 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, 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 three to one 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 three plus two plus one for a total of six. And then we're just going to take each of these divided by the total of six. This is going to be the partners for K, C, and M are the partners. So it's going to be three over six, which is 50%. Now that one can be expressed with a with a percentage, but the others are a little bit more difficult. The two over six 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 and more of a fraction type format. The last one then is one over six, that's a 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 will often 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 to liquid up 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 the other partners and that could be a result of us selling the inventory for less than we had thought or or some other something else could happen the liquidation process the liabilities could differ than what we thought. And if that happens, we won't have the money to pay out 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 inventories that's going to give our example here. And we're actually going to sell it for for 450. So this is this should be 450 is what we're going to sell for in this case. And therefore, when we reduce the inventory, we only got 450 the inventory is worth 530 or it's on the books for 530 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 a the accounting equation up top. So we're going to multiply that times 0.5. 50% that's the 40,000. If we take that same 80,000 times 0.3333333333333 that's going to be the 26 667. And the last one will, of course, be 80,000 times 0.1 666666 on forever. And that'll be the 1333 three about. So that's going to be our selling of the assets. Then we're going to have the balance will 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 zero. 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 or bring 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 13,332,153,667. Then we're going to pay off the liabilities this 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 account. So 53,000 bringing them down 185,833 bringing it down 5153,667 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 mess 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 a 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 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 chart of accounts. We're not going to 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 going to pay off the liabilities, then we're going to distribute the capital. So if we sell the assets, we're going to say cash is going to 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, given 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 going to be an income statement accounts going from zero up in the credit or 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. We're doing kind of a two step process. We recorded the gain. Now we're going to allocate that gain to the capital accounts in accordance to their profit sharing agreement. So to do that, we're going to say that the gains going to have to go down. We're going to debit the capital account for K. And that's going to be the 80,000 times 0.5. That's the 0.5 here times 80,000. That's going to go to K's just like we did when we allocated up here in the table. Then we're going to go to the 33.33 to see which is 26667. Then we're going to go to the 1667 of the 80,000. So 80,000 times 0.16666 on forever gives us the 13333. Then of course the 40,000 plus the 26667 plus the 13333 adds up to 80,000. So if we post this out then we're going to 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 26667 to 185,833. And then M started at 167,000. It's going down by 13333 to 153,667. And then we have the gain starting at 80,000. It's going down to 0. So now the gains back down to 0. 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 going to say, all right, the payable account has 240,000. It's a credit balance. We're going to make it go down doing the opposite thing to it, a debit. Then the credit's going to go to cash because we're going to pay off the cash for it. Posting this out then cash is going to go from 632,500 down in the credit direction 240,000 to 392,500. Then the accounts payable is going to go from 240,000 down by 240,000 to zero. So now we're going to 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 going to 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 going to make it go down to zero by debiting 53,000. The next one has 185,833. We're going to make it go down to zero by debiting 185,833. M's capital account has 153,667. We're going to make it go down by debiting 153,667. Then we're going to credit the cash for the 392,500. It has to be in balance because this is the accounting equation. Assets, which are just cash now, equals liabilities, none, plus equity, these three accounts. So that means it should be in balance, the 53,000 plus 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 going to go from 392,500 to a credit down to zero. And that's going to be it. We've now liquidated the account for the partnership. Remember the liquidation process. We want to first sell the assets, then pay off the liabilities, then we can distribute to the owners.