Question

The computation of a safe installment payment for the XYZ partnership resulted in only partner Z receiving cash. Which of the following statements is correct?

1) Partner Z lent the partnership cash, and the partnership had to pay back the loan to Z before distributing cash to X and Y.
2) After assuming all noncash assets were potentially worthless and that assumed capital deficits created in X's and Y's capital balances were losses to be allocated to Z; Z's capital balance was the only capital balance left with a credit.

Answer 1

Only partner Z receiving cash in the XYZ partnership indicates that, after accounting for potential losses, Z's capital account was the only one with a positive balance, while partners X and Y possibly faced capital deficits.

Step-by-step explanation:

The computation of a safe installment payment for the XYZ partnership resulted in only partner Z receiving cash. The correct statement is that after assuming all noncash assets were potentially worthless and that assumed capital deficits created in X's and Y's capital balances were losses to be allocated to Z; Z's capital balance was the only capital balance left with a credit. This implies that partners X and Y had their capital accounts reduced to zero or negative amounts due to losses, and thus, there was no available cash to distribute to them.

When considering financial entities like banks, it's important to note that they factor in the riskiness of loans not being repaid. If a bank like the Safe and Secure Bank experiences unexpected defaults, its asset values would decline, potentially leading to negative net worth. Similarly, in the case of the XYZ partnership, unexpected losses can lead to certain partners not receiving cash distributions, as demonstrated by partner Z being the only one to receive a cash payment in this scenario.