FAC1601-partnerships - Liquidation

Study unit 4
FAC1601
 Key concepts
 Liquidation methods
 Simultaneous
 Piecemeal
 Liquidationaccount
 Accounting procedures
 Simultaneous liquidation
 Piecemeal liquidation
 Dissolution
 Liquidation
 Dissolution of solvent partnership
 Assets converted to cash, liabilities settled &
balance transferred to partners’ capital accounts
 Liquidation account
 Simultaneous liquidation
 Piecemeal liquidation
 Loss-absorption-capacity method
 Simultaneous
 Partnership assets are sold simultaneously or over brief
period
 Discontinue operations
 Single liquidation account Net profit/loss on
liquidation
 Piecemeal
 Partnership continues operations – steadily decrease
 Liquidate partnership at best possible price
 More than one liquidation account
 Net profit/loss on each portion of partnership
liquidated
 Close each liquidation account off to partners’
capital account in profit-sharing ratio
 Date liquidation process commence
 Close-off following accounts to liquidation account:
 All assets (excluding Bank)
 Contra-assets (e.g. accumulated depreciation &
allowance for credit losses)
 Liability accounts
 Record the following in the liquidation account
 Liquidation of assets (Amounts received for assets)
 Settlement of debt
 Further income received/expenses paid
 Balancing amount = net profit/loss on liquidation
 Close off to partners’ capital accounts
 Profit-sharing ratio
 Similar to method 1 EXCEPT:
 Only liability accounts where settlement discount
is expected are closed off to liquidation account
 Settlement of other liabilities
 Cr Bank account, NOT liquidation account
 Subsequent settlement discount received
 Dr Liability (full amount)
 Cr Bank (Amount actually paid)
 Cr Liquidation account (Settlement discount)
1. Drawings and current accounts capital accounts
2. Goodwill & reserves  capital accounts in
 Profit-sharing ratio
3. Prepare liquidation account
 Close off assets, contra assets & liabilities
 Record liquidation of assets (excl Bank)
 Partner take over asset  Dr Capital, Cr Liquidation
 Sell for cash  Dr Bank, Cr Liquidation account
 Record income received  Dr Bank, Cr Liquidation
 Record liquidation costs paid  Dr Liquidation, Cr Bank
 Record payments of liabilities  Dr Liquidation, Cr Bank
 Record payment of further expenses  Dr Liquidation, Cr Bank
 Close off balance to capital accounts in profit-sharing ratio
 Profit  Dr Liquidation account, Cr Capital:A, Capital:B
 Loss  Dr Capital A, Capital:B, Cr Liquidation account
4. Record settlement of capital accounts
 Dr Capital Account:A, B, Cr Bank
 Ratio of capital balances NOT profit-share ratio.
• Close off balances of the drawings & current accounts to
capital accounts
Step 1
• Close off balances of goodwill & reserves to capital accounts

using profit share ratio
Step 2
• Prepare liquidation account

• Transfer balance to capital accounts using profit share ratio
Step 3
• Record settlement of capital accounts

• Balance in capital accounts = Balance in bank account
Step 5
1. Drawings & current accounts  capital
2. Goodwill & reserves  Capital
 Profit-sharing ratio
3. Payment of expenses, settlement of debts
 Dr Liquidation account, Cr Bank
4. Liquidation of assets, receipt of further cash
5. Interim payments made to partners
 After debt and expenses are paid
 Partial settlement of capital accounts
 Calculation
 Surplus-capital method
 Loss-absorption-capacity method
6. Settlement to partners – Final repayment
 Capital account
• Close off balances of the drawings &
Step 1 current accounts to capital accounts
• Close off balances of goodwill & reserves

Step 2 to capital accounts using profit share ratio
• Prepare liquidation account

Step 3 • Apply loss-absorption-capacity method
• Record settlement of capital account

Step 5
1. Determine actual GL on date cash becomes
available for distribution
2. Debit contingent/budgeted expenses to capital
accounts – profit share ratio
 NOT accounting entry – calculation only
3. Close off unsold assets to capital accounts
 Assume no value
4. Close off anticipated capital deficit to
favourable capital accounts
 Profit share ratio
 Assume partners with final anticipated deficits are
insolvent
Determine the actual general ledger account
balances on the date that cash becomes
available for interim repayments.
Debit any budgeted/contingent expenses to the

partners’ capital accounts – profit-sharing ratio
Close of all unsold assets to the capital accounts

– profit-sharing ratio
Close off any anticipated deficit to the capital

accounts of the partners who have favourable
anticipated capital account balances – profit-
sharing ratio

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Study unit 4

• Close off balances of goodwill & reserves to capital accounts

• Prepare liquidation account

• Record settlement of capital accounts

• Close off balances of goodwill & reserves

• Prepare liquidation account

• Record settlement of capital account

Debit any budgeted/contingent expenses to the

Close of all unsold assets to the capital accounts

Close off any anticipated deficit to the capital

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