Norris, Madson, and Howell have income ratios of 5: 3: 2 and...

Norris, Madson, and Howell have income ratios of $5: 3: 2$ and capital balances of $$\$ 34,000 $$, $$\$ 31,000 $$, and $$\$ 28,000$$, respectively. Noncash assets are sold at a gain and allocated to the partners. After creditors are paid, $$\$ 103,000$$ of cash is available for distribution to the partners. How much cash should be paid to Madson?

Key Concepts

Partnership Liquidation

This concept refers to the process of dissolving a partnership by selling noncash assets and paying off liabilities. During liquidation, the partnership converts its assets into cash and then distributes the remaining cash among the partners according to their adjusted capital balances. The process generally involves settling creditors first and then allocating any residual cash based on pre?determined ratios or partners' capital accounts.

Capital Accounts

Capital accounts track each partner’s investment in the partnership, including their contributions, allocated profits and losses, and withdrawals. At the point of liquidation or reorganization, these accounts are used to determine the amount of cash or other assets each partner should receive after settling liabilities. The final distribution typically aims to settle these accounts to zero, ensuring that each partner receives their fair share of the remaining assets.

Gain Allocation in Dissolution

When noncash assets are sold during a liquidation and sold at a gain or loss, the resultant gain or loss is allocated among the partners according to their agreed-upon distribution ratios (often the income sharing or profit and loss ratios). This allocation adjusts the partners’ capital accounts prior to the final cash distribution. The mechanism ensures that any differences between the book values of assets and their realized amounts are fairly distributed.

Income Sharing Ratio

This ratio determines how profits, losses, and gains from asset sales are allocated among partners and is fundamental during the dissolution or reorganization process. It is used to adjust partners’ capital accounts when gains or losses are recognized from the sale of assets. The income sharing ratio reflects the agreed-upon method of distributing financial impacts and is critical for ensuring each partner receives an appropriate share of the final cash available for distribution.

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