LIQUIDATION OF PARTNERSHIP BY LUMP SUM METHOD
This lump sum method is just one method, the other one being the LIQUIDATION BY INSTALLMENT
THERE ARE TWO STEPS IN THE TERMINATION OF A PARTNERSHIP
A. REALIZATION - converting of non cash assets into cash
b. liquidation - dstribution of cash
DISTRIBUTION CLASSIFIED INTO TWO:
1. BY LUMP SUM - method where all non cash ;are realized first, before Any cash distribution.is made .
2. by installment - cash is distributed as it is collected
THE FOLLOWING SEQUENCE ON REALIZATION:
1. Liabilities are paid first.
2. loans of partners to the firm
3. partners capital
However, at the time of liquidation , partners loan need not be distinguished from partners capital.
A partners loan should not be paid if he has a debit balance on capital or his capital credit is not sufficient.
Recording Procedures:
1. to record proceeds of sales of assets any loss on sales is debited to " loss on realization or credited "gain on realization.
2. any gain or loss on realization is is distributed to capital accounts
3. to record payment of liabilities
4. to record payment of partners loan
5. cash distribution to partners.
IF AFTER THE DISTRIBUTION OF LOSS ON REALIZATION , A PARTNERS CAPITAL IS NOT SUFFICIENT TO COVER HIS SHARE ON LOSS , IT MAY BE COVERED BY:
A. offset any loans payable to him to his negative capital . and balance shall be paid by him if he is solvent.
b. in case he is insolvent the remaining partners shall transfer their share on that balance of capital deficiency of the other partner , so the deficient capital will become zero capital..
ILLUSTRATIVE EXAMPLE:
The ledger showed the following balances
Cash 43,000
ACCT REC 155,000
ALLO, BDEBTS 25,000
INVENTORY 250,000
FIXED ASSETS 320,000
DEPN 50,000
NOTES PAY 40,000
ACCTS PAY 97,000
LOANS PAYBLE BOY 6,000
BOY 50,000
PETE CAPITAL 200,000
TONY CAPIT 300,000
all assets were sold for 476,000, and cash were distributed to the partners.
ASSUMPTION NO. 1 profits shared equally, deficient partners has personal money.
journal entry 1 . FIRST PROCEDURE TO SELL
cash 476,000
allo. bad debts\ 25,000
allo. depn 50,000
loss on realization 174,000
all assets 725,000
to record sales of assets and closing of res. accounts and recognized the loss.
entry 2 : TO DISTRIBUTE LOSS ON REALIZATION
CAPITAL BOY 58,000
PETE 58,000
TNY 58,000
loss on realization 174,000
distribute loss based on sharing ratio
entry 3 ; since the share of loss of BOY IS BIGGER THAN HIS CAPITAL, this entry first.
loans payable boy 6,000
boy capital 6,000
to offset the loans payable to boy on his debit balance of capital of 8,000 the remaining is promised to be paid in cash
Entry 4. to collect the balance o f boy captal deficiency.
cash 2,000
capital boy 2,000
entry , 5 since fully settled the deficiency, the settling of outside creditors
accounts payable 97,000
notes 40,000
cash 137,000
to pay liabilities.
entry 5 ; distribute cash to partners based on their final balance of capital
PETE CAPITAL 142,000
TONY CAP 242,000
CASH 384,000
YOU HAVE NOW TO PREPARE THE STATEMENT OF LIQUIDATION FOR CLARITY.
particulars cash non liab. loans pay BOY PETE TONY
balances 43 650 137 6 50 200 300
sell 476 476
loss 174 58 58 58
offset loans 6 6
pay def 2 2
balance 521 0 137 - - 142 242
pay liab 137 137
bal 384 - 142 242
pay partner 384 142 242
balance --- - -
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ASSUMPTION 2 ; Sharing boy 40%, 30% 30% tony. all partners insolvent.
CASH NON CASH LIAB. LOANS BOY PETE TONY
balances 43 650 137 6 50 200 300
sell 476 476
loss 174 69.6 52.2 52.2
offset 6 6
bal 519 - 137 - (13.6 ) 147.8 247.8
share def BOY 6.8 6.8 6.8
pay liab 137 137
bal 382 141 241
distribute 382 141 241
balces 0 0 0
AFTER YOU HAVE STUDIED THE ABOVE LIQUIDATION METHOD, YOU MAY HAVE THE FOLLOWING QUESTIONS:
1. ANY PARTNER WHOSE CAPITAL IS SMALL HAS THE TENDENCY THAT HIS CAPITAL WILL NOT BE SUFFICIENT TO ABSORB HIS SHARE ON THE LOSS OF SALE OF NON CASH ASSETS, BECAUSE HE WILL SHARE ON IMMEDIATELY ON ANY LOSS THAT WILL OCCUR. IN THIS CASE HE WILL HAVE TO PAY BACK THE AMOUNT HE HAS RECEIVED IN THE PROCEEDS OF SALE BECAUSE HIS CAPITAL BECOME DEFICIENT. IT IS NOT PRACTICAL IN A SENSE.
2. THE PARTNERS WHO HAS A BIG CAPITAL WILL RECEIVE INITIALLY A LESSER CASH DISTRIBUTION BECAUSE EVEN THE PARTNERS MENTIONED IN NO. 1 WILL SHARE ON THE CASH DISTRIBUTION. WHERE LATER ON HE WILL PAY BACK BECAUSE HIS CAPITAL IS NOT SUFFICIENT TO ABSORB THE LOSS ON SALES
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