Learning Objectives LO 5 Calculate and record a

Learning Objectives LO 5 Calculate and record a gain on realization. LO 6 Calculate and record a loss on realization. LO 7 Journalize entries to liquidate a partnership. © 2014 Cengage Learning. All Rights Reserved.

Lesson 23 -3 Account Balances Before Realization LO 5 ● If a partnership goes out of business, its assets are distributed to the creditors and partners. ● The process of paying a partnership’s liabilities and distributing remaining assets to the partners is called liquidation of a partnership. ● Cash received from the sale of assets during liquidation of a partnership is called realization. © 2014 Cengage Learning. All Rights Reserved. SLIDE 2

Lesson 23 -3 Account Balances Before Realization Bal. Cash 28, 000. 00 Accounts Payable Bal. LO 5 8, 500. 00 Bal. Supplies 2, 000. 00 Gerald Bakkan, Capital Bal. 22, 000. 00 Bal. Machinery 25, 000. 00 Jon Bakken, Capital Bal. 19, 500. 00 Accumulated Depreciation—Machinery Bal. 5, 000. 00 © 2014 Cengage Learning. All Rights Reserved. SLIDE 3

Lesson 23 -3 Calculating Gain on Realization 1 Determine Book Value of Asset Sold Value of Asset Received Cash $21, 500. 00 − − Book Value of Asset Sold Cost Accum. Depr. Book Value $25, 000. 00 $20, 000. 00 2 Subtract Book Value from Cash Received = Gain on Realization = $1, 500. 00 LO 5 3 Amount of Gain on Realization Gain recorded as a credit © 2014 Cengage Learning. All Rights Reserved. SLIDE 4

Lesson 23 -3 Recording Gain on Realization LO 5 July 1. Received cash from sale of machinery, $21, 500. 00: original cost, $25, 000. 00; total accumulated depreciation recorded to date, $5, 000. Receipt No. 712. Bal. Sold Machinery Cash 28, 000. 00 21, 500. 00 Bal. Machinery 25, 000. 00 Accumulated Depreciation—Machinery 5, 000. 00 Bal. Gain on Realization Sold Machinery © 2014 Cengage Learning. All Rights Reserved. 25, 000. 00 1, 500. 00 SLIDE 5

Lesson 23 -3 Recording Gain on Realization Debit Accumulated 1 Depreciation—Machinery LO 5 2 Credit Machinery 3 Credit Gain on Realization © 2014 Cengage Learning. All Rights Reserved. Debit Cash 4 SLIDE 6

Lesson 23 -3 Calculating Loss on Realization 1 Determine Book Value of Asset Sold Value of Asset Received − Book Value of Asset Sold = Loss on Realization Cash $1, 700. 00 − Supplies $2, 000. 00 = $(300. 00) 2 Subtract Book Value from Cash Received LO 6 3 Amount of Loss on Realization Loss recorded as a debit © 2014 Cengage Learning. All Rights Reserved. SLIDE 7

Lesson 23 -3 Recording a Loss on Realization LO 6 July 1. Received cash from sale of supplies, $1, 700. 00; balance of Supplies account, $2, 000. Receipt No. 713. Bal. Sold Machinery Sold Supplies Bal. Sold Supplies Cash 28, 000. 00 21, 500. 00 1, 700. 00 Supplies 2, 000. 00 Loss on Realization 300. 00 © 2014 Cengage Learning. All Rights Reserved. SLIDE 8

Lesson 23 -3 Recording a Loss on Realization LO 6 Debit Loss on Realization

Lesson 23 -3 Liquidating Liabilities July 1. Paid cash to all creditors for the amounts owed, $8, 500. Check No. 825. Bal. Sold Machinery Sold Supplies Bal. LO 7 Cash 28, 000. 00 Paid Acct. Pay. 21, 500. 00 1, 700. 00 Accounts Payable 8, 500. 00 Bal. © 2014 Cengage Learning. All Rights Reserved. 8, 500. 00 SLIDE 10

Lesson 23 -3 Account Balances after Liquidation of Noncash Assets and Payment of Liabilities Bal. Sold Machinery Sold Supplies (New Bal. Cash 28, 000. 00 Paid Acct. Pay. 21, 500. 00 1, 700. 00 42, 700. 00) Gerald Bakken, Capital Bal. Jon Bakken, Capital Bal. Gain on Realization Sold Machinery Bal. Sold Supplies Bal. 8, 500. 00 22, 000. 00 19, 500. 00 1, 500. 00 Loss on Realization 300. 00 © 2014 Cengage Learning. All Rights Reserved. SLIDE 11

Lesson 23 -3 Distributing Loss or Gain on Realization Balance of Gain on Realization G. Bakken J. Bakken Total = 60% 40% = = × Fixed Percentage = × × 60% 40% = = $1, 500. 00 × Balance of Loss on Realization G. Bakken J. Bakken Total Fixed Percentage × $300. 00 © 2014 Cengage Learning. All Rights Reserved. LO 7 Share of the Balance of Gain on Realization $ 900. 00 600. 00 $ 1, 500. 00 Share of the Balance of Loss on Realization $ 180. 00 120. 00 $ 300. 00 SLIDE 12

Lesson 23 -3 Distributing Loss or Gain on Realization LO 7 July 6. Recorded distribution of gain on realization: to Gerald Bakken, $720. 00; to Jon Bakken, $480. 00. Recorded distribution of loss on realization: to Gerald Bakken, $180. 00; to Jon Bakken, $120. 00. Memorandum Nos. 531 and 532. Share of loss Gerald Bakken, Capital Bal. 180. 00 Share of gain (New Bal. 22, 000. 00 900. 00 22, 720. 00) Jon Bakken, Capital Share of loss 120. 00 Bal. Share of gain (New Bal. 19, 500. 00 600. 00 19, 980. 00) Gain on Realization Distribution 1, 500. 00 Sold Machinery 1, 500. 00 Loss on Realization Sold Supplies 300. 00 Distribution © 2014 Cengage Learning. All Rights Reserved. 300. 00 SLIDE 13

Lesson 23 -3 Distributing Loss or Gain on Realization LO 7 Close Gain on

Lesson 23 -3 Distributing Remaining Cash to Partners Cash July 6. Recorded final distribution of remaining cash to partners: to Gerald Bakken, $22, 720. 00; to Jon Bakken, $19, 980. 00. Check Nos. 826 and 827. Bal. (New Bal. 42, 700. 00) LO 7 22, 720. 00 19, 980. 00 Gerald Bakken, Capital Bal. 22, 720. 00 (New Bal. 22, 720. 00) Jon Bakken, Capital Debit each partner’s capital account for the amount of the account balance 19, 980. 00 Bal. (New Bal. 19, 980. 00) Credit Cash for the amounts distributed © 2014 Cengage Learning. All Rights Reserved. SLIDE 15

Lesson 23 -3 Audit Your Understanding 1. How is a gain on realization recorded?

Lesson 23 -3 Audit Your Understanding 2. How is a loss on realization recorded?

Lesson 23 -3 Audit Your Understanding 3. Which accounts are debited when distributing remaining cash to partners during liquidation? ANSWER Each partner’s capital account © 2014 Cengage Learning. All Rights Reserved. SLIDE 18