750,000

M, Capital 3,125,000

N, Capital 1,875,000

On January 1, 2023, the partners decided to wind up the partnership affairs. During the winding up.
liquidation expenses amounting to P500,000 were paid. Non-cash assets with book value of P7,500,000
were sold during January. Forty percent of the total liabilities were also paid during January. P750,000
cash was withheld during January for future liquidation expenses. On January 31, 2023, partner L
received P2,500,000. All partners are insolvent.

1. Compute the amount received by partner M on January 31, 2023

a. 625,000

b. 1,250,000

c. 1,875,000

d. 750,000

Solution

L 3,750 - 2,500 = (1,250) / 20% = (6,250) Total Loss (Actual and Possible)

M 3,125 - 1,875 = 1,250,000

N 1,875 - 3,125 = (1,250)

2. Using the same information, Compute the proceeds from the sale of non-cash assets during January
2023?

a. 5,500,000

b. 5,000,000

c. 6,250,000

d. 5,750,000

Solution

6,250,000 total loss (actual and possible)

1) Actual loss-liquidation expenses paid P500,000

2) Possible loss - anticipated expenses P750,000
3) Possible loss - BV of unsold non cash assets P2.5
4) Deficiency of a partner (N) 1,250,000
5) Actual loss-loss on realization/ loss on sale P1,250

BV of the sold NCA 7.5M-1.25M

3,750 + 6,250 = 10M - 500,000 - 750,000 - 5M = 3,750