Which of the following statements is true concerning the distribution of safe payments in the context of partnership liquidation?

• A. Safe payments are distributed equally among all partners regardless of their capital balances.
• B. Safe payments are based solely on the original capital contributions of each partner.
• C. Safe payments are distributed only after all possible losses have been allocated to the partners' capital accounts.
• D. Safe payments are distributed before recognizing any potential losses on asset realization.

Answer: (C)

Verified step by step guidance

1. Understand the concept of 'safe payments' in partnership liquidation. Safe payments refer to the amounts distributed to partners during the liquidation process, ensuring that no partner receives more than their rightful share after accounting for potential losses.
2. Review the process of partnership liquidation. In liquidation, assets are sold, liabilities are paid, and any remaining funds are distributed to partners based on their capital accounts. Before distributing safe payments, potential losses on asset realization must be considered.
3. Recognize that safe payments are distributed only after all possible losses have been allocated to the partners' capital accounts. This ensures that no partner receives funds that might later be needed to cover losses or liabilities.
4. Eliminate incorrect statements: Safe payments are not distributed equally among partners regardless of their capital balances, nor are they based solely on original capital contributions. Additionally, safe payments are not distributed before recognizing potential losses on asset realization.
5. Conclude that the correct statement is: 'Safe payments are distributed only after all possible losses have been allocated to the partners' capital accounts.' This ensures fairness and protects the partnership from insolvency risks during liquidation.