# Advance Cash Distribution Plan for YZ Partnership ## Given Information - **Partner Y Capital Balance:** $15,000 - **Partner Z Capital Balance:** $12,000 - **Total Capital:** $27,000 - **Profit & Loss Sharing Ratio:** - Y: 40% - Z: 60% - **Liabilities:** None ## Objective Prepare an **Advance Cash Distribution Plan**, which details the order and proportion in which partners receive cash as assets are liquidated, ensuring no partner receives more than their share before losses are known. --- ## Step 1: Recognize Potential Loss Absorption If the partnership’s assets sell for less than book value, **losses** are first absorbed by the partners according to their profit and loss ratio. Let’s assume a worst-case scenario: all non-cash assets are worthless, so the only cash available is the current capital. - **Total Loss to be Absorbed:** $27,000 (if no cash is realized from assets) ## Step 2: Loss Absorption Schedule Distribute the hypothetical total loss of $27,000 according to profit/loss ratios: - **Y:** $27,000 × 40% = $10,800 - **Z:** $27,000 × 60% = $16,200 Subtract these losses from each partner’s capital: | Partner | Capital | Less: Hypothetical Loss | Remaining Capital | |---------|---------|------------------------|-------------------| | Y | $15,000 | $10,800 | $4,200 | | Z | $12,000 | $16,200 | **($4,200)** | - **Z would have a deficit of $4,200** (i.e., would owe this to the partnership if all assets were lost). - **Y would still have $4,200 left** after absorbing their share of the loss. ## Step 3: Priority of Cash Distributions 1. **First:** Z must receive enough cash so that both partners are reduced to the same "risk of loss" (i.e., capital balances are equalized based on their loss-sharing ratio). 2. **Second:** After Z's capital is reduced to zero, all further cash is distributed to Y. ### Calculating “Equalization Point” - Z’s capital ($12,000) is less than Y’s ($15,000). - If $3,000 is paid to Y, both partners will have $12,000. - However, because of the loss-sharing ratio, the "equalization" is reached by considering how much each partner can lose before reaching zero. More formally, **the first distributions go to Y until the capital accounts are in the same proportion as the loss-sharing ratio.** #### Find ratio of capitals to loss ratio: - Y’s capital / Y’s loss share = $15,000 / 40% = $37,500 - Z’s capital / Z’s loss share = $12,000 / 60% = $20,000 Since Z’s ratio is lower, Z will run out of capital first if losses are sustained. So, to **equalize risk**, bring Y’s capital down to the same relative risk as Z’s. Let \( x \) be the amount paid to Y so that: \[ \frac{15,000 - x}{.4} = \frac{12,000}{.6} \] \[ \frac{15,000 - x}{.4} = 20,000 \] \[ 15,000 - x = 8,000 \] \[ x = 7,000 \] **So, the first $7,000 of cash goes to Y.** After this, the capital balances are: - Y: $8,000 - Z: $12,000 Now, the ratio of capitals matches the loss-sharing ratio: - $8,000 : $12,000 = 2 : 3, which matches 40% : 60%. ## Step 4: All Further Distributions From this point, **distribute all additional cash in the profit and loss sharing ratio** (Y: 40%, Z: 60%) until both capital accounts are exhausted. ### How much more can be distributed? Y has $8,000, Z has $12,000. The next distributions are in 40/60 ratio. Let \( y \) be the total further cash distributed, such that Y gets 40% (\( .4y \)), Z gets 60% (\( .6y \)), and both accounts reach zero at the same time: \[ 8,000 - .4y = \implies y = 20,000 \] \[ 12,000 - .6y = \implies y = 20,000 \] So, **the next $20,000** distributed (after the $7,000 to Y) is split:** - Y: 40% of $20,000 = $8,000 - Z: 60% of $20,000 = $12,000 At this point, both capital accounts are zero. --- ## Step-by-Step Distribution Plan 1. **First $7,000:** All to Y 2. **Next $20,000:** 40% to Y ($8,000), 60% to Z ($12,000) 3. **Total distributed:** $27,000 --- ## Summary Table | Distribution Step | To Y | To Z | Cumulative Y | Cumulative Z | |-------------------------|---------|----------|--------------|--------------| | First $7,000 | $7,000 | $ | $7,000 | $ | | Next $20,000 (40/60) | $8,000 | $12,000 | $15,000 | $12,000 | | **Totals** | $15,000 | $12,000 | $15,000 | $12,000 | --- ## **Final Advance Cash Distribution Plan** 1. **Distribute the first $7,000 of available cash to Partner Y.** 2. **Distribute the next $20,000 of cash 40% to Y and 60% to Z ($8,000 to Y, $12,000 to Z).** 3. **Once $27,000 of cash has been distributed, both partners’ capital accounts are zero.** 4. **If less than $27,000 is realized, follow the above order and proportions.** --- ### **Note** If cash is received in installments (not all at once), apply the steps above to each installment until the total distributed matches the available partnership capital. --- **Alt text for visualization:** *Table showing stepwise cash distribution from a $27,000 partnership, with $7,000 first to Partner Y, followed by $20,000 split 40% to Y and 60% to Z, until both capital accounts reach zero.*