liquidating distributions of the partnership are required to be made in accordance with the positive capital...

liquidating distributions of the partnership are required to be made in accordance with the positive capital account balances of the partners. Explain why this is so important.

Solutions

Expert Solution

(1) A positive capital account balance implies amount due to the partner and a negative capital account balance implies amount due from the partner. Hence payment cannot be made in negative capital account balances.

(2) Excess paid capital relative to the profit sharing ratio is to be distributed first. Here positive capital account balance implies excess over that needed as per profit sharing ratio. Hence unless positive capital account balance is paid, payment to other partners cannot be made.

(3) Thus if liquidating distributions of the partnership are to be made to all partners in profit sharing ratio, their capitals must be in profit sharing ratio. Otherwise it leads to unjustice to those who retained their earngs in the firm and unnecessarly benefits those who made heavy drawings from the firm in earlier periods. That is why it is so important to take positive capital account balance for distributions at the time of liquidation of firm.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Partnership Distributions What is the difference between the definition of a non-liquidating distributions and a liquidating...

Partnership Distributions What is the difference between the definition of a non-liquidating distributions and a liquidating distribution? What is the tax significance between the two? What issues arise if a partner contributes appreciated property to a partnership and other appreciated property is distributed to that partner? For example, a partner has a $60,000 basis in the partnership interest just before receiving a parcel of land as a liquidating distribution, the partner will have no remaining precontribution gain and will receive...

In partnership what is the difference between liquidating vs. non-liquidating distributions? Proportionate Vs, Disproportionate distribution? and...

In partnership what is the difference between liquidating vs. non-liquidating distributions? Proportionate Vs, Disproportionate distribution? and cash distribution?

Partnership Distributions No unread replies.No replies. What is the difference between the definition of a non-liquidating...

Partnership Distributions No unread replies.No replies. What is the difference between the definition of a non-liquidating distributions and a liquidating distribution? What is the tax significance between the two? What issues arise if a partner contributes appreciated property to a partnership and other appreciated property is distributed to that partner? For example, a partner has a $60,000 basis in the partnership interest just before receiving a parcel of land as a liquidating distribution, the partner will have no remaining precontribution...

Prior to liquidating their partnership, Samuel and Brian had capital accounts of $60,000 and $240,000,...

Prior to liquidating their partnership, Samuel and Brian had capital accounts of $60,000 and $240,000, respectively. The partnership assets were sold for $120,000. The partnership had no liabilities. Samuel and Brian share income and losses equally Required: a. Determine the amount of Samuel's deficiency b. Determine the amount distributed to Brian, assuming Samuel is unable to satisfy the deficiency

After the accounts are closed on April 10, prior to liquidating the partnership, the capital accounts...

After the accounts are closed on April 10, prior to liquidating the partnership, the capital accounts of Zach Fairchild, Austin Lowes, and Amber Howard are $42,000, $7,500, and $36,500, respectively. Cash and noncash assets total $23,500 and $84,500, respectively. Amounts owed to creditors total $22,000. The partners share income and losses in the ratio of 1:1:2. Between April 10 and April 30, the noncash assets are sold for $48,500, the partner with the capital deficiency pays the deficiency to the...

After the accounts are closed on February 3, 2016, prior to liquidating the partnership, the capital...

After the accounts are closed on February 3, 2016, prior to liquidating the partnership, the capital accounts of William Gerloff, Joshua Chu, and Courtney Jewett are $19,520, $4,080, and $22,180, respectively. Cash and noncash assets total $4,880 and $55,940, respectively. Amounts owed to creditors total $15,040. The partners share income and losses in the ratio of 2:1:1. Between February 3 and February 28, the noncash assets are sold for $36,020, the partner with the capital deficiency pays the deficiency to...

After the accounts are closed on February 3, 2016, prior to liquidating the partnership, the capital...

After the accounts are closed on February 3, 2016, prior to liquidating the partnership, the capital accounts of William Gerloff, Joshua Chu, and Courtney Jewett are $19,680, $4,960, and $21,840, respectively. Cash and noncash assets total $5,100 and $56,140, respectively. Amounts owed to creditors total $14,760. The partners share income and losses in the ratio of 2:1:1. Between February 3 and February 28, the noncash assets are sold for $32,700, the partner with the capital deficiency pays the deficiency to...

Prior to liquidating their partnership, Jolly and Bain had capital accounts of $18,000 and $68,000, respectively....

Prior to liquidating their partnership, Jolly and Bain had capital accounts of $18,000 and $68,000, respectively. The partnership assets were sold for $34,000. The partnership had no liabilities. Jolly and Bain share income and losses equally. Required: a. Determine the amount of Jolly's deficiency. $ b. Determine the amount distributed to Bain, assuming Jolly is unable to satisfy the deficiency.

After closing the accounts on July 1, prior to liquidating the partnership, the capital account balances...

After closing the accounts on July 1, prior to liquidating the partnership, the capital account balances of Gold, Porter, and Sims are $28,500, $40,200, and $18,000, respectively. Cash, noncash assets, and liabilities total $45,900, $74,700, and $33,900, respectively. Between July 1 and July 29, the noncash assets are sold for $59,700, the liabilities are paid, and the remaining cash is distributed to the partners. The partners share net income and loss in the ratio of 3:2:1. Prepare a statement of...

Prior to liquidating their partnership, Perkins and Montgomery had capital accounts of $73,000 and $125,000, respectively....

Prior to liquidating their partnership, Perkins and Montgomery had capital accounts of $73,000 and $125,000, respectively. Prior to liquidation, the partnership had no cash assets other than what was realized from the sale of assets. These partnership assets were sold for $190,000. The partnership had $8,000 of liabilities. Perkins and Montgomery share income and losses equally. Determine the amount received by Perkins as a final distribution from liquidation of the partnership.

Subjects