 Hello, in this lecture, we're going to take a look at the liquidation of a partnership. We're going to put this information here into two formats. One will be basically a table type of format to show the process of liquidation. We'll then put the journal entries over in this format in this area here. And then we will post those journal entries to the trial balance on this side. So once again, we're going to have the beginning trial balance over here. We're going to post our entries into a quick column on this side so that we can then see what happens in terms of the trial balance, which of course, at the end of this, this trial balance will be all zero. We're going to liquidate. We're going to close the company and we're going to do it in a specific order in order to make sure that the process is done correctly. And then we can also take a look at, of course, the accounting equation on this side. We're going to run three scenarios. We're going to basically start off with the scenario where when we sell the inventory, there will be a gain on the sale that we will have to then allocate. So let's go through this process. We're going to liquidate the company, meaning we are going to close the company and liquidation of a partnership is really good practice to see how these journal entries will work and see how the capital accounts work. So obviously liquidation doesn't happen every day in a partnership, but going through the process is helpful because it does really help to understand the capital accounts. So we're going to record journal entries to liquidate the partnership and post transactions to the trial balance. So we got the partners KC and M partners share the income and loss at a three to one ratio. So three to one ratio. First of all, what does that mean? What is a three to one ratio and how are we going to represent that? Many times a partnership, when we think of a partnership, when there's two partners, we might say it's a 50 50 share on the split. But sometimes it's going to be easier to represent things in terms of a ratio, especially if the percentage is not exactly even. So what does it mean to have the three to one? Well, for K, we will have the three and then we're basically going to divide that by the total. So three plus two plus one is six. So we could do that in a ratio format in cell F four by selecting equals and then putting the three divided by which is of course the slash on the keyboard. And then I'm going to just bracket this and put this in there the three plus the two plus the one, which is of course six of three over six is 50.5. If we want to make that a percentage, then we'd go up to the home tab, we go to the numbers group and we're going to make that a percentage then see same idea C has two. So we're going to say two are equals, we need an equal sign equals two divided by and then we're going to do the same thing divided by three plus two plus one divided by six. And that will give us enter point three three. Now note this one isn't exactly even and that and that's the reason that a ratio is going to be more specific than the percentage. So Excel is actually seeing a very a more specific ratio, even though we can only see the percentage. Let me show you what I mean by that if we go to the home tab, we go to the numbers group and we increase the decimals right here, we can see that it actually is three three three on forever, but we're going to decrease the decimals to just the two decimals. So if we use a formula that actually references this cell, it will use an exact ratio calculation, even though it's only showing point three three. So keep that in mind when you're working with Excel, we're going to make it a percent home tab numbers, we can make it a percent and we could make it a little bit more precise. I can highlight both of these and say I want to make it a little more precise and now we could go to the home tab and go to the numbers and increase the decimals this way. So this is fifty even, this is thirty three point three three three. Then we'll go to M here, which is the one over six. So this equals one over and then we're going to have the three plus the two plus the one brackets and that's enter. That's point one seven and we can do the same thing here. We're going to go to the home tab numbers and we're going to make that a percent and then I'll add some decimals on it and we could see of course that that is really sixteen point six six six six six forever, but we're going to round it to sixteen point six seven. If we reference that cell in the formulas then it will actually use the more specific ratio rather than just sixteen point six seven. So be aware of that, keep that in mind. We are then going to have this information in terms of the accounts. We can see it in a table. We've got cash, we've got inventory, we've got accounts payable, then we have the capital accounts. If we see that in terms of a trial balance, which is how we might see it in practice, we can see it in terms of a trial balance where we have the beginning balance numbers, cash and inventory, the assets, the liabilities to 40 accounts payable and then the capital accounts here. We're not going to represent any income and expenses at this time because we're looking to close the company. So we would have closed out the revenue to the capital accounts and then we're going to basically close out the company in this format. So we're going to look at it in this format closing it out and we'll also look at it in terms of a table to close it out and we'll post the journal entries to actually do so. Now the steps that we want to go through when closing out the company is usually to first sell the inventory and why do we want to do that? Well, if we start allocating the cash out, for example, this partner right here, if C says, hey, I would like the cash now before we sell the inventory, we're hesitant to do that because notice that the cash is only at 182.5 and we owe C to 12. We don't have enough cash to pay C and if we pay out the cash first and then we sell the inventory and we realize that the inventory is not worth 5.30, but it happens to be less worth less than that, then we could end up in a problem where we pay off one partner and now we don't have the cash to pay the rest because the inventory was not sold and therefore we don't have the cash to do so. So what we want to do, the process we want to go through is sell all assets represented by just inventory in this case, see if we get a gain or the loss on that sale and then allocate that gain or loss to the partners in accordance with their part profit sharing here and then we'll pay off the any liabilities we have which is just represented by one liability accounts payable in this problem and then we'll be left with just cash, just capital counts and it'll be perfect that we could just pay off the capital counts in that way. So that's the reasoning on why we're going to go through this process, we're going to sell all assets which is just inventory in this case and then allocate the gain or loss to the capital accounts, then pay off the accounts payable, the liabilities which is just one in this case and then we can allocate out the rest to the partnerships. So if we take a look, we're going to say that we sold the inventory, we're going to say that we sold it for 700,000. So the cash then is going to go up by 700. So we're going to say 700,000 and therefore the new balance in the cash will be equal to the prior balance 1825 plus the 700,000 and enter that gives us the 882 in the new balance here. And then on the inventory then we're going to take the inventory off the books, it's on the books at a cost of 530. We received 700 for it, but we need to make it go to zero on the book. So I'm going to say it's going to go down, I'll just represent that with a negative 530. And there we have that. Now it's going to go down. So if I did this with a formula then within Excel, the formula would be equals this 530 plus this 530. And that will actually be a subtraction problem because this is a negative sign. So it's this number plus the negative that number, which brings it to zero. Okay, and then the accounts payable, I'm just going to bring these numbers across. There's going to be no effect on accounts payable. So we can just bring that down. It's going to be the same number. And then the capital accounts, what's going to happen to the capital accounts, we're going to have to allocate the difference here to the capital accounts in accordance to their profit sharing. So the difference is going to be this 17, 170, the 700 minus the 530, which is the 170. And so we're going to take this 170 times 50% 4k, this 170,000 times 33.3333. And that's going to be for C and then for M we'll take the 170 times the 16.6666. So let's do that. So I'm going to do that with this type of formula. I'm going to say this equals the sum of the seven and the 530, which is this attraction problem, which will give us that 170 brackets, times, and then we'll point to the 50%. So there's the number, the calculation, once again, if we did it in the calculator, all we're doing is we're saying 700,000 minus 530,000 times 0.5. So 170 times the 0.5, that's the 85,000. So we'll do the same thing here. I'm going to say this equals the sum of the 700 minus the 530 brackets times and then I'm going to point to this 33.3333. And there we have that. Now notice if I do that in the calculator, if we do that in the calculator, what did we do? We took the 700,000 minus the 530,000 equals the 170,000. If I multiply that times 0.3333 times 0.3333, we get something that's slightly different, 56661, then 56667, which we got here. Why? Because when we did it in Excel, we're actually using 0.33333 on forever because Excel actually sees this ratio, even though it's showing this percentage. So just keep that in mind as we do this. It's more precise if we use this number within the formula rather than hard coding the 0.3333 on forever. So keep that in mind as we are going. We're going to do the same thing here for m. We're going to say this equals the sum of, we're going to have the 700 minus the 530 brackets times the 16.67. And same concept here. If we took out the calculator and did that by hand, we're taking the 700 minus the 530, which is that 170 times, this would be 0.1667. That's 16.67 percent. And that's 28339, which again slightly different than this number. Why? Because this number is not really 16.67 in Excel. It's really 1 over 3 plus 2 plus 1. So that is going to be slightly different. We do want to use cell references in that case and just be careful when working in Excel if there's some rounding difference, probably because the format of the Excel is not showing the entire number. All right, so let's keep on going down here. We're going to then have our balance, which will be increased by this amount because we received more cash than the inventory was on the books for. Therefore, the capital counts will be the 93,000 for K plus the 85,000 and enter. So K is now going to have 178 and then C will now have equals the 225 plus the 56.667 and enter. And then M is now going to have the beginning balance of 167 plus the 28333 and enter. So we're going to represent the same transaction here in terms of a journal entry and post that activity to the trial balance and see what happens in that type of format. So if we think of the journal entry, then we can ask our question, is cash affected in this transaction? And we're going to say, yeah, cash is affected because what's happening? We're selling the inventory and receiving cash. We received 700,000. And note also as we do this, some people really like to see it more on a table like this. And some people like to see the journal entry. I tend to like to see the trial balance and work through the journal entry because that's what I've worked with a lot. So I mean, if you think go through our system of questions, we're basically going to do the same thing we did in a table now with a system of questions in terms of our journal entry. So is cash affected? Yeah, we got 700,000. Cash has a debit balance. We need to make it go up by 700,000. How do we make something go up? We do the same thing to it, which in this case would be another debit. So I'm going to copy the cash. I'm going to put that on top in J4 and then right click and paste that 123. We're not going to paste the content of the type of cell. We're just going to paste the value. And that will give us obviously we can type the value in there too if we wanted to type cash. But then we're going to say that it's going to go up by 700,000. All right. And then the other thing that's going to happen is that inventory needs to go off the books. We sold the inventory. Once again, if we have the trial balance here, we can see what inventory is on the books for. If we sold all of it, it needs to go to zero. So how do we make something go to zero? We're going to do the opposite thing to it as what it is. That's a debit. We're going to do the opposite, opposite being a credit. So we're going to go to N5, right click, copy and then go to J5, right click and paste it 123. And we're going to credit that for what is in there. So there's 530 in there. We're going to put a negative 530. And I'm going to represent the credits with a negative number, which when we select enter, we'll put brackets around it like so. And now we have a debit of the 700, a credit of 530. That means there's that 170 difference. We have that 170 difference. We are going to need another credit here in order to account for that 170 difference. Now, ultimately, that 170 difference is going to be split between the capital.