Answer to Question #165158 in Economics for Fikir

Question

Installment Payment to Partners

Occurs when realization of non-cash assets takes longer periods and the partners want to receive cash as it becomes available rather than waiting until all non-cash assets are realized.  

Liquidation in installment is, therefore, a process of realizing some assets, paying creditors, paying the remaining available cash to partners, realizing additional assets, and making additional cash payment to partners until all non-cash assets are realized and all cash distributed.

General Principles Guiding Installment Payments

The only safe policy for determining cash payments to partners is assuming the worst case scenario:

• Assume a total loss on all remaining non cash-assets, and provide for all possible losses, including potential liquidation costs and unrecorded liabilities

• Any partner with a potential capital deficit will be unable to pay anything;

Thus, distribute each installment of cash as if no more cash will be forthcoming.

To illustrate, assume that the partners of UVW Partnership who share net income or loss in a 4:3:2 ratio decide to liquidate the partnership and distribute cash in installments. The balance sheet just prior to liquidation on July 5, 2020 is as follows:

UVW Partnership

Balance Sheet

July 5, 1999

          Assets Liabilities & Partners’ Capital

Cash     8,000 Liabilities 61,000

Other Assets  192,000

total.................200.000

Liabilities and partner and capital

Liability ...... 61000

U capital......40000

V capital.......45000

W capital.......54.000

Total..............200.000

Answer 1

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