LEARNING UNIT 5

5
The liquidation of a partnership

Learning outcomes .............................................................................................................. 119

Key concepts........................................................................................................................ 119
5.1 Introduction ................................................................................................................. 120
5.2 Liquidation methods ................................................................................................... 120
5.3 The liquidation account .............................................................................................. 120
5.4 Accounting procedures to record the simultaneous liquidation of a partnership ...... 121
5.5 Accounting procedures to record the piecemeal liquidation of a partnership ........... 126
5.6 Exercises and solutions.............................................................................................. 131
Self-assessment .................................................................................................................. 134

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 Learning outcomes

After studying this learning unit, you should be able to do the following:

• Describe the meaning of the term "liquidation" from the perspective of this learning unit.
• Distinguish between a simultaneous liquidation and a piecemeal liquidation.
• Apply the accounting procedure in the case of a simultaneous liquidation of a partnership
with
- a profit on liquidation
- a loss on liquidation, where all of the partners have sufficient personal funds to
cover the shortage in their capital account
- a loss on liquidation, where one or more of the partners do not have sufficient personal
funds to cover the shortfalls in their capital accounts and where the capital deficit
must be apportioned to the remaining solvent partners according to their profit-sharing
ratio

• Apply the accounting procedure in the case of a piecemeal liquidation of a partnership

and calculate the interim repayment of available cash between partners according to the
loss-absorption-capacity method.

Key concepts

• Dissolution
• Liquidation
• Liquidation account
• Simultaneous liquidation
• Piecemeal liquidation
• Loss-absorption-capacity method

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5.1 Introduction

The liquidation of a partnership means a complete dissolution and cessation of business

activities of a partnership business. It is a form of dissolution that results in the termination of
the business activities of a solvent partnership, whereas sequestration is regarded as a form
of dissolution of an insolvent partnership. In this module, the focus is on the accounting
procedures that pertain to a dissolution of a solvent partnership.

When a partnership is dissolved, the assets of the business are sold and the liabilities settled.
All profits and losses arising from the liquidation process are transferred to the partners
according to their profit-sharing ratio. Once the liquidation procedure is complete, the only
items that remain the books of the business are the cash and owners’ equity. The balance on
each partner’s capital account represents the amount due to be paid to each partner on
liquidation.

A partnership can be dissolved simultaneously or piecemeal. A simultaneous liquidation

occurs when the assets of a partnership are sold simultaneously or over a relatively short
period. This would normally happen to a partnership which already has discontinued its trading
activities. On the other hand, a piecemeal liquidation occurs when a partnership continues
with its business activities, whilst steadily scaling down its operations until all assets are sold,
and liabilities settled.

5.2 The liquidation account

With a simultaneous liquidation, a single liquidation account is prepared. All assets, contra
assets and all liabilities are transferred to the liquidation account on the date the liquidation
commences. The liquidation of the assets and the settlement of liabilities are recorded in this
account. Any other expenses or income received on liquidation of the assets and settlement
of the liabilities are also recorded in the liquidation account and the balance of the liquidation
account (profit or loss on liquidation) is transferred to the partners’ capital accounts in their
profit-sharing ratio. After recording the amounts received or paid in the bank account, a
positive bank balance can be used to refund the partners’ capital accounts. Otherwise, if it is
a negative bank balance, the partners will be expected to settle the amount owing as it will
also be reflected as a debit balance in their capital accounts.

In the case of a piecemeal liquidation, a liquidation account is prepared for each phase of the
liquidation process. Remember that the partnership carries on with its activities on a
decreasing scale. As is the case with simultaneous liquidation, the profit or loss determined in
the liquidation account in each phase is closed off to the partners’ capital accounts according
to their profit-sharing ratio.

5.3 Accounting procedure to record the simultaneous liquidation of

a partnership

The following steps are to be followed when a partnership is dissolved according to the
simultaneous liquidation method:

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 • Close off the balances of the drawings and current accounts to the capital accounts on
the date the simultaneous liquidation commences.
• Close off the balances of the goodwill and revaluation surplus account to the partners’
capital accounts according to their profit-sharing ratio.
• Prepare the liquidation account and record the following liquidation transactions in this
account:
➢ Transfers of assets and liabilities thereto
➢ Proceeds on sale of assets and settlement of liabilities
➢ Assets taken over by partners
• Record the once-off settlement of the capital accounts of the partners. Note that after
recording the liquidating transactions, the capital accounts of the partners may not
necessarily be in their profit-sharing ratio due to agreed assets or liabilities taken over
by the partners and the current and drawings accounts not being in the profit-sharing
ratio, and so forth.

5.4 Insolvent partner

Before we look at the piecemeal liquidation of a partnership, let us deal with the issue that
pertains to the insolvency of a partner in the process of liquidating a partnership business. In
both instances, whether a partnership is dissolved simultaneously or piecemeal, one or more
of the partners may become insolvent. This occurs when the capital account of a partner ends
with a debit balance after making all adjustments (including the share of any profit or loss on
sale of assets). In such cases the partner is expected to repay to the partnership the amount
of the deficit in his/her capital account. If the partner is unable to bring in the necessary cash
to make up the deficiency, he/she is referred to as an insolvent partner. If this is the case,
the remaining partners naturally have to bear the loss of the shortfall in the insolvent partner’s
capital account.

If a partner is insolvent and cannot make payment to make good a debit balance on his/her
capital account, the rule laid down in the case of Garner vs Murray is suggested. The Garner
vs Murray rule is extracted from a 1904 English case that involved Garner, Murray and Wilkins,
where Wilkins was deemed to be insolvent. It was held in that case that subject to any
agreement to the contrary, such a debit balance deficiency was to be shared by the other
partner not in their profit and loss sharing ratio but in “the ratio of their last agreed capitals”.
The Garner vs. Murray rule is applicable when there is no agreement between the partners
for sharing the deficiency in the capital account of insolvent partner. The rule stipulates that
liquidation loss should be divided in the profit-sharing ratio in the usual manner. The solvent
partners should bring in cash to make good the loss on liquidation. The final debit balance of
the insolvent partner should be distributed amongst the solvent partners in proportion in their
last capital account balances, after drawings accounts, current accounts, goodwill and
revaluations have been transferred to the partners’ capital accounts.

It is an open debate whether or not the Garner vs Murray conclusion could be applied in South
Africa. In South Africa, there has been no similar court case; as a result the issue is yet to be

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resolved. The general opinion is that this rule is contrary to recognised accounting principles,
namely, that all profits and losses of a partnership have to be divided in accordance with the
profit-sharing ratio. In this module, the share of a debit balance in the partner’s capital account
will be apportioned to the solvent partners according to their (solvent partners) profit-sharing
ratio.

Activity 5.1

Iyaya, Nestum and Zombo are in partnership, trading as Abashante and sharing profits and
losses in the ratio of 2:2:1. On 30 June 20.1, the partners decided to dissolve the partnership.

The following information is extracted from the accounting records of Abashante at that date:

Balances as at 30 June 20.1

R
Sundry assets ...................................................................................................... 6 000
Capital: Iyaya ...................................................................................................... 3 000
Nestum ................................................................................................... 300
Zombo .................................................................................................... 1 000
Bank ..................................................................................................................... 900
Trade payables .................................................................................................... 2 600

Sundry assets were sold for R3 000. Nestum was insolvent and unable to contribute to her
deficit.

Required:

Prepare the journal entries required to close off the books of the partnership. (All cash items
should also be shown in the form of journal entries.)

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 Feedback 5.1

ABASHANTE
JOURNAL ENTRIES
Debit Credit
R R
20.1
June 30 Liquidation account 6 000
Sundry assets 6 000
Transfer of sundry balance
Bank 3 000
Liquidation account 3 000
Sale of sundry assets
Capital: Iyaya (R3 000 x 2/5) 1 200
Capital: Nestum (R3 000 x 2/5) 1 200
Capital: Zombo (R3 000 x 1/5) 600
Liquidation accoun 3 000
Transfer and division of losses at dissolution in the profit-
sharing ratio
Capital: Iyaya [(R3 000 x 2/5) - R300] x 2/3 600
Capital: Nestum [(R3 000 x 2/5) - R300] x 1/3 300
Capital: Zombo 900
Transfer of Nestum’s deficit to Iyaya and Zombo in the profit-
sharing ratio.
Trade payables 2 600
Capital: Iyaya 1 200 6 500
Capital: Zombo 100
Bank 3 900
Sundry payments in order to close the books

When the cash received upon liquidation of the assets is insufficient to pay the creditors in full,
the partners are jointly and individually responsible for all the debts of the partnership. This
means that, if the proceeds of the dissolution of the partnership are insufficient to settle all
debts to creditors, the partners are obliged to provide funds from their private resources to
make up the deficit. Remember that all creditors have to be paid in full, irrespective of the
proceeds received on sale.

If there is a deficit in the cash required to pay the creditors, the assumption would be that there
would also be a pronounced deficit at dissolution, because it would be unthinkable that there
could be a deficit in the cash. In this case, the partners' capital accounts would naturally be
debited with their respective share in the loss at dissolution. This transfer of the loss would
cause at least one of the partner’s capital accounts to show a debit balance, and it is quite
possible that all the partners’ capital accounts would show negative balances. In this event,
the partners would each have to pay to the partnership the amount of the deficit in their capital
accounts. This payment would then provide the necessary cash to pay the creditors in full. In
these circumstances there would be no cash available for distribution to partners.

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 Activity 5.2

Penn and Penzil were in partnership for 38 years, trading as Manual Accounting Services,
and shared profits or losses equally. Owing to a steady decline in their clientele and profits,
they decided to liquidate the partnership at a public auction on 30 June 20.15. On this date
and just prior to the auction, the following trial balance for Manual Accounting Services was
prepared:

MANUAL ACCOUNTING SERVICES

TRIAL BALANCE AS AT 30 JUNE 20.15
Debit Credit
R R
Land and buildings at valuation 500 000
Furniture at cost 102 000
Vehicles at cost 215 000
Accumulated depreciation: Furniture 20 000
Accumulated depreciation: Vehicles 15 000
Goodwill 120 000
Inventory 45 000
Trade receivables control 75 000
Allowance for credit losses 7 000
Capital: Penn 150 000
Capital: Penzil 80 000
Current account: Penn 30 000
Current account: Penzil 10 000
Revaluation surplus 270 000
Mortgage (in respect of land and buildings) 300 000
Bank overdraft 90 000
Trade payables control 145 000
1 087 000 1 087 000

Additional information

On 30 June 20.15 the following transactions took place:

1. The land and buildings were sold for R849 500 cash.
2. The furniture was sold for R60 200 cash.
3. The inventory was sold for R50 050 cash.
4. All the debtors (as recorded in the above trial balance) settled their accounts and
received a discount of 20%.
5. A previous client, whose outstanding debtor's account of R650 was written off as
irrecoverable, paid R500 to the partnership.
6. There were two vehicles in the partnership. Penn took over one of these vehicles at a
fair value of R60 000 and Penzil took over the other at its fair value of R70 000.
7. The liquidation costs amounted to R10 000 and were paid.
8. The mortgage was paid in full.
9. All creditors were paid. A settlement discount of R29 000 was received.

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10. Penzil paid R250 for a farewell luncheon out of the funds of the partnership.

REQUIRED

Prepare the liquidation account, the bank account, and the partners' capital accounts in the
general ledger of Manual Accounting Services to record its liquidation on 30 June 20.15.

NB: Show all calculations.

Feedback 5.2

Dr Liquidation account Cr
20.15 R 20.15 R
Jun Jun
30 Land and buildings at valuation 500 000 30 Accumulated depreciation:
Furniture at cost 102 000 Furniture 20 000
Vehicles at cost 215 000 Accumulated depreciation:
Inventory 45 000 Vehicles 15 000
Trade receivables control 75 000 Mortgage 300 000
Bank (Liquidation costs) 10 000 Trade payables control 145 000
Bank (Mortgage) 300 000 Allowance for credit losses 7 000
Bank (Trade payables control) 116 000 Bank (land and buildings) 849 500
R(145 000 – 29 000) Bank (Furniture) 60 200
Bank (Luncheon) 250 Bank (Inventory) 50 050
Capital: Penn ➁ 137 000 Bank (Trade receivables
Capital: Penzil ➁ 137 000 control) ➀ 60 000
Bank (Credit losses recovered) 500
Capital: Penn (Vehicle) 60 000
Capital: Penzil (Vehicle) 70 000
1 637 250 1 637 250

Calculations

➀ Cash received from debtors

Discount = R75 000 x 20% = R15 000
Cash received = R(75 000 – 15 000) = R60 000

➁ Apportioned of profit made on liquidation

R(1 637 250❶ - 1 363 250❷) = R274 000❸
Penn: R274 000 x ½ = R137 000
Penzil: R274 000 x ½ = R137 000
❶ The total of the credit side
❷ The total of the debit side before the apportionment of the profit
❸ The balancing amount that must be apportioned to the partners according to
their profit-sharing ratio.

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Dr Bank Cr
20.15 R 20.15 R
Jun 30 Liquidation account: 849 500 Jun 30 Balance b/d 90 000
(Land and buildings) Liquidation account: 10 000
Liquidation account: 60 200 (Liquidation costs)
(Furniture) Liquidation account: 300 000
Liquidation account: 50 050 (Mortgage)
(Inventory) Liquidation account: 116 000
Liquidation account: 60 000 (Trade payables control)
(Trade receivables control) Liquidation account: 250
Liquidation account: 500 (Luncheon)
(Credit losses recovered) Capital: Penn* 272 000
Capital: Penzil* 232 000
1 020 250 1 020 250

* The settlement of the outstanding balances on the capital accounts of Penn and Penzil. The capital accounts
must first be prepared to determine these balances. Note how the balance of the bank account (prior to this
settlement) is equal to the sum of the outstanding capital account balances (R272 000 + R232 000 = R504 000).

Dr Capital: Penn Cr
20.15 R 20.15 R
Jun 30 Current account: Penn 30 000 Jun 30 Balance b/d 150 000
Liquidation account: 60 000 Revaluation surplus 135 000
(Vehicles) (R270 000 x ½)
Goodwill (R120 000 x ½) 60 000 Liquidation account 137 000
Bank* 272 000
422 000 422 000

* Balancing amount (outstanding balance)

Dr Capital: Penzil Cr
20.15 20.15 R
Jun 30 Liquidation account: 70 000 Jun 30 Balance b/d 80 000
(Vehicles) Current account: Penzil 10 000
Goodwill (R120 000 x ½) 60 000 Revaluation surplus 135 000
Bank* 232 000 (R270 000 x ½)
Liquidation account 137 000
362 000 362 000

* Balancing amount (outstanding balance)

Note that the remaining cash after liquidation is not apportioned to the capital accounts of the
partners according to their profit-sharing ratio, but according to their outstanding capital
account balances.

5.5 Accounting procedure to record the piecemeal liquidation of a

partnership

In the previous section, the discussion on the dissolution of a partnership focused on the
simultaneous method of liquidating a partnership. The approach assumed that all the assets
of the partnership were being sold simultaneously. The simultaneous liquidation of partnership
may be an oversimplification of what happens in practice.

In practice, when a partnership is dissolved, it is not always possible to realise the assets
within a relatively brief period. The partners may therefore decide to liquidate their business
piecemeal, in which case the business continues normally, but on a steadily decreasing scale.

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This crates the opportunity to sell inventories and other assets at the most favourable prices
and to collect the receivables in the ordinary course of business.

As the assets in the business are sold, a cash fund will accumulate, which will not be used for
business purposes again. These funds are the property of the partners and they are entitled
to make periodic capital withdrawals from the funds. In order to ensure that the respective
interests of the partners are not prejudiced in any way, these periodic capital withdrawals have
to take place in a very orderly and systematic way.

There are two recognised methods according to which capital repayments can be made,
namely the surplus capital method and the loss-absorption-capacity method. Under the
surplus capital method, the initial amounts repaid to partners are in order to reduce their
capitals to amounts such that these are in the same ratio as that in which they share profits
and losses. The amounts that are repaid to each partner are referred to as “repayment of
surplus capital”. Once the surplus capital has been paid to partners, the remaining capital,
known as “base capital”, can be repaid. According to the loss-absorption-capacity method,
the interim repayments of the available cash to the partners are calculated by determining to
what extent each of the balances of the capital accounts can absorb the maximum anticipated
loss during the liquidation of the partnership, by apportioning such losses to the capital
accounts according to the profit-sharing ratio of the partners. The available cash is then repaid
according to these anticipated balances of the capital accounts. This calculation must be
repeated each time cash becomes available for interim repayments.

In this module, the focus is on the loss-absorption-capacity method to dissolve the partnership
piecemeal.

5.5.1 Loss-absorption-capacity method

The loss-absorption-capacity method assumes that the assets that are unrealised after the
first realisation are worthless. The resultant deficit is divided among the partners in their
profit-sharing ratio and every resultant debit balance which appears in any partner’s capital
account is redistributed among the remaining partners in accordance with their profit-sharing
ratio.

The following steps will assist in guiding the process to be followed when a partnership is
liquidated piecemeal, following the loss-absorption-capacity method:

➢ Open the applicable accounts in columnar form with the balances as at the
commencement of liquidation.
➢ Close off the balances of the goodwill and revaluation surplus account to the
partners' capital accounts according to their profit-sharing ratios.
➢ Record the sale of assets, apportion the profits or losses that arise after each sale
of assets to partners’ capital accounts according to their profit-sharing ratios.
➢ Record the payment of expenses as they arise and settle the liabilities.
➢ Set aside amounts that will be required to settle any future expenses.

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 ➢ Once all liabilities have been settled and future expenses have been provided for,
draw up a liquidation schedule to determine the amounts that are repayable to
partners out of the available cash.
➢ Assume the assets that have not yet been sold as worthless and apportion the
“potential deficit” to the partners in their profit-sharing ratios.
➢ Any deficit (debit balance) that may arise in a partner’s capital account must be
transferred to the remaining partners according to their respective profit-sharing
ratios.
➢ Transfer the amount as calculated in the liquidation schedule to the partners’ capital
accounts. This amount will equal the remaining cash balance, which will be used to
settle the amounts in credit in their capital accounts.

Activity 5.3

Sauce, Age and Roll are in a partnership, sharing the profits or losses in the ratio of 5:3:2
respectively. The following information is taken from the accounting records of the partnership
at 31 December 20.14:

Balances as at 31 December 20.14

R
Capital: Sauce .................................................................................................. 7 000
Capital: Age ...................................................................................................... 14 000
Capital: Roll ...................................................................................................... 18 000
Equipment at carrying amount ......................................................................... 42 000
Goodwill............................................................................................................ 3 000
Bank ................................................................................................................. 5 000
Trade payables control .................................................................................... 11 000

The partners decided to liquidate the partnership piecemeal as from 1 January 20.15. The
net proceeds will be apportioned amongst the partners in such a way that no partner will find
it necessary to repay any amount that was previously received.

Liquidation of assets Carrying amount Proceeds

R R
1 February 20.15 13 000 9 000
2 July 20.15 29 000 33 000

REQUIRED

a) Calculate the amount of cash that is available for an interim repayment after the first
liquidation of the assets and the settlement of the liabilities on 1 February 20.15.

b) Calculate how the cash as determined in (a) must be repaid to the partners by applying
the loss-absorption-capacity method. Show all calculations in a columnar format.

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Application of the loss-absorption-capacity method in steps:

Step A: Determine the general ledger account balances in the partnerships' books on
the date that cash becomes available for interim payments.

Step B: Debit any contingent/budgeted expenses in the partners' capital accounts

according to their profit-sharing ratio. Credit Bank.

Step C: Close off all unsold assets to the capital accounts according to the profit-
sharing ratio. We assume the unsold assets have no recoverable amount.

Step D: Close off any anticipated capital deficit to the capital accounts of the partners
who have favourable anticipated capital balances according to their profit-
sharing ratio.

Note that steps B to D are not recorded in the books of the partnership – only the interim
repayments are recorded.

Feedback 5.3

a) Cash available for interim repayment

Bank = Opening balance + Cash sales – Payment of liabilities
Bank = R(5 000 + 9 000 – 11 000)
Bank = R3 000
b) Interim cash repayment (loss-absorption-capacity method)
Capital: Capital: Capital:
Step* Bank Equipment
Sauce Age Roll
R R R R R
A 3 000 29 000 (3 500) (11 900) (16 600)
C (29 000) ➂ 14 500 ➂ 8 700 ➂ 5 800
3 000 – 11 000 (3 200) (10 800)
D (11 000) ➃ 6 600 ➃ 4 400
3 000 – – 3 400 (6 400)
D (3 400) 3 400
3 000 – (3 000)
* The steps are shown for illustrative purposes only.

Comment
Since the anticipated capital accounts of Sauce and Age show deficits, the amount of
available cash (namely R3 000) must be paid solely to Roll. Note that the amount of available
cash is equal to the amount that must be paid to Roll.

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Calculations

Balances immediately prior to first interim repayment

SAUCE, AGE AND ROLL
GENERAL LEDGER (SUMMARISED IN COLUMNAR FORMAT)
Trade Capital: Capital: Capital:
Bank Equipment
Transactions payables Sauce Age Roll
R R R R R R
Balances at 31 Dec 20.14 5 000 42 000 (11 000) ➀ (5 500) ➀ (13 100) ➀ (17 400)
Sale of assets and
allocation of loss
(1 February 20.15) 9 000 (13 000) ➁ 2 000 ➁ 1 200 ➁ 800
Payment of creditors (11 000) 11 000
3 000 29 000 – (3 500) (11 900) (16 600)

➀ Capital account balances after apportionment of the goodwill:

Sauce: R 7 000 – R(3 000 x 5/10) = R 5 500
Age: R14 000 – R(3 000 x 3/10) = R13 100
Roll: R18 000 – R(3 000 x 2/10) = R17 400

➁ Allocation of loss on first liquidation

R
Proceeds (selling price) 9 000
Carrying amount (13 000)
Loss on liquidation (4 000)
Sauce: R(4 000 x 5/10) = R2 000
Age: R(4 000 x 3/10) = R1 200
Roll: R(4 000 x 2/10) = R 800

➂ Apportionment of the anticipated loss as a result of the remaining equipment

being assumed as worthless
Sauce: R(29 000 x 5/10) = R14 500
Age: R(29 000 x 3/10) = R 8 700
Roll: R(29 000 x 2/10) = R 5 800

➃ Apportionment of the anticipated capital deficit of Sauce, who must be

assumed insolvent, to Age and Roll
Age: R(11 000 x 3/5) = R 6 600
Roll: R(11 000 x 2/5) = R 4 400

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5.6 Exercise and solution

EXERCISE 5.1:

Recording piecemeal liquidation transactions in columnar format (loss-absorption-

capacity method)

Patrys, Pine and Promise are in partnership, trading as African Timber and sharing in the
profits or losses in the ratio of 5:3:2 respectively. The following information regarding the
statement of financial position in respect of the partnership was prepared at 30 June 20.15:

AFRICAN TIMBER
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.15
R
Property, plant and equipment 18 000
Capital: Patrys 8 000
Capital: Pine 5 000
Capital: Promise 2 000
Trade payables control 3 000

Due to increasing liquidity problems, the partners decided to liquidate the partnership
piecemeal as from 1 July 20.15. As soon as cash becomes available from the liquidation of
assets, it must be paid to the partners in such a manner that no partner will have to refund
money to the partnership at a later stage.

The property, plant and equipment were liquidated as follows:

Carrying amount Cash received
R R
First liquidation 2 500 2 500
Second liquidation 5 600 5 000
Third liquidation 6 000 6 000
Fourth liquidation 3 900 4 000

REQUIRED

Record the liquidation of African Timber in columnar format. Use the format as outlined below.
Disclose the credit balances and the credit entries in brackets. Apply the loss-absorption-
capacity method to calculate the interim repayments to the partners.

REQUIRED FORMAT
Property,
Trade Capital: Capital: Capital:
Transaction Bank plant and
payables Patrys Pine Promise
equipment
R R R R R R

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SOLUTION 5.1

AFRICAN TIMBER
GENERAL LEDGER (SUMMARISED IN COLUMNAR FORMAT)
Property,
Trade Capital: Capital: Capital:
Transaction Bank plant and
payables Patrys Pine Promise
equipment
R R R R R R
Balances at 1 July 20.15 – (3 000) 18 000 (8 000) (5 000) (2 000)
Sale of assets
(1st liquidation) 2 500 (2 500)
Payment of creditors (2 500) 2 500
Sale of assets
(2nd liquidation) 5 000 (5 600) ➀ 300 ➀ 180 ➀ 120
Payment of creditors (500) 500
4 500 – 9 900 (7 700) (4 820) (1 880)
1st Interim repayment (4 500) ➀ 2 688 ➀ 1 812
– 9 900 (5 012) (3 008) (1 880)
Sale of assets
(3rd liquidation) 6 000 (6 000)
6 000 3 900 (5 012) (3 008) (1 880)
2nd Interim repayment (6 000) ➂ 3 062 ➂ 1 838 ➂ 1 100
– – 3 900 ➃ (1 950) ➃ (1 170) ➃ (780)
Sale of assets
(4th liquidation) 4 000 (3 900) ➄ (50) ➄ (30) ➄ (20)
4 000 – – (2 000) (1 200) (800)
Settlement of capital
accounts (4 000) 2 000 1 200 800

Calculations

➀ Allocation of loss (R600)

Patrys: R600 x 5/10 = R300
Pine: R600 x 3/10 = R180
Promise: R600 x 2/10 = R120

Interim cash repayment (loss-absorption-capacity method)

Property,
Capital: Capital: Capital:
Step* Bank plant and
Patrys Pine Promise
equipment
R R R R R
A 4 500 9 900 (7 700) (4 820) (1 880)
C (9 900) ➁ 4 950 ➁ 2 970 ➁ 1 980
4 500 – (2 750) (1 850) 100
D ➂ 62 ➂ 38 (100)
4 500 – (2 688) (1 812) –
* The steps are shown for illustrative purposes only.

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SOLUTION 5.1 (continued)

➁ Allocation of the loss as a result of the remaining property, plant and equipment
being assumed worthless

Patrys: R9 900 x 5/10 = R4 950

Pine: R9 900 x 3/10 = R2 970
Promise: R9 900 x 2/10 = R1 980

➂ Allocation of the anticipated capital deficit of Promise, who must be assumed to

be insolvent, to Patrys and Pine

Patrys: R100 x 5/8 = R62 (rounded off to the nearest lower rand)
Pine: R100 x 3/8 = R38 (rounded off to the nearest lower rand)

Interim cash repayment (loss-absorption-capacity method)

Property,
Capital: Capital: Capital:
Step* Bank plant and
Patrys Pine Promise
equipment
R R R R R
A 6 000 3 900 (5 012) (3 008) (1 880)
C (3 900) ➃ 1 950 ➃ 1 170 ➃ 780
6 000 – (3 062) (1 838) (1 100)
*The steps, as suggested in the Activity 5.3, are shown for illustrative purposes only.

➃ Allocation of the loss as a result of the remaining property, plant and equipment
being assumed worthless
Patrys: R3 900 x 5/10 = R1 950
Pine: R3 900 x 3/10 = R1 170
Promise: R3 900 x 2/10 = R 780

➄ Allocation of profit (R100)

Patrys: R100 x 5/10 = R50
Pine: R100 x 3/10 = R30
Promise: R100 x 2/10 = R20

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 Self-assessment

After having worked through this learning unit, are you able to do the following?

Yes No
Describe the meaning of the term "liquidation" from the perspective of this
learning unit.

Distinguish between a simultaneous and a piecemeal liquidation.

Apply the accounting procedure in the case of a simultaneous liquidation

of a partnership with a profit or loss on liquidation.

Apply the accounting procedure in the case of a piecemeal liquidation of a

partnership, and to calculate the interim repayments of available cash
between partners according to the loss-absorption-capacity method.

If you answered "yes" to all of the assessment criteria, you can move on to learning
unit 6. If your answer was "no" to any of the criteria, revise those sections concerned
before progressing to learning unit 6.

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