CHAPTER 12

Accounting for partnerships

CHAPTER STUDY OBJECTIVES

1. Describe the characteristics of the partnership form of business organization. The main characteristics of a partnership are (1) the association of individuals, (2) mutual agency, (3) co-ownership of property, (4) limited life, and (5) unlimited liability for a general partnership.

2. Account for the formation of a partnership. When a partnership is formed, each partner’s initial investment should be recorded at the assets’ fair value at the date of their transfer to the partnership. If accounts receivable are contributed, both the gross amount and an allowance for doubtful accounts should be recorded. Accumulated depreciation is not carried forward into a partnership.

3. Allocate and record profit or loss to partners. Profit or loss is divided based on the profit and loss ratio, which may be any of the following: (1) a fixed ratio; (2) a ratio based on beginning, ending, or average capital balances; or (3) salary and interest allowances and the remainder in a fixed ratio.

4. Prepare partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The main differences are that (1) the statement of owners’ equity is called the statement of partners’ equity, and (2) each partner’s capital account is usually reported on the balance sheet or in a supporting schedule.

5. Account for the admission of a partner. The entry to record the admission of a new partner by purchase of a partner’s interest affects only partners’ capital accounts. The entry to record the admission by investment of assets in the partnership (1) increases both net assets and total capital, and (2) may result in the recognition of a bonus to either the old partners or the new partner.

6. Account for the withdrawal of a partner. The entry to record a withdrawal from the firm when payment is made from partners’ personal assets affects only partners’ capital accounts. The entry to record a withdrawal when payment is made from partnership assets (1) decreases net assets and total capital, and (2) may result in recognizing a bonus to either the departing partner or the remaining partners.

7. Account for the liquidation of a partnership. When a partnership is liquidated, it is necessary to record (1) the sale of noncash assets, (2) the allocation of the gain or loss on realization based on the profit and loss ratio, (3) the payment of partnership liabilities, (4) the removal of any capital deficiency either by repayment or by allocation to the other partners, and (5) the distribution of cash to the partners based on their capital balances.

Exercises

Exercise 1

Three types of partnerships were described in the text. Explain how limited partnerships (LP) and limited liability partnerships (LLP) differ from each other and from a traditional partnership.

Exercise 2

Arnold Black and Sam Smith operate separate auto repair shops as proprietorships. On January 1, 2021, they decide to combine their separate businesses to form Black Smith Auto Repair, a partnership. Information from their separate balance sheets is presented below:

Black Auto Repair Smith Auto Repair

Cash $ 5,000 $ 10,000

Accounts receivable 8,000 5,000

Allowance for doubtful accounts 1,000 500

Accounts payable 3,000 6,000

Notes payable — 5,000

Salaries payable 1,000 500

Equipment 12,000 26,000

Accumulated depreciation—equipment 2,000 4,000

It is agreed that the expected realizable value of Black's accounts receivable is $ 5,000 and Smith's receivables is $ 4,000. The fair value of Black's equipment is $ 15,000 and Smith's equipment is $ 24,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Smith's balance sheet that he will pay himself.

Instructions

Prepare the journal entries necessary to record the formation of the partnership.

Exercise 3

On January 1, 2020, Steve Furlong and Mark Pippy agreed to pool their assets and form a partnership called F&P Computing. They agree to share all profits equally and make the following initial investments:

Pippy Furlong

Cash $ 10,000 $ 30,000

Accounts receivable 6,000 4,000

Allowance for doubtful accounts 1,500 500

Office furniture 24,000 29,000

On December 31, 2020, the partnership reported a loss for the year of $ 19,500. On January 1, 2021, Furlong and Pippy agreed to accept Nicholas Adams into the partnership by purchasing 20% of Pippy’s interest in the partnership and 30% of Furlong’s interest. The partnership agreement is amended to provide for the following sharing of profit and losses:

Adams Pippy Furlong

Salary allowance $ 20,000 $ 30,000 $ 60,000

Remaining ratio 5 3 2

For the year ended December 31, 2021, profit was $ 350,000.

Instructions

a) Journalize the following transactions:

(1) the initial contributions to the partnership by Furlong and Pippy on January 1, 2020.

(2) the allocation of the loss to the partners at the end of December 2020.

(3) the purchase of the partnership interest by Adams on January 1, 2021.

b) Prepare a schedule to show the division of profit at December 31, 2021.

Exercise 4

On January 1, 2020, Jacky Wu and Tim Lee decided to form a partnership, dividing all profits and losses equally and by making the following investments:

Wu Lee

Cash $ $ 150,000 $ 0

Land 0 65,000

Building 0 120,000

Furniture 35,000 0

On December 31, 2020, the partnership reported a profit for the year of $ 28,000. On January 1, 2021, Wu and Lee agreed to accept Jody Smith into the partnership by purchasing 25% of partnership interest for $ 165,000 cash. The partnership agreement is amended to provide for the following sharing of profit and losses:

Wu Lee Smith

Salary allowance $ 60,000 $ 60,000 $ 30,000

Remaining ratio 1/3 1/3 1/3

For the year ended December 31, 2021, profit was $ 330,000.

Instructions

a) Journalize the following transactions:

(1) the initial contributions to the partnership by Wu and Lee on January 1, 2020.

(2) the allocation of the profit to the partners at the end of December 2020.

(3) the purchase of the partnership interest by Smith on January 1, 2021.

b) Prepare a schedule to show the division of profit at December 31, 2021.

Exercise 5

Max Baer and Jimmy Choo are two proprietors who decide to merge their businesses into a partnership on January 1, 2021. The assets each contributed to the partnership are as follows:

During the year ended December 31, 2021, the business, Bear-Chew Pet Services, had revenues of $ 180,000, rent expenses of $ 12,000, depreciation expense of $ 2,500, and other operating expenses of $ 8,400. Other than depreciation expense, all revenues and expenses incurred by the business were for cash. As well, cash of $ 7,500 was collected on the accounts receivable, with the remainder of the accounts receivable written off. The partnership agreement specifies that Max and Jimmy will share the partnership profit equally. During the year, Max withdrew $ 40,000 for personal use, and Jimmy withdrew $ 28,000.

Instructions

a) Prepare the journal entry to record the two partners’ contributions on January 1, 2021.

b) Prepare the partnership’s income statement, statement of partners’ equity, and balance sheet at December 31, 2021.

Exercise 6

Peter and Paul have a partnership agreement that includes the following provisions regarding sharing profit or loss:

1. A salary allowance of $ 30,000 to Peter and $ 15,000 to Paul.

2. An interest allowance of 10% on capital balances at the beginning of the year.

3. The remainder to be divided 30% to Peter and 70% to Paul.

The capital balances on January 1, 2021, for Peter and Paul were $ 80,000 and $ 100,000, respectively. During 2021, the Peter and Paul Merchandising Partnership had sales of $ 330,000, cost of goods sold of $ 190,000, and operating expenses of $ 60,000.

Instructions

Prepare an income statement for the Peter and Paul Merchandising Partnership for the year ended December 31, 2021. As a part of the income statement, include a division of profit to each of the partners.

Exercise 7

Pac-link Technologies is a partnership owned and operated by Tom Kennedy and Mike McConnell. To recognize the fact that the partners have invested significantly different amounts of capital and that Tom works full time, while Mike works only part time, the partnership agreement states that the profit will be allocated as follows: An interest allowance of 3% of each partner’s beginning capital balance plus a salary allowance of $ 85 per hour worked. Any remaining profit or loss after calculation of these allowances will be allocated equally. At January 1, 2021, Tom’s capital account balance was $ 15,000 and Mike’s was $ 20,000. During the year ended December 31, 2021, Tom worked 1,200 hours and Mike worked 550 hours.

Instructions

a) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2021 is $ 196,000.

b) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2021 is $ 88,000.

Exercise 8

Laroche, Kennedy, and White formed a partnership on January 1, 2021. Laroche invested $ 40,000, Kennedy $ 30,000, and White $ 50,000. Laroche will manage the store and work 40 hours per week in the store. Kennedy will work 20 hours per week in the store, and White will not work. Each partner withdrew 30 percent of his profit distribution during 2021. Other than the profit distribution to a partner, there were no withdrawals of cash.

Instructions

Calculate the partners' capital balances at the end of 2021 under the following independent conditions: (Hint: use T accounts to determine each partner's capital balance.)

a) Profit is $ 80,000 and the profit ratio is Laroche 40%, Kennedy 35%, and White 25%.

b) Profit is $ 100,000 and the partnership agreement specifies a salary of $ 35,000 to Laroche and $ 20,000 to Kennedy. Any remaining amount is to be shared equally among the partners.

c) Profit is $ 35,000 and the partnership agreement provides for (a) a salary of $ 20,000 to Laroche and $ 20,000 to Kennedy, (b) interest on beginning capital balances at the rate of 6%, and (c) any remaining profit or loss is to be shared by Laroche 50%, Kennedy 35%, and White 15%.

Exercise 9

The condensed, adjusted trial balance of the Mario and Luigi Partnership as at December 31, 2021, appears below:

MARIO AND LUIGI PARTNERSHIP

Adjusted Trial Balance

December 31, 2021

Debit Credit

Current assets $ 25,000

Property, plant, and equipment 80,000

Current liabilities $ 7,000

Long-term debt 44,000

Mario, capital 26,000

Mario, drawings 270,000

Luigi, capital 18,000

Luigi, drawings 245,000

Service revenue 593,000

Operating expenses 68,000

$ 688,000 $ 688,000

The partnership agreement stipulates that a division of partnership profit or loss is to be made as follows:

1. A salary allowance of $ 310,000 to Mario and $ 250,000 to Luigi.

2. The remainder is to be divided equally.

Instructions

a) Prepare a schedule that shows the division of profit to each partner.

b) Prepare the closing entries for the division of profit and for the drawings accounts at December 31, 2021.

Exercise 10

Joanne and Diane have a partnership in The Luxury Flooring Company. The partnership agreement includes the following provisions regarding sharing profit or loss:

1. A salary allowance of $ 90,000 to Joanne and $ 65,000 to Diane.

2. An interest allowance of 7% on capital balances at the beginning of the year.

3. The remainder to be divided 60% to Joanne and 40% to Diane.

The capital balances on January 1, 2021, for Joanne and Diane were $ 480,000 and $ 1,000,000, respectively. During 2021, The Luxury Flooring Company had sales of $ 1,200,000, cost of goods sold of $ 417,000, and operating expenses of $ 335,000.

Instructions

Prepare an income statement for The Luxury Flooring Company for the year ended December 31, 2021. As a part of the income statement, include a division of profit to each of the partners.

Exercise 11

The following condensed adjusted trial balance relates to Loud & Proud Music at December 31, 2021, a partnership formed by Simon Loud and Willard Proud.

LOUD & PROUD MUSIC

Adjusted Trial Balance

December 31, 2021

Debit Credit

Current assets $ 125,000

Property, plant, and equipment 30,000

Current liabilities $ 20,000

Long-term debt 85,000

Loud, capital 50,000

Loud, drawings 20,000

Proud, capital 75,000

Proud, drawings 15,000

Sales revenue 370,000

Operating expenses 410,000

$ 600,000 $ 600,000

The partnership agreement stipulates that a division of partnership profit or loss is to be made as follows:

1. A salary allowance of $ 40,000 to Loud and $ 50,000 to Proud.

2. The remainder is to be divided equally.

Instructions

a) Prepare a schedule that shows the division of profit/loss to each partner.

b) Prepare the closing entries for the division of profit/loss and for the drawings accounts at December 31, 2021.

Exercise 12

Bob Spade and Ken Lundy have formed the partnership Art World, and have capital balances of $ 120,000 and $ 105,000, respectively on January 1, 2021. On June 1, 2021, Lundy invested an additional $ 20,000. Also, during the year, Spade withdrew $ 16,000 and Lundy withdrew $ 22,000. Sales for the year amounted to $ 850,000 and expenses were $ 520,000. After taking salary allowances of $ 60,000 and $ 90,000, respectively, Spade and Lundy share any remaining profit and losses on a 40% and 60% ratio, respectively.

Instructions

a) Prepare a schedule that shows the division of profit to each partner.

b) Prepare the closing entries at December 31, 2021, for the Art World partnership.

c) Prepare a statement of partners' equity for 2021.

Exercise 13

Jane Zhou, Ron Higgins, and Liz O’Neill are three partners who operate ZHO Consulting, which has a June 30 year end. For the year ended June 30, 2021, the partnership had revenue of $ 380,000 and operating expenses of $ 176,000. Information about the partnership accounts is as follows:

Instructions

a) Prepare the Statement of Partners’ Equity for the year ended June 30, 2021.

b) Prepare a partial balance sheet at June 30, 2021, showing the Partners’ Equity section.

c) Prepare closing entries for the June 30, 2021 year end.

Exercise 14

Marty Cummerford and Jane Wheeler have formed the MCJW partnership, and have capital balances of $ 65,000 and $ 50,000, respectively on January 1, 2021. On June 1, 2021, Wheeler invested an additional $ 35,000. Also, during the year, Cummerford withdrew $ 30,000 and Wheeler withdrew $ 34,000. Sales for the year amounted to $ 300,000 and expenses were $ 220,000. After taking salary allowances of $ 30,000 and $ 20,000, respectively, Cummerford and Wheeler share any remaining profit and losses on a 3:1 basis.

Instructions

a) Prepare a schedule that shows the division of profit to each partner.

b) Prepare the closing entries at December 31, 2021, for the MCJW partnership.

c) Prepare a statement of partners' equity for 2021.

Exercise 15

Julie Harris, William Gosse, and Regina Ryan started a partnership to provide mobile tax services. The partners’ capital account at the beginning of 2021 was Harris, $ 120,000; Gosse, $ 180,000; and Ryan, $ 90,000. The partnership agreement states that the partners will share profit equally.

On December 31, 2021, the partnership reported a loss of $ 21,000 for the year. During the year, Harris withdrew $ 80,000 and Gosse withdrew $ 140,000. Ryan did not make any withdrawals.

On January 1, 2022, the partners had a major disagreement as to the direction of the partnership and decided to liquidate the business. The December 31, 2021 balance sheet showed the following balances:

Cash $ 26,000

Machinery (net) 169,000

Accounts payable 46,000

Partners’ capital 149,000

On January 1, 2022, the machinery was sold for proceeds of $ 133,000.

Instructions

Prepare the journal entry to record the following:

a) The allocation of the loss to the partners on December 31, 2021.

b) The closing of the drawings accounts on December 31, 2021.

c) The liquidation of the partnership on January 1, 2022.

Exercise 16

Cleaning Solutions is a partnership owned by E. England and P. France. At January 1, 2021, the partner’s capital accounts were: E. England, $ 16,500 and P. France $ 12,300. During 2021, France contributed to the business equipment with a fair value of $ 5,600. Each partner withdrew $ 50,000 during the year and profit was $ 141,900. The partners share profit on a 2:1 ratio (England: France).

Instructions

a) Prepare the statement of partners’ equity for the year ended December 31, 2021.

b) Prepare a partial balance sheet, showing the partners’ equity section.

Exercise 17

At September 30, 2021, C. Saber and J. Wong, the two partners of City Landscaping, had capital account balances of $ 25,000 each. D. Walker joined the partnership on September 30, 2021 and received a 1/3 interest in the partnership in exchange for a capital contribution of $ 40,000.

For the year ended September 30, 2022, City Landscaping had profit of $ 126,000, which is allocated equally to the three partners. Withdrawals during the year were $ 18,000 each by Saber and Wong, and $ 14,000 by Walker.

Instructions

a) Record the transaction on September 30, 2021 admitting Walker into the partnership.

b) Calculate the balance of each partner’s capital account after the transaction.

c) Prepare the statement of partners’ equity for the year ended September 20, 2022.

Exercise 18

The following information is available regarding CGG Company’s partnership accounts at December 31, 2021, before completion of the closing entries:

A. Choudrey, Capital $ 70,000

N. Gilker, Capital 45,000

R. Godfrey, Capital 20,000

A. Choudrey, Drawings 50,000

N. Gilker, Drawings 28,000

R. Godfrey, Drawings 35,000

Income Summary (shared equally among partners) 180,000

No new contributions were made during 2021. Godfrey wishes to withdraw from the partnership January 1, 2022.

Instructions

a) Prepare the statement of partners’ equity for the year ended December 31, 2021.

b) Prepare the January 1, 2022 entry to record Godfrey’s withdrawal under each of the following three independent alternatives:

(i) Choudrey and Gilker each pay Godfrey $ 10,000 out of their personal accounts and each receives one-half of Godfrey’s equity.

(ii) Godfrey is paid $ 100,000 out of partnership cash.

(iii) Godfrey is paid $ 40,000 out of partnership cash.

Exercise 19

At March 31, 2021, Mira Olynik and J.P. Dalton, the two partners of Kanko Datamatics, had capital account balances of $ 150,000 each. Sarah Lumas joined the partnership on March 31, 2021 and received a 1/3 interest in the partnership in exchange for a capital contribution of $ 175,000.

For the year ended March 31, 2022, Kanko Datamatics had profit of $ 450,000, which is allocated equally to the three partners. Withdrawals during the year were $ 75,000, $ 90,000, 60,000 by Olynik, Dalton, and Lumas, respectively.

Instructions

a) Record the transaction on March 31, 2021 admitting Lumas into the partnership.

b) Calculate the balance of each partner’s capital account after the transaction.

c) Prepare the statement of partners’ equity for the year ended March 31, 2022.

Exercise 20

Connie Knox and Andrea Cardoza have capital accounts of $ 360,000 and $ 280,000, respectively. Bob Lee and Mike McClure are to join the partnership. Lee invests $ 55,000 in the partnership for which he receives a capital credit of $ 55,000. McClure purchases a one-half interest from Knox for $ 230,000 and a one-fourth interest from Cardoza for $ 100,000.

Instructions

a) Prepare the journal entries to record the admission of Lee and McClure to the partnership.

b) Determine the capital balances of the partners after the admission of Lee and McClure.

Exercise 21

Petra Stone and Pam Peach are partners who share profit on a 3:2 basis, and on July 1, their capital account balances are $ 165,000 and $ 136,000 respectively. On July 1, Bobby Jo is admitted to the partnership.

Instructions

Prepare the entry to record Bobby’s admission to the partnership under the following independent situations:

a) Bobby purchases 50% of Petra’s partnership interest from him for $ 115,000.

b) Bobby purchases a 1/3 interest in the partnership by contributing cash of $ 96,500.

c) Bobby purchases a 1/3 interest in the partnership by contributing cash of $ 167,900.

Exercise 22

Tim Tarrant and Jim Edmonds share partnership profit on a 3:2 basis. They have capital balances of $ 170,000 and $ 90,000, respectively, when J.T. Ryder is admitted to the partnership.

Instructions

Prepare the journal entry to record the admission of Ryder under each of the following independent assumptions:

a) Ryder invests $ 100,000 for a 25% ownership interest.

b) Ryder invests $ 40,000 for a 25% ownership interest.

c) Ryder invests an amount that gives him a 20% ownership interest.

Exercise 23

The Felix and Morris Partnership has capital account balances as follows:

Felix, Capital $ 145,000

Morris, Capital 160,000

The partners share profit and losses in the ratio of 60% to Felix and 40% to Morris.

Instructions

Prepare the journal entry on the books of the partnership to record the admission of Singh as a new partner under the following three independent circumstances:

a) Singh pays $ 80,000 to Felix and $ 95,000 to Morris for one-half of each of their ownership interests in a personal transaction.

b) Singh invests $ 150,000 in the partnership for a one-third interest in partnership capital.

c) Singh invests $ 1,000,000 in the partnership for a one-third interest in partnership capital.

Exercise 24

Donna Karr, Alice Wright, and Nancy Shaffer have capital balances of $ 100,000, $ 70,000, and $ 50,000, respectively, and they share profit on a 4:3:3 basis.

Instructions

Journalize the withdrawal of Wright from the partnership under each of the following circumstances:

a) Wright is paid $ 70,000 in cash from partnership assets.

b) Wright is paid $ 77,000 in cash from partnership assets.

c) Wright is paid $ 49,000 in cash from partnership assets.

Exercise 25

Julie Ellis, Sara Lake, and Dan Madden have capital balances of $ 54,000, $ 82,000, and $ 36,000, respectively, and their profit ratios are 4:2:4.

Instructions

Record the withdrawal of Madden from the partnership under each of the following independent assumptions:

a) Madden is paid $ 36,000 from partnership assets.

b) Madden is paid $ 48,000 from partnership assets.

c) Madden is paid $ 27,000 from partnership assets.

Exercise 26

Baker, Gregg, and Stine share profit and losses in a ratio of 4:1:5, respectively. The capital account balances of the partners are as follows:

Baker, Capital $ 150,000

Gregg, Capital 90,000

Stine, Capital 60,000

Instructions

Prepare the journal entry on the books of the partnership to record the withdrawal of Stine under the following independent circumstances:

a) The partners agree that Stine should be paid $ 70,000 by the partnership for his interest.

b) The partners agree that Stine should be paid $ 45,000 by the partnership for his interest.

c) Baker agrees to pay Stine $ 40,000 for one-half of his capital interest and Gregg agrees to pay Stine $ 40,000 for one-half of his capital interest in personal transactions among the partners.

Exercise 27

Jabar Hassan, Mohammed Badoo, and Sanji Patel have capital balances of $ 650,000, $ 500,000, and $ 425,000, respectively, and they share profit on a 5:3:2 basis.

Instructions

Journalize the withdrawal of Sanji from the partnership under each of the following independent circumstances:

a) Sanji is paid $ 425,000 in cash from partnership assets.

b) Sanji is paid $ 450,000 in cash from partnership assets.

c) Sanji is paid $ 400,000 in cash from partnership assets.

Exercise 28

At June 30, Fine Balance Partnership is liquidated. Just before the liquidation, Fine Balance has cash of $ 2,800, equipment of $ 45,000, accumulated depreciation of $ 31,000, accounts payable of $ 6,000, and the following partner capital accounts: R. Mistry $ 9,000; M. Mohal $ 1,800. Partners share in profit or losses equally. Upon liquidation, the equipment is sold for $ 10,000 cash, the accounts payable are paid in full, and any remaining cash is distributed to the partners. If a partner’s capital account is in a deficit balance, he or she will contribute the necessary cash to the partnership to cover it.

Instructions

Calculate how much cash will be paid to, or received from, each partner upon liquidation.

Exercise 29

The RAD Partnership is to be liquidated and the ledger shows the following:

Cash $ 15,000

Noncash assets 80,000

Liabilities 20,000

Reed, Capital 30,000

Ales, Capital 40,000

Dent, Capital 5,000

Reed, Ales, and Dent's profit ratios are 6:3:1 respectively.

Instructions

Prepare separate entries to record the liquidation of the partnership assuming that the noncash assets are sold for $ 50,000 in cash.

Exercise 30

The ABC Partnership is to be liquidated and you have been hired to prepare a schedule of cash payments for the partnership. Partners A, B, and C share profit and losses in the ratio of 6:2:2 respectively. Assume the following:

1. Equipment was sold for $ 80,000.

2. Liabilities were paid in full.

3. The remaining cash was distributed to the partners. (If any partner has a capital deficiency, assume that the partner is unable to make up the capital deficiency.)

ABC PARTNERSHIP

Trial Balance Immediately Prior to Liquidation

Cash $ 10,000

Equipment 120,000

Liabilities $ 35,000

A, Capital 21,000

B, Capital 38,000

C, Capital 36,000

$ 130,000 $ 130,000

Instructions

Using the above information, calculate the following:

a) Cash available to be distributed to all partners.

b) Any gain or loss on sale of noncash assets.

c) The amount of cash to be received by each partner upon liquidation.

Exercise 31

Sam Bilbo and Edmond Lewis who operate the Shire Partnership have decided to liquidate their business and retire. Sam and Edmond allocate profit and losses on a 3:2 basis, respectively. At December 31, 2020, after all closing entries have been made, the trial balance of the partnership shows the following account balances:

Cash $ 2,000

Merchandise inventory 52,000

Accounts payable $ 8,000

Bank loan 15,000

S. Bilbo, Capital 26,000

E. Lewis, Capital 5,000

The inventory is sold on January 1, 2021 for cash, and the liabilities are paid. Both partners have the resources to cover deficits (if any) in their capital accounts.

Instructions

a) Assuming the inventory is sold for $ 25,000, calculate the balance in each partner’s capital account after allocating the gain or loss on sale of inventory and payment of the liabilities. Prepare the entry to record the receipt of cash from, or payment of cash to, each partner to liquidate the partnership.

b) Assuming the inventory is sold for $ 57,000, calculate the balance in each partner’s capital account after allocating the gain or loss on sale of inventory and payment of the liabilities. Prepare the entry to record the receipt of cash from, or payment of cash to, each partner to liquidate the partnership.