 Hello, and welcome to this session. This is Professor Fahad. In this session, we're going to be looking at installment liquidation in a partnership. This topic is covered in advanced accounting as well as the CPA exam. As always, I would like to remind you, my viewers, to connect with me only then. YouTube is where you would need to subscribe. I have over 1,500 plus accounting, auditing, and tax lectures. Please, if you like my lectures, like them, share them, put them in playlists. If you're listening to my YouTube, it means others might benefit as well. If you're benefiting, so please share the wealth. This is my Instagram account. Please follow me on Instagram as I'm trying to increase my followers. This is my Facebook account, and this is my website. On my website, if you would like to, you can donate by supporting the channel. Also on my website, I do have offers. And right now, Becker CPA Review, the gold standard in CPA preparation, is offering $1,000 off of all four parts of the Becker bundle with unlimited access. Usually, Becker don't offer unlimited access. Now they have this limited offer. If I was in your shoes and I'm studying for the exam or planning to study for the exam, I would purchase this package. Also, if you are a college student, Becker offer over 2,000 plus multiple choice questions as well, exercises and problems that would help you supplement your college studies. So let's talk about installment liquidation. In the prior session, we looked at what's called simple liquidation. And if you don't know what the prior channel, prior lecture is, this is the simple liquidation. I explained it. Then we worked an example. So in case you're wondering what a simple liquidation is, just go back and view the simple liquidation. But what is a simple liquidation? Simple liquidation is when you sell all your assets all at once. You sell all your assets all at once. Well, for one thing, that's not realistic. When a liquidation occur, it doesn't happen all at once. And if it does happen all at once, what's gonna happen is it's gonna be a fire sale. And what is a fire sale? In a fire sale, you're gonna be forced to sell your asset at low prices because you wanna sell them all and you wanna sell them fast all at once. So that's what's wrong with a simple liquidation. Nothing wrong is not the correct word, but that's the disadvantage for the partnership. And oftentimes it's not realistic. Sometimes you cannot sell it all at once. And if you wanna sell it all at once, well guess what's gonna happen? You're gonna have to lower your prices. So it does hurt the partnership when you have, in reality, a simple liquidation, simple liquidation. So what's gonna happen is we're gonna look at a more advantageous and more realistic plan for the partners. And that's where the installment method comes into place. That's when the installment method gets into place. We're gonna sell the asset rather than all at once. We're gonna sell it over time. And we can all agree that this is what usually happened in the real world. You sell your asset periodically when you are liquidating. Now you might sell a little bit faster than normal, but you're not gonna sell it all at once. So you're gonna sell it in pieces, okay? And, but here's what's gonna happen. When you sell your assets in pieces bit by bit, guess what? The partners are gonna be knocking on the door of the treasurer or of the person in charge of the cash and asking them for payment. So that's gonna create a problem for us. Problem in a sense, how are we going to allocate? How are we going to distribute those profits? So special care must be taken. This way we don't end up giving partner some money then ending up asking that partner back from that money. So we're gonna go through that liquidation plan to make sure we take precautions. We make sure we take precautions. So the best way to illustrate this is working an example, but before working an example, we have to look at the assumptions that we have to make. This is the most conservative approach. So the safe payment approach, we're gonna be using the safe payment approach. It's the most conservative approach. And it makes three assumptions. So listen to me carefully. One, loan from partners are added to their capital. Simply put, if the partners lend money to the partnership, we say, guess what? We owe you this money and it's gonna be paid part of your capital. So we add the loan to their capital balance. That's the first assumption. Any remaining non-cash asset are sold at zero. Again, this is an assumption. Hopefully we all know what an assumption is. We say, we assume that we're gonna sell everything else at zero, it means everything else is a loss. In other words, we assume worst case scenario to determine the effect on the partner's capital balances. This is an assumption. It's not gonna happen, but it's an assumption. Three, we assume that partners are insolvent. What does it mean, partner are insolvent? It means they cannot come up with any money. To remember, we talked in the prior session, if you have a deficit, you can come up with some money to cover your balance. We assume here, there is no, they are insolvent. And remember assumptions, we don't record the assumptions. There is no journal entries for the assumptions. Then what we do, once we have enough cash, we pay the creditors and at every sale of assets, the safe, after every sale of assets, the safe payment of the available cash is determined. So we prepare a schedule after every sale because we're gonna sell in pieces, in installment. Installment means in pieces. The best way to illustrate this concept is to look at an example. We have this partnership here. They have 10,000 in cash, 40 in receivable, 30,000 in inventory, 60,000 in equipment. So this is the non-cash assets. They have liabilities of 18,000. And here's the capital balances, B, D and O, 45,000, 27 and 50, they're all, they have surplus. It's not deficit. The partner shares income to 40, 40 and 20, 40%, 40% and 20%. Assume that 70% of the receivable are collected. So of the receivable, we collected 70%. So 40,000 times 70% is 28,000. So we collected 28,000 in cash. And the inventory with the book value of 15 is sold for 10. And we sold the inventory for $10,000. That's the cash that we received, but it has a book value of 15. On this inventory, we have a loss of 5,000. All in all, we collected cash, 28. We collected cash, 28 plus 10. We have cash available now, 38,000, okay? All cash available at this time is distributed. So let's take a look and see how are we gonna distribute this cash. Okay, first we're gonna start with the beginning balances, 10,000 in cash, 130 in non-cash assets, 18,000 in liabilities, 45,000, their balance is for Brink, 27 for Davis and 50,000 for Olson. And again, they all have surplus. This is the beginning balances. Now we collected some cash and we made a sale. So we collected cash of 40,000, 38,000. And we reduce our non-cash asset. We reduce the receivable by 28. And the inventory by 15. So we reduce our non-cash assets by 43,000. We reduce our non-cash assets by 43,000. Now what we did, we incurred a loss. On the inventory, remember, and what I showed you here, we have a $5,000 loss on the sale of the inventory. Now what we do, we distribute the loss. We have $5,000, 40%, 40% go to B, 5,000 times 40%, 40% goes to Davis, and 20% goes to Olson. So we distributed the loss. Now we compute the new balances. Now we have cash of 48,000. And let me show you the journal entry. Just I will show you the journal entry for this. So we debit cash, we debit cash 38,000. Credit, non-cash assets, 43,000. Then we have a loss of 5,000. Then we allocate the loss. We debit, bring account, bring capital. We debit, bring capital, 2,000. We debit, Davis capital, 2,000. I always like to work the journal entries. And Olson, we debit the balance 10, and we credited the loss 5,000. We credited the loss 5,000. So this is the journal entry that we made, okay? Hopefully I would remember to make all the journal entries for you. The next thing we're gonna do since we have the money and we have enough money to pay the creditors because before we did not have, we only have 10,000 and we have 18,000 of liabilities. Now we can pay the creditors. So we're gonna pay the liability. We're gonna reduce our cash. So we're gonna debit liabilities by 18, credit cash by 18,000, okay? Now cash that we still have now at hand, 30,000. We still have 87 of non-cash assets, and these are the balances for the partners. Now the question becomes, now you are supposed to distribute this $30,000 to the partners, but the question becomes, which partner are you gonna give the money to? They all have credit balances. This has 43, this has 49, this Davis has 25. So the question is, who do you give it to? Do you give it to the largest balance, which is who? Olson, do you give it to the lowest, Davis, do you give it to Brink? Who do you give the cash to? Well, now we're gonna have to prepare what's called worst case scenario. What's the worst case scenario? We're gonna find out who's gonna be standing in the, which partner is gonna be standing in a worst case scenario? Okay, what does that mean? It means here's the capital balances before we make this assumption. Remember, we still have 87,000 worth of non-cash assets. What are we gonna assume? Assume this is worth zero. We're gonna assume we can't sell this. So when we sell it, we get nothing. We're gonna get zero. Therefore, we have 87 of losses. Well, if we have 87 of losses, let's allocate the losses, 87 times 40%. 34,800 goes to Brink. The same amount goes to Davis because they have 40% rate and 48, 87,000 times 20% goes to Olson. So what we did is we allocate the losses to the three partners, then we compute their capital balances. Notice what happened? Davis is wiped out. Davis, now they have a deficit balance. So in a worst case scenario, Davis will not exist. Okay, then who left in a worst case scenario? B left because B still have 8,200 of a credit balance and Olson will have 31,600. What does that mean? It means when you distribute the cash, first you distribute the cash, available cash to B and O, to Brink and Olson. If you really think about it, let me tell you why Davis will not get any money. And hopefully you can see this even before you do the computation. Davis has the lowest credit balance, okay? The lowest credit balance and has a high absorption rate of losses or profit. So when we have losses, he's gonna take 40% of the losses in relative to Olson. Olson on the other hand, Olson has a low percentage. Okay, and I'm gonna tell you, Olson's gonna survive, survive Davis and survive Brink. Olson will always survive them because his participation in the profit and the loss is low and his capital is high. Okay, really to wipe Olson out, to wipe, let me just tell you, just kind of give you a number. To wipe Olson out, 49,000 divided by 0.2, the partnership will have to incur $245,000 in losses and also will absorb 20% of this. And the partnership doesn't even have 245,000 in non-cash asset. So notice Olson would survive them all, okay? So I just want to, I want you to see this, so you'll see the big picture. Now, what do we do with this deficit, 9,800? Well, what's gonna happen? They're gonna have to absorb the deficit. They're gonna have to absorb the deficit. What does that mean? It means of the deficit, 9,800 goes to Brink and 40% of it, of the 9,800 and 20% of it goes to Olson, 3,260. After that, Brink will have a balance of 1667. Olson will have a balance of 28,333. Therefore, those two together, if we add those two together, those equal to 30,000. And this is how we allocate the 30,000 because Olson's gonna survive. We're always gonna have to give Olson Durmani first, okay? So of the 30,000, 28,333 goes to Olson and 1667 goes to Brink. Now, what we're left with is non-cash assets of 87. B has a credit balance of 41,333. Davis has a balance of 25 and Olson has a balance of 20,667. Simply put, Davis did not get any money after the sale because Davis, it's gonna, as we assume worst case scenario, he's gonna be wiped out first, okay? Now, guess what? Once we make another sale of the 87, we'll prepare another schedule again. And we'll prepare another schedule. Then we do the allocation then we do the allocation that we prepare another schedule again, then we do the allocation and this process repeats itself. I'll work an example in the next session a more like maybe two, three schedules. Additional losses, discovery of liabilities and liquidation of expenses. Sometime what could happen as you are making the payment, it's possible since some additional liabilities will be discovered during the course of the liquidation. We find that now that we're responsible for more payments. Usually there are liquidation expenses which may not be paid at the time of the safe payment. Also, we might have to make payments because as we are liquidating, we're gonna have additional expenses, maybe lawyers, accountant, consultant, help us go through the liquidation. Under those circumstances, we have to create an allowance. Simply put, we have to kind of create a debt, a contingent liability for those payment. If there's anything discovered, any expenses. So just basically we have to put some cash aside. A balance of cash will be retained to be used for these expenditure. If you have any questions, please email me. If you happen to visit my website for additional lectures, please consider donating and supporting the channel. If you are studying for your CPA exam, as always, study hard. I highly doubted that they go this much in depth on the exam, but you never know. In the next session, I will work an example, a more comprehensive example using this method. Good luck, steady hard, and see you on the other side of success. Thank you.