 Hello and welcome to the session. This is Professor Farhad. In this session, we're going to be looking at advanced plan for cash distribution. This is part of the installment liquidation for partnerships. So, basically this is an extension or a continuation of 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. Make sure to subscribe to my YouTube. I have 1500 plus accounting, auditing and tax lectures. If you like my lectures, please like them, share them, put them in the playlist. If they're benefiting you, it means they might benefit other people. Please share the wealth. This is my Instagram account. Please follow me on Instagram. This is my Facebook and this is my website. On my website, I do have a donation button. If you'd like to support the channel, it's greatly appreciable. Also, on my website, I do have offers right now. A Becker CPA review is offering $1,000 off of the Becker Bundle Unlimited Access Four Parts CPA exam. If you're studying for your CPA exam, this is an excellent choice. Although you may not be studying now, you might be studying in the future for the exam. Sign for it now because you'll have it as long as you need to and you could supplement your current studies. Now, in the prior session, we looked at the safe payment approach and we said that's the most conservative approach. So, I'm going to go over the next three slides very quickly for a reason. The reason is a review. That's why that's the reason. But the reason is because I'm going to go from the safe payment approach to another technique called advanced plan for distribution of cash. So, the safe payment payment approach is the most conservative. It assumes that loan from partners are added to their capital balances. Remaining non-cash assets are sold at zero. Partners are personally insulted. It means they cannot pay their money. We looked at this in the prior session and we said when adequate cash is accumulated, we pay creditors and after each sale, the safe payment is available. The safe payment of the available cash is determined. So, after we make every sale, we're going to have to prepare a schedule and we might be making maybe 20 different sales. So, think about this method. Every time you have a sale, you have to prepare the schedule. Every time you have a sale, you have to prepare the schedule. And let me show you what I mean by this. So, we looked at this example and we determined that after we made the first sale, we had losses. We allocated the losses, then we paid the creditors. Now, I'm going fast through this because I went through over this example. I just want to make a point here. Then we have our balances. Then we determine how much we should pay for the remaining capital of the 30,000 based on the remaining capital and of the 30,000, we paid 1,667 to break and 28,333 for Olsen. Now, we have $87,000 of remaining non-cash assets. Every time we make a sale, every time we make a sale of these $87,000 an asset, we have to prepare another schedule. Once again, we might be making 20 sales and every time we have to do so. So, do you see that's an efficient way? Hopefully, you see that's not an efficient way. So, we're going to use another method that's more efficient in determining the cash distribution to creditors, not the creditors, to partners, because the partners wants to be paid fairly and equally. So, we're going to move into something called Advanced Plan for Distribution of Cash. The objective is to derive the order of the amount of cash that should be distributed to each partner, such as that no partner receiving a cash distribution will make an additional investment. Simply put, we're going to be preparing the schedule upfront and based on that schedule, every time we make a sale, we know how much cash to pay to each partner. So, it's a different method on distributing that installment sales, but rather than going through the method that we looked at earlier, which is kind of inefficient, the safe payment approach, we're going to be looking at the advance, at the advance plan for distribution of cash. So, here are the four steps for this plan. The first step is to determine the net capital interest to each partner, which is adding to it if they have any loans, adding to their capital balance, provide an order of cash distribution in which the ratio of partners' capital interest will eventually be equal to their profit or loss shares. Simply put, we have to determine which of the partner has the strongest position, simply put, and which one has the weakest position. Now, we're going to start to make the distribution in order to make all the partner equal in terms of their profit and loss ratio. We'll see this in numbers, don't worry about it. Simply put, we're going to rank the partner who has the strongest position. Strongest position means who can absorb the most losses, then we're going to let them absorb the most losses until they go to the second level, then we keep on doing this until they all have equal ratios. And you will see what I mean by this. The best way is to work with numbers. Determine the amount of cash to be distributed to bring the ratio to their capital interest into alignment with their profit and share interest. Basically here, we determine the amount of cash that we should give out, then prepare a cash distribution plan. And guess what? We're going to be looking at an example that illustrates all these four points with figures. So it's not easy to just look at them and understand them. Let's look at them step by step. Okay, let's take a look at a trial balance. We have this company. We have three partners. The strongest, weak, and strong have called you to assist them in the winding up of the affairs of the partnership. The trial balance of the partnership as of June 30th is as follows. They have cash of 6,000, receivable of 22, inventory of 44, and property planning equipment of 99. This is their non-cash asset. And this is their cash. They have strong, strongest advance at 12,000. So strongest borrowed 12,000 from the partnership. This is an advance. This is basically kind of a receivable. And strong, another partner also borrowed 7,500. Accounts payable, 17,000. Remember, this has to be paid first. We have the strongest capital is 67, weak capital is 45, and strong capital is 31,500. Now notice strong and weak. It doesn't mean because strong has 31,000, which is lower than 45. It means they're strong. We're going to see what that means in a moment. I just called them this way. You will see why later on. So this is the trial back. The partners share the profit and losses as is followed. 40% for the strongest, 40% for weak, and 20% for the strong. The partners are considering an offer for 100,000 for the receivable inventory and property planning equipment, which is all of their non-cash asset for 100,000 that would be paid in the partners and installment. All right. The numbers of the amount, the number and the amount, which are to be negotiated. That's fine. We know the amount is 100. Prepare an advanced cash distribution. Prepare the schedule to show how the $106,000 payment, because they sold older assets for 100,000. And right now they have $6,000 in cash. So we have to distribute 106. Remember the first thing we have to pay is the accounts payable. Now the remaining will be distributed. But how would the remaining be distributed? This is what we have to determine. So we're going to follow the false four steps that we looked at. The first thing is we start with the, determine the net capital interest. The strongest has a capital interest of 67, weak 45 and strong 31. But remember the strongest has a loan from the partnership. Therefore we have to reduce his balance by 12 and strong has a loan in advance of 12. Now we look up their net capital balances. So we're starting with net capital balance of 55, 45 and 24. This is step one. Step two, provide an order of cash distribution in which the ratio of partner's capital interest will eventually be equal to their profit or loss ratio. Here's what we're going to have to do is we're going to have to rank them. This is what we're going to determine. Who's the strongest? Who's the least strongest? And who's, you know, in between because we have three. Who's weak? Basically who's weak? Who's the strongest and who's in between? How do we determine this? We determine this, your capital relative to your profit and share a profit and loss ratio. Simply put, if you have, if you have, let's look at your beginning balance. If you have a balance of 55,000 and your profit, profit loss ratio is 40%. In other words, how much losses can you absorb? And the more you could absorb, the strong, the stronger you are. Well, think about it. If I take 55,000, my capital balance divided by the ratio of my profit slash loss, I will find my relative loss, my relative strength, which is I can absorb 137,500 for the strongest. The strong has a capital balance of 24,000. If I take 24,000, divide by, by, by strongest ratio, 0.2, strong can absorb 120,000. Obviously, the strongest is, is stronger than strong. So you know why I call them this way. Now, weak has a balance, capital balance of 45. Although his capital balance is, is greater than strong, but based on his relative strength, when we take 45,000 and we assume losses, okay, 112,500 will wipe him or her out. Therefore, his last absorption potential is 112. Well, we can say the strongest is the strongest. This is the first individual. So this is the first individual that should be basically satisfied. Generally speaking, this is the second and this is the third. Okay, now we rank them. What does that mean? It means the first cast distribution has to go to the strongest until he reaches the strong level. Then once the strongest reached the strong level, then we distribute money to the strongest and the strong until they reach the weak level. Once they reach the weak level, then they distribute, then everything is distributed 40, 40, 20, 40, 40, 20, which is their respective ratio. So that's how we're going to do it. And you'll see the next step. In step three, determine the amount of cash to distribute to bring the ratios of their capital interest in alignment with their profit and loss. There we go. This is what we are giving. We are giving this information, okay. We are giving their net capital interest 55,045 and 24. This is from the prior slide. And we already know from the prior slide that the strongest can absorb 137,000 with the weak 112,500 and the strong 120. Simply put, when we make a cash payment, so when we make cash payment, it doesn't matter how much is the cash payment. The first thing you have to know is the strongest has to be paid. Why? Because he has, he's going to withstand the most losses. Therefore, he's in the strongest position. Therefore, we need to reward him or her first. And he can absorb, notice the difference between 137,500 and 120, the strongest can absorb 17,500 before his capital position goes down to the strong. Well, if he can absorb that many losses before he gets to the strong, it means how much is the cash distribution? Well, how much is the cash distribution? Well, think about it. If he can absorb 17,500, he will absorb 40% of that easily. Well, let's see how much is that. We need a calculator here. 17,500 times 0.4. It means the first $7,000 in cash distribution, okay. The first 7,000 should go to the strongest. 7,500. Oops, not sorry. 7,000 or 7,500? Oops, sorry, 7,000. The first 7,000, the first $7,000 should go to strongest. Therefore, the first $7,000 of any cash payment go to the strongest. And by, and by doing so, and by doing so, notice what's going to happen, his loss absorption potential equal to the strong absorption potential, but they're both of them, they're better than the weak. They can still absorb better than the weak. Now, we're going to look at basically the second level of distribution, the second level of distribution. What is the second level of distribution? Notice the strongest and the strong, they can absorb how much of losses they can absorb if we take 120 minus 12,500. So they could absorb an additional 7,500 in losses before they reach before they reach the weak level. So 7,500 times 40%, let's do the math, 7,500 times 0.4, 7,500 times 0.4, and 7,500 times 0.2, so 3,000 and 1,500, okay. So each one of them can absorb 7,500 of losses, the strongest can absorb 3,000 and strong can absorb 1,500, 1,500. Simply put, together they can absorb, you know, in total 7,500 of losses, okay, and math together, each one of them can absorb 7,500 of losses. Therefore, for the 7,500 of losses that they can absorb, okay, they would receive $3,000 in cash, and strong for the 7,500 in losses he or she can absorb would receive 1,500 in cash. Let's see what happened after we do this. Now remember we brought their loss absorption level, the loss absorption level all equal, 1,200, 1,200, 1,200, 1,200, 1,200, 1,200, and notice what happened too. As we're doing so, their capital balance is 45, 45, 22, 500, which is 40%, 40% and 20%. Now any future cash payment, okay, what do you mean future cash payment? The first cash payment 7,000 goes to the strongest, the next 4,500, 3,000 goes to the strongest, 1,500 go to the strong, and any future cash payment, it will be distributed 40%, 40%, and 20%. And this is how we order them. So the strongest get their money, it's get 7,000 first before anybody gets anything, then the strongest get 3,000 and the strong get 1,500. And after those payments are made, which is in total of 11,000, if you think about it, the 11,500 in cash distribution, any money paid above that amount, 11,500 will have to be distributed equally, because now we brought their loss absorption potential. So simply put, this is what it looks like. The first 17,000 I told you has to go to the creditors. Then the next 7,100% goes to the strongest, the next 4,567%, 67% go to the strongest and 33 goes to the strong, which is 3,000, which we computed this earlier, 3,000 and 1,500. Then any future payment, whatever's left, whatever's left is will be distributed 40%, 40%, 20%. Any money that's left will be distributed 40%, 40%, 20%. So the first 17,000 goes to the creditor. Then 7,000 goes to the strongest, 3,000 and 1,500 goes to the strongest and the strong. And the remainder, which is 77,500, goes to the 31,000 to the strongest, 31,000 to the weak and 15,500 goes to the strong. And altogether, we are going to distribute 106,000. Now it doesn't matter how many cash, how many installment sales we are going to make. We might be making 50 installment sales. We don't have to prepare the schedule every time. Now we know right from the get go how we should be distributing our cash. Once again, pay the creditors first. The first 7,000 of cash goes to the strongest. Then the next 4,500, 3,000 to the strongest, 1,500 to the strong. Now you might be saying, what if we receive only 2,000 after the 7,000? It's 67 to 33. Okay, this is the ratio until 4,500 is paid. Then anything else. So notice anything else above 11,500, which is what remained 77,500 is distributed in proportion. Now they all have the same loss absorption. Again, what are we doing? We want to make sure that the strong partner is being paid first. It's the partner that's going to withheld all the losses. It means they have the highest capital with the lowest, lowest absorption of losses. And the highest absorption of losses will be paid first because they're not going to be wiped out. I hope this session makes sense. If you happen to visit my website or my YouTube, please consider donating. It's a greatly appreciated to support the channel. If you're studying for your CPA exam, as always study hard, good luck and see you on the other side of success.