Chapter 1 Test Bank



Chapter 16 Test Bank | |

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|DISSOLUTION AND LIQUIDATION OF A PARTNERSHIP |

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|Multiple Choice Questions |

LO1

|1. | |Which statement is correct in describing the rank order of payments as specified by the Uniform Partnership Act? |

| | | | |

| | |a. |Payments to partners with loans to the partnership are ranked equally with payments to other creditors. |

| | |b. |Payments to partners with loans to the partnership are ranked ahead of payments to partners without loans to the |

| | | |partnership. |

| | |c. |Payments to other creditors are ranked ahead of payments to partners with loans to the partnership. |

| | |d. |After payments are made to other creditors and partners with loans to the partnership, payment can be made to |

| | | |partners with capital interests. |

LO1

|2. | |Which of the following procedures is acceptable when accounting for a deficit balance in a partner’s capital account during |

| | |partnership liquidation? |

| | | | |

| | |a. |A partner with a negative capital balance must contribute personal assets to the partnership that are sufficient to |

| | | |bring the capital account to zero. |

| | |b. |If a partner with a negative capital balance is personally insolvent, the negative capital balance may be absorbed by|

| | | |those partners having a positive capital balance according to the residual profit and loss sharing ratios that apply |

| | | |to all the partners. |

| | |c. |If a partner with a negative capital balance is personally insolvent, the negative capital balance may be absorbed by|

| | | |those partners having a positive capital balance according to the residual profit and loss sharing ratios that apply |

| | | |to those partners having positive balances. |

| | |d. |All the above procedures are acceptable. |

LO1

|3. | |A partnership dissolution differs from a liquidation in that |

| | | | |

| | |a. |payments are made to creditors before partners receive value. |

| | |b. |periodic payments to partners are made when cash becomes available. |

| | |c. |a partner withdraws from the business and the enterprise continues to function. |

| | |d. |full payment is made to all outside creditors before remaining cash is distributed to partners in a final lump sum |

| | | |payment. |

LO1

|4. | |A partnership in liquidation has converted all assets into cash and paid all liabilities. According to the Uniform Partnership|

| | |Act, the order of payment |

| | | | |

| | |a. |will have amounts due to partners with respect to their capital accounts take precedence over amounts owed by |

| | | |partners other than for capital and profits. |

| | |b. |will be according to the partners’ residual profit and loss sharing ratios. |

| | |c. |will have amounts owed by partners other than for capital and profits take precedence over amounts due to partners |

| | | |with respect to their capital accounts. |

| | |d. |Will be by any manner that is both reasonable and rational for the partnership. |

LO1

|5. | |In partnership liquidation, how are partner salary allocations treated? |

| | | | |

| | |a. |Salary allocations take precedence over creditor payments. |

| | |b. |Salary allocations take precedence over amounts due to partners with respect to their capital interests, but not |

| | | |profits. |

| | |c. |Salary allocations take precedence over amounts due to partners with respect to their capital profits, but not |

| | | |capital interests. |

| | |d. |Salary allocations are disregarded. |

LO1

|6. | |A simple partnership liquidation requires |

| | | | |

| | |a. |periodic payments to creditors and partners determined by a safe payments schedule. |

| | |b. |partnership assets to be converted into cash with full payment made to all outside creditors before remaining cash is|

| | | |distributed to partners in a lump sum payment. |

| | |c. |only creditors to be paid in an orderly manner. |

| | |d. |periodic payments to partners as cash becomes available. |

LO2

|7. | |In a simple partnership liquidation, the last remaining cash distribution should be made according to the ratio of |

| | | | |

| | |a. |the individual partner’s profit and loss agreement. |

| | |b. |the individual partner's capital accounts, increased by partner loans to the partnership. |

| | |c. |the individual partner’s capital accounts, increased by partnership loans to the partners and decreased by partner |

| | | |loans to the partnership. |

| | |d. |the individual partner’s capital accounts, decreased by partnership loans to the partners and increased by partner |

| | | |loans to the partnership. |

LO2

|8. | |If conditions produce a debit balance in a partner’s capital account when liquidation losses are allocated |

| | | | |

| | |a. |the partner receives further allocations of liquidation losses, but not gains. |

| | |b. |the partner receives no further allocation of liquidation losses and gains. |

| | |c. |the partner is no longer obligated to partnership creditors. |

| | |d. |the partner has an obligation of personal net assets to the other partners. |

|Use the following information for questions 9, 10 and 11. |

| |

|On June 30, 2006, the Warle, Xin, and Yates partnership had the following fiscal year-end balance sheet: |

|Cash |$ |4,000 | |Accounts payable |$ |7,000 |

|Accounts receivable | |6,000 | |Loan from Xin | |5,000 |

|Inventory | |14,000 | |Warle, capital(20%) | |14,000 |

|Plant assets-net | |12,000 | |Xin, capital(30%) | |10,000 |

|Loan to Warle | |6,000 | |Yates, capital(50%) | |6,000 |

|Total assets |$ |42,000 | |Total liab./equity |$ |42,000 |

| | | | | | | |

|The percentages shown are the residual profit and loss sharing ratios. The partners dissolved the partnership on July 1, 2006,. and began |

|the liquidation process. During July the following events occurred: |

| | | | | | | |

|* |Receivables of $3,000 were collected. | |

|* |The inventory was sold for $4,000. | |

|* |All available cash was distributed on | |

| |July 31, except for $2,000 that was set aside for contingent expenses. | |

| | | |

LO2

|9. | |The book value of the partnership equity (i.e., total equity of the partners) on June 30, 2006 is |

| | | | |

| | |a. |$60,000. |

| | |b. |$29,000. |

| | |c. |$30,000. |

| | |d. |$42,000. |

LO2

|10. | |The cash available for distribution to the partners on July 31, 2006 is |

| | | | |

| | |a. |$ 2,000. |

| | |b. |$ 4,000. |

| | |c. |$ 7,000. |

| | |d. |$11,000. |

LO2

|11. | |How much cash would Xin receive from the cash that is available for distribution on July 31? |

| | | | |

| | |a. |$ 0. |

| | |b. |$ 600. |

| | |c. |$1,000. |

| | |d. |$2,000. |

LO2

|12. | |Hara, Ives, and Jack are in the process of liquidating their partnership. Since it may take several months to convert the |

| | |other assets into cash, the partners agree to distribute all available cash immediately, except for $10,000 that is set aside |

| | |for contingent expenses. The balance sheet and residual profit and loss sharing percentages are as follows: |

|Cash |$ |400,000 | |Accounts payable |$ |200,000 |

|Other assets | |200,000 | |Hara, capital (40%) | |135,000 |

| | | | |Ives, capital (30%) | |216,000 |

| | | | |Jack, capital (30%) | |49,000 |

| | | | | | | |

|Total assets |$ |600,000 | |Total liab./equity |$ |600,000 |

| | | | | | | |

| | |How much cash should Ives receive in the first distribution? |

| | | | |

| | |a. |$146,000. |

| | |b. |$147,000. |

| | |c. |$153,000. |

| | |d. |$156,000 |

LO2

|13. | |Jade, Kahl, and Lane are in the process of liquidating their partnership. Lane has agreed to accept the inventory, which has a|

| | |fair value of $60,000, as part of her settlement. A balance sheet and the residual profit and loss sharing percentages are as|

| | |follows: |

|Cash |$ |198,000 | |Accounts payable |$ |149,000 |

|Inventory | |80,000 | |Jade, capital (40%) | |79,000 |

|Plant assets | |230,000 | |Kahl, capital (40%) | |140,000 |

| | | | |Lane, capital (20%) | |140,000 |

| | | | | | | |

|Total assets |$ |508,000 | |Total liab./equity |$ |508,000 |

| | | | | | | |

| | |If the partners then distribute the available cash, Lane will receive |

| | | | |

| | |a. |$23,000. |

| | |b. |$29,000 |

| | |c. |$30,000. |

| | |d. |$34,000. |

LO2

|14. | |Under the rule of offset, what is the proper disposition of a partnership loan that was made from a partner who has a debit |

| | |balance? |

| | | | |

| | |a. |The loan is first paid to the debtor partner before cash payments are made to partners. |

| | |b. |The loan is written off as a partnership loss if the partner does not have the cash to cover the debit balance. |

| | |c. |The loan is charged off to the capital accounts of all the partners in their profit and loss sharing ratios. |

| | |d. |The loan is charged off to the capital account of the debtor partner. |

LO3

|15. | |In partnership liquidations, what are safe payments? |

| | | | |

| | |a. |The amounts of distributions that can be made to the partners, after all creditors have been paid in full. |

| | |b. |The amounts of distributions that can be made to the partners with assurance that such amounts will not have to be |

| | | |returned to the partnership. |

| | |c. |The amounts of distributions that can be made to the partners, after all non-cash assets have been adjusted to fair |

| | | |market value. |

| | |d. |All the above are examples of the safe payments concept. |

LO4

|16. | |If all partners are included in the first installment of an installment liquidation, then in future installments |

| | | | |

| | |a. |cash will be distributed according to the residual profit and loss sharing ratio. |

| | |b. |cash should not be distributed until all non-cash assets are converted into cash. |

| | |c. |a safe payments schedule must be prepared before each cash distribution to avoid excessive payments to partners. |

| | |d. |a cash distribution plan must be prepared so that partners will know when they will be included in cash |

| | | |distributions. |

| | | | |

| | | | |

LO5

|17. | |The year-end balance sheet and residual profit and loss sharing percentages for the Lang, Maas, and Neal partnership on |

| | |December 31, 2005, are as follows: |

|Cash |$ |30,000 | |Accounts payable |$ |200,000 |

|Loan to Lang | |40,000 | |Loan from Maas | |50,000 |

|Other assets | |480,000 | |Lang, capital (25%) | |70,000 |

| | | | |Maas, capital (25%) | |80,000 |

| | | | |Neal, capital (50%) | |150,000 |

|Total assets |$ |550,000 | |Total liab./equity |$ |550,000 |

| | | | | | | |

| | |The partners agree to liquidate the business and distribute cash when it becomes available. A cash distribution plan for the |

| | |Lang, Maas, and Neal partnership will show that cash available, after outside creditors are paid, will initially go to |

| | | | |

| | |a. |Lang in the amount of $20,000. |

| | |b. |Maas in the amount of $45,000. |

| | |c. |Maas in the amount of $55,000. |

| | |d. |Neal in the amount of $90,000. |

LO5

|18. | |In a schedule of assumed loss absorptions |

| | | | |

| | |a. |the partner with lowest loss absorption is eliminated last. |

| | |b. |it is necessary to have a cash distribution plan first. |

| | |c. |the least vulnerable partner is eliminated first. |

| | |d. |the most vulnerable partner is eliminated first. |

LO5

|19. | |Which partner is considered the most vulnerable as a result of a computation of vulnerability rankings? |

| | | | |

| | |a. |The partner with the lowest vulnerability ranking, who also has the lowest loss absorption potential. |

| | |b. |The partner with the lowest vulnerability ranking, who also has the highest loss absorption potential. |

| | |c. |The partner with the highest vulnerability ratio, who also has the lowest loss absorption potential. |

| | |d. |The partner with the highest vulnerability ranking, who also has the highest loss absorption potential. |

LO6

|20. | |The rank order is for claims against a bankrupt partner of |

| | | |

| | |I. Those owing to partners by way of contribution |

| | |II.Those owing to separate creditors |

| | |III.Those owing to partnership creditors |

| | | | |

| | |a. |II first; I second and III third. |

| | |b. |III first; II second and I third. |

| | |c. |I first; III second and II third. |

| | |d. |II first; III second and I third. |

LO2

Exercise 1

|The balance sheet of the Alba, Blick, and Calvo partnership on January 1, 2006 (the date of partnership dissolution) was as follows: |

|Cash |$ |2,000 | |Liabilities |$ |4,010 |

|Other assets | |13,000 | |Loan from Alba | |500 |

|Loan to Calvo | |1,000 | |Alba, capital (20%) | |990 |

| | | | |Blick, capital(40%) | |4,500 |

| | | | |Calvo, capital(40%) | |6,000 |

|Total assets |$ |16,000 | |Total liab./equity |$ |16,000 |

|In January, other assets with a book value of $8,000 were sold for $5,000 in cash. |

| |

|Required: |

| |

|Determine how the available cash on January 31, 2006 will be distributed. |

| | | | | | | |

LO2

Exercise 2

|The partnership of Dale, Edgar, and Fred was dissolved, and by July 1, 2006, all assets had been converted into cash and all partnership |

|liabilities were paid. The partnership balance sheet on July 1, 2006 (with partner residual profit and loss sharing percentages) was as |

|follows: |

|Cash |$ |10,000 | |Fred, capital(30%) |$ | 40,000 |

| | | | |Dale, capital(40%) | |(20,000) |

| | | | |Edgar, capital(30%) | |(10,000) |

| | | | | | | |

|Total assets |$ |10,000 | |Total equity |$ |10,000 |

| | | | | | | |

| |

|The value of partners' personal assets and liabilities on July 1, 2006 were as follows: |

| | | | | | | |

| | |Dale | |Edgar | |Fred |

|Personal assets |$ |45,000 |$ |30,000 |$ |25,000 |

|Personal liabilities | |30,000 | |20,000 | |10,000 |

| | | | | | | |

|Required: |

| | |

|Prepare the final statement of partnership liquidation. |

LO2

Exercise 3

|The balance sheet of the Omar, Paolo, and Quek partnership on November 1, 2006 (before commencement of partnership liquidation) was as |

|follows: |

| | | | | | | |

|Cash |$ |58,000 | |Accounts payable |$ |34,000 |

|Inventory | |60,000 | |Notes payable | |62,000 |

|Loan to Omar | |8,000 | |Omar, capital(40%) | |24,000 |

|Loan to Quek | |14,000 | |Paolo, capital(25%) | |26,000 |

|Plant assets-net | |70,000 | |Quek, capital (35%) | |64,000 |

| | | | | | | |

|Total assets |$ |210,000 | |Total liab./equity |$ |210,000 |

| |

|Liquidation events in November were as follows: |

|- The inventory was sold for $10,000 above book value; |

|- Plant assets with a book value of $60,000 were sold for $34,000. |

| |

|Required: |

|Determine how the available cash on November 31, 2006 should be distributed. |

| |

LO2

Exercise 4

|A cash distribution plan for the Folger, Glover, and Hale partnership was as follows: |

| |

| |

| | | | | | | |

|Cash |$ |54,000 | |Accounts payable |$ |28,000 |

|Inventory | |60,000 | |Notes payable | |60,000 |

|Loan to Jody | |10,000 | |Jody, capital (30%) | |32,000 |

|Loan to Lark | |16,000 | |Kane, capital (45%) | |90,000 |

|Plant assets-net | |110,000 | |Lark, capital (25%) | |40,000 |

| | | | | | | |

|Total assets |$ |250,000 | |Total liab./equity |$ |250,000 |

| |

|Liquidation events in May were as follows: |

|- The inventory was sold for $6,000 below book value; |

|- Plant assets with a book value of $50,000 were sold for $60,000. |

| |

|Required: |

Determine how the available cash on April 30, 2006 should be distributed.

LO2

Exercise 6

|The balance sheet of the Nebe, Oak, and Pang partnership on October 1, 2006 (the date of partnership dissolution) was as follows: |

|Cash |$ |3,000 | |Liabilities |$ |9,000 |

|Other assets | |33,000 | |Loan from Nebe | |1,000 |

|Loan to Oak | |4,000 | |Nebe, capital (20%) | |3,000 |

| | | | |Oak, capital (30%) | |6,000 |

| | | | |Pang, capital (50%) | |21,000 |

|Total assets |$ |40,000 | |Total liab./equity |$ |40,000 |

| |

|In October, other assets with a book value of $15,000 were sold for $17,000 in cash. |

| |

|Required: |

| |

|Determine how the available cash on October 31, 2006 will be distributed. |

| | | | | | | |

LO2

Exercise 7

|The partnership of Hanly, Ide, and Jen was dissolved. By August 1, 2006, all assets had been converted into cash and all partnership |

|liabilities were paid. The partnership balance sheet on August 1, 2006 (with partner residual profit and loss sharing percentages) was as |

|follows: |

|Cash |$ |50,000 | |Hanly, capital(30%) |$ | 4,000 |

| | | | |Ide, capital(20%) | |(60,000) |

| | | | |Jen, capital(50%) | | 106,000 |

| | | | | | | |

|Total assets |$ |50,000 | |Total equity |$ | 50,000 |

| | | | | | | |

| |

|The value of partners' personal assets and liabilities on August 1, 2006 were as follows: |

| | | | | | | |

| | |Hanly | |Ide | |Jen |

|Personal assets |$ |74,000 |$ |120,000 |$ |56,000 |

|Personal liabilities | |72,000 | |80,000 | |60,000 |

| | | | | | | |

|Required: |

Prepare the final statement of partnership liquidation.

LO5

Exercise 8

|Luis, Mac, Nel, and Oma are partners who share profits and losses 40%, 25%, 25%, and 10%, respectively. The partnership will be liquidated |

|gradually over several months beginning January 1, 2006. The partnership trial balance at December 31, 2005 is as follows: |

| | |Debits | |Credits |

|Cash |$ |3,000 | | |

|Accounts receivable | |19,000 | | |

|Inventory | |25,000 | | |

|Loan to Nel | |5,000 | | |

|Furniture | |15,000 | | |

|Equipment | |10,000 | | |

|Goodwill | |12,000 | | |

|Accounts payable | | |$ |14,000 |

|Note payable | | | |30,000 |

|Loan from Luis | | | |5,000 |

|Luis, capital (40%) | | | |15,000 |

|Mac, capital (25%) | | | |9,000 |

|Nel, capital (25%) | | | |12,000 |

|Oma, capital (10%) | | | |4,000 |

|Totals |$ |89,000 |$ |89,000 |

| | | | | |

| | | | | |

|Required: |

| | | | | |

|Prepare a cash distribution plan for January 1, 2006, showing how cash installments will be distributed among the partners as it becomes |

|available. |

LO5

Exercise 9

Quan, Ray, Sen, and Tad are partners who share profits and losses 30%, 20%, 35%, and 15%, respectively. The partnership will be liquidated gradually over several months beginning January 1, 2006. The partnership trial balance at December 31, 2005 is as follows:

| | |Debits | |Credits |

|Cash |$ |3,000 | | |

|Accounts receivable | |10,000 | | |

|Inventory | |25,000 | | |

|Loan to Ray | |4,000 | | |

|Furniture | |15,000 | | |

|Equipment | |18,000 | | |

|Goodwill | |10,000 | | |

|Accounts payable | | |$ |12,000 |

|Note payable | | | |30,000 |

|Loan from Sen | | | |6,000 |

|Quan, capital (30%) | | | |12,000 |

|Ray, capital (20%) | | | |9,000 |

|Sen, capital (35%) | | | |12,000 |

|Tad, capital (15%) | | | |4,000 |

|Totals |$ |85,000 |$ |85,000 |

| | | | | |

| | | | | |

|Required: |

| | | | | |

|Prepare a cash distribution plan for January 1, 2006, showing how cash installments will be distributed among the partners as it becomes |

|available. |

LO5

Exercise 10

|A cash distribution plan for the Upton, Valenta, and Walker partnership was as follows: |

| |

SOLUTIONS

Multiple Choice Questions

| 1. |c | |

| 2. |c | |

| 3. |a | |

| 4. |c | |

| 5. |d | |

| 6. |b | |

| 7. |a | |

| 8. |d | |

| 9. |b |($14,000 Warle capital + $10,000 Xin capital + |

| | | $6,000 Yates capital + $5,000 Loan from Xin - |

| | | $6,000 Loan to Warle) |

|10. |a |($4,000 beginning balance + $3,000 cash collected + $4,000 for inventory sold - $7,000 of accounts payable - |

| | |$2,000 for expenses) |

|11. |d | |

| | | |

| | | |

| | | |

|15. |b | |

|16. |a | |

|17. |c | |

| |

|Vulnerability ranks: |

| Lang equity ($70,000 - $40,000)/.25 = $120,000 = 1 |

| Maas equity ($80,000 + $50,0000/.25 = $520,000 = 3 |

| Neal equity ($150,000/.5) = $300,000 = 2 |

| |

Assumed loss absorption:

| | | |

|19. |a | |

|20. |d | |

Exercise 1

|Alba, Blick, and Calvo Partnership |

|Partnership Liquidation Schedule |

| |

| | | | | | | | | | | |

| | | |Alba | | |Blick | | |Calvo | |

| | | |Equity | | |Equity | | |Equity | |

|Partners’ pre-distribution balances | |$|890 | |$ | 3,300 | |$ |3,800 | |

|Possible losses on non-cash assets | |(|1,000 |)|( |2,000 |)|( |2,000 |)|

| | |(|110 |)| |1,300 | | |1,800 | |

|Write off Alba 50-50 | | |110 | |( |55 |)|( |55 |)|

|Cash distribution to partners | |$|0 | |$ |1,245 | |$ |1,745 | |

| | | | | | | | | | | |

|Cash distribution plan on January 31: |

| |

|First $4,010 goes to priority creditors, and then Blick receives $1,245 and Calvo receives $1,745. |

| |

| |

| |

| |

Exercise 2

|Dale, Edgar, and Fred Partnership |

|Final Statement of Partnership Liquidation |

| |

|Schedule of Partnership Liquidation |

|November 30, 2006 |

| |

|Schedule of Partnership Liquidation |

|May 30, 2006 |

| |

|Partnership Liquidation Schedule |

| |

| | | | | | | | | | | |

| | | |Oak | | |Nebe | | |Pang | |

| | | |Equity | | |Equity | | |Equity | |

|Partners’ pre-distribution balances | |$|2,600 | |$ |4,400 | | |22,000 | |

|Possible losses on non-cash assets | |(|5,400 |)|( |3,600 |)|(|9,000 |)|

| | |(|2,800 |)| |800 | | |13,000 | |

|Write off Oak 2/7 and 5/7 | | |2,800 | |( |800 |)|(|2,000 |)|

|Cash distribution to partners | |$|0 | |$ |0 | |$|11,000 | |

| | | | | | | | | | | |

|Cash distribution plan on October 31: |

| |

|First $9,000 goes to priority creditors, and then Pang receives $11,000. |

| |

| |

| |

Exercise 7

|Hanly, Ide, and Jen Partnership |

|Final Statement of Partnership Liquidation |

| |

| |

| |

| |

|First $44,000 pays the priority creditors; |

|Next $4,000 goes to Luis; |

|Next $2,000 goes $1,600 to Luis, and $400 to Oma; |

|Next $6,000 goes $3,200 to Luis, $2,000 to Mac, and $800 to Oma; |

|Remainder goes 40% to Luis, 25% to Mac, 25% to Nel, and 10% to Oma. |

Exercise 9

|Loss absorption potential: |

| |

| |

|First $42,000 pays the priority creditors; |

|Next $4,000 goes to Sen; |

|Next $8,667 goes $4,667 to Sen, and $4,000 to Quan; |

|Next $1,333 goes $583 to Sen, $500 to Quan, and $250 to Tad; |

|Remainder goes 35% to Sen, 30% to Quan, 20% to Ray, and 15% to Tad. |

Exercise 10

| | |Priority

Creditors | | |

Upton | | |

Valenta | | |

Walker | | |First $100,000 |$ | |100,000 | | | | | | | | | | | |Next $180,000 | | | | |$ |79,200 | |$ |18,000 | |$ |82,800 | | |Next $270,000 | | | | | |60,000 | | |30,000 | | |180,000 | | |Last $150,000 | | | | | |16,500 | | |66,000 | | |67,500 | | |Total $700,000 |$ | |100,000 | |$ |155,700 | |$ |114,000 | |$ |330,300 | | | | | | | | | | | | | | | | | |

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