Illustration 14-4 is based on these facts and demonstrates the following concepts:
1. Gains and losses on realization are allocated according to the partners' profit and loss ratio.
2. Unsold noncash assets are assumed to be worthless for purposes of determining the safe payments to partners.
3. Loan balances are combined with capital balances according to the right-of-offset doctrine. This offset can result in partners receiving distributions of capital before other partners' loan accounts have been paid (as in the February 17 distribution in Illustration 14-4). However, such distributions may be placed in escrow until it is certain that debit balances will not develop in these partners' capital accounts.
4. Distributions are applied to a partner's loan balance before they are applied to the partner's capital balance.
5. Typically, the doctrine of marshaling of assets is ignored until all assets have been realized, at which time debit balances in partners' capital accounts may be satisfied through contributions of personal assets.
6. A schedule of safe payments is an iterative process that will cease when the schedule indicates that a given distribution will be shared among all partners. Further distributions will be allocated among the partners according to their profit and loss ratio. For example, when the March 5 distribution in Schedule A indicates that all partners will receive a portion of the distribution, the distribution on March 18 would be made in the profit and loss ratio, with results identical to those that would be indicated by continuing the schedule of safe payments:
(1) Total Distribution to All Partners
Partners' Profit and Loss Percentage
(1) X (2) Amount to Be Distributed
Amount to Be Distributed per
Schedule of Safe Payments
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