 Hello and welcome to this session. This is Professor Farhad and this session we're gonna be looking at simple liquidation example. This topic is covered in advanced accounting as well the CPA exam, the FAR section. As always, I would like to remind my viewers to connect with me on LinkedIn. YouTube is where you would need to subscribe. I have over 1,500 plus accounting, auditing and CPA lectures. If you like my lectures, please like them, share them, put them in playlist, let the world know about them. If you're benefiting from them, it means other people might benefit as well. So share the wealth. This is my Instagram account. This is my Facebook account. And on my website, you could always donate if you'd like to support the channel. Also on my website, I do have offers. And right now, Becker's CPA review is offering $1,000 off. It's a limited offer for the summer on the Becker bundle four parts of the CPA exam. 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So this is 40%, 40%, I'm sorry, 30% and 30%. This is the respective shares. Now let's assume we have four to three, then one of them left, one of the partners left, when we still have four and three. Now we have four to three, four plus three equal to seven. We still have four seventh and three seventh. So this is what happened if one of them leave the partnership. So you understand how these ratios work. I wanna make sure you do so. And they sold their assets for $30,000. This is their balance sheet. They have right now cash of 15. They have other assets of 110 and they only got 30,000 for this, that's not good. They sold it at a loss. Means they're selling it very quickly. That's their liabilities, 42,000. And this is their capital balances. Or their capital balances is a credit. It means because it's on the under liabilities and capital and it's not negative. So they don't have any deficit. And this is where do they stand from a personal level? Pete, that's their personal status. They have 55,000 in assets and 80,000 in liabilities. So Pete basically had a deficit, personal deficit of 25,000. What does that mean? It means don't expect Pete to contribute anything to the partnership because Pete's money will have to go and meet his personal obligation. Tom, he has 30,000 in personal liabilities, 20. If Tom has a deficit, Tom has some money to cover. Zach, his assets are less than his liabilities. So we don't expect Zach to contribute anything to the partnership in case his balance goes into deficit. So the only person that could possibly contribute is Tom and Tom can possibly contribute up to 20,000. So let's take a look at the beginning balances and start this process. We have cash of 15,000, non-cash assets of 110, 42,000 in liabilities, 55,000, the credit balance for Tom, 14,000, the credit balance, I'm sorry, 55,000 for Pete, 14,000 for Tom and 14,000 for Zach. The first thing they did is they sold the non-cash asset for 30,000 and they had a cost of 110. Therefore the partnership will have a loss of 80,000. So the partnership will debit a loss, 80,000, debit cash of 30,000 and they will credit non-cash assets of 110. Then we have to allocate the loss to the various partners. So we have to take this loss and allocate it to the various partners. So we're gonna debit, we're gonna debit Pete's capital, we're gonna debit Tom's capital, we're gonna debit Zach's capital and we're gonna credit the loss of 80,000. How much do we debit and credit? Well, Pete's gonna get 40%, Tom 30% and Zach 30%. Therefore it's gonna be 24,000 to Tom, 24,000 to Zach, that's 30% of 80,000 and 32,000 to Pete. Okay, now let's go ahead and allocate. So we're gonna increase cash by 30,000, reduce our non-cash asset, now our non-cash asset is zero, we have cash of 45, our liability is still 42, we're gonna reduce Pete's balance by 32,000, it's still credit, Tom's balance, we're gonna reduce it by 24, now Tom's gonna go down to deficit, now Tom has a deficit, Tom has a deficit now, Tom has a deficit and we're gonna reduce Zach's balance and Zach has a deficit as well, they both have deficits. So this is what we did, we sold the asset and allocated the loss. Sold the asset, allocated the loss, okay? Let's clear everything before we move to the next step. The next step is this, we know now that Zach has a deficit balance, now we know Zach has a deficit balance. And if we look at the prior slide, we don't expect anything from Zach because Zach, his personal asset, can barely cover his personal liabilities. Therefore, we don't expect to get anything from Zach, what does that mean? It means we're gonna take Zach's balance, okay, Zach's balance of 10,000 and allocate the balance to Tom and Pete. Why to Tom? Because Tom has some cash, Tom will eventually contribute some cash to cover his balance and Pete already has a credit balance. So they're gonna be absorbed by Tom and Pete. How are they gonna be absorbed? They're gonna be absorbed by the rate of four and three, okay? Four plus three equal to seven. Four seventh will go to Pete and three seventh will go to Tom. Let's do the computation. So of the $10,000 that Zach's cannot recover times, let's do four seventh first, four seventh times 10,000, which is 5,714, 5,714. So we're gonna reduce the balance by 5,714 and we're gonna reduce this balance by the remaining which is 4,286. So this balance is allocated to those two, okay? Allocated to those two and as a result, Tom went down, his account went even further negative, deficit to 14,286. No worries, remember Tom has some money from personal asset. Pete's account still credit, although it's lower, it went from 23 to 17, but he does still have some credit in the account. The next thing we're gonna do, Tom's gonna come up with his share of the cash. And by the way, the journal entry for this, so you know what the journal entry is, we debited, just gonna show you the journal entry since we're doing the journal entry, we debited Pete's capital, 5,714, and we debited Tom's capital, 4,286 and we credited Zach 10,000 and by crediting Zach's, we took Zach out of the picture. We brought his account up to zero. The next thing, Tom's gonna contribute money, Tom's gonna contribute 14,286, we're gonna debit cash, 14,286, debit cash and credit his account, credit Tom's capital for that amount and by crediting his capital by that amount, we brought his capital up to zero and Tom's out. Okay, so Zach is out, Tom's out. This is how much cash we have, this is the liability that we have and this is Pete's remaining balance. The next thing we're gonna do, we're gonna pay off the liability. We're gonna pay off the liability for 42,000, we're gonna debit, the entry will be debit, liabilities, 42,000, reduce the cash, 42,000. So notice, cash went down, liability went down, the liability is out too and what we're left with obviously is, is Tom, Tom still have 17,286 of capital and actually we're gonna do it, we're gonna distribute the remaining cash to him. So we're gonna debit Pete's capital, 17,286, we're gonna credit cash, 17,286, cash is out, non-cash assets are gone, liabilities are gone, Pete's capital is gone, Tom and Zach's gone, we liquidated the partnership, we are gone. Now if you were asked how much did they pay, how much did they pay to the creditors? Basically, Zach, Zach only paid 30,000 to the creditors because he got 30,000 in assets, 50,000 in liabilities, he couldn't even pay his personal account, he only paid the personal, he couldn't even pay his personal debt, he still have a deficiency of 20,000, that's his problem. Tom has a 30,000 in asset, 30,000 in personal asset, 10,000 in personal liability, Tom only paid 10,000, which is his personal debt and the remaining 20,000 went to cover his deficit. So paid to the creditors, 10,000, Pete had 55,000 in personal asset and 80,000 in liabilities, Pete paid the, paid 55,000 to this personal debt, then he had 17,286 left from the partnership and this is gonna go, now the personal creditors can go after this money, so the personal creditors, now they can go after this money, after the final liquidation and this is what I talked about earlier, when I said if you have anything left from the partnership, now the personal creditors can come after you, they were not covered wholly, but at least they recovered additional 17,286, so they came after this money, so the personal creditors came after this money, okay, came after this money that Pete's got, okay, because he could not cover them from his personal asset, what's left in the partnership, now they have access to it. 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