 In this presentation, we will take a look at partnership liquidation where there is a gain on sale of assets at the point of liquidation. Although a liquidation process, the closing of a partnership doesn't happen all that often, it is very important and useful for us to look at that liquidation process because it helps us focus in on that area which is different from a partnership to other types of organizations that being the capital accounts. How would we allocate this information to the capital accounts and it helps us to see that allocation method when we close out the partnership. Helps us to see the focus as well on the accounting equation, assets equal liabilities plus equity. We hear focusing in specifically on equity because equity includes now three partners who own the partnership. So if we go through this, we're going to say that first there's a three to one profit sharing and we're going to sell for 700,000 of cash, sell all the assets for 700,000 in cash. First thing we need to do is say what does that mean three to one profit sharing and if we don't know that we can't move forward and often times this is how this will be represented in agreements as well as in textbooks. So what we do is all we have to do is say this three plus the two plus the one is going to be the six that we're going to take is total. So we'll obviously start with three plus two plus one is going to be the total of six and we're just going to say then the one partner has three over the total of six or 50%. Another partner has two over the total of six or 33.333 and note that this being a repeated number is one reason we don't just use the percentages, we can't just say it's 33.333 really. What we need is the ratio in this case because it's a bit more specific. So what this is giving us is a ratio type of analysis and then we've got the one over six which would give us the 0.333. Let's do that one more time. Then we've got the one over the six and that would give us the 0.1666. So those are going to be our numbers here. Now if we put that into our table we're going to say that capital for case capital 50% C about 33.33 so that we can get an idea. It would be a ratio we can also represent it as the ratio of two over six or simplify that ratio and then for M we're going to have 16.67 about. Now we're showing what the company has at this point in time. So this is kind of like a little trial balance that we have here that we're representing in table format. Note when you look at partnership problems it'll often be in terms of a table whereas it's really nice to see the trial balance and we will look at the trial balance here for one because the trial balance will tell us a lot more about the story and two it's useful for us to be recording this stuff and seeing how things will be entered and reduced down to ultimately zero with journal entries at least for someone like me who deals with journal entries a lot. So the table is useful but it's often going to group things together and shorten things up and you're often going to have especially in book problems tables that are going to group things together when we have the table. But we'll look at this in two different ways so we can get a bigger picture or a fuller idea of what we're talking about here. So we're saying that the cash is 182.500 we got the inventory 530,000 we've got the accounts payable a liability of 240,000 and that's all we're going to basically be dealing with. The rest is going to be the capital account. So if we were to say assets minus liabilities our account equation then would be 182.500 plus the 530,000 minus the liabilities of 240,000 gives us 4725 which should be the sum of these three. So if we added up these three remember that number it should be 93,000 plus 212500 plus 167,2725. So this is in essence our trial balancing table format then we're going to go ahead and say we're selling the assets for this 700,000 meaning our asset here we're just going to show assets with inventory that's going to be our only assets for an example and so if we sell that what's going to happen cash is going to go up by the 700,000 and inventory is going to go down. Note we sold the inventory for more than what was on the books for. That doesn't always happen probably happens more that it will sell it for less we'll see another example later where we sell it for less but the point is that whatever the inventory is we're not going to get the same amount of cash for it and whatever that difference is we're then going to have to allocate to the capital accounts. So we're going to say that the difference here we had 700,000 that we got minus the 530,000 again of 170,000 times .5 gives us the 85,000 here so if we take that one 170,000 times .333 that will give us 56666 here and so on if we take the same gain we'll get the 28,333. So if we look at this in terms of a table remember this is the account equation so 700,000 minus 530,000 is that 170 and that should match what we did over here on the equity side which is 85,000 plus 56667 plus 28333,170. Okay so then we're going to say the balance then if we bring this down cash went from 182,500 up by 700 to 882,500 inventory goes from 530 down by 532,0 we still have the accounts payable bringing that down still at 240,000 K's capital account was at 93,000 it's going up by 85,000 to 178,000 C's capital was at 112,500 goes up by 56,667 to 269,167 M's account was at 167,000 goes up by 28,333 to 195,333. Now we're going to take that money we're going to pay off the liabilities we want to make sure that we do it in this order so that we don't end up having a problem at the end meaning we should first when liquidating the company we should sell the assets first then pay off the liabilities and then pay the owners here. If we start to pay the owners before that time it's quite possible that we pay them too much and then we don't have enough money to pay off the liabilities and someone gets their problems happen at that point so if we're responsible for liquidating properly we want to make sure to sell the assets first pay off whoever they owe in terms of a partnership and then pay off the capital accounts at the end. So if we pay the liabilities we have 240,000 of payables we're going to pay it with 240,000 from the cash that we just got bringing that balance down and then we're going to have to allocate that we don't have to allocate that so cash went down and accounts payable went down no effect on the capital accounts here. So then we're going to bring the balance cash was at 182,500 going down by 240,000 to 642,500 inventory is gone so the accounts payable is going from 240,000 down by 240,000 to zero and then the capital accounts are just being pulled down there's nothing happen here stays at the 178,000 for K stays at the 269,167 for C stays at the 195,300,334 M then we got the distributed distribute cash to the owners now all we have left note is cash and the capital accounts now we can distribute to the owners and not have to worry about distributing too much and not having enough to then pay off any kind of liabilities that are still owed by the company. So to do that we're going to reduce cash pay off case capital C and M and now we're finally fully liquidated so that's the liquidation process in a table format you can think of it in terms of an accounting equation format as well we're going to see it in terms of a trial balance now so here's our same table up top and see how we mirror this table in terms of journal entries it's really important and useful to see the journal entries because it helps us one just know the journal entries and two it gives us just a better idea of what is actually happening in terms of the financial statements so we have a really basic trial balance here just to show the same information we have the same cash of 180 we've got the inventory of the 530 we've got the accounts payable of 240 and then KC and M KC and M capital accounts we're now going to close out this process with a series of journal entries similar to our activities here first selling the inventory and then we'll pay off the liabilities and then we'll finally pay off the capital accounts again it needs to be in that order if not we run into problems it could we could for example if C demanded to get paid their 212 500 cash right now and then we sold the inventory and we didn't get 534 then K and M are going to be in a situation where they're not going to get as much money as they should and so to do this properly to be fair to all partners as well as liabilities to outside people outside the partnership we want to sell the assets first then pay the liabilities then pay the owners so first thing we're going to do is we're going to say we got this cash for selling the assets we got 700,000 cash is going to go up it's a debit balance account we're going to increase it doing the same thing to it another debit we're going to credit the inventory account for what's on the books 530,000 and the difference then in this case is a gain so the 700,000 minus the 530 is the 7 170,000 note that the difference may not be a gain it may be a loss but it's almost never going to be the same what we sold the inventory for as what it's on the books for and that's one of the major problems if it's inventory it could also be equipment that's on the books and oftentimes again it might be on the books for something far different than what we sell it for so we have to sell it to know what the actual market value is how much cash we actually have so then to post this we're going to say that cash is going to go from 182,500 up by 700,000 to 882,500 the inventory is going to go from 530,000 down by 530,000 to zero and then we've got this gain going to be down here on the income statement going up by 700,170,000 so there's our game here's what we have now we have an income statement amount here and we have to you know we have to take care of that income statement account we can't close anything out if the income statements still open we can't liquidate without closing in other words we got to close out the income statement to the capital accounts and we'll do that with our closing type of journal entry we'll do that in accordance with the profit sharing agreement so that's what we'll do now we'll say that the gain here is a credit we need to do the opposite thing to it a debit and then we're going to allocate it to our owners in accordance with their profit sharing 50 33 16.67 so we're going to take this 170 times 0.5 that's going to go to case capital account we're going to take the 170 times 0.333333 that's going to go to a C's capital account and so on and so forth so we've got case capital account going up by 85,000 we've got C's capital account going up by 56,067 and M 28 333 these three then adding up to the gain here we post this out then the gains going to go from 170,000 credit down by 170,000 debit to zero we've got case capital account starting at 93,000 credit going to go up by 85,000 credit to 178,000 so after this sale of course the the owners now are going to be attributed more money because we sold it for more than was expected more than was on the books then we're going to say C capital account goes from 212 500 up by 56,067 to 269,167 M's capital account goes from 167,000 up by 28,333 to a balance of 195,333 so here's going to be our balance now now the income statement accounts are all back to zero we basically have a post closing trial balance again and we have a very few amount of accounts we've got the cash we've got the payables we want to be left with at the end of this before we liquidate before we do the final step with just cash and the capital accounts so therefore next step we pay off the liabilities so we're going to do that here we've got the 240,000 credit we're going to do the opposite thing to it debiting it to make it go down to zero and we're going to pay it off of course with cash so cash is going to go down this will be our journal entry to pay off the payable so let's post that out then we're going to say the accounts payable have 240,000 credit we're going to make it go down by 240,000 with a debit to zero and then the cash account has 885,882,500 we're going to make it go down with a credit of 240,000 to 642,500 that leaves us when then with just cash and the capital accounts and of course the capital accounts should add up to the cash meaning the three capital accounts here 178,000 plus 269,167 plus 195,333 adds up to the cash balance note that these three will not necessarily and almost certainly not line up to the profit sharing the 50 to 33 the 16 and that's because this really only has to do with profit sharing and the things that are involved in the capital accounts also include investments and withdrawals so these will almost never line up to the profit sharing although the profit sharing is used to allocate net income a component of the capital accounts now that we have that it's easy to finish this up we're just going to say okay well now I'm just going to pay out the cash and we're going to pay it in accordance with what is owed given by the capital accounts left so we're going to say that the capital accounts goes down here for case got 178,000 we're going to do the opposite thing to it at debit we're going to do the same for C we're going to make it go down by whatever's in it which is 269,167 it goes down to zero and then we've got M's capital accounts of the 195,333 going down by the 195,333,20 and then the cash that we're going to pay out we've got the cash account here at a debit we're going to pay it all out because we're paying it all out to the owners in the liquidation process bringing it to zero so that's finally we're at the last step where we have finally liquidated the partnership if we can go through that series of journal entries it really helps us to understand what the partnership is what it looks like the relationship between assets liabilities and equity and what the actual capital accounts mean and stand for as we go through this process and as we think about those capital accounts in terms of any normal operating partnership