No Capital Deficiency in Liquidation

Rachel, David, and Lee are equal partners running a bakery business with an opening capital balance of ten thousand dollars each.

They decide to liquidate the partnership, which means closing the business by selling assets, paying debts, and distributing the remaining cash.

The partnership begins by selling its noncash assets for cash. This step is called realization.

The book value of the bakery’s equipment and furniture is sixty thousand dollars. These assets are sold for seventy-two thousand dollars.

Since the assets are sold for greater than the book value, the partnership records a gain on the realization of twelve thousand dollars.

This gain is shared equally among the three partners, so each receives four thousand dollars in their capital accounts.

Next, the partnership pays its liabilities. Consider, the bakery owes thirty thousand dollars to creditors and has no other liabilities.

After paying creditors, forty-two thousand dollars in cash remains.

This remaining cash is distributed to the partners based on their final capital balances.

Each partner receives fourteen thousand dollars.

All capital balances are settled. So, there is no capital deficiency in the partnership.