1. © 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO5 Calculate and record a gain on realization. LO6 Calculate and record a loss on realization. LO7 Journalize entries to liquidate a partnership.

2. © 2014 Cengage Learning. All Rights Reserved. Account Balances Before Realization ●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. SLIDE 2 LO5 Lesson 23-3

3. © 2014 Cengage Learning. All Rights Reserved. Account Balances Before Realization SLIDE 3 LO5 Lesson 23-3 Cash Bal.28,000.00 Bal.25,000.00 Machinery Supplies Bal.2,000.00 Bal.5,000.00 Accumulated Depreciation—Machinery Accounts Payable Bal.8,500.00 Bal.19,500.00 Jon Bakken, Capital Gerald Bakkan, Capital Bal.22,000.00

4. © 2014 Cengage Learning. All Rights Reserved. Calculating Gain on Realization SLIDE 4 LO5 Gain recorded as a credit Gain on Realization Value of Asset Received − Book Value of Asset Sold = Gain on Realization Cost$25,000.00 Accum. Depr. 5,000.00 Cash $21,500.00−Book Value$20,000.00=$1,500.00 2 2 Subtract Book Value from Cash Received 1 1 Determine Book Value of Asset Sold 3 3 Amount of Gain Lesson 23-3

5. © 2014 Cengage Learning. All Rights Reserved. Recording Gain on Realization SLIDE 5 Cash Bal.28,000.00 Sold Machinery21,500.00 Sold Machinery1,500.00 Gain on Realization LO5 July 1. Received cash from sale of machinery, $21,500.00: original cost, $25,000.00; total accumulated depreciation recorded to date, $5,000.00. Receipt No. 712. Machinery Bal.25,000.00 25,000.00 5,000.00 Accumulated Depreciation—Machinery Bal.5,000.00 Lesson 23-3

6. © 2014 Cengage Learning. All Rights Reserved. Recording Gain on Realization SLIDE 6 LO5 2 2 Credit Machinery Debit Accumulated Depreciation—Machinery 1 1 4 4 Debit Cash 3 3 Credit Gain on Realization Lesson 23-3

7. © 2014 Cengage Learning. All Rights Reserved. Calculating Loss on Realization SLIDE 7 LO6 Lesson 23-3 Loss recorded as a debit Loss on Realization Value of Asset Received − Book Value of Asset Sold = Loss on Realization Cash $1,700.00−Supplies $2,000.00=$(300.00) 3 3 Amount of Loss 2 2 Subtract Book Value from Cash Received 1 1 Determine Book Value of Asset Sold

8. © 2014 Cengage Learning. All Rights Reserved. Recording a Loss on Realization SLIDE 8 July 1. Received cash from sale of supplies, $1,700.00; balance of Supplies account, $2,000.00. Receipt No. 713. LO6 Lesson 23-3 Bal.28,000.00 Sold Machinery21,500.00 Sold Supplies1,700.00 Cash Supplies Bal.2,000.00 2,000.00 Sold Supplies300.00 Loss on Realization

9. © 2014 Cengage Learning. All Rights Reserved. Recording a Loss on Realization SLIDE 9 LO6 Lesson 23-3 Debit Loss on Realization 1 1 3 3 Debit Cash 3 3 Credit Supplies

10. © 2014 Cengage Learning. All Rights Reserved. Liquidating Liabilities SLIDE 10 July 1. Paid cash to all creditors for the amounts owed, $8,500.00. Check No. 825. LO7 Lesson 23-3 Accounts Payable Bal.8,500.00 Bal.28,000.00 Sold Machinery21,500.00 Sold Supplies1,700.00 Cash Paid Acct. Pay.8,500.00

11. © 2014 Cengage Learning. All Rights Reserved. Paid Acct. Pay.8,500.00 Bal.28,000.00 Sold Machinery21,500.00 Sold Supplies1,700.00 (New Bal.42,700.00) Cash Account Balances after Liquidation of Noncash Assets and Payment of Liabilities SLIDE 11 Sold Supplies300.00 Bal.300.00 Loss on Realization Bal.22,000.00 Gerald Bakken, Capital Jon Bakken, Capital Bal.19,500.00 Sold Machinery1,500.00 Bal.1,500.00 Gain on Realization Lesson 23-3

12. © 2014 Cengage Learning. All Rights Reserved. Distributing Loss or Gain on Realization SLIDE 12 LO7 Lesson 23-3 Balance of Gain on Realization × Fixed Percentage = Share of the Balance of Gain on Realization G. Bakken$1,500.00×60%=$900.00 J. Bakken$1,500.00×40%=600.00 Total$1,500.00 Balance of Loss on Realization × Fixed Percentage = Share of the Balance of Loss on Realization G. Bakken$300.00×60%=$180.00 J. Bakken$300.00×40%=120.00 Total$300.00

13. © 2014 Cengage Learning. All Rights Reserved. Distributing Loss or Gain on Realization SLIDE 13 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. LO7 Lesson 23-3 Sold Supplies300.00 Loss on Realization Distribution300.00 Sold Machinery1,500.00 Gain on Realization Distribution1,500.00 Jon Bakken, Capital Bal.19,500.00 Share of gain600.00 (New Bal.19,980.00) Share of loss120.00 Bal.22,000.00 Share of gain900.00 (New Bal.22,720.00) Gerald Bakken, Capital Share of loss180.00

14. © 2014 Cengage Learning. All Rights Reserved. Distributing Loss or Gain on Realization SLIDE 14 LO7 Lesson 23-3 Close Gain on Realization account. Close Loss on Realization account.

15. © 2014 Cengage Learning. All Rights Reserved. Distributing Remaining Cash to Partners SLIDE 15 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. LO7 Lesson 23-3 Bal.42,700.00 (New Bal.0.00) 22,720.00 19,980.00 Cash Bal.19,980.00 (New Bal.0.00) Jon Bakken, Capital 19,980.00 22,720.00Bal.22,720.00 (New Bal.0.00) Gerald Bakken, Capital Debit each partner’s capital account for the amount of the account balance Credit Cash for the amounts distributed

16. © 2014 Cengage Learning. All Rights Reserved. Lesson 23-3 Audit Your Understanding 1.How is a gain on realization recorded? SLIDE 16 ANSWER As a credit to the Gain on Realization account Lesson 23-3

17. © 2014 Cengage Learning. All Rights Reserved. Lesson 23-3 Audit Your Understanding 2.How is a loss on realization recorded? SLIDE 17 ANSWER As a debit to the Loss on Realization account Lesson 23-3

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