Illustration 14-3 presents the lump-sum distribution and demonstrates the following concepts that were discussed previously:

1. Gains and losses on realization are allocated according to the partners' profit and loss ratio.

2. Claims against the partnership are paid in the proper order.

3. The marshaling of assets doctrine is followed to determine the disposition of B's and C's debit balances in their capital accounts. That is, a partner's personal assets first are used to satisfy personal liabilities. Then, to the extent possible, remaining assets are contributed to the partnership to eliminate debit capital balances.

4. C's debit capital balance is charged against A, the only personally solvent partner.

5. Partner A will have a claim against C's future personal assets for the debit balance that was absorbed.

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