CHAPTER 6- liquidation

1. Define partnership liquidation and identify its causes. Partnership liquidation is the winding up of the business affairs of a partnership; hence the business operation is completely terminated or ended. Partnership liquidation may be caused by any of the following: (1) accomplishment of the purpose of the partnership (2) termination of the term/ period covered by the partnership contract (3) bankruptcy of the partnership (4) mutual agreement among the partners to close the business. 2. Discuss the various problems encountered in partnership liquidation. The liquidation of a partnership will give rise to the ff. problems (1) determining the partnership profit or loss from the beginning of the accounting period to the date of the liquidation and distributing such profit or loss to the partners (2) closing the partnership books (3) correcting accounting errors in prior periods (4) liquidating the business.

3. Identify and differentiate the two types of partnership liquidation. The two types of partnership liquidation are lump- sum liquidation (liquidation by totals) and instalment liquidation (piece-meal liquidation). Under lump- sum liquidation, distribution of cash to the partners is done only after the realization and payment of partnership liabilities. Under instalment liquidation, asset realization is on a piece-meal basis and cash is distributed to partners as it becomes available even if there are still unrealized non- cash assets. 4. Discuss and understand the accounting procedures under lump sum liquidation, Lump sum liquidation requires the following procedures: (1) realization of non-cash assets (sale of non-cash assets for cash) (2) distribution of gain or loss on realization to the partners according to their liquidation ratio, if there is any, or according to their residual profit and loss ratio; (3)payment of liabilities to outside creditors (4) distribution of cash to partners

Glossary of Accounting Terminologies

Capital deficiency- the excess of a partners share of losses over his capital credit balance Deficient partner- a partner with a debit balance in his capital account after receiving his share on the loss on realization Insolvent partner- a partner whose personal assets are less than his personal liabilities Free interest- a partners capital interest that is available for cash payment. Liquidation- the winding up of the business affairs of a partnership Realization- the process of converting non cash assets into cash Restricted Interest- a portion a partners capital account balance that is restricted for possible losses on liquidation. It is not, therefore, available for cash payment. Right of offset- the legal right to apply all or part of partners loan to the partnership against capital deficiency Solvent Partner- a partner whose personal assets are more than his personal liabilities