 Hello and welcome to this session. This is Professor Farhad and this session we're going to be looking at an example that deals with installment liquidation. If I say we are working an example, it means we already covered the topic in a prior session. So installment liquidation is covered in depth and explanation in the prior session. This topic is covered in advanced accounting as well as the CPA exam. As always, I would like to remind you to connect with me only then. YouTube is where you would need to subscribe. I have 1,500 plus accounting, auditing and tax lectures. If you like my lectures, if you're listening to me, please like them, share them, put them in the playlist. And if they're benefiting you, means they might benefit other people. Please share the wealth. This is my Instagram account. Please follow me on Instagram. This is my Facebook account and I do have a website on my website. If you chose to support the channel, you can donate if you chose to. Also on my website, I do have offers for my students and right now Becker CPA review is offering a thousand dollar off of the Becker Bundle, the four-part CPA exam. Becker is the gold standard and CPA preparation and right now they are they are having an unlimited offer. That means once you sign up for the course, you have access as long as needed. So if you're planning to study for the exam or if you are still a college student, I encourage you strongly to sign up for the course because you could use their lectures and their multiple choice and exercises as a supplement to your college studies. So let's take a look at an example that illustrates that illustrates the installment method. We have Nick Parker and Rice, our partner who share profit for three to one. Once again, four, three to three, not to one. It means four plus three plus three equal to 10, four tenth, three tenth and three tenth. Every time you are giving the information this way, let's assume you are giving four to three to five. Well, you add four plus three plus five and that's 12 and it's going to be four, 12, three, 12 and 15, 12. This is how you determine the percentages. Parker, one of them, decided it would be more profitable for him to operate as a sole proprietary. So Parker wants to leave. Nelson and Rice are an agreement that life would be more rewarding if Parker were to enter into direct competition with them. And the other two partners said, you know what, we really don't want Parker, you know, it's OK for him to leave. Nelson and Rice made repeated attempt to buy Parker's interests. They were unable to reach an agreement. The partners mutually agree that their association should be dissolved. So basically what we're doing is we're going to be liquidating the partnership. So they agreed that it's not a good idea to stay together. A condensed balance sheet before realization of the asset is shown on the next slide. So here's where they stand. They have 5,000 in cash, 60,000 in other assets, they have 20,000 in liabilities. Nelson's capital is 20, Parker's capital is 12 and Rice's capital is 13 and they distribute profit 40. Let me go back and see how they distribute profit, 40 to 30 to 30, 40 percent, 30 percent and 30 percent. So what they did is they sold their assets in installments. So they have one, two, three, four sales. The first sale, they sold it more than the book value and they generated again a $4,000. So copy this information down because we're going to be using this information in the next slide. They, so they sold it for 16,000. This is the cash that they received. So they received cash of 16,000 and they had a gain. OK. Simply put, let me do the journal entry. I'm not going to do the journal entry for everyone. I'm going to show you the journal entry for two examples, for stage one and stage two, but you'll be able to follow. For stage one, what they would do, they will debit cash. They will debit cash because they sold the assets for 16,000. They will credit the asset, whatever they sold for 12,000. That's the book value and they would have a gain for 4,000. Then what they would do with this gain, this gain is debited. Then they would allocate the gains. Then they will debit the gain for 4,000. Then they will credit Nielsen, capital, Parker capital and rice capital. Now, how much will they do it? Well, for Parker and rice, for Parker and let's start with Nielsen. Nielsen is 40%. That's going to give Nielsen 1,600 and for the other two, 1,600, not 16,000. 1,600 and for the Parker and rice, 1,200 because they allocate their profit sharing is 30%. Therefore, we got rid of the gain and we allocated it. Okay, so that's the first sale. Let's take a look at the second sale and I'm going to do two. Then you'll be able to do the rest on your own if need be. They sold something for 12. It has a book value of 10. They sold it at a gain. Am I going to do a gain? Let's look at the third sale. They sold something for 10. It has a book value of 20. Here they have a loss. Therefore, they debit cash 10,000. They debit loss 10,000. Then they credit the asset for 20,000. Then they have to allocate this loss. They're going to have to allocate this loss to three partners. They have to allocate the loss for three partners. Now, how would they allocate the loss? Well, how would they allocate the loss? They would allocate the loss and the respective ratio, which is in other words, I'm going to show you the numbers because they might be different down the road, they'll have to debit Nelson, debit Parker, and debit Trice's capital and credit the loss for 10,000. And those accounts will be debited. Okay. So this is the journal entry in case you are wondering, because I don't want to be doing the journal entry when I start to prepare the schedule. Okay. So they made four sales. Okay. And again, copy the data down because we're going to be using it in the next, in the next, on the next slide. I don't want to be flipping back and forth. So they had the gain, a gain, a loss, and a big loss. Okay. So the partners prefer the cash to be distributed as soon as it's available. So that's, that's what they want to do. Require, prepare the summary and call firm in the, in the, of the polarized realization and liquidation. You should prepare supporting schedule. Okay. Let's take a look at what we have. We're starting with beginning balances. $5,000 in cash, $60,000 in other assets, $20,000 in liabilities. And this is the respective capital. And they all have surpluses, $20,000, $12,000, and $20,000, $12,000, and $13,000. The first thing they did, they sold an asset for $16,000. And the asset has a cost of $12,000. Remember, they sold it for $16,000. It has a cost of $12,000. They have a gain of $4,000. So we received cash of $16,000. So we're going to add cash, $16,000, reduce the asset, $12,000, then $4,000. And I show you the journal entry will increase the capital balances of the various partners. Now the new balances, now they have cash, $21,000, other assets of $48,000, liabilities of $20,000, liabilities of $20,000, then their capital, the respective capital balances. What do you think they're going to do first? Well, before they distribute any cash to the partners, now they have enough cash to pay off this liability. So let's pay off the liability. We're going to reduce the cash and reduce the liability. And simply put, the entry will be debit, I'll do the entry here real quick. They're going to debit, let's assume the liabilities are payable, debit accounts payable, $20,000. It doesn't have to be accounts payable, credit cash, $20,000. I'm just using accounts payable as a representation of liabilities. So liabilities are gone. Liabilities are down to zero. So basically we get rid of the liabilities. Now we have $1,000 in cash, $48,000 and other assets, and we have their capital balances. Now, remember, once they pay off their liabilities, every time cash is available, Nelson, Parker and Rice, they're going to be, they want to be paid. They have, there is $1,000 of cash. How are we going to distribute the $1,000? Are we going to give the Nelson, Parker or Rice? Now we have to prepare what's called the safe payment schedule. So why do we prepare the safe payment schedule? This way we don't give the money to a partner that may have to end up giving us that money back, okay? Because we don't know what's going to happen, okay? So we have $1,000 payment. What we're going to do, we're going to assume that this $48,000 is useless. This $48,000, it's going to be sold at a zero, at a zero value. It means we're going to have a loss of $48,000. We're going to distribute the loss to the various partners and see who, which one of the partners will survive till the end, okay? Let's do this. So schedule one, here are the balances for Nelson, Parker and Rice. 21, right here, okay? These are the balances. Now we're going to allocate $48,000 of losses, 40%, 30%, and 30%. So we allocate $19,200 to Nelson, $14,400 to Parker and $14,400. So we allocated $48,000 to them. Let's look at their balances afterward. If we look at their balances afterward, the only person, the only person, or not the person, yes, the only person that's going to survive with a credit balance is Nelson, okay? The other two, they have $1,200 debit balance, $200 debit balance. What are we going to do with those debit balances? We're going to close them to Nelson. Nelson's going to absorb them. So we're going to go ahead. Nelson's going to absorb $1,400 and now their balances are zero and zero. So guess what? The first $1,000 since Nelson is expected to survive till the end, Nelson's going to get the $1,000. So where's going to go? This $1,000 is going to go to? It's going to go to Nelson's account. It's going to go to Nelson's balance and it's going to reduce Nelson's balance to $20,600. Okay. And hopefully you can see that Nelson will survive. Well, not necessary, but notice Nelson has the largest capital balance. So there's a good chance he might survive the other two, although he got 40% allocation of profit. In terms of profit, he's going to get the money first. In terms of losses, he's going to lose because he's going to absorb more losses than them, but notice he has the largest capital. So there's a good chance he might survive. And between Parker and Rice, I want you to think about it. Between Parker and Rice, who's going to survive first? Well, Rice will survive more because Rice has $13,000 balance and Parker 12 and they both share everything 30%. So notice, before we even do the computation, I want you to see that Parker, Rice will survive Parker. Rice will survive Parker, just so you know about the big picture. Okay. So we gave $1,000 to Nelson. All right. Then we made another sale. And the second sale, we sold something for $12,000. It has a cost of $10,000. We had a $2,000 gain. That's from, this is sale number two. This is sale number two. We had a gain of $2,000. Therefore, we increase cash, reduce the asset and distribute of the $2,000 gain. It's going to increase their account by $800, increase their account by $600, increase their account by $600. Now, we have $12,000 in cash. Again, what do we have to do now? Well, they want to be paid. Once there's a cash, they want to be paid the cash. Well, let's see what's going to happen. We're going to have to prepare another schedule. Here are their capital balances and we're going to assume this account is equal to zero. In other words, not equal to zero, all these, all other assets, they're going to be sold and we're going to receive nothing for them. So let's start with the second schedule. So we're going to bring down the balances. Okay. Then we're going to go ahead and distribute the $38,000 in losses. $40,000, $30,000, that's equal to $38,000 in losses distributed. That's going to reduce their balances. They still have a capital balance. Whoops, still have a cap, still have a capital balance, still have a capital balance, still have a capital balance. Okay. Now, what's going to happen is we're going to distribute it. $6,200, $2,400, and $3,400, the respective balances. Okay. So the $12,000 will be distributed. $6,000 is going to increase their balance, increase their balance, increase their balance. Now, we no longer have cash. Okay, and we have $38,000, this is the balances. This is the balances in the non-cash assets, and this is their capital balances. We're going to make a third sale, a third sale. The third sale, we sold something for $10,000, but we are at a loss. So we sold something for $10,000, we are at a loss. So we received cash, but we have a loss to distribute. The loss is distributed 40%, 30% and 30%. We sold something for $10,000, something has a basis of $20,000. We are at a loss. Loss is distributed $40,000, $30,000 and $30,000, $40,000, $30,000 and $30,000. Okay. Now we have the $10,000, now we're going to have to, we have to do payment to the partners of the $10,000. We're going to distribute $40,000, $30,000 and $30,000. So $10,000, $40,000, $30,000 and $30,000. Then we're going to have a zero cash again. We're going to have $18,000 left and we're going to sell that $18,000 for $2,000. Well, if that's the case, if we sold something for $18,000, we have $2,000 left. We're going to have $16,000 to distribute. Those are losses. Those are losses and those are $16,000 in losses. Therefore, what's going to happen after we distribute the losses? What's left is $800, $600 and $600, $800 plus $600 plus $600 equal to $2,000 cash and we're going to distribute the cash accordingly and we liquidated the whole company. We liquidated the whole partnership, the company. So this is a schedule to compute safe payment. This is a schedule to compute safe payment and this is installment liquidation. If you have any questions about this topic, please email me. If you happen to visit my website for additional lectures or my YouTube, please consider donating and you're greatly appreciated. And if you're studying for your CPA exam, I'm not sure if they go down, if they go down this far, but you need to know the simple liquidation. But in case you don't, now you know it, now you know it. Good luck and study hard for your exam.