INSTALLMENT LIQUIDATIONSTEPS IN LIQUIDATION BY INSTALLMENT

Record the sales of non-cash assets and the distribution of gain or loss on realization.

Record liquidation expenses by decreasing the cash and the partners capital accounts based on their profit and loss ratio.

Record the payment of liabilities. If liabilities are not to be paid fully, an equal amount of cash should be set aside for the unpaid debts and future liquidation expenses and should not be distributed to the partners.

If there is available cash to the partners but is not sufficient, prepare a schedule of distribution of safe payment observing the rules previously mentioned above.

Repeat steps 1 4 until the final sale when the rules for lump-sum liquidation should be observed.

INSTALLMENT LIQUIDATIONIllustrative Problem

The Statement of Financial Position of the partnership of Erika, Eunice and Eliza on December 31, 2010, when the partners decide to liquidate follows: Assets Liabilities and Partners EquityCash. . . . . . . . . . . . . . .P200,000 Accounts Payable. . . . . . . .P 250,000Other Assets. . . . . . . . . 500,000 Erika, Loan. . . . . . . . . . . . 70,000 Erika, Capital (30%). . . . . .200,000 Eunice, Capital (40%). . . . 30,000 Eliza, Capital (30%). . . . . . 150,000Total Assets. . . . . . . . . P700,000 Liabilities and Partners Equity P700,000 =========== ==========Cash is realized on the other assets and the amounts realized are distributed at the end of each month to the appropriate parties as follows: Month Book Value ProceedsJanuary P300,000 P260,000February200,000230,000

INSTALLMENT LIQUIDATIONSolution3E CompanyStatement of LiquidationJanuary 1-February 28, 2011

Other Loans- Capital Cash Assets Liabilities Erika Erika Eunice Eliza Balance before liquidation200,000 500,000 250,000 70,000 200,000 30,000 150,000 January-Realization260,000 ( 300,000) ( 12,000) ( 16,000) ( 12,000) Balances460,000 200,000 250,000 70,000 188,000 14,000 138,000 Payment of Liabilities ( 250,000) ( 250,000) Balances210,000 200,000 70,000 188,000 14,000 138,000 Payment to Partners (Sch. 1) ( 210,000) ( 70,000) ( 95,000) ( 45,000) Balances 200,000 93,000 14,000 93,000 February-Realization230,000 ( 200,000) 9,000 12,000 9,000 Balances230,000 102,000 26,000 102,000 Final Settlement to Partners ( 230,000) (102,000) ( 26,000) (102,000)

INSTALLMENT LIQUIDATIONSolution3E CompanySchedule to Accompany Statement of LiquidationJanuary 31, 2011

Erika Eunice ElizaCapital balances before cash distribution 188,000 14,000 138,000Add: Loans 70,000Total Partners Interest 258,000 14,000 138,000Restricted Interest Possible Loss of P 200,000 if nothing is realized on remaining unsold assets( 60,000)( 80,000)( 60,000) 198,000( 66,000) 78,000Restricted Interest Additional possible loss of P 66,000 to Erika and Eliza if Eunice is unable to pay her possible deficiency, shared in the ratio of 30:30( 33,000) 66,000( 33,000)Free Interest Payments to partners 165,000 45,000

Payment to apply On:Loan 70,000Capital 95,000 45,000Total Cash Distributions165,000 45,000

INSTALLMENT LIQUIDATIONSolutionJournal Entries 2011 JanuaryCash260,000Erika, Capital 12,000Eunice, Capital 16,000Eliza, Capital 12,000 Other Assets 300,000To record sale of assets and distribution of loss

Accounts Payable250,000 Cash 250,000To record payment of accounts payable

Erika, Loan 70,000Erika, Capital 95,000Eliza, Capital 45,000 Cash 210,000To record final settlement to partners

INSTALLMENT LIQUIDATIONSolutionJournal Entries 2011 FebruaryCash230,000 Other Assets 200,000 Erika, Capital 9,000 Eunice, Capital 12,000 Eliza, Capital 9,000To record sale of assets and distribution of gain

Erika, Capital102,000Eunice, Capital 26,000Eliza, Capital102,000 Cash 230,000To record final settlement to partners

INSTALLMENT LIQUIDATIONPROGARM OF CASH DISTRIBUTION/CASH PRIORITY PROGRAM

May be prepared in advance as to whom cash distribution shall be made as cash becomes available Requires the preparation of a program called Cash Priority Program, Cash Predistribution Program, or Program of Priorities Procedures:

1. Determine the total partners interest 2. Divide the total partners interest by their P/L ratio to get each partners loss absorption capital 3. When the loss absorption balances are determined, allocations may now be made, starting with Allocation I, wherein the highest loss absorption balance is reduced to the next highest 4. Once the partners loss absorption balance becomes equal, cash distributions are made in the P/L ratio

INSTALLMENT LIQUIDATIONIllustrative Problem

The Statement of Financial Position of the partnership of Erika, Eunice and Eliza on December 31, 2010, when the partners decide to liquidate follows: Assets Liabilities and Partners EquityCash. . . . . . . . . . . . . . .P200,000 Accounts Payable. . . . . . . .P 250,000Other Assets. . . . . . . . . 500,000 Erika, Loan. . . . . . . . . . . . 70,000 Erika, Capital (30%). . . . . .200,000 Eunice, Capital (40%). . . . 30,000 Eliza, Capital (30%). . . . . . 150,000Total Assets. . . . . . . . . P700,000 Liabilities and Partners Equity P700,000 =========== ==========Cash is realized on the other assets and the amounts realized are distributed at the end of each month to the appropriate parties as follows: Month Book Value ProceedsJanuary P300,000 P260,000February200,000230,000

INSTALLMENT LIQUIDATIONUsing the same problem as illustrated previously3E CompanyCash Priority ProgramJanuary 1, 2011

Payments to Erika Eunice Eliza Erika Eunice Eliza Balance before liquidation 200,000 30,000 150,000 Add: Loans 70,000 Total Partners Equity 270,000 30,000 150,000 Divide by Profit and Loss Ratio 30% 40% 30% Loss Absorption Capacity 900,000 75,000 500,000 Allocation I: Cash to Erika reducing her loss absorption balance to an amount reported for Eliza; reduction of P400,000 requires payment of 30% x P 400,000 (400,000) 120,000 500,000 75,000 500,000 Allocation II: Cash to Erika and Eliza to reduce their loss absorption balances to amount reported for Eunice; reduction of P 425,000 requires payment as follows: To Erika: 30% x P 425,000(425,000)127,500 To Eliza: 30% x P 425,000(425,000)127,500 75,000 75,000 75,000247,500127,500 Allocation III: Further cash distributions are to be made in the P/L Ration

INSTALLMENT LIQUIDATIONUsing the same problem as illustrated previously

Installment DistributionJanuary 31, 2011

Amount Erika Eunice Eliza Cash Available 210,000 Allocation I: Payable to Erika 120,000 120,000

Allocation II: Payable to Erika and Eliza 90,000 45,000 45,000 165,000 45,000

Installment DistributionFebruary 28, 2011

Amount Erika Eunice Eliza Cash Available 230,000 Allocation II: Balance P 255,000 P 90,000 payable to Erika and Eliza 165,000 82,500 82,500

Allocation III: Payable to Erika, Eunice and Eliza at P/L ratio 65,000 19,500 26,000 19,500 102,000 26,000 102,000

INSTALLMENT LIQUIDATIONIllustration 2Del Rosario, Modesto and Paterno divide profits 60%, 25% and 15%, respectively. A balance sheet on June 30, 2011, just before partnership liquidation, showed the following balances:DMP CompanyStatement of Financial PositionJune 30, 2011 Assets Liabiliies and CapitalCash P 50,000Liabilities P 350,000Noncash assets925,000Del Rosario, Capital 450,000Modesto, Capital 100,000Paterno, Capital 75,000Total Assets P975,000Total Liab. & Capital P975,000==========Certain assets were sold in July at book value of P 50,000 and available cash is distributed to appropriate parties. Remaining assets were sold in August for P 150,000 and cash is distributed in a final settlement.

INSTALLMENT LIQUIDATIONDel Rosario, Modesto and PaternoCash Priority ProgramJune 30, 2011

Payments to Del Rosario Modesto Paterno Del Rosario Modesto Paterno Balance before liquidation 450000 100,000 75,000

Total Partners Equity 450,000 100,000 75,000 Divide by Profit and Loss Ratio 60% 25% 15%

Loss Absorption Capacity 750,000 400,000 500,000 Allocation I: Cash to Del Rosario reducing her loss absorption balance to an amount reported for Paterno; reduction of P250,000 requires payment of 60% x P 250,000 (250,000) 150,000* 500,000 400,000 500,000 Allocation II: Cash to Del Rosario and Paterno to reduce their loss absorption balances to amount reported for Modesto; reduction of P 425,000 requires payment as follows: To Del Rosario: 60% x P 100,000(100,000) 60,000** To Eliza: 15% x P 100,000(100,000) 15,000** 400,000 400,000 400,000210,000 15,000 Allocation III: Amounts in excess of P 225,000 *** based on P/L * P 250,000 x 60% = P 150,000 ** P 100,000 x 60% = P 60,000; P 100,000 x 15% = P 15,000*** P 210,000 + P 15,000 = P 225,000

For the month of July 2011Sale of noncash assets

Cash500,000Noncash assets 500,000Payment of liabilities

Liabilities350,000Cash 350,000Distribution of cash to partners

Del Rosario, Capital190,000Paterno, Capital 10,000Cash 200,000Computation:Del RosarioPaterno TotalPriority 1: To Del Rosario 150,000 150,000Priority 2: 60:15 ratioDel Rosario: P 50,000 x 60/75 40,000 40,000Paterno : P 50,000 x 15/75 10,000 10,000INSTALLMENT LIQUIDATION

For the month of August 2011Sale of noncash assets

Cash150,000Del Rosario, Capital 95,000Modesto, Capital 68,750Paterno, Capital 41,250Noncash assets 150,000

Distribution of cash to partners

Del Rosario, Capital 95,000Modesto, Capital 31,250Paterno, Capital 23,750Cash 155,000INSTALLMENT LIQUIDATION

Computation: Del Rosario Modesto Paterno TotalPriority 2: Balance of P 25,000Del Rosario: P 25,000 x 60/75 20,000Paterno : P 25,000 x 15/755,000 25,000Priority 3: To all partners in the ratio of 60:25:15Del Rosario: P 125,000 x 60% 75,000Modesto : P 125,000 x 25% 31,250Paterno : P 125,000 x 15% 18,750 125,000Total 95,000 31,250 23,750 150,000INSTALLMENT LIQUIDATION