$20,000 20,000 20,000

7. The partner with the greatest ability to absorb anticipated losses (i.e., to preserve a credit capital balance after allocating anticipated losses) will be the first to receive a safe payment.

Predistribution Plan. Schedules of safe payments provide a means of guaranteeing the propriety of installment distributions to partners, especially in complex situations. However, a predistribu-tion plan provides a less tedious means of determining distributions to partners. The predistribu-tion plan is prepared in advance of actual distributions and provides the user with information regarding the order and amount of all future distributions. As was the case with schedules of safe payments, the predistribution plan (a) combines partners' loan balances with their capital balances, (b) anticipates all possible liabilities, losses on realization, and liquidation expenses, and (c) recognizes that the partner with the greatest ability to absorb anticipated losses will be the first partner to receive safe payments.

To prepare the predistribution plan, all anticipated but unrecorded liabilities and liquidation expenses are allocated to the various partners' capital balances according to their profit and loss ratio. The resulting capital balances then are evaluated to determine the maximum loss from realization that could be absorbed by the partners before a debit balance is created in each of their capital accounts. As suggested by the schedule of safe payments, the partner who maintains a credit capital balance after assuming that all noncash assets are worthless is the partner with the greatest ability to absorb realization losses. Therefore, that partner will be the first to receive an actual distribution of assets.

The maximum loss a partner could absorb (maximum loss absorbable), before a debit balance in the partner's capital account is created, is determined by the following calculation:

Maximum Loss Absorbable (MLA)

Partner's Capital Balance Partner's Profit and Loss Percentage

Since the partner with the largest MLA will be the first to receive an actual distribution, the MLAs are used to indicate the order in which partners will receive distributions. However, it should be noted that the MLAs do not indicate the amounts of the distributions. To illustrate, assume a partnership consists of three partners (A, B, and C) who have capital balances, before the realization of noncash assets, of $70,000, $60,000, and $40,000, respectively, and profit and loss percentages of 35%, 25%, and 40%, respectively. The maximum losses absorbable by Partners A, B, and C are determined as follows:


Capital Balance

Profit and Loss Percentage


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