Chapter 5

Liquidation of a partnership
 Partnership liquidation: Ends both the legal the economic life of the
entity.

1
2
 Examples
Case One: When We Have Gain + No Capital Deficiency
 Example 1: Assume that K, R and L who, share profits and losses
equally, decide to liquidate their partnership. The balance sheet of the
partnership:
KRL partnership
Balance sheet
At November 15,2018
Assets Liabilities and Partners ‘capital
Cash $20,000 Liabilities $50,000
Other assets 150,000 loan payable to R 30,000
K's capital 50,000
R's capital 20,000
L`s capital 30,000
Total $170,000 Total $170,000
Assume that all other assets are sold for $180,000,Liabilities are paid in
full, and the remaining cash is distributed to the partners.
Required:
A) Prepare the statement of realization and liquidation
B) Prepare the journal entries to record the realization of assets and
complete the liquidation of the partnership.
Solution
KRL Partnership
Statement of realization and liquidation
At November 16, 2018
Explanation Assets liabilities Partners` capital
Cash Other K (1/3) R (1/3) L(1/3)
Balances,Nov.16 $20,000 $150,000 $50,000 $50,000 $40,000 $30,000
1-relization of other asset at a $180,000 (150,000) 10,000 10,000 10,000
gain of 30,000

Balances 200,000 0 50,000 60,000 50,000 40,000

3-Payment to Creditors (50,000) (50,000)

Balances 150,000 0 0 60,000 50,000 40,000

5-payment to partners (150,000) (60,000) (50,000) (40,000)

0 0 0 0 0 0

3
 Journal entries
Loan payable to R 30,000
R,Capital 30,000
Cash 180,000
K,Capital 10,000
R,Capital 10,000
L,Capital 10,000
Other assets 150,000
Liabilities 50,000
Cash 50,000
K,Capital 60,000
R,Capital 50,000
L,Capital 40,000
Cash 150,000

Case 2: When We Have loss + No Capital Deficiency

 Example 2: Refer to Example 1, Assume that the non cash assets with a
carrying amount of $150,000 are sold for $114,000
Solution
KRL Partnership
Statement of realization and liquidation
At November 16, 2018
Explanation Assets liabilities Partners` capital
Cash Other K (1/3) R (1/3) L(1/3)
Balances,Nov.16 $20,000 $150,000 $50,000 $50,000 $40,000 $30,000
1-relization of other asset at a $114,000 (150,000) (12,000) (12,000) (12,000)
loss of 36,000

Balances 134,000 0 50,000 38,000 28,000 18,000

3-Payment to Creditors (50,000) (50,000)

Balances 84,000 0 0 38,000 28,000 18,000

5-payment to partners (84,000) (38,000) (38,000) (18,000)

0 0 0 0 0 0

4
 Journal entries
Loan payable to R 30,000
R,Capital 30,000
Cash 114,000
K,Capital 12,000
R,Capital 12,000
L,Capital 12,000
Other assets 150,000
Liabilities 50,000
Cash 50,000
K,Capital 38,000
R,Capital 28,000
L,Capital 18,000
Cash 84,000

Case 3: When We Have loss + Capital Deficiency

 Example 1: Assume that K, R and L who, share profits and losses
20%,40% and 40% decide to liquidate their partnership. The balance sheet
of the partnership:
KRL partnership
Balance sheet
At November 15,2018
Assets Liabilities and Partners ‘capital
Cash $10,000 Liabilities $15,000
Other assets 40,000 K's capital 20,000
R's capital 10,500
L`s capital 4,500
Total $50,000 Total $50,000
Assume that all other assets are sold for $25,000,Liabilities are paid in
full, and the remaining cash is distributed to the partners.Assume all
Partners are Solvent
Required:
A) Prepare the statement of realization and liquidation
B) Prepare the journal entries to record the realization of assets and
complete the liquidation of the partnership.

5
 Solution
KRL Partnership
Statement of realization and liquidation
At November 16, 2018
Explanation Assets liabilities Partners` capital
Cash Other K (20%) R (40%) L(40%)
Balances,Nov.16 $10,000 $40,000 $15,000 $20,000 $10,500 $4,500
1-relization of other asset at a $25,000 (40,000) (3,000) (6,000) (6,000)
loss of 15,000

Balances 35,000 0 15,000 17,000 4,500 (1,500)

3-Payment to Creditors (15,000) (15,000)

Balances 20,000 0 0 17,000 4,500 (1,500)

5-Cash Received from M 1,500 1,500

Balances 21,500 0 0 17,000 4,500 0

6-Payment to K and R (21,500) (17,000) (4,500)
0 0 0 0 0 0

Journal entries
Cash 25,000
K,Capital 3,000
R,Capital 6,000
L,Capital 6,000
Other assets 40,000
Liabilities 15,000
Cash 15,000
Cash 1,500
L,Capital 1,500
K,Capital 17,000
R,Capital 4,500
Cash 21,500

 Example 2: Refer to the above example, Assume that (L) Insolvent

6
 Solution
KRL Partnership
Statement of realization and liquidation
At November 16, 2018
Explanation Assets liabilities Partners` capital
Cash Other K (20%) R (40%) L(40%)
Balances,Nov.16 $10,000 $40,000 $15,000 $20,000 $10,500 $4,500
1-relization of other asset at a $25,000 (40,000) (3,000) (6,000) (6,000)
loss of 15,000

Balances 35,000 0 15,000 17,000 4,500 (1,500)

3-Payment to Creditors (15,000) (15,000)

Balances 20,000 0 0 17,000 4,500 (1,500)

5- Payment to K and R (20,000) (16,500) (3,500)

Balances 0 0 0 500 1000 (1,500)

Additional loss to K and L (500) (1000) 1,500

If L`s deficit is
uncollectible
Journal entries
Cash 25,000
K,Capital 3,000
R,Capital 6,000
L,Capital 6,000
Other assets 40,000
Liabilities 15,000
Cash 15,000
K,Capital 16,500
R,Capital 3,500
Cash 20,000
K,Capital 5,00
R,Capital 1,000
L,Capital 1,500

7
 Assignment
Assume that K, R and L who, share profits and losses equally, decide to
liquidate their partnership. The balance sheet of the partnership:
KRL partnership
Balance sheet
At November 15,2018
Assets Liabilities and Partners ‘capital
Cash $5,000 Liabilities $31,000
Other assets 60,000 K's capital (3) 15,000
R's capital (2) 17,800
L`s capital (1) 1,200
Total $65,000 Total $65,000
Assume that all other assets are sold for $42,000,Liabilities are paid in
full, and the remaining cash is distributed to the partners.
Assuming That
 L solvent
 L insolvent
Required:
C) Prepare the statement of realization and liquidation
D)Prepare the journal entries to record the realization of assets and
complete the liquidation of the partnership.