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MODULE 9
(INSTALLMENT
LIQUIDATION)

COURSE LEARNING OUTCOMES

At the end of the module, you should be able
to:
describe the nature of installment liquidation;
understand the procedures followed under
installment liquidation; and
prepare a Statement of Liquidation and the
accompanying schedule.

FINANCIAL
ACCOUNTING AND
REPORTING

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 The first great gift we can bestow on others is a good example.
Thomas Morell

COURSE INTRODUCTION
This course provides an introduction to accounting, within the context of business and business
decisions. Students explore the role of accounting information in the decision-making process and learn how
to use various types of accounting information found in financial statements and annual reports. This course
starts with a discussion of accounting thought and the theoretical background of accounting and the
accounting profession. The next topic is the accounting cycle - recording, handling, and summarizing
accounting data, including the preparation and presentation of financial statements for merchandising and
service companies. Moreover, it continues with transactions, financial statements, and problems peculiar to
the operations of partnerships and corporations as distinguished from sole proprietorships. Topics include
accounting for partnership formation and operations; share capital issuances, treasury shares, other related
transactions affecting accumulated profits. Emphasis is placed on understanding the reasons underlying basic
accounting concepts and providing students with an adequate background on the recording, classification, and
summarization functions of accounting to enable them to appreciate the varied uses of accounting data.

NATURE OF INSTALLMENT LIQUIDATION

Under the installment liquidation, non-cash assets are sold on a piece-meal basis over an extended
period of time. Cash realized is immediately distributed to partners after fully satisfying creditors' claims or
after setting aside sufficient cash for these liabilities. In as much as cash distributions are made before

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 realizing all non-cash assets and the total gain or loss on realization is not yet determined, it is necessary that
each cash distribution to partners be considered as if it were the last. Remaining unsold assets, therefore,
must be treated as a complete loss, assuming that nothing is realized on them. Also, debit balances capital
and potential capital deficiencies are assumed uncollectible. In this sense, partners' interests are reduced by
cash distributions to a balance proportionate to the partners' profit and loss ratios. Succeeding cash
distributions are then based on the profit and loss ratio.
The liquidation procedures shall be the same as in lump sum liquidation except that:
1. Cash is distributed to partners even before fully realizing non-cash assets and determining total gain
or loss on realization.
2. Restricted interest, in the Accompanying Schedule to Determine Amounts to be Paid to Partners, shall
consist of:
a) Remaining unsold assets
b) Cash withheld (for possible expenses)
c) Debit balances in capital

Illustrative Problem A:
The statement of financial position of the partnership of Arias, Buendia, and Caras on December 31, 2019,
when the partners decide to liquidate follows:

Assets
Cash P200,000
Other Assets 500,000
Total Assets P700,000
Liabilities and Capital
Liabilities P250,000
Arias, Loan 70,000
Arias, Capital (30%) 200,000
Buendia, Capital (40%) 30,000
Caras, Capital (30%) 150,000
Total Liabilities and Capital P700,000

Cash is realized on the other assets as follows, and amounts realized are distributed at the end of each month
to the appropriate parties.
Fiscal Year 2020 Asset Book Value Cash Proceeds
January P300, 000 P260,000
February 200,000 230,000
Instructions:

1. Prepare a statement of liquidation to summarize the course of liquidation schedules in support of

monthly distributions.

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 2. Prepare the journal entries to record the liquidation

Arias, Buendia and Caras

Statement of Liquidation
January to Febraury 2020

Cash Other Liabilities Arias Arias Buendia Caras,

Assets Loan Capital , Capital Capital
Profit and Loss Ratio (30%) (40%) (30%)
Balances before liquidation P200,000 P500,000 P250,000 P70,000 P200,000 P30,000 P150,000
January:
Sale of assets & distribution of
loss 260,000 (300,000) (12,000) (16,000) (12,000)
Balances P460,000 P200,000 P250,000 P70,000 P188,000 P14,000 P138,000
Payment of liabilities (250,000) (250,000)
Balances P210,000 P200.000 P70,000 P188,000 P14,000 P138,000
Payment to partners (per (210,000) (70,000) (95,000) (45,000)
schedule)
Balances P200,000 P93,000 P14,000 P93,000
February:
Sale of assets & distribution of P230,000 (200,000) 9,000 12,000 9,000
gain
Balances P230,000 P102,000 P26,000 P102,000
Payment to partners (230,000) (102,000) (26,000) (102,000)

Arias, Buendia, and Caras Partnership

Schedule to Accompany Statement of Liquidation
Amounts to be Paid to Partners January 31, 2020
Arias Buendia Caras
(30 %) (40 %) (30 %)
Capital balances before cash distribution P l88,000 P 14,000 P 138,000
Add Loans 70,000
Total partners' interest P 258,000 P 14,000 P 138,000

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 Restricted interest - possible loss of
P200,000 if nothing is realized on
remaining unsold assets ( 60,000) ( 80,000) ( 60,000)
P 198,000 ( P 66,000) P 78,000
Restricted interest - additional possible
loss of P66,000 to Arias and Caras if
Buendia is unable to pay his possible
deficiency,
shared in the ratio of 30:30 ( 33,000) 66,000 ( 33,000)
Free interest - payments to partners P l65,000 P 45,000
Payment to apply on:
Loan P 70,000
Capital 95,000 P 45,000
Total cash distributions P l65,000 P 45,000

Based on the schedule, the January payments to partners shall be made to partners Arias and Caras which
shall apply first on the loan an then on capital.
Journal entries to record the liquidation:
January Cash 260,000
Arias, Capital 12,000
Buendia, Capital 16,000
Caras, Capital 12,000
Other Assets 300,000
Sale of assets and distribution of loss.

Liabilities
Cash 250,000
Payment to liabilities 250,000

Arias, Loan 70,000

Arias, Capital 95,000
Caras, Capital 45,000
Cash 210,000
Payment to partners.

February Cash 230,000

Other Assets 200,000
Arias, Capital 9,000
Buendia, Capital 12,000
Caras, Capital 9,000
Sale of assets and distribution of gain.

Arias, Capital 102,000

Buendia, Capital 26,000
Caras, Capital 102,000
Cash 230,000

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 Final payment to partners.

PROGRAM OF CASH DISTRIBUTION

Partners may desire to determine in advance as to whom cash distributions shall be made as cash may
become available. This procedure requires the preparation of a program called Cash Priority Program,
Cash Predistribution Plan or Program of Priorities. The program is prepared prior to liquidation, that is,
before cash becomes available for distribution. Cash realized on other assets is distributed based on the
program without the need for the preparation of the schedule previously used to accompany the statement of
liquidation. The steps in the preparation of the program are the following:

1. Determine total partners' interest; that is, capital balances before liquidation plus loans by partners
to the partnership less advances by the partnership to the partners.

2. Divide total partners' interest by their profit and loss ratio to get each partner's loss absorption
capacity. The loss absorption capacity is the maximum amount of loss that a partner may absorb and
may eliminate any partner in any cash distribution. A partner, therefore, with the highest loss
absorption balance bas the first priority on cash distributions.

3. Once 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. Each
reduction in the loss absorption balance requires payment to partners computed by multiplying the
amount of reduction by the partner's profit and loss ratio.

4. After the partners' loss absorption balances are made equal, cash distributions are made in the profit
and loss ratio.
Using the same information for the partnership of Arias, Buendia, and Caras, the cash priority program
follows:

Aris, Buendia and Caras Partnership

Cash Priority Program
January 1, 2020

Payments to
Arias Buendia Caras Arias Buendia Caras
Capital balances before P200,000 P30,000 P150,000
liquidation
Add Loans 70,000
Total partners’ interest P270,000 P30,000 P150,000
Divided by the profit & loss ratio
30% 40% 30%
Loss absorption capacity P900,000 P75,000 P500,000
Allocation I: Cash to Arias
reducing his loss absorption
balance to an amount reported

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 for Caras; reduction of
P400,000 requires payment of
30% x P400,000
(400,000) P120,000
P500,000 P75,000 P500,000
Allocation II: Cash to Arias and
Caras to reduce their loss
absorption balances to amount
reported for Buendia; reduction
of P425,000 requires payment as
follows:
To Arias, 30% x P425,000
(425,000) 127,500
To Caras, 30% x P425,000 (425,000) 127,500
P75,000 P75,000 P75,000 P247,500 - P127,500
Allocation III. Further cash
distributions are to be made in
the P & L ratio.

A summary of the information provided by the cash priority program follows:

After fully satisfying liabilities:
1. The first P 120,000 cash available to partners should be paid to Arias.

2. The next P255, 000 should be paid to Arias and Caras in the ratio 30:30.

3. Amounts in excess of P375, 000 should be paid to Arias, Buendia, and Caras in the profit and loss
ratio of 30:40:30.
Application of the cash priority program on the installment distribution upon liquidation of the partnership of
Arias, Buendia, and Caras shall be:

Installment Distribution
January 31, 2020

Amount Arias Buendia Caras

Cash Available P210,000
Allocation I – Payable to Arias

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 120,000 P120,000
Allocation II – Payable to Arias
and Caras, 30:30 P90,000 45,000
P165,000 - P45,000

Installment Distribution
February 28, 2020

Amount Arias Buendia Caras

Cash Available P230,000
Allocation II – Balance P255,000
– P90,000 payable to Arias and
Caras, 30:30 165,000 P82,500 P82,500
Allocation III – Payable to Arias,
Buendia and Caras, 30:40:30
P65,000 19,500 P26,000 19,500
P102,000 P26,000 P102,000

Key Points. The same amount of cash distributions per accompanying schedule to the statement of
liquidation were arrived at in January and February. Also, when cash available for distribution is not
sufficient to cover an allocation, the partners share such insufficient cash on the basis of their profit and loss
ratio.
There may be instances wherein the gain or loss related to the sale of individual assets during the course of
liquidation is difficult to determine. In such cases, no gain or loss is recognized on realization and cash is
recorded equal in amount to the book value of the assets sold. The total gain or loss on realization is
recognized in the final realization of assets and it is the difference between the cash realized and the book
value of the remaining assets sold. Such gain or loss is then carried to capital.

Reference: Baysa, J.T. and Lupisan, M.Y. (2018). Accounting for Partnership and Corporation. Manaluyong
City: Millenium Books, Inc.

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 Practice Exercise 9-1. (Distribution of Cash)
Aguilar and Bernardo share earnings in a 60:40 ratio. They have decided to liquidate their partnership. A
portion of the assets has been sold but other assets with a carrying amount of P84,000 still must be realized.
All liabilities have been paid, and cash of P40,000 is available for distribution to partners. The capital
accounts show balances of P80,000 for Aguilar and P44,000 for Bernardo.
Instructions: Determine how should the cash of P40,000 be divided.

Practice Exercise 9-2. (Safe Cash Distribution)

When Conde and Dalmacio, partners who share earnings equally, were incapacitated in an airplane accident, a
liquidator was appointed to wind up their business. The accounts showed cash, P70,000; other assets,
P220,000; liabilities, P40,000; Conde's capital, Pl42,000; and Dalmacio's capital, PI08,000. Because of the
highly specialized nature of the non-cash assets, the liquidator anticipated that considerable time would be
required to dispose them. The expenses of liquidating the business (advertising, rent, travel, etc.) are
estimated at P20,000.
Instructions: Determine the amount of cash that can be distributed safely to each partner at this point.

Practice Exercise 9-3. (Program of Cash Distribution)

Capital and loan balances for partners Estela, Fajardo, Gomez who share profits 40%, 40%, and 20%
respectively, are as follows just before liquidation :

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 Instructions:
1. Prepare a schedule becomes available cash will be distributed to partners as it becomes available
2. How much must partnership realize on the sale of its assets if Halili is to receive P10,000 as final
settlement
3. If Halili receives a total of P3, 200 in cash, how much will Jacinto have received at this point?
4. If Halili is personally insolvent and Ibanez receives a total of P 1,800 in final liquidation of the
firm, what was the partnership loss on liquidation?

SUMMATIVE ASSESSMENT (GRADED ACTIVITY) – Cash Priority Program; Statement of

Liquidation
On January 1, 2020, partners Kho, Lagman and Magno decided to liquidate their partnership. Prior to the
liquidation, the partners had cash of P 12,000, non-cash assets of Pl46,000, liabilities to outsiders of P36,000
and a note payable to Partner Magno of P 14,000. The capital balances of the partners were: Kho - P36,000;
Lagman - P54,000; Magno - P18,000. The partners share profits and losses in the ratio of 3:3:4, respectively.
During January 2020, the partnership received cash of P30,000 from the sale of assets with a book value of
P38,000 and paid P3,600 of liquidation expenses. During February, the partnership realized P44,000 from the
sale of assets with a book value of P35,000 and paid liquidation expenses of P8,400. During March, the
remaining assets were sold for P36,000. The partners agreed to distribute cash at the end of each month.
Instructions:
1. Prepare a cash priority program.

2. Prepare a statement of liquidation.

3. Prepare the necessary journal entries to ·record the liquidation process.

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 End of Module 9

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