Partner A has a smaller capital balance than Partner L.Partner A,however,has a higher profit-and-loss-sharing percentage than Partner L.The LA partnership has decided to liquidate.As a result of the information given,

Question

Quizplus · Accepted Answer

Since Partner A has a higher profit-and-loss-sharing percentage, they will receive a larger portion of the partnership's profits. However, since they have a smaller capital balance, they will have a smaller loss absorption power, meaning they will be responsible for absorbing less of the partnership's losses. Therefore, Partner L will have a larger loss absorption power and will be responsible for absorbing more of the losses. In a liquidation scenario, Partner A will receive cash based on their profit-and-loss-sharing percentage, but they will have a smaller overall claim on the partnership's assets due to their smaller capital balance. Partner L will receive cash only after all debts and obligations have been paid, but they will have a larger claim on the remaining assets due to their larger capital balance.

Partner a Has a Smaller Capital Balance Than Partner L