Chapter 1 Test Bank

DISSOLUTION AND LIQUIDATION OF A PARTNERSHIP

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 partners 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 partners profit and loss agreement.

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

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

d.the individual partners 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 partners 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$4,000Accounts payable$7,000

Accounts receivable6,000Loan from Xin5,000

Inventory14,000Warle, capital(20%)14,000

Plant assets-net12,000Xin, capital(30%)10,000

Loan to Warle6,000Yates, capital(50%)6,000

Total assets$42,000Total 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$400,000Accounts payable$200,000

Other assets200,000Hara, capital (40%)135,000

Ives, capital (30%)216,000

Jack, capital (30%)49,000

Total assets$600,000Total 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$198,000Accounts payable$149,000

Inventory80,000Jade, capital (40%)79,000

Plant assets230,000Kahl, capital (40%)140,000

Lane, capital (20%)140,000

Total assets$508,000Total 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$30,000Accounts payable$200,000

Loan to Lang40,000Loan from Maas50,000

Other assets480,000Lang, capital (25%)70,000

Maas, capital (25%)80,000

Neal, capital (50%)150,000

Total assets$550,000Total 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 1The balance sheet of the Alba, Blick, and Calvo partnership on January 1, 2006 (the date of partnership dissolution) was as follows:

Cash$2,000Liabilities$4,010

Other assets13,000Loan from Alba500

Loan to Calvo1,000Alba, capital (20%)990

Blick, capital(40%)4,500

Calvo, capital(40%)6,000

Total assets$16,000Total 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 2The 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$10,000Fred, capital(30%)$ 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:

DaleEdgarFred

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

Personal liabilities30,00020,00010,000

Required:

Prepare the final statement of partnership liquidation.

LO2

Exercise 3The balance sheet of the Omar, Paolo, and Quek partnership on November 1, 2006 (before commencement of partnership liquidation) was as follows:

Cash$58,000Accounts payable$34,000

Inventory60,000Notes payable62,000

Loan to Omar8,000Omar, capital(40%)24,000

Loan to Quek14,000Paolo, capital(25%)26,000

Plant assets-net70,000Quek, capital (35%)64,000

Total assets$210,000Total 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 4A cash distribution plan for the Folger, Glover, and Hale partnership was as follows:

Priority

CreditorsFolgerGloverHale

First $250,000100%

Next $100,00070%30%

Next $150,00011/154/15

Remainder20%35%45%

Required:

If $850,000 of cash was distributed by the partnership, how much was received respectively by the priority creditors, Folger, Glover, and Hale?

LO2

Exercise 5The balance sheet of the Jody, Kane, and Lark partnership on May 1, 2006 (before commencement of partnership liquidation) was as follows:

Cash$54,000Accounts payable$28,000

Inventory60,000Notes payable60,000

Loan to Jody10,000Jody, capital (30%)32,000

Loan to Lark16,000Kane, capital (45%)90,000

Plant assets-net110,000Lark, capital (25%)40,000

Total assets$250,000Total 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 6The balance sheet of the Nebe, Oak, and Pang partnership on October 1, 2006 (the date of partnership dissolution) was as follows:

Cash$3,000Liabilities$9,000

Other assets33,000Loan from Nebe1,000

Loan to Oak4,000Nebe, capital (20%)3,000

Oak, capital (30%)6,000

Pang, capital (50%)21,000

Total assets$40,000Total 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 7The 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$50,000Hanly, capital(30%)$ 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:

HanlyIdeJen

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

Personal liabilities72,00080,00060,000

Required:

Prepare the final statement of partnership liquidation.

LO5

Exercise 8Luis, 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:

DebitsCredits

Cash$3,000

Accounts receivable19,000

Inventory25,000

Loan to Nel5,000

Furniture15,000

Equipment10,000

Goodwill12,000

Accounts payable$14,000

Note payable30,000

Loan from Luis5,000

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 9Quan, 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:

DebitsCredits

Cash$3,000

Accounts receivable10,000

Inventory25,000

Loan to Ray4,000

Furniture15,000

Equipment18,000

Goodwill10,000

Accounts payable$12,000

Note payable30,000

Loan from Sen6,000

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 10A cash distribution plan for the Upton, Valenta, and Walker partnership was as follows:

Priority

CreditorsUptonValentaWalker

First $100,000100%

Next $180,00044%10%46%

Next $270,0002/91/92/3

Remainder11%44%45%

Required:

If $700,000 of cash was distributed by the partnership, how much was received respectively by the priority creditors, Upton, Valenta, and Walker?

0

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