AKUNTANSI KEUANGAN LANJUTAN II

RMK CHAPTER 17

“PARTNERSHIP LIQUIDATION”

Disusun Oleh:

Kelompok 9

Rosyidatul Maulidinah (17013010087)

Aprillia Kartika Apsari (17013010096)

Larasati Kusuma Wardani (17013010111)

Dizzy Nindya Priswari (17013010113)

KELAS D

JURUSAN AKUNTANSI

FAKULTAS EKONOMI DAN BISNIS

UNIVERSITAS PEMBANGUNAN NASIONAL “VETERAN” JAWA

TIMUR

2020
Chapter 17 - Partnership Liquidation

This chapter covers the situation in which a partnership is dissolved and the
business ceases to operate. In this case, the business must be liquidated. The
liquidation process, or winding up the business, includes paying liabilities, selling
assets, and distributing monies to the partners.
THE LIQUIDATION PROCESS
Usually, partnership liquidation involves the following:

 Converting noncash assets into cash.

 Recognizing gains and losses and expenses incurred during the liquidation
period.
 Settling all liabilities.
 Distributing cash to the partners according to the final balances in their
capital account.

This general description of the liquidation process assumes the following:

 The partnership is solvent (i.e., partnership assets exceed partnership

liabilities).
 All partners have equity in partnership net assets.
 No outstanding loan balances to any partner exist.
 All assets are converted into cash before any cash is distributed to the
partners.

As these assumptions are relaxed, the liquidation process becomes more

complex. Accordingly, this chapter begins with simple liquidations for solvent
partnerships and proceeds to installment liquidations and liquidations of insolvent
partnerships.

The rules for distributing assets in the liquidation of a partnership are covered
in Section 807 of the Uniform Partnership Act of 1997 (UPA). The rank order of
payment is as follows:

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 1. Amounts owed to creditors other than partners and amounts owed to
partners other than for capital and profits.
2. Amounts due to partners liquidating their capital balance upon conclusion
of the liquidation of partnership assets and liabilities
Simple partnership Liquidation

Simple partnership liquidation is a conversion of all partnership assets into cash

with a single distribution of cash to partners in final settlement of the partnership’s
affairs. To illustrate a simple 2liquidation, assume that the balance sheet of Hol and
Kir at December 31, 2016, is as follows (amounts in thousands):

HOL AND KIR

BALANCE SHEET AT DECEMBER 31, 2016

Assets Liabilities and Equity

Cash $10 Account payable $40

Account receivable 30 Loan from Hol 10

Inventory 30 Hol Capital 25

Plant assets- net 40 Kir Capital 35

$110 $110

Hol and Kir share profits and losses 70 percent and 30 percent, respectively,
and agree to liquidate their partnership as soon as possible after January 1, 2017.
Assume that on January 5, 2017, the inventory items are sold for $25,000, plant
assets are sold for $30,000, and $22,000 is collected in final settlement of the
accounts receivable.

The balance sheet after these transactions are recorded (see Exhibit 17-1,
Part A, for the journal entries) is as follows (amounts in thousands):

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 HOL AND KIR
BALANCE SHEET
AT JANUARY 5, 2017
(IMMEDIATELY AFTER ASSET SALE AND RECEIVABLE COLLECTION)

Assets Liabilities and Equity

Cash $87 Account payable $40

Loan from Hol 10

Hol Capital 8.9

Kir Capital 28.1

$87 $87

As the final step in the partnership liquidation, the cash is distributed to the
creditors and partners as follows (see Exhibit 17-1, Part B, for the journal
entries):

Order of Payment I To creditors for accounts payable $40.000

To Hol for his loan balance 10.000

To Hol for his capital balance 8.000

To Kir for his capital balance 28.000

Total distribution $87.000

We use the established profit- and loss-sharing ratios (in this example, 70%
and 30%) during the liquidation period unless the partnership agreement specifies
a different division of profits and losses during liquidation. In the case of

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partnership agreements that provide for salary and interest allowances, only the
residual profit- and loss-sharing ratios would be applied during the liquidation
period. This is because the gains and losses at liquidation are essentially
adjustments of prior profits that would have been shared using the residual profit-
sharing ratios if they had been recognized prior to dissolution.

A liquidating partnership should maintain a summary of transactions and

balances during the liquidation stage. We present this summary of transactions and
balances, called a partnership liquidation statement, for the Hol and Kir partnership
in Exhibit 17-2.

Debit Capital Balances in a Solvent Partnership

If liquidating partnerships are solvent, sufficient resources exist to pay

creditors and distribute some cash to the partners. However, the process of
liquidation may result in losses that force the capital accounts of some partners into
debit balances. When this happens, those partners with debit balances have an
obligation to partners with credit balances, and they can be required to use their
personal assets to settle their partnership obligations. If the partners with debit
balances are without personal resources, the partners with positive equity absorb
losses equal to the debit balances. Such losses are shared in the relative profit- and
loss-sharing ratios of the partners with positive equity balances. The partnership of
Jay, Jim, and Joe is in the process of liquidation. The partnership accounts have the
following balances after all assets have been converted into cash and all liabilities
have been paid (amounts in thousands):

Debit Credit

Cash $25

Jay Capital (40%) 3

Jim Capital (40%) $16

Joe Capital (20%) 12

Total $28 $28

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 If Jay is personally solvent, he should pay $3,000 into the partnership to
eliminate his debit capital account balance. His payment of $3,000 will bring the
partnership cash up to $28,000, which can then be distributed to Jim and Joe in final
liquidation of the partnership.

If Jay is unable to pay the debit balance, the debit balance represents a
$3,000 loss to be absorbed by Jim and Joe according to their relative profit- and
loss-sharing ratios. Jim’s share of the loss is $2,000 ($3,000 x 0.4/0.6), and Joe’s
share is $1,000 ($3,000 x 0.2/0.6). In this case, the $25,000 is distributed $14,000
to Jim and $11,000 to Joe, and the partnership business is terminated.

UPA assigns higher payment priority in liquidation to amounts owed to

partners other than their capital balances. This priority is usually abandoned and the
legal doctrine of right of offset is applied when the partner has a debit capital
balance. In this situation, the amount owed to the partner offsets up to the debit
capital balance amount.

For example, assume that the partnership of Jay, Jim, and Joe had the
following account balances
(in thousands):

Debit Credit

Cash $25

Loan from Jay $5

Jay Capital (40%) 8

Jim Capital (40%) $16

Joe Capital (20%) 12

Total $33 $33

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 Under the right of offset rule, the loan from Jay would not be paid even
though it has a higher priority ranking in liquidation than the capital interests of Jim
and Joe. Instead, it would be offset against Jay’s debit capital balance, leaving Jay
with a $3,000 obligation to Jim and Joe. If Jay is personally solvent, he pays $3,000
to the partnership so that Jim and Joe can receive the balances in their capital
accounts in final liquidation.

If Jay is personally insolvent, however, the situation is changed

considerably. In this case, Jay’s personal creditors would have a prior claim on any
money paid to Jay because personal creditors have a prior claim on personal assets.
If the right of offset is applied by the partnership, $25,000 cash would be paid:
$14,000 to Jim and $11,000 to Joe. If the right of offset was not applied, Jay’s
personal creditors would be paid the amount of their claims up to $5,000, leaving
less than $25,000 for distribution to Jim and Joe. If the entire $5,000 is paid to Jay’s
creditors, only $20,000 would be distributed to Jim and Joe.

Because of insufficient evidence that the right of offset rule is generally

accepted by the courts, it has been recommended that the rule not be applied without
agreement from the partners when a partner-creditor is personally insolvent.1 Upon
dissolution and subject to the rights of creditors, partners can agree to different
property distributions than provided for under UPA.

SAFE PAYMENTTS FOR PARTNERS

Ordinarily, the process of liquidating a business take considerable time.

Some cash may become available for distribution to partners after all liabilities are
paid but before all noncash asset are converted into cash. If the partners decide to
distribute available cash before all noncash asset are sold (and before all gains or
losses are recognized), the question arises as to how much cash can be safely
distributed to individual partners. Safe payment are distributions that can be made
to partners with assurance that the amount distributed will not to be returned to the
partnership at some later date to cover known liabilities or realign partner capital.

The calculating pf safe payment is based on the following assumptions:

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 1. All partners are personally insolvent.
2. All noncash asset represent possible losses. In addition, when calculating
safe payments, the partnership may withhold specific amounts of cash on
hand to cover liquidation expense, unrecorded liabilities, and general
contingencies. The amount of cash withheld are contingent losses to the
partners and considered losses for purposes of determining safe payments.

Application of a Safe Payments Schedule

The safe payments schedule begins with the equity of each partner shown
on the top line. Partner equity is determined by combining the capital and loan
balances for each pf the partners. Possible losses are allocated to the partners in
their profit-and-loss-sharing ratios and are deducted from partner equity balances
in the safe payments schedule in the same manner that actual losses would be
deducted.

After possible losses are deducted from the equity of each partner for
purposes of safe payment calculation, some partners may show negative equity. The
negative amounts must be allocated to the partners with positive equity balances
using their relative profit and loss sharing ratios. Allocations are continued until
none of the partners show negative equity. At that point, the sum of the amounts
shown for partners with equity balances will be equal to the cash available for
distribution.

Note that the safe payment schedule is used only to determine to the amount
of advanced distributions. The safe payment schedule does not affect account
balances or the statement of partnership liquidation.

Advance Distribution Requires Partner Approval

Any distribution to partners before all gains and losses have been realized
and recognized requires approval of all partners. Assume that Vax, Yoo, and Zeb
are partners sharing profits and losses equally and that the partnership is in the

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process of liquidation with the following account balances after all non partner
liabilities have been paid (amounts in thousands):

Debits Credits

Cash $30 Vax loan $15

Equipment 45 Yoo capital 30

Vax capital 10 Zeb capital 40

$85 $85

If available cash is to be distributed, $10,000 should be paid to Yoo and

$20,000 to Zeb according to the following safe payments computations (in
thousands):

Possible Vax Yoo Zeb

Losses Equity Equity Equity

Partner’s equities $5 $30 $40

Possible loss on noncash asset: $45 (15) (15) (15)

Equipment

(10) 15 25

Possible loss on Vax’s Debit 10 (5) (5)

balance shared 50:50

Safe payments $0 $10 $20

Vax may object to the immediate distribution of the $30,000 cash to Yoo
and Zeb because his $15,000 loan to the partnership has a higher priority in
liquidation than the capital balances of Yoo and Zeb. The objection means that the
partners do not agree to the advance distribution of cash, and accordingly, all

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distributions to partners are delayed until all assets are converted into cash and a
final settlement can be made.

INSTALLMENT LIQUIDATIONS

Installment liquidation involves the distribution of cash to partners as it

becomes available during the liquidation period and before all liquidation gains and
losses have been realized. The alternative is a simple liquidation, in which no cash
is distributed to partners until all gains and losses on liquidation are realized and
reflected in the partners’ capital account balances.

General Principles of Installment Liquidation

An orderly liquidation of a solvent partnership may be carried out with

distributed to individual cash on a regular basic until all noncash asset are converted
into cash. Liabilities other than those to the partners must be paid before any
distributions are made to the partners.

Once cash is available for distribution to partners, the amounts to be

distributed to individual partners can be determined by preparing a schedule of safe
payments for each installment distribution. A safe payments schedule will not be
necessary, however, when the capital accounts at the start of the liquidation process
are in the relative profit- and loss-sharing ratios of the partners and there are no
partner loan or advance balances. In this case, all distributions to partners will be
made in the relative profit- and loss-sharing ratios.

When installment payments to partners are determined using safe payments

schedules, the order of distributions will be such that the remaining capital balances
(equity balances if there are loans with partners) after each distributions will be ever
closer to alignment with the profit and loss sharing ratios of the partners.

Installment Liquidation Illustration

The partnership of Deb, Ken, and Ren is to be liquidated as soon as possible

after December 31, 2016. All cash on hand except for a $20,000 contingency

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balance is to be distributed at the end of each month until the liquidation is
completed. Profits and losses are shared 50 percent, 30 percent, and 20 percent by
Deb, Ken, and Ren, respectively. The partnership balance sheet at December 31,
2016, contains the following (in thousands):

DEB, KEN, AND REN BALANCE SHEET AT DECEMBER 31, 2016

Assets Liabilities and Capital

Cash $240 Account Receivable $300

Accounts receivable—net 280 Note Payable 200

Loan to Ren 40 Loan from Ken 20

Inventories 400 Deb Capital (50%) 340

Land 100 Ken Capital (30%) 340

Equipment—net 300 Ren Capital (20) 200

Goodwill 40

$1.400 $1.400

A summary of liquidation events is as follows:

 January 2017: The loan to Ren is offset against his capital balance, the
goodwill is written off, $200,000 is collected on account, inventory items
that cost $160,000 are sold for $200,000, nonowner liabilities are settled at
recorded values, and cash is distributed.
 February 2017: Equipment with a book value of $80,000 is sold for
$60,000, the remaining inventory items are sold for $180,000, liquidation
expenses of $4,000 are paid, a liability of $8,000 is discovered and paid,
and cash is distributed.

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  March 2017: The land is sold for $150,000, liquidation expenses of $5,000
are paid, and cash is distributed. April 2017 Remaining equipment is sold
for $150,000, the remaining receivables are written off, and all cash on
hand is distributed in final liquidation of the partnership.

JANUARY LIQUIDATION EVENTS

The events of the Deb, Ken, and Ren partnership during the month of January 2017
are recorded as follows (in thousands):

Ren capital (-OE) 40

Loan to Ren (-A) 40

(To offset loan against capital).

Deb capital (-OE) 20

Ken capital (-OE) 12

Ren capital (-OE) 8

Goodwill (-A) 40

(To write off goodwill.)

Cash (+A) 200

Accounts receivable (-A) 200

(To record collection of receivables).

Cash (+A) 200

Inventories (-A) 160

Deb capital (+OE) 20

Ken capital (+OE) 12

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 Ren capital (+OE) 8

(To record sale of inventory items at a gain).

Accounts payable (-L) 300

Note payable (-L) 200

Cash (-A) 500

(To record payment of non partner liabilities)

Loan from Ken (-L) 20

Ken capital (-OE) 100

Cash (-A) 120

(To record distribution of cash to Ken).

In addition to being recorded in the accounts, each of the foregoing entries

should be reflected in a statement of partnership liquidation, such as the one shown
in Exhibit 17-4. A liquidation statement is a continuous record that summarizes all
transactions and events during the liquidation period, and it will not be complete
until the liquidation is finalized.

The statement shown in Exhibit 17-4 for January events is really an interim
statement. However, interim liquidation statements are probably more important
than the final liquidation statement because interim statements show the progress
that has been made toward liquidation to date and can provide a basis for current
decisions as well as future planning. The completed liquidation statement can do
little more than provide interested parties with an ability to check what has been
done. The partnership liquidation statement may be an acceptable legal document
for partnerships that are liquidated through a bankruptcy court.

In the cash distribution that is made on January 31, 2017 (see Exhibit 17-4),
the partnership has $140,000 in cash remaining after all non partner debts have been

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paid. Of this amount, $20,000 is retained by the partnership for contingencies, and
$120,000 is available for distribution to the partners. The safe payments schedule
that appears in Exhibit 17-5 shows that the full $120.000 should be distributed to
Ken. The partnership has a $20.000 loan payable to Ken, so the first $20.000
distributed to Ken is applied to the loan, and remaining $100.000 is charged to
Ken’s Capital account.

FEBRUARY LIQUIDATION EVENTS

Journal entries to record the February 2017 events of the Deb, Ken, and Ren
liquidation are as follows (in thousands):

Cash (+A) 60

Deb capital (-OE) 10

Ken capital (-OE) 6

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Ren capital (-OE) 4

Equipment—Net (-A) 80

To record sale of equipment at a $20,000 loss.

Cash (+A) 180

Deb capital (-OE) 30

Ken capital (-OE) 18

Ren capital (-OE) 12

Inventories (-A) 240

To record sale of remaining inventory items at a $60,000 loss.

Deb capital (-OE) 2

Ken capital (-OE) 1.2

Ren capital (-OE) 0.8

Cash (-A) 4

To record payment of liquidation expenses.

Deb capital (-OE) 4

Ken capital (-OE) 2.4

Ren capital (-OE) 1.6

Accounts payable (+L) 8

To record identification of an unrecorded liability.

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 Accounts payable (-L) 8

Cash (-A) 8

To record payment of accounts payable.

Deb capital (-OE) 84

Ken capital (-OE) 86.4

Ren capital (-OE) 57.6

Cash (-A) 228

To record distribution of cash to partners.

Exhibit 17-6 reflects these entries in a liquidation statement for the period
January 1, 2017, to March 1, 2017. Exhibit 17-7 shows computations for the amount
of cash distributed to partners on February 28, 2017. All the partners are included
in the February 28 distribution, so all future distributions will be in the profit- and
loss-sharing ratios, provided that the liquidation proceeds as planned.

The plan of distribution can be upset by events such as the distribution of

noncash assets to specific partners. In the liquidation of a medical practice
partnership, for example, doctors might withdraw equipment early in the liquidation
process in order to continue their own practices. When noncash assets are
distributed to partners, the fair value of such assets should be determined, and any
difference between fair value and book value should be recognized as a partnership
gain or loss. The distribution of noncash assets to specific partners and the valuation
of the property distributed must be approved by all partners.

MARCH AND APRIL LIQUIDATION EVENTS. By March 2017, the

liquidation of the Deb, Ken, and Ren partnership has progressed to a point at which
partner capital balances are in their relative profit- and loss-sharing ratios. Journal
entries for the events of March and April are as follows (in thousands):

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Entries for March

Cash (+A) 150

Deb capital (+OE) 25

Ken capital (+OE) 15

Ren capital (+OE) 10

Land (-A) 100

To record sale of land at a $50,000 gain.

Deb capital (-OE) 2.5

Ken capital (-OE) 1.5

Ren capital (-OE) 1

Cash (-A) 5

To record payment of liquidation expenses.

Deb capital (-OE) 72.5

Ken capital (-OE) 43.5

Ren capital (-OE) 29

Cash (-A) 145

To record the March distribution of cash to partners.

Entries for April

Cash (+A) 150

Deb capital (-OE) 35

Ken capital (-OE) 21

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Ren capital (-OE) 14

Equipment—net (-A) 220

To record sale of the remaining equipment at a $70,000 loss.

Deb capital (-OE) 40

Ken capital (-OE) 24

Ren capital (-OE) 16

Accounts receivable (-A) 80

To record write-off of remaining receivables.

Deb capital (-OE) 85

Ken capital (-OE) 51

Ren capital (-OE) 34

Cash (-A) 17

To record distribution of cash to partners in final liquidation

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 Exhibit 17-8 reflects these entries in a complete liquidation statement for
the partnership. The complete liquidation statement covers the period January 1 to
April 30, 2017. The March and April cash distributions to partners are in the relative
profit- and loss-sharing ratios, so safe payments computations are not necessary.
The $145,000 distributed to partners on March 31 is determined by subtracting the
$20,000 cash reserve from the $165,000 cash balance immediately before the
distribution. All remaining cash is remitted to the partners in the final installment
distribution on April 30, 2017.

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CASH DISTRIBUTION PLANS

Cash distribution plan (also referred to as a cash pre distribution plan) for
the liquidation of a partnership involves ranking the partners in terms of their
vulnerability to possible losses, using the vulnerability ranking to prepare a
schedule of assumed loss absorption, and developing a cash distribution plan from
the assumed-loss-absorption schedule.

Vulnerability Ranking

Deb, Ken, and Ren had capital balances of $340,000, $340,000, and
$200,000, respectively, but their equities (capital loan balances) were $340,000,
$360,000, and $160,000, respectively. In determining their vulnerability to possible
losses, the equity of each partner is divided by his or her profit-sharing ratio to
identify the maximum loss that the partner could absorb without reducing his or her
equity below zero. Vulnerability rankings for Deb, Ken, and Ren are determined as
follows:

PARTNER PROFIT LOST VULNERABILLITY

EQUALLY SHARING ABSORTION
RATIO POTENTIAL

Deb $340.000 0.5 $680.000 1

Ken 360.000 0.3 1.200.000 3

Ren 140.000 0.2 800.000 2

Assumed Loss Absorption

A schedule of assumed loss absorption is prepared as a second step in

developing the cash distribution plan. This schedule starts with the pre liquidation
equities and charges each partner’s equity with its share of the loss that would
exactly eliminate the equity of the most vulnerable partner

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Cash Distribution Plan

Ken should receive the first $120,000 distributed to the partners. A cash
distribution plan for the Deb, Ken, and Ren partnership is prepared from the
schedule of assumed loss absorption as follows:

Cash Distribution Schedule

Deb, Ken, and Ren partnership is liquidated in two installments, with

$550,000 cash being distributed in the first installment and $250,000 in the second
and final installment. Under these assumptions, the cash distribution plan would be
used in preparing a cash distribution schedule, such as the following one (amounts
in thousands):

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 The $550,000 cash distributed in the first installment is allocated $500,000
to non partner liabilities and $20,000 to repay the loan from Ken. The remaining
$30,000 is paid to Ken to reduce the balance of his capital account. In the second
installment distribution, as shown in the cash distribution schedule, Ken receives
the first $70,000 in order to align his capital balance with that of Ren.

The next $60,000 is allocated to Ken and Ren in accordance with their 60:40
relative profit- and loss-sharing ratios, and the final $120,000 is allocated to Deb,
Ken, and Ren in their 50:30:20 relative profit- and loss-sharing ratios.

Insolvent partnership

When a partnership is insolvent, the cash available after all noncash assets
have been converted into cash is not enough to pay partnership creditors. Rik, Fab,
and Kat are partners sharing profits equally. Their partnership is in the process of
liquidation. After all assets have been converted into cash and all available cash
applied to payment of partnership liabilities, the following account balances remain
on the partnership books (amounts in thousands):

All partners have personal resources of at least $30,000, each partner should
pay $30,000 into the partnership in full satisfaction of partnership liabilities.
However, the creditors may collect the full $90,000 deficiency from any one of the
partners. For example, creditors may collect the $90,000 from Rik, in which case
the remaining partnership balances would be as follows (in thousands):

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 DAFTAR PUSTAKA

Beams. Floyd A. Joseph H. Anthony, Bruce Bettinghaus, and Kenneth A. Smith. 2018.
“Advanced Accounting”, 13th Edition, Pearson Prentice-Hall International, Inc., New
Jersey.

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