 Hello, in this lecture, we're going to work a problem that will liquidate a partnership, close up a partnership and distribute the assets and pay off the liabilities. We have looked at a problem in a previous video where we had a liquidation process where we sold the inventory at a gain up here in part one. Part two will now sell the inventory at a loss, so the process will be much the same. However, now instead of selling the inventory here at a gain, we're going to sell it at a loss. It's on the books at 5.30, and we're going to sell it for 4.50. We're going to put this information into two formats, one being a worksheet format such as this, where we can see our accounts in a worksheet. We can see our capital counts in a worksheet. We're also going to record it in terms of a journal entry. So we're going to record the journal entry in this area here, and we will post that to the trial balance to see what happens in terms of a trial balance. So here's going to be the trial balance over here. And then we have our accounting equation of assets, equal liabilities, and owner's equity. So in our trial balance, we're going to have assets, the only two assets being cash and inventory. We've got the payable, being the liability, and credits are going to be represented with brackets in this worksheet. Then we have our capital accounts. We've got the three capital accounts here. We don't have any net income at the time or expenses because those have been closed out to the balance sheet, and that's the process that needs to happen before. We can then close out the company, liquidate the company. Now the order of liquidation will be that we want to first sell the assets. The only asset we have is going to be represented by inventory. That's going to represent all assets if we had a larger company with obviously more assets, larger partnership with more assets. We're going to sell the inventory. Then we're going to see whatever gain or loss we have. In this case, we'll have a loss and we're going to recognize that as a gain or loss. We will then allocate that gain or loss to the capital accounts in accordance with their profit sharing, which we'll put over here. Then we'll pay off the payable accounts. We're going to pay off this liability. Again, all liabilities we should pay off. We're just going to represent all liabilities with one liability, in this case being accounts payable. Then we'll be left with just cash and the capital accounts, and we can pay off the partners in that way. Why do we need to do it in this order? The reason is, well, what if, for example, C here asked for the money right away, C says, hey, I'm a partner. The partnership is closing. I have a capital account balance of $212. Why don't you just pay that now, $212.5, or pay me what you can. Notice we don't have the cash. We've only got $182.5. If we gave C $182.5 and say, okay, here you go, that's fine because we have inventory that we're going to sell here. What if we don't sell the inventory for $530? What if we sell it for less? We then have a problem with the other two partners saying that, well, now the money has been given away already to one partner and we have a loss. Therefore, we want to first sell the inventory, then pay off the liabilities, and then allocate the cash to the partners at the end of the process to make sure it works out as fairly as possible. So we're going to do this in two different ways. We're going to say that first we have these partners sharing a partnership at a three to one ratio with KCM respectively. So what does that mean? What does the three to one mean? And note that if we, the simplest way to think of a partnership is if we have two partners and we say, well, we split it 50-50, 50%, 50%. Why do we have to represent this in a ratio? Why don't we represent it in percentages? Sometimes the percent is not precise. And so sometimes we have a situation where the ratio is more precise. This is one of those situations. Therefore, the ratio is actually more precise than a percentage allocation. So how would we then convert this to a percent? Well, let's think about that. We're going to put it into a percent in Excel. We're going to put K here. K has three out of the three to one or six. Therefore, it's going to be equals three divided by, and I'm going to put brackets in the list of those, divided by three plus two plus one brackets. So we're going to put the division problem three over six. We're going to represent it in this format to show the whole information. Equals to make a formula three divided by, which is of course the slash brackets because we need the order of operations being adding before division. And then we're going to have three plus two plus one. That's three divided by six, which is 50 or 50%. If we want to convert that to a percent, then we can go to the home tab. We can go to the numbers group and we can go to percentage and there's the 50%. Then let's do the same thing for C, who has two out of the six. So we're going to go to C, same thing, we're going to say equals. Then I'm going to say two divided by slash brackets. We're going to say the three plus the two plus the one. Yes, we could just type six, but we're going to put the whole thing in there. And then we're going to say enter and we come up to 0.33. And if we want to see a percent, home tab, numbers group, percentage. Now note that that percent is not actually 0.33%. It's actually, if we go to the home tab, numbers and increased decimals like so, it goes on forever. It's 33.3333 on forever. That's why the ratio is more precise than the percent. Note that even though we are reporting it as a percent in Excel, in the cell, that's what it looks like. It looks like 33. And if I bring it back down, I'm going to bring it down to just two. Then at 33.33. But if we use that cell in a calculation, it is really a ratio because what's really in there is two over six. So keep that in mind. I'll point that out as we go. I'm going to add a couple of spaces to all of these to make them equal so we can see a little bit more of what the actual number is. So I'm going to add a couple of decimals. That's 50. Obviously there's zeros after that there. That's an even one. We're going to do the same thing for M which has one over six. So we're going to say this equals one divided by slash brackets for order of operations three plus two plus one and brackets. So one over six would be point one seven. If we make that a percent home tab numbers percent. I'm in the wrong cell. I'm in the wrong cell undo. We're going to be on this cell and I'm going to go home tab numbers percent. And it's not really 17. However, because if I go to the home tab numbers increase decimals. It's really 16.67 right. So or it's really 666 on forever. And so we're going to leave it at 16.67 and recognize the fact that that is not the whole number. It's really one sixth or 16.666 on forever. All right. So keep that in mind anytime we have an issue like that. If the number comes out if we have a rounding issue it's probably due to or it could be due to the rounding of Excel using the rounding function. Okay. So now we're going to go down here and we are going to sell the inventory. So we're selling this inventory for cash. So we got 450. If we see this in terms of a table will do it in terms of a table first. Then we'll do it in terms of the trial balance. So we're going to receive 450. So cash is going to go up by 450 like so. And we're going to take the inventory off the books. The inventory is on the books at 530. So we're going to do a subtraction. I'm going to take a negative 530 like so. And then we have we have this difference here, meaning the inventory is greater than the cash we got for it. We lost money and we lost 80,000. So that 80,000 then is going to have to be eaten. It's going to have to be allocated to the partners. We're going to have to reduce their partnership balances by the loss that we have there. So we could do that. What we're going to do is we're going to take that 80 and multiply it times their profit percentages. So I can do that in this way. I'm going to say this equals the sum of the 450 and the 5 brackets. The 450 and the 5 is a negative 80 because it's a loss. And then we're going to say times and I'm going to point to that 50% and enter. So let me do that with a calculator. This is the formula that we're using. Obviously what we did here is that we took the 450,000 minus the 530,000. We have an $80,000 loss that we're going to allocate to K based on the profit percent of 50% times .5. That's how we're coming up with this negative 40. Let's do the same thing for C. We're going to do the same thing and say this equals the sum of this and this, which is a negative 80 brackets times their profit percent for C, which is 33.333 and entered. So once again, you could see the formula here. Let's do it with a calculator now. And we're going to say that this then is the 530,000. So let's do the cash first. We come up with a loss of 450,000 minus the 530,000. We lost 80,000. We're going to allocate to C 33.33 or times .3333 if we put it into decimal format. That comes up with 26.664. Why is that slightly different than the 26.667 over here? Because over here, this is actually a more accurate number in Excel. It's more accurate because we're using the cell reference of this cell to do the calculation. And even though that cell says 33.33% it's really two sixths, which is 33.3333 on forever. So keep that in mind when you're working with Excel. That's that's a distinction that could kind of drive you a little crazy. So if you don't see what's happening. So we're going to do the same thing here and for H in H 27 for partner M equals the sum of we're going to highlight these two cells again. Brackets times and I'm going to point to that 16.67 and enter. Once again, this is the formula. If we did that on the calculator, all we're doing is the 450,000 minus the 530,000. That's a negative 80,000 times. If we make this a decimal point 16.67 and enter. Once again, 13.336 slightly different than the 13.333 we calculated over here. Why? Because we used this cell reference, which is not really 16.67%. It's really one sixth. So that keep that in mind. All right. So we're going to do that same thing. Well, now let's bring our balances down here. So we in cash, we had 1825. We increased it by 40. Let's do the calculation equals 1825 plus 450,000 gives us 632.5. Do the same thing for inventory. We're going to say inventory was at 530 minus the 530. But in Excel, it's going to be a plus because this is a negative number. So it's plus a negative 530. That'll make it go down to zero. If that's confusing, just realize that if you did it the wrong way, if we said 530 minus 530 and it came out to that, that doesn't make sense. And obviously what happened is we went the wrong way. We doubled the 530 and we want to do a subtraction problem. So we realize, oh, that means that delete equals this plus this because this is a negative number. So it's plus a negative number. It means it goes down to zero. Nothing happened to accounts table. So we'll just bring that balance down. I'm just going to say, and notice I'm starting to hit plus instead of equals. It's going to be the same thing. If you start with a plus, it's going to Excel knows it's a function. We're going to point to this 240,000. I'm going to select tab and tab over that. I'll do the same thing here. I could hit plus or equals. I'll hit equals this time equals the beginning balance for K, which is 93,000 in case capital account. And once again, I'm going to say plus this negative number. So it's going to reduce the capital account like so. We're going to do the same thing here for C. We're going to say this equals the 225 beginning capital number plus this negative number 26667 brings the balance down to 185,833. One more time for M. We're going to say this equals point to the 167 plus this negative number, which will bring the balance down to 153,667. Now we're going to do the same thought process, but now do it in terms of the trial balance and the general ledger. Some people really like to see it in terms of a table such as this. Some people such as myself would rather kind of see it in a trial balance because I've worked a lot more with the trial balance format and we can see that what account will go down as we post them. So if we think about this in terms of a journal entry, we can think, well, what's happening here? We're selling the inventory for cash. So we can ask our questions, is cash affected? Yeah, cash is affected. We're getting cash for the sale of the inventory. Cash is a debit balance. We need to make it go up. How do we make something go up? We do the same thing to it as what it is. That's a debit. Therefore we're going to debit it because that's the same thing to it. So I'm going to copy that cash. We're going to put that in cell J25, right-click and paste it 123. So there is the cash and the cash we receive is the 450. So we're going to say the 450 will be the debit 450,000 and enter. Then the credit will be going to one credit will be going to inventory. Inventory here is what we sold. It's on the books for 530,000. We sold all of it needs to go down to zero. How do we make something go down? We do the opposite thing to it as what it is. That's a debit. Therefore we're going to credit it because that's the opposite thing to it. And we want to make it go down and doing the opposite is how to do so. So we're going to copy that going to put this over here in J26. Right-click, paste 123 and the credit will be for then the amount that is in there of a negative for the credit 530,000.