 In this presentation we will take a look at a problem where there is a liquidation of a partnership and within that liquidation one partner is going to end up with a negative capital count and have to pay the partnership within the process of the liquidation process. So first thing we're going to start off with is to have a ratio and change this kind of ratio formats to a percentage format. This is often going to be seen in problems where we have this 3 to 1 or some type of setup like this to show the profit sharing. One reason being that it helps us have a ratio in case some of the percentages aren't exact. So the way to deal with this is we're just going to take out the calculator and we're going to say that we have 3 plus 2 plus 1 gives us 6. So we're going to take the 3 over 6 and that's 50% for our first capital account and then our second capital account is 2 over 6 or 0.3333 for our second capital account and then 1 over 6 for the third capital account. So we'll do that again with formulas here. We're going to say that this equals 3 over 6, 50%. This equals 2 over 6 or 0.333. Note that this really goes on forever, it's 0.3333 on forever here even though we can only see it at 2 decimal places on this format. This is important to note because when we use this cell in a formula then it will pull the actual number 1 third rather than just 0.33. Next we'll do the same for M so we're going to say this equals 1 over 6, it was 0.17 and then if we add these up of course it sums up to 1 or 100%. So then we're going to use this information to work the rest of the problem. Now these are going to be the kind of our trial balance, we have 182.5 of cash, we've got 3,530,000 of inventory, our assets, that's going to be the only asset we'll deal with here and then we've got the account payable, 240,000 and the capital accounts. So we know the assets equal the liabilities plus equity or this plus this is 712.5 and these are 712.5. So now we're going to use this information in order to liquidate the partnership in our sequence first selling the assets then paying off the liabilities then paying the capital accounts paying the partners. We must do it in that order or we really should do it in that order because if we don't then we could end up in a problem where the capital accounts end up with a negative balance and even still with doing this process as in this problem we'll have a negative balance and we want to avoid that as much as possible because that will result in arguments in the partnership most likely within the liquidation process. So to avoid that as much as possible we're going to sell the inventory first get all the cash that we can pay off the liabilities then pay the partners. So that's the first step we're going to sell the inventory now we're going to say we sold it for 320,000 in this problem so we had it on the books for 530,000 we're going to sell it for 320,000 then we'll take the inventory off the books for what it's on the books for because we're sold the entire amount 530,000 and then we have a difference if we highlight these two the 530 minus the 320 gives us the $210 difference which we're then going to have to allocate to the partners in accordance with their partnership agreement their 50, 33 and 17 split. So to do that in a calculator we would say that we have the 320,000 minus the 530,000 gives us 210 times for K 0.5 50% times their percentage 105. Same thing if we took 210 times the percentage for C it would be 0.33 but note that's pretty low because it's actually going to be 0.3333 on forever if we use this cell it'll actually not come out to this number it'll come out to 70,000 and to see that just to see how that rounding can kind of throw us off sometimes if it was 210,000 times 0.333333 it's pretty close. If we took the ratio of 210,000 times one-third or divided by 3 then we get that 70,000 that's what will show up even though we only see 0.3333 here once we use the formula. So let's do that now let's just do this with a with the formulas here what we're going to do is add these up because they're subtraction problem because this one's negative and that's positive so if we say this number plus this number it's going to say this number plus the negative which is a subtraction so we can just say equals sum of these two which will actually be a subtraction problem because this is a negative number brackets times the 50% and enter so all we did was just add those two up which is a negative which makes a subtraction problem so that 210 times 50%. So we'll do that here again we're going to say this equals the sum double click the sum function highlight those two numbers which will actually be a subtraction problem close the brackets times then that 0.33 which is really one-third or two-sixth same thing 70,000 so then we'll do this again we'll say equals the sum brackets and we'll highlight these two close the brackets times this 0.17 giving us the 35,000 so that's going to be our allocation of course if we add these up we've got the 210 which is equal to our loss of 210 so now we'll bring the balances down so we're just going to add these up we're going to bring the balances down so we're in cash we're just going to say equals the sum of these two numbers bringing the balance down inventory and we could just copy that across that formula but I'm going to do it each way each time so we can emphasize what we're doing here both from a excel standpoint and just mathematically as well as theory why we're doing it so the inventory was here it's going down to zero because we sold it all the accounts payable is just going to be brought down no change so I'm just going to say this equals that same number then the capital accounts will sum these up and I can use the sum function even though it's a subtraction problem so it's 93,000 minus the 105 if I sum this problem however it's going to take this is a positive that's a negative so it's going to subtract the two so I can still use the equals SUM double click the sum highlight and note it actually went to a negative number because of course the you know went from down to zero and then in the negative direction so that's a problem for K here their capital account went into a negative that's not good and then we'll sum up C's equals the sum brackets these two enter and then M equals the sum double click highlight these two that's the 106th out 167,000 minus 35,000 gives us 132,000 okay so then we're going to have the payback now this is the thing that's kind of usual unusual here the new thing here and that is that case account has a negative balance so someone has to go to this partner and say hey you know what we sold the inventory for way less than it's on the books for resulting in this big loss of you know 210,000 and that brought your capital account from a positive balance down to you owning the partnership 12,000 within the liquidation process hopefully we can get this partner to pay us within the liquidation process pay the partnership and then we can allocate the payment in accordance with the profit sharing agreement but that doesn't always I mean within a liquidation process it you know might be difficult to get payments sometimes because it's trying to liquidate the process and this problem will show the payment and then the next one will show what would happen if we couldn't you know get a payment from this partner as the liquidation process happened so now we're going to go to we're going to say that case paying the partnership which is good that's what should happen so it's good for good of them so we're going to say 12,000 is going to go up for cash and then his capital account is going to go down by the 12,000 so now now we're going to sum these up so we got the 502 500 K just paid us on the partnership 12,000 so if we sum them up equals the SUM double click the sum highlight those two cells we're now at cash of 514 500 inventory still zero I'll just leave that zero accounts payable is still 240 I'm just going to say equals that 240 then the case capital will sum these up so I'm going to say equals SUM double click the sum and highlight those two so the negative 12,000 and a positive 12,000 equals zero and so now case capital account is at zero which is good and then we're going to say this equals the 142 500 tab and then ends equals the 132,000 and enter so we still have the the assets of now 514 500 equaling the liabilities plus the equity 514 500 now we need to get rid of the accounts payable account so accounts payables on the books for 240 that's a liability we want to pay off the liabilities before allocating money to the partnerships to the partners from the partnership so we're going to pay out 240 so we're going to be here we're going to say negative 240,000 tab tab within e 52 negative 240,000 no effect on the capital accounts now we'll just sum this up again we were at a balance of 514 500 cash we just paid out 240,000 we will use the SUM function which will actually be a subtraction problem because it's going to sum up a positive and negative number so this will be equals SUM double click the sum function highlight those two numbers and that comes out to 274,500 we'll do the same thing here in e 53 equals SUM double click the sum function highlight those two numbers and that comes out to zero and then the capital accounts we'll just bring down the balance so in g 53 equals that number and then in h 53 equals that number and enter okay and then we can just distribute so now we've got cash of 274,500 and C and M's capital counts at 1425 and 3132,000 respectively and we can just pay that out now last step so we're going to pay out 274 500 to C's 142 500 and M 132,000 and now we can just sum these up in the final amount so we're just going to sum these up and it'll sum back to zero because this is a positive and that's a negative so we're going to say equals SUM sum those two and tab and we'll do the same here equals SUM and we'll sum those two tab one more time equals SUM summing those two and tab and now we're at all zeros here so that's that's our goal we're gonna do the same thing now in in a journal entry format and we'll get to see the trial balance and this is something we often see the problems in this table format with book problems and in practice as well but when we actually record it and it's we have to do that with a journal entry and it's really good practice to see it in journal entries for me it's easier to do in a journal entry format so if you work with a lot of journal entries it makes sense to actually see the trial balance and then you can see what you're going to do in the format so liquidation problems are really good practice for that so we have a pretty simple trial balance here but we try to give some of all the accounts so we can see how this would work so we've got cash as an asset we've got inventory we've got the accounts payable our only liability we've got the capital accounts this is reflecting our beginning balances here on the table and so we know that the debits are non-bracketed numbers and the credits are bracketed numbers so if we add them up they add up to zero okay so now we're just gonna go through our same steps we're gonna sell the inventory the assets then we're gonna pay off the liability and then we're going to allocate to the partners at the last step note that there's nothing in revenue and expenses it's important to note that we had closed out we must have closed out the the income statement so so we have a post closing trial balance and essence here only balance sheet accounts when we do this process because that means that this side assets minus liabilities 472 500 equals this side equity 472 500 and we can just close this thing out to the capital accounts so first we're gonna sell the inventory so inventories on the books for 530,000 and we're gonna sell it we're gonna get cash so we're only gonna get however 320,000 even though it's on the books for 530 so we're gonna get cash cash is a debit balance account we're gonna make it go up by doing the same thing to it another debit so we'll copy the cash we'll put that on top in j 42 right click and paste 123 the amount will be that 320,000 then we're gonna credit the inventory inventory is an asset account we need to make it go down so we're gonna do the opposite thing to it this case a credit so we'll copy the inventory right click and copy we're gonna put that in cell J 47 right click and paste 123 I'm gonna indent that as we go so I'm gonna go up to the top home tab alignment increase indenting and then the credit side of this is gonna be whatever's in there 530,000 so we're gonna credit 530,000 to make it go down to 0 the difference then will be the gain or loss on sale that's gonna be our income statement account so note where that is down here it's on the income statement note on our table that we just allocated it directly to the capital accounts on the table but here we're gonna do a two-step process and make this sale as if it would typically be when we sell inventory we're gonna record the gain or loss on the income statement then we'll close it out to the capital accounts so this is gonna be a loss so we're gonna copy the gain or loss on the income statement put that in J 48 right click and paste 123 if we take the 530 minus the 320 we get the 210 that's gonna be a debit because the debits are what is needed to be in balance here we're gonna do this with the plug formula the negative sum formula so we'll say negative SUM double click the sum function and highlight those four cells and there we have it 210,000 so no I put the this on the bottom even though it's a even though it's a debit so we could reverse the order but the structure of this makes the most sense to me to go back and look at what has been done so I'm gonna keep it there in this format therefore so let's post this out then we're gonna say the cash is up top here's the cash on the journal entry here it is on the trial balance we're gonna post it to the entries column where we will say equals and scroll to the left and point to that 320 bringing the 182,500 up by 322,500 and 2,500 then we're gonna go to the inventory inventory is here on the trial balance we're gonna be in p47 and say equals point to the 530,000 bringing the balance from 530 down by 532,0 and then we have the gain so here are the loss in this case loss here's the gain or loss a debit's gonna be a loss because it's kind of like a like an expense debit any expense rather than revenue being a credit so we're gonna say equals and point to that 210 bringing the balance up from 0 by 210 to 210 so now we have this 210 on the income statement and we said before that we need to kind of close out the income statement so that's what we will do now we'll take this this gain this $210,000 gain we will allocate it to the capital accounts so we're gonna copy this I'm gonna copy the gain and I'm gonna try to put it on the bottom I'll try to keep in the right format this time so there's gonna be one two three one two three and then the gains gonna be underneath so or the loss so right click and paste I'm on cell J 53 that should give us enough room if we're down here on J 53 then I'm gonna go to the home tab alignment increase in denting and we're gonna credit that cell in L 553 negative 210,000 then we'll debit the three capital accounts so we'll highlight the three capital accounts copy those right click and copy let's do that again I'm not sure exactly what happened copy and then we'll put that up top here in J 50 right click and paste one two three alright so now we're gonna take that 210 we're gonna allocate it in accordance with their profit sharing ratios which I'm gonna pull from over here and the reason we have to is because if we just type in 0.33 it's not gonna come out to the right number again we have to use this cell because it's really one-third so we're gonna we're gonna be in cell K and cell K 50 for case capital and say that this equals a negative to flip the sign of this number times that 50% and what we should get the same 105,000 that we got on the table we'll do the same thing again here I'm gonna say negative of this number times C's percent equals enter equals negative 210,000 times m's percent and enter so now if we add these up if we highlight these it should add up to 210 which is the same as the credit if we highlight the whole thing it adds up to zero so it works it's in balance we're gonna post it then so here's the capital account K's capital account we're gonna post it here in P 49 we will say equals point to the 105,000 and enter bringing the balance flipping it from a credit balance of 93,000 to a debit of 12,000 that's where the problem lies in this problem is the fact that it flipped to this this debit balance of 12,000 then we've got the C capital 70,000 we're gonna post here in P 50 equals that 70,000 bringing the balance from 212 500 down by 72 142,500 then C's capital is gonna go here so we're in P 51 where we say equals and point to the 35,000 so we've got the 167,000 it's gonna go down by 35,000 to 132,000 and then we've got the gain which is gonna go down here there's already something in that cell so we're gonna double click on it go to the end after the 8 and say plus and point it to that 210 that'll bring the balance down once we hit enter bring us back in balance and bring the net income back to zero so there we have that okay so so we've we've now allocated that now we've got this loss that we have to deal with that's gonna be the next step so again with we have to go to the capital account for cancer hey you know that we sold it for there's a loss on the sale and your capital account went from a positive capital account to a negative capital account meaning you owe them partnership money within the liquidation process would you please pay the partnership and if they do then that's great so then we can say cash is going to go up by the 12,000 that's owed by K partner within this liquidation process so we're gonna copy right click and copy cash put that down here in J 55 right click and paste 1 2 3 the amounts gonna be for that 12,000 we're gonna credit the 12,000 as well I'm gonna put a negative of that number and then we'll take that from the capital account so in in 49 right click and copy and we'll put that down here in J 56 right click and paste 1 2 3 then we're gonna go to the home tab alignment increase the indenting and there we have it so now we can post this so here's the cash here here's the cash up top we want to be in the middle so we're in P 46 there's something in that cells therefore we'll double click on it go to the end of it and say plus and then point to that 12,000 bringing the balance up from 502 500 to 514 500 and then we've got the capital account here here's the capital account on the trial balance we're gonna be in the middle and P 49 double click go to the end of it plus and then point to that 12,000 bringing the balance down to zero so now the balance is at zero and we only have these other two capital accounts but we still have to pay off the liability the payable that'll be our next step so we want to pay off the payable we're gonna pay it with cash so cash is gonna go down cash is a debit balance we're gonna do the opposite thing to it on credit so we'll copy cell in 46 right click and copy we're gonna skip a cell skip another one put on the bottom in J 59 right click and paste 1 2 3 then we're gonna go to the home tab alignment increase the indenting and the amount's gonna be for this 240,000 so we're gonna pay cash of a credit to 240,000 then we're gonna debit something 240 I'm gonna say negative of that number flipping the sign and that's gonna go to the accounts payable so accounts payable is gonna go down to zero so in N 48 right click and copy we're gonna put that in J 58 right click and paste 1 2 3 and then we'll just post this out so here's P there's the accounts payable we're gonna post that here to the trial balance in P 48 so within P 48 we will say equals point to that 240,000 bringing the balance down to zero and then cash is up top so we're gonna scroll up just a little to P 46 something is in it so we will double click on it go to the end of it and say plus and then scroll down just a bit and pick up that cash number and enter so now we're back in balance down here now we're just left with the cash and the capital accounts and it's nice to see it this way because we can just say okay cash is 247 if we highlight these two it's 274 it's 274 500 they're equal therefore we can just pay the cash out and pay it to the two owners the two capital accounts note that these capital accounts are not going to represent almost never the profit sharing percentages because these are just the percentage of sharing profits and doesn't necessarily almost never correlates to how much was invested throughout the entire life of the partnership and the amount drawn out those two don't have to be in alignment with the partnership percentages unless stated within the partnership agreement so most of the time the capital accounts will not equal those percentages okay so then we're just gonna pay this off so we're gonna say cash has a debit balance we're gonna make it go down doing the opposite thing to it so we'll copy this and it's gonna go underneath against so those two capital accounts and it's gonna be in the bottom because we're gonna credit it so we'll try to be in proper format here so we are in J 53 J 63 right-click and paste 1 2 3 then I'm gonna go up top home tab alignment increase in denting and then we're in cell L 63 the amount being credit of 274 500 I know if you wanted to try to like put a reference like a negative of that number I you can't do it there because you'll have a circle reference once we post it because we're gonna post it here which is gonna change that number which we would have used down here so just be aware that formulas would be best whenever possible but every once in a while the most common problem will be a like a circle reference like that and so just be aware of that when it when that happens so then we're gonna have the C capital and M capital we're just gonna copy those right-click and copy put those up top we're in cell J 61 right-click and paste 1 2 3 and then again we're not using the profit sharing percentages we're just pulling whatever is in the capital account here we're paying whatever's owed this basically represents what's owed it's at a book value now because we only have cash wasn't at a book value before because we had inventory which could possibly have a different value than it's on the books for so now we're gonna pay this off at 142500 and 132,000 and if we add those two up adds up to zero if we add them all up and we can post this then so here's the C capital here's C capital up top we want to be in P 50 where we will say double-click go to the end of it plus and then point to that 142500 bringing the balance down to zero and then here's M's capital here's M's capital we're gonna go to the middle double-click on it go to the end of it plus and then point to that 132,000 bringing the balance down to zero and then we've got the cash cash will be up top so we'll have to scroll up just a bit we're gonna be here in P 46 double-click on it go to the end of it plus then we'll scroll down just a bit and we're picking up that cash amount and that should bring us back in balance and bring cash up so there we have it now we're at all zeros and we've liquidated the partnership