GRADUAL LIQUIDATION

In practice, it is not always possible to sell the assets within a relatively short period after the dissolution of the partnership. The partners can then decide to liquidate the partnership gradually. In such a case the entity’s activities continue at a steadily decreasing rate.

The gradual liquidation results in the accumulation of cash funds that cannot be re-used for business purposes. Partners are entitled to make periodic capital drawings from these funds.

These periodic capital drawings must be done in such a manner that the mutual financial interests of the partners are not affected. In other words, the excess cash must be divided in such a manner that no partner is expected to make a later repayment.

The periodic distribution of surplus cash funds to the individual partners must occur in an orderly and systematic way.

TUTORIAL EXERCISE:    The statement of financial position of A, B and C who share profit and losses in the ratio 5:3:2 is as follows on 30 June 2015:

ABC Partnership Statement of financial position as at 30 June 2015   ASSETS Sundry assets TOTAL ASSETS   EQUITY AND LIABILITIES: Capital: A B C LIABILITIES: Payables TOTAL EQUITY AND LIABILITIES

N$     36 000 36 000         16 000 10 000 4 000       6 000 36 000

The assets are sold gradually, and as soon as cash is available, it is distributed to the partners. The realization occurred as follows:

Realisation no	Carrying  amount (N$)	Cash  received (N$)	Profit/  (Loss) (N$)
1.	5 000	5 000	-
2.	112 00	10 000	(1 200)
3.	12 000	12 000	-
4.	7 800	8 000	200
	36 000	35 000	(1 000)

 

 

REQUIRED:

• Calculate the excessive equity over profit-sharing ratio.
• Classify partners’ capital for repayment
• Prepare a schedule for the distribution of cash.
• Prepare the capital account of the three partners in column format.

Answer rating: 100% (QA)

Loss on realization 1000 This loss on realization will b... View the full answer