 In this presentation, we will take a look at a partnership liquidation where there's a gain on the sale of the assets of the partnership in the liquidation process. We're going to start off looking at the liquidation in terms of a table. Then we'll do the same thing in terms of journal entries. It's nice to know both formats. It's often presented in a table format when we work through these problems, but it's useful and very helpful to see the journal entries as well. It gives us a really good idea of what the chart of accounts is. Gives us a good idea of the capital accounts, especially in a partnership. So we're going to start here first with the ratios. So the ratio is a 3 to 1 ratio. And we first have to know what that means before we can move forward on anything. So that means it's going to be 3 plus 2 plus 1 for a total of 6. And then we're just going to take each of these divided by the total of 6. This is going to be the partners for K, C, and M are the partners. So it's going to be 3 over 6, which is 50%. Now that one can be expressed with a percentage, but the others are a little bit more difficult. 2 over 6 is 0.333 or 33.333 on forever. That one is more difficult to represent in a percent, easier to represent with a fraction, which is the reason we have this format in more of a fraction type format. The last one then is 1 over 6. That's 0.1666 on forever or 16.67 or 66 on forever. It's rounded up here. So those are going to be our percentages. So that's of course the first part that we need to know to move forward with any type of problem that we're going to have some revenue split in and dealing with the capital accounts in a partnership. These are going to be the accounts and this is similar to like a trial balance that we're going to have listed out in this format. Note that if you're working book problems, the book will often combine accounts together into grouping assets. So here's a group of assets and whatnot. But it's useful to see all the accounts and that's why the trial balance, which we'll look at next, is nice to look at. We're still going to reduce all the accounts because we want to focus in on the capital accounts. But we will show some of those accounts because we want to see how the actual liquidation process would go. The liquidation process should go in this order. We're going to pay off, we're going to sell the inventory and then we're going to pay off the liabilities and then we're going to finally pay the capital accounts. And the reason it goes in that order is because if we start paying the capital accounts, then it's quite possible that we end up with not enough money to pay the other partners. And that could be a result of us selling the inventory for less than we had thought or something else could happen in the liquidation process. The liabilities could differ than what we thought. And if that happens, we won't have the money to pay off the full capital account balances. So to not get in that problem, to not get in trouble, to not get a fight between the partners, at the end, if we need to do it the proper way, which means we sell the inventory first, then we pay off the liabilities and then we can pay the cash to the partners. So we've got cash of $182,500. We've got inventory, our only asset in this problem, $530,000. We've got accounts payable, $240,000. And then the capital accounts are $93,000, $212,500, $167,000, respectively. First thing we're going to do is sell the assets, which is only inventors. That's going to give our example here. And we're actually going to sell it for $450,000. So this should be $450,000. Is what we're going to sell for in this case. And therefore, when we reduce the inventory, we only got $450,000. The inventory is worth $530,000, or it's on the books for $530,000. That's the book value. So that means that there's going to be this kind of loss that we have on the inventory. And that's going to go to the capital accounts. We're basically going to break out this loss. So if we take the $530,000 minus the $450,000, we get an $80,000 loss. We then are going to say, multiply that times the profit sharing to allocate it to the capital accounts in the proper format. Note this is kind of like the accounting equation up top. So we're going to multiply that times 0.5, 50%. That's the $40000. If we take that same $80,000 times 0.333333333333, that's going to be the $26,667. And the last one will, of course, be 80,000 times 0.1666666 on forever. And that'll be the 13333 about. So that's going to be our selling of the assets. Then we're going to have the balance. We'll bring the balance down. We'll have the cash. And the sale of the assets, increasing the cash to 632,500. Inventory was at 530. Went down by 532.0. Then we've got the capital accounts was at 93,000 for K. It's going down by 40, because there's a loss. I'm sorry, the accounts payable. We're bringing down the accounts payable. Then we have the loss for 53,000. Then C's capital, 212,500 minus the 26,667, gives us 185,833. And then M's capital, 167,000 going down by 13,333.2. 153,667. Then we're going to pay off the liabilities. There's liabilities here of 240,000. So cash is going to go down by 240. We'll pay off the liabilities for 240. That's the only two components of this transaction, no effect on the capital accounts here. The balance then, we have cash 632,500 minus the 240, giving us the 392,500. We then have the payable going down to zero. And then we'll just bring down the capital accounts, so 53,000 bringing them down 185,833, bringing it down 153,667, bringing that down. Next, we're going to distribute the cash to the owners. Note all we have left is cash and the owner's balances. So now we can just pay off the cash and give whatever is owed to the owners. Do not make the mistake that thinking that these balances here should match the profit sharing percent. It's common to think that and we'll start to think that we messed something up if that is the case, but we didn't mess anything up. These profit shareings only deal with the profit sharing. They don't deal with the capital account balance in total. There are things that will throw off the capital account from the profit sharing amount, including investments, which don't necessarily need to follow the profit sharing percent, although they could. And the distributions, which don't necessarily need to follow this percentage, they can, in essence, take out whatever they want up to their capital account balance unless there's our other restrictions in the partnership agreement. So that brings our balances down to zero and we've closed this thing out. Let's do the same thing now with journal entries. So here's our chart of accounts, basically the same thing. It's a small account, a chart of accounts. We're not gonna have a lot of accounts, but just to get an idea of what would look like if we were going to liquidate using journal entries, we've got our assets in green, liabilities in orange. We've got the capital accounts and there's no revenue and expenses. They've all been closed out and that's kind of a prerequisite for us to start the closing process. The income statement should be closed out once we start the closing process and therefore the assets minus the liabilities equals what's in the equity. Remember the order that we will have, we're going to sell our assets, then we're gonna pay off the liabilities, then we're going to distribute the capital. So if we sell the assets, we're gonna say cash is gonna go up. We sold it for 450 remember. We're matching this table so you could follow along with the table here and see how they relate. Then we're going to credit, 530 for the inventory because we sold all of it. So it's at 530, it needs to go down to zero with a credit. The difference then, 80,000, that's the 530 minus the 450 gives us that 80,000. And that is a loss because it's a debit. So we can see that because we got less cash of course than what we sold, giving us that loss of 80,000. If we post this out then cash is going from 182,500 up by 450,000 to 632,500. Inventory is going from 530,000 down by 530,000 to zero because we sold it. And then this gain is gonna be an income statement account going from zero up in the debit direction, a loss by 80,000 bringing us to 80,000. So now what we have is this loss here on the income statement. And remember we just said that what we need to do is close out everything on the income statement so that we just have basically a post closing trial balance and we can then allocate everything to the capital accounts. We did that all in one step when we made the sale here. We just allocated to the capital accounts here. So we're doing kind of a two step process. We recorded the gain. Now we're gonna allocate that gain to the capital accounts in accordance to their profit sharing agreement. So to do that we're gonna say that the gain's gonna have to go down. We're gonna debit the capital account for K and that's gonna be the 80,000 times 0.5. So that's the 0.5 here times the 80,000. That's gonna go to Ks just like we did when we allocated up here in the table. Then we're gonna go to the 33.33 to C which is 26,667. Then we're gonna go to the 16,67 of the 80,000. So 80,000 times 0.16666 on forever gives us the 13,333. Then of course the 40,000 plus the 26,667 plus the 13,333 adds up to 80,000. So if we post this out then we're gonna say that the capital accounts going from 93,000 for K down by that 40,000 because we're allocating the loss to the capital accounts to 53,000. C had 212,500. It's going down by 26,667 to 185,833. And then M started at 167,000. It's going down by 13,333 to 153,667. And then we have the gain starting at 80,000. It's going down to zero. So now the gains back down to zero and we're left with just cash, the liabilities and then the capital accounts. Next step we're going to reduce the liabilities. So to do that we're gonna say, all right, the payable account has 240,000. It's a credit balance. We're gonna make it go down, doing the opposite thing to it, a debit. Then the credit's gonna go to cash because we're gonna pay off the cash for it. Posting this out then cash is gonna go from 632,500 down in the credit direction 240,000 to 392,500. Then the account payable is gonna go from 240,000 down by 240,000 to zero. So now we're gonna be left with just cash and the capital accounts. And now we can just do our final journal entry which would be just to zero out those capital accounts and the cash. So we're just gonna list what the capital accounts have. We don't need to remember the percentages up top. We don't need to know the allocation percentages because it doesn't matter, it doesn't affect this part. We're not going by the percentages, we're going by whatever is in the capital accounts. This one happens to have 53,000 in it. So we're gonna go make it go down to zero by debiting 53,000. The next one has 185,833. We're gonna make it go down to zero by debiting 185,833. M's capital account has 153,667. We're gonna make it go down by debiting 153,667. Then we're gonna credit the cash for the 392,500. It has to be in balance because this is the cap, the accounting equation. Assets which are just cash now equals liabilities, none, plus equity, these three accounts. So that means that it should be in balance, the 53,000 plus the 180, the 185,833 plus the 153,667 adds up to the 392,500. So if we post this out, then we've got the capital account for K company at 53. It's going down in the debit direction to zero. Then we've got the capital account for C, 185,833. It's going down debit to zero. Then we've got M's capital account 153,667 going down with a debit to zero. And then we've got the cash, which is gonna go from 392,500 to a credit down to zero. And that's gonna be it. We've now liquidated the accounts for the partnership. Remember the liquidation process. We wanna first sell the assets, then pay off the liabilities, then we can distribute to the owners.