Test bank with answers for advanced accounting 3e by jeter chapter 16

To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation Multiple Choice Which of the following statements is correct? Personal creditors have first claim on partnership assets Partnership creditors have first claim on partnership assets Partnership creditors have first claim on personal assets a b c d Both and The first step in the liquidation process is to a convert noncash assets into cash b pay partnership creditors c compute any net income (loss) up to the date of dissolution d allocate any gains or losses to the partners A schedule prepared each time cash is to be distributed is called a(n) a advance cash distribution schedule b marshaling of assets schedule c loss absorption potential schedule d safe payment schedule An advance cash distribution plan is prepared a each time cash is distributed to partners in an installment liquidation b each time a partnership asset is sold in an installment liquidation c to determine the order and amount of cash each partner will receive as it becomes available for distribution d none of these The first step in preparing an advance cash distribution plan is to a determine the order in which partners are to participate in cash distributions b compute the amount of cash each partner is to receive as it becomes available for distribution c allocate any gains (losses) to the partners in their profit-sharing ratio d determine the net capital interest of each partner Offsetting a partner's loan balance against his debit capital balance is referred to as the a marshaling of assets b right of offset c allocation of assets d liquidation of assets If a partner with a debit capital balance during liquidation is personally solvent, the a partner must invest additional assets in the partnership b partner's debit balance will be allocated to the other partners c other partners will give the partner enough cash to absorb the debit balance d partnership will loan the partner enough cash to absorb the debit balance http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition The following condensed balance sheet is presented for the partnership of Jim, Bill, and Fred who share profits and losses in the ratio of 4:3:3, respectively: Cash Other assets Jim, receivable $ 180,000 1,940,000 60,000 $ 2,180,000 Accounts payable Bill, loan Jim, capital Bill, capital Fred, capital $ 480,000 80,000 720,000 440,000 460,000 $2,180,000 Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership decides to admit Tom as a new partner, with a 25% interest No goodwill or bonus is to be recorded How much should Tom contribute in cash or other assets? a $270,000 b $405,000 c $540,000 d $520,000 The partnership of Joe, Al, and Mike shares profits and losses 60%, 30%, and 10%, respectively On January 1, 2011, the partners voted to dissolve the partnership, at which time the assets, liabilities, and capital balances were as follows: Assets Cash Other Assets $ Total assets $1,600,000 400,000 1,200,000 Liabilities and Capital Accounts Payable Joe, Capital Al, Capital Mike, Capital Total liabilities $ 580,000 440,000 380,000 200,000 $1,600,000 All of the partners are personally insolvent Assume that all noncash assets are sold for $840,000 and all available cash is distributed in final liquidation of the partnership Cash should be distributed to the partners as follows a Joe, $744,000; Al, $372,000; Mike, $124,000 b Joe, $440,000; Al, $380,000; Mike, $200,000 c Joe, $224,000; Al, $272,000; Mike, $164,000 d Joe, $396,000; Al, $198,000; Mike, $66,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 10 16-3 The partnership of Pratt, Ellis, and Mack share profits and losses in the ratio of 4:4:2, respectively The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows: Assets Cash $ 250,000 Other assets 1,000,000 $1,250,000 Liabilities and Capital Liabilities Pratt, Capital Ellis, Capital Mack, Capital $ 200,000 300,000 350,000 400,000 $1,250,000 The partnership will be liquidated over a prolonged period of time As cash is available, it will be distributed to the partners The first sale of noncash assets having a book value of $600,000 realized $475,000 How much cash should be distributed to each partner after this sale? a Pratt, $90,000; Ellis, $140,000; Mack, $295,000 b Pratt, $210,000; Ellis, $290,000; Mack, $145,000 c Pratt, $290,000; Ellis, $210,000; Mack, $105,000 d Pratt, $150,000; Ellis, $175,000; Mack, $200,000 11 In a partnership liquidation, the final cash distribution to the partners should be made in accordance with the: a partners' profit and loss sharing ratio b balances of the partners' capital accounts c ratio of the capital contributions by the partners d ratio of capital contributions less withdrawals by the partners 12 In an advance plan for installment distributions of cash to partners of a liquidating partnership, each partner's loss absorption potential is computed by a dividing each partner's capital account balance by the percentage of that partner's capital account balance to total partners' capital b multiplying each partner's capital account balance by the percentage of that partner's capital account balance to total partners' capital c dividing the total of each partner's capital account less receivables from the partner plus payables to the partner by the partner's profit and loss percentage d some other method 13 Under the Uniform Partnership Act a partnership creditors have first claim (Rank I) against the assets of an insolvent partnership b personal creditors of an individual partner have first claim (Rank I) against the personal assets of all partners c partners with credit capital balances share (Rank I) the personal assets of an insolvent partner that has a debit capital balance with personal creditors of that partner d personal creditors of the partners of an insolvent partnership share partnership assets on a pro rata basis (Rank I) with partnership creditors http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 14 During the liquidation of the partnership of Karr, Rice, and Long Karr accepts, in partial settlement of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of $70,000, and a current fair value of $110,000 The partners share net income and loss equally The net debit to Karr's account (including any gain or loss on disposal of the machine) is a $90,000 b $100,000 c $110,000 d $150,000 15 X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively Profits are allocated 35% to X, 35% to Y, and 30% to Z The partners have decided to dissolve and liquidate the partnership After paying all creditors, the amount available for distribution is $60,000 X, Y, and Z are all personally solvent Under the circumstances, Z will a receive $18,000 b receive $30,000 c personally have to contribute an additional $6,000 d personally have to contribute an additional $36,000 16 The ABC partnership has the following capital accounts on its books at December 31, 2011: Credit A, Capital $400,000 B, Capital 240,000 C, Capital 80,000 All liabilities have been liquidated and the cash balance is zero None of the partners have personal assets in excess of his personal liabilities The partners share profits and losses in the ratio of 3:2:5 If the noncash assets are sold for $400,000, the partners should receive as a final payment: a A, $304,000; B, $176,000; C, $80,000 b A, $256,000; B, $144,000; C, $-0c A, $304,000; B, $176,000; C, $-0d A, $120,000; B, $80,000; C, $200,000 17 The summarized balances of the accounts of MNO partnership on December 31, 2011, are as follows: Assets Cash Noncash Total Assets $ 15,000 90,000 $105,000 Liabilities and Capital Liabilities $ 15,000 M, Capital 45,000 N, Capital 30,000 O, Capital 15,000 Total Equities $105,000 The agreed upon profit/loss ratio is 50:40:10, respectively Using the information given above, which one of the following amounts, if any, is the loss absorption potential of partner N as of December 31, 2011? a $20,000 b $35,000 c $75,000 d $120,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 18 16-5 Adamle, Boyer, and Clay are partners with a profit and loss ratio of 4:3:3 The partnership was liquidated and, prior to the liquidation process, the partnership balance sheet was as follows: ADAMLE, BOYER, AND CLAY Balance Sheet January 1, 2011 Assets Cash Other assets $ 60,000 540,000 Total Assets $600,000 Liabilities and Equity Adamle, Capital Boyer, Capital Clay, Capital Total Liabilities & Equities $216,000 240,000 144,000 $600,000 After the partnership was liquidated and the cash was distributed, Boyer received $96,000 in cash in full settlement of his interest The liquidation loss must have been: a $360,000 b $144,000 c $504,000 d $480,000 19 The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation On July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows: Assets Cash Receivables-net Inventories Equipment-net Total assets $ 200,000 50,000 150,000 100,000 $ 500,000 Liabilities & Equities Liabilities $ Hall, Capital 50% Jones, Capital 30% Otto, Capital 20% Total Lia & Equity 150,000 100,000 175,000 75,000 500,000 Assume that the available cash is distributed immediately, except for a $25,000 contingency fund that is withheld pending complete liquidation of the partnership How much cash should be paid to each of the partners? Hall a $87,500 b 12,500 c -0d -0- Jones $52,500 7,500 25,000 15,000 Otto $35,000 10,000 -010,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 20 The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation On July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows: Assets Cash Receivables-net Inventories Equipment-net Total assets $ 200,000 50,000 150,000 100,000 $ 500,000 Liabilities & Equities Liabilities $ Hall, Capital 50% Jones, Capital 30% Otto, Capital 20% Total Lia & Equity 150,000 100,000 175,000 75,000 500,000 Assume that Hall takes equipment with a fair value of $40,000 and a book value of $50,000 in partial satisfaction of his equity in the partnership If all the $200,000 cash is then distributed, the partners should receive: Hall Jones Otto a $100,000 $60,000 $40,000 b 25,000 15,000 10,000 c -0 45,000 5,000 d -0 50,000 -0 21 The partnership of Starr, Foley, and Pele share profits and losses in the ratio of 4:4:2, respectively The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows: Assets Cash Other assets Total assets $150,000 600,000 $750,000 Liabilities and Equity Liabilities $120,000 Starr, Capital 180,000 Foley, Capital 210,000 Pele, Capital 240,000 Total Lia & Equity $750,000 The partnership will be liquidated over a prolonged period of time As cash is available, it will be distributed to the partners The first sale of noncash assets having a book value of $360,000 realized $285,000 How much cash should be distributed to each partner after this sale? a Starr, $54,000; Foley, $84,000; Pele, $177,000 b Starr, $174,000; Foley, $174,000; Pele, $87,000 c Starr, $126,000; Foley, $126,000; Pele, $63,000 d Starr, $90,000; Foley, $105,000; Pele, $120,000 22 A, B, and C have capital balances of $90,000, $60,000, and $30,000, respectively Profits are allocated 35% to A, 35% to B and 30% to C The partners have decided to dissolve and liquidate the partnership After paying all creditors the amount available for distribution is $60,000 A, B, and C are all personally solvent Under the circumstances, C will a receive $18,000 b receive $30,000 c personally have to contribute an additional $6,000 d personally have to contribute an additional $36,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 23 16-7 The ABC partnership has the following capital accounts on its books at December 31, 2011: A, Capital B, Capital C, Capital Credit $200,000 120,000 40,000 All liabilities have been liquidated and the cash balance is zero None of the partners have personal assets in excess of his personal liabilities The partners share profits and losses in the ratio of 3:2:5 If the noncash assets are sold for $150,000, the partners should receive as a final payment: a A, $152,000; B, $88,000 C, $40,000 b A, $128,000; B, $72,000; C, $ - c A, $152,000; B, $88,000; C, $ - d A, $60,000; B, $40,000; C, $100,000 24 The summarized balances of the accounts of RST partnership on December 31, 2011, are as follows: Assets Liabilities and Equity Cash $ 30,000 Liabilities $ 30,000 Noncash 180,000 R, Capital 90,000 S, Capital 60,000 T, Capital 30,000 Total Assets $210,000 Total Lia & Equities $210,000 The agreed upon profit/loss ratio is 50:40:10, respectively Using the information given above, which one of the following amounts, if any, is the loss absorption potential of partner S as of December 31, 2011? a $60,000 b $70,000 c $150,000 d $240,000 25 The partnership of Hill, Kiner, and Polk has been dissolved and is in the process of liquidation On July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows: Assets Liabilities and Equity Cash $ 80,000 Liabilities $ 60,000 Receivables-net 20,000 Hill, Capital 50% 40,000 Inventories 60,000 Kiner, Capital 30% 70,000 Equipment-net 40,000 Polk, Capital 20% 30,000 Total assets $200,000 Total Lia & Equity $200,000 Assume that the available cash is distributed immediately, except for a $10,000 contingency fund that is withheld pending complete liquidation of the partnership How much cash should be paid to each of the partners? Hill Kiner Polk a $35,000 $21,000 $14,000 b $5,000 $3,000 $4,000 c $0 $10,000 $0 d $0 $6,000 $4,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Problems 16-1 The NOR Partnership is being liquidated A balance sheet prepared prior to liquidation is presented below: Assets Cash Other Assets Total Assets $240,000 300,000 $540,000 Liabilities & Equities Liabilities $ 160,000 Reese, Loan 60,000 Nen, Capital 180,000 Ott, Capital 60,000 Reese, Capital 80,000 Total Equities $540,000 Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio All partners are personally insolvent Required: A Prepare the journal entries necessary to record the distribution of the available cash B 16-2 CASH 180,000 Prepare the journal entries necessary to record the completion of the liquidation process, assuming the other assets are sold for $120,000 The trial balance for the ABC Partnership is as follows just before liquidation: OTHER ASSETS 625,000 BALL RECEIVABLE = 90,000 LIABILITIES 150,000 ADLER CAPITAL 420,000 BALL CAPITAL 270,000 CARL CAPITAL 180,000 Partners share profits a 50:30:20 ratio Required: Prepare an advance cash distribution plan showing how available cash would be distributed 16-3 Lewis, Nance, and Otis operate the LNO Partnership The partnership agreement provides that the partners share profits in the ratio of 40:40:20, respectively Unable to satisfy the firm's debts, the partners decide to liquidate Account balances just prior to the start of the liquidation process are as follows: Debit Credit Cash $ 90,000 Other Assets 330,000 Liabilities $165,000 Otis, Loan 36,000 Lewis, Capital 165,000 Nance, Capital 36,000 Otis, Capital 39,000 Otis, Drawing 21,000 _ Totals $441,000 $441,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 16-9 During the first month of liquidation, other assets with a book value of $150,000 are sold for $165,000, and creditors are paid In the following month unrecorded liabilities of $12,000 are discovered and assets carried on the books at a cost of $90,000 are sold for $36,000 During the third month the remaining other assets are sold for $42,000 and all available cash is distributed Required: Prepare a schedule of partnership realization and liquidation A safe distribution of cash is to be made at the end of the second and third months The partners agreed to hold $30,000 in cash in reserve to provide for possible liquidation expenses and/or unrecorded liabilities All of the partners are personally insolvent 16-4 Due to the fact that the partnership had been unprofitable for the past several years, A, B, C, and D decided to liquidate their partnership The partners share profits and losses in the ratio of 40:30:20:10, respectively The following balance sheet was prepared immediately before the liquidation process began: A B C D Partnership Balance Sheet Cash Other Assets Total Assets $ 100,000 350,000 $450,000 Liabilities A, Capital B, Capital C, Capital D, Capital Total Lia & Equities The personal status of each partner is as follows: Personal _Assets_ A $165,000 B 100,000 C 180,000 D 60,000 $250,000 55,000 60,000 50,000 35,000 $450,000 Personal Liabilities $ 120,000 140,000 160,000 70,000 The partnership's other assets are sold for $100,000 cash The partnership operates in a state which has adopted the Uniform Partnership Act Required: A Complete the following schedule of partnership realization and liquidation Assume that a partner makes additional contributions to the partnership when appropriate based on their individual status CASH $100,000 OTHER ASSETS $350,000 LIABILITIES $250,000 A 55,000 B 60,000 CAPITAL C 50,000 http://downloadslide.blogspot.com D 35,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition B Complete the following schedule to show the total amount that will be paid to the personal creditors From Personal _Assets_ Distribution from _Partnership_ Total Paid to Personal _Creditors_ A B C D 16-5 A trial balance for the DEF partnership just prior to liquidation is given below: Cash Noncash Assets Nonpartner Liabilities Dugan, Loan Dugan, Capital Elston, Capital Flynn, Capital Totals Debit $ 75,000 750,000 $825,000 Credit $240,000 75,000 225,000 153,000 132,000 $825,000 The partners share income and loss on the following basis: Dugan 50% Elston 30% Flynn 20% Required: Prepare an advance cash distribution plan for the partners 16-6 David, Paul, and Burt are partners in a CPA firm sharing profits and losses in a ratio of 2:2:3, respectively Immediately prior to liquidation, the following balance sheet was prepared: Assets Cash Noncash assets $ 100,000 580,000 Total Assets _ $680,000 Liabilities & Equities Liabilities David, Capital Paul, Capital Burt, Capital Total Liabilities & Equities http://downloadslide.blogspot.com $280,000 160,000 160,000 80,000 $680,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 16-11 Required: Assuming the noncash assets are sold for $300,000, determine the amount of cash to be distributed to each partner Complete the worksheet and clearly indicate the amount of cash to be distributed to each partner in the spaces provided No cash is available from any of the three partners Beginning Bal Cash 100,000 Noncash Assets 580,000 Liabilities 280,000 David Capital 160,000 Paul Capital 160,000 Burt Capital 80,000 16-7 Using the information from Problem 16-6, assume the noncash assets are sold for $160,000 Determine the amount of cash to be distributed to each partner assuming all partners are personally solvent 16-8 The December 31, 2010, balance sheet of the Deng, Danielson, and Gibson partnership, along with the partners’ residual profit and loss sharing ratios, is summarized as follows: Assets Cash Receivables Inventories Other Assets Total Assets $ 150,000 300,000 375,000 475,000 $1,300,000 Liabilities & Equities Accounts Payable $ 225,000 Loan from Danielson 50,000 Deng, Capital (20%) 250,000 Danielson, Capital (30%) 400,000 Gibson, Capital (50%) 375,000 Total Lia & Equities $1,300,000 The partners agree to liquidate their partnership as soon as possible after January 1, 2011 and to distribute all cash as it becomes available Required: Prepare an advance cash distribution plan to show how cash will be distributed as it becomes available http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Short Answer The Uniform Partnership Act specifies specific steps in distributing available partnership assets in liquidation Describe the steps used to distribute partnership assets during the liquidation process An advance cash distribution plan specifies the order in which each partner will receive cash and the dollar amount each will receive as it becomes available for distribution Identify the four steps in the preparation of an advance cash distribution plan Short Answer Questions from the Textbook Why are realization gains or losses allocated to partners in their profit and loss ratios? In what manner should the final cash distribution be made in partnership liquidation? Why does a debit balance in a partners’ capital account create problems in the UPA order of payment for a partnership liquidation? Is it important to maintain separate accounts for a partner’s outstanding loan and capital accounts? Explain why or why not Discuss the possible outcomes in the situation where the equity interest of one partner is inadequate to absorb realization losses During a liquidation, at which point may cash be distributed to any of the partners? What is “marshaling of assets”? To what extent can personal creditors seek re-covery from partnership assets? In an installment liquidation, why should the partners view each cash distribution as if it were the final distribution? 10 Discuss the three basic assumptions necessary for calculating a safe cash distribution How is this safe cash distribution computed? 11 How are unexpected costs such as liquidation expenses, disposal costs, or unrecorded liabilities covered in the safe distribution schedule? 12 What is the objective of the procedures used for the preparation of an advance cash distribution plan? 13 What is the “loss absorption potential”? 14 In what order must partnership assets be distributed? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 16-13 Business Ethics Question from the Textbook You and two of your former college friends, Freeman and Oxyman, formed a partnership called FOB, which builds and installs fabricated swimming pools The business has been operating for 15 years and has become one of the top swimming pool companies in the area Typically, you have been providing the on-site estimates for the pools, while your partners most of the onsite construction While visiting one of the sites, you hear a conversation between one of your partners and a customer Your partner is explaining that the cost will increase by $10,000 because of unexpected rock removal You are a bit surprised by this, since you had tested the area for rocks Later, back at the office, you review the core-sample results done on that job, which did not reveal any rock You decide to talk to the partner when he returns to the office When the partner returns to the office, he is arguing with someone from a local bank concerning an outstanding personal loan 1.What you see as your duty with respect to the partnership? 2.What should you do? Explain your reasoning http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition ANSWER KEY Multiple Choice b c d c d b a 10 11 12 13 14 c c a b c a b 15 16 17 18 19 20 21 c b c d c d a 22 23 24 25 c b c c Problems 16-1 A Net interest Potential loss–$300,000 Nen Ott $(180,000) $(60,000) 120,000 120,000 (60,000) 60,000 40,000 (60,000) $(20,000) $ -0- Potential loss–$60,000 Cash distribution Liabilities Cash 160,000 Reese, Loan Nen, Capital Cash 60,000 20,000 160,000 80,000 B Cash Nen, Capital ($180,000 × 40) Ott, Capital ($180,000 × 40) Reese, Capital ($180,000 × 20) Other Assets Nen, Capital ($12,000 × [40/60]) Reese, Capital ($12,000 × [20/60]) Ott, Capital ($72,000 - $60,000) Nen, Capital Reese, Capital Cash Reese_ $(140,000) 60,000 (80,000) 20,000 $(60,000) 120,000 72,000 72,000 36,000 300,000 8,000 4,000 12,000 80,000 40,000 120,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 16-15 16-2 Net capital interest Profit-loss ratio Loss absorption potential Order of cash distribution Adler $420,000 / 50 $840,000 Ball $180,000 / 30 $600,000 Carl $180,000 / 20 $900,000 Profit-Loss Ratio Loss absorption potential Distribution to Cole Balances after distribution Distribution to Adams & Cole Balances after distribution Loss Absorption Potential Adler Ball Carl 50 30 20 $840,000 $600,000 $900,000 60,000 840,000 600,000 840,000 240,000 240,000 $600,000 $600,000 $600,000 Profit-Loss Ratio Net capital interest Distribution to Cole Balances after distribution Distribution to Adams & Cole Balances after distribution Asset Distribution Ball Carl 30 20 $180,000 $180,000 12,000 180,000 168,000 _ 48,000 $180,000 $120,000 Remainder of asset distributions Order of Cash Distribution First $150,000 Next $12,000 Next $168,000 Remainder Adler 50 $420,000 420,000 _120,000 $300,000 50 30 Cash Distribution Plan Adler Liabilities 100% 71% 50% http://downloadslide.blogspot.com 20 Ball Carl 30% 100% 29% 20% To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 16-3 Balances Sale of assets Distribute cash to creditors Cash 90,000 165,000 255,000 (165,000) 90,000 Record liabilities 90,000 36,000 126,000 (96,000) 30,000 42,000 72,000 Sale of assets Distribute cash Sale of assets Assets = Liabilities 330,000 = (150,000) 180,000 = 165,000 180,000 = -0(12,000) 180,000 = (90,000) 90,000 (12,000) 12,000 90,000 -0(90,000) -0-0- (165,000) (165,000) (12,000) Allocate Nance's deficit 72,000 (72,000) -0- Distribute cash Balances -0- -0- -0- -0- Capital Interest Lewis Nance = (165,000) (36,000) (6,000) (6,000) (171,000) (42,000) Balances Sale of assets Otis = (3,000) = (54,000) = 2,400 = 10,800 (43,800) 9,000 (34,800) 9,600 (25,200) 1,200 (24,000) 24,000 -0- (57,000) (57,000) Distribute cash to creditors (171,000) 4,800 (166,200) 21,600 (144,600) 75,000 (69,600) 19,200 (50,400) 2,400 (48,000) 48,000 -0- Record liabilities Sale of assets Distribute cash Sale of assets Allocate Nance's deficit Distribute cash Balances Capital interest Potential loss plus cash reserve (120,000) Allocate potential deficit Cash distribution Lewis (144,600) 48,000 (96,600) (2/3) 14,400 (75,000) (42,000) 4,800 (37,200) 21,600 (15,600) (15,600) 19,200 3,600 (3,600) -0-0Nance (15,600) Otis (43,800) 48,000 32,000 32,400 (19,800) (21,600)(1/3) 10,800 -0( 9,000) http://downloadslide.blogspot.com (54,600) To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 16-17 16-4 A Other Assets = Liabilities 350,000 = (350,000) -0= (250,000) Cash 100,000 100,000 200,000 Account Balances Sale of Assets Allocated Debit Balance of B* Investment from C Investment from A 200,000 10,000 45,000 255,000 (255,000) -0- Distribute Cash A (55,000) 100,000 45,000 Account Balances Sale of Assets Allocate Debit Balance of B* = -0-0Capital B (60,000) 75,000 15,000 (15,000) -0- 45,000 Investment from C Investment from A -0- (250,000) (250,000) (250,000) 250,000 -0- C (50,000) 50,000 -0- D (35,000) 25,000 (10,000) 10,000 10,000 (10,000) 5,000 (5,000) (45,000) -0- -0- -0- -0- -0- -0- (5,000) 5,000 Distribute Cash -0- *Allocate only to C and D, since A is able to contribute only $45,000 from personal assets B From Personal Assets A B C D 120,000 100,000 160,000 60,000 Distribution from Partnership 5,000 http://downloadslide.blogspot.com Total Paid to Personal Creditors 120,000 100,000 160,000 65,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 16-5 Capital balances Loan balances Net capital interest Profit and loss ratio Loss absorption potential Order of cash distribution Profit & loss ratio Loss absorption potential Net cap interest Distrib to Flynn (60,000 × 2) Elston $153,000 Flynn $132,000 153,000 / $510,000 132,000 / $660,000 Loss Absorption Potential Dugan Elston Flynn $600,000 $510,000 Dugan Asset Distribution Elston Flynn $660,000 $300,000 $153,000 $132,000 153,000 12,000 120,000 60,000 600,000 Distrib to Dugan and Flynn (90,000 × 2) (90,000 × 5) Dugan $225,000 75,000 300,000 / $600,000 510,000 600,000 90,000 300,000 90,000 18,000 $510,000 $510,000 $510,000 Remainder 45,000 $255,000 $153,000 $102,000 Cash Distribution Plan Order of cash distribution after creditors have been paid: First $12,000 Next $63,000 Remainder Dugan Elston 5/7 50% 30% Flynn 100% 2/7 20% 16-6 Beginning Balance Sale of Assets Balances Pay Liabilities Balances Noncash Cash Assets 100,000 80,000 300,000 (120,000 400,000 (40,000) (280,000) 120,000 (40,000) Liabilities 580,000 David Capital 280,000 (580,000) -0- 280,000 Burt Capital 160,000 (80,000) (80,000) 80,000 80,000 80,000 80,000 (280,000) -0- -0- Allocate deficit Balances Paul Capital 160,000 (20,000) 40,000 120,000 -0- -0- -0- http://downloadslide.blogspot.com 60,000 (20,000) 60,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 16-19 Cash payment to partners (120,000) Balances -0- (60,000) -0- -0- http://downloadslide.blogspot.com -0- (60,000) -0- -0- To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 16-7 Noncash Cash Assets Beginning Balance 100,000 80,000 Sale of Assets 160,000 (180,000) Balances 260,000 (100,000) Cash payment from Burt 100,000 100,000 Balances 360,000 -0Pay Liabilities (280,000) Balances 80,000 Liabilities 580,000 David Capital 280,000 Paul Capital 160,000 (580,000) Burt Capital 160,000 (120,000) (120,000) -0- 280,000 40,000 40,000 -0- 280,000 40,000 40,000 40,000 40,000 (40,000) (40,000) (280,000) -0- -0- -0Cash payment to partners (80,000) Balances -0- -0- -0- -0- -0- -0- 16-8 Net capital interest Profit/Loss ratio Loss absorption potential Order of cash distribution Deng $250,000 / 20 $1,250,000 Danielson $450,000 / 30 $1,500,000 Gibson $375,000 / 50 $750,000 Loss Absorption Potential Loss absorption potential Distribution to Danielson Balances Distribution to Deng & Danielson Balances Deng Danielson Gibson $1,250,000 $1,500,000 $750,000 (250,000) $1,250,000 $1,250,000 $750,000 (500,000) (500,000) _ $750,000 $ 750,000 $750,000 Asset Distribution Net capital interest Distribution to Danielson Balances Distribution to Deng & Danielson Balances Remainder of asset distributions Deng Danielson Gibson $250,000 $450,000 $375,000 75,000 _ _ 250,000 375,000 375,000 (100,000) (150,000) _ $150,000 $225,000 $375,000 0.20 http://downloadslide.blogspot.com 0.30 0.50 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 16-21 Cash Distribution Plan Order of Cash Distribution First $225,000 Next $75,000 Next $250,000 Remainder Liabilities 100% Deng 0.20 Danielson 0.30 40% 20% 100% 60% 30% Gibson 0.50 50% Short Answer The first step in the liquidation process is to compute any net income/loss up to the date of dissolution Any net income/loss is allocated to the partners according to their profit and loss agreement In the next step, the assets that are not acceptable for distribution in their present form are converted into cash, and any gains/losses realized are allocated according to the profit and loss ratio The last step is to distribute the available cash to creditors and partners Steps in the preparation of an advance cash distribution plan include: a Determine the net capital interest of each partner by combining partners’ capital accounts with any loans to or receivables from the partners b Determine the order in which the partners are to participate in cash distributions c Compute the amount of cash each partner is to receive as it becomes available for distribution d Prepare the cash distribution plan Short Answer Questions from the Textbook Solutions Realization gains or losses are allocated to partners in their profit and loss ratio because the changes in asset values are the result of risk assumed by the partnership Also, because it may be difficult to separate gains and losses that result from liquidation from the under- or over-statement in book values that result from accounting policies followed in prior years The final cash distribution is based on capital balances, not on profit and loss ratios, since the capital balance represents the partners' "residual claims" to the assets remaining after settlement of partnership obligations Because the UPA order of payment ranks partnership obligations to a partner ahead of asset distributions to a partner for capital investments, a debit balance in a partner's capital account will create problems when that partner has an outstanding loan balance Other partners will have a claim against this partner for the amount of his/her debit balance which is considered to be an asset of the partnership by the UPA If the partner with a debit balance settles his/her obligation with the partnership, there is no problem However, if he/she can't settle, the other partners must absorb the deficit as a loss, even though the partner with the debit balance had received cash for his/her outstanding loan balance To avoid this inequity, the courts have recognized the right of the partnership to offset the loan balance against the debit capital balance Maintaining separate accounts for outstanding loan and capital accounts recognizes the legal distinction between the two This would be important if the liquidation is carried on over an extended period, since the UPA provides that a partner is entitled to accrued interest on the loan balance When the equity interest of one partner is inadequate to absorb realization losses several alternative outcomes are possible If the partner is personally solvent, he may pay the partnership for the amount he http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16-22 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition is liable If he/she is personally insolvent then the other partners must absorb his/her debit balance in their respective profit and loss ratio If the other partners are unsure of what the partner with the debit balance will do, but still wish to distribute cash, they can assume the worst (absorbing their share of the debit balance) to determine what amount of cash can be safely distributed Cash should not be distributed to any partner until all liquidation losses are recognized in the accounts or are provided for in determining a safe cash payment The classification of assets into personal and partnership categories in recognition of the rights of both partnership creditors and creditors of the individual partners is referred to as "marshalling of assets." To the extent that personal creditors not recover from personal assets they can seek recovery from those partnerships assets still available after partnership obligations have been met This recovery, however, is limited to the extent that the partner involved has a credit interest in partnership assets Because in an installment liquidation the amount of cash to be received from the unsold assets and the resulting gain or loss is unknown, the partners should view each cash distribution as if it were the final distribution 10 The three assumptions upon which a safe cash distribution is determined are (1) any loan balances to partners are offset against their capital accounts, (2) the remaining noncash assets will not generate any more cash, and (3) any partner with a deficit capital balance will not settle his/her obligation to the partnership In other words, assume the worst The safe cash balance is computed as the difference between the current capital balances and the balance required to maintain the above assumptions 11 Unexpected costs are added to the book value of noncash assets When the potential loss on the noncash assets is allocated in the determination of a safe payment, these costs are also included 12 The objective of the procedure is to bring the balance of the partners' capital accounts into the agreed profit and loss ratio as soon as possible so that no one partner is placed in a better position than any other partner 13 The "loss absorption potential" is determined by dividing the partners' net capital balances by their respective profit ratio This determines the maximum amount of loss each partner can absorb 14 The Uniform Partnership Act provides that the liabilities of the partnership shall rank in order of payment as follows: (1) (2) (3) (4) Those owing to creditors other than partners, Those owing to partners other than for capital and profits, Those owing to partners in respect of capital, Those owing to partners in respect of profits Business Ethics from the Textbook Solution Business ethics solutions are merely suggestions of points to address The objective is to raise the students' awareness of the topics, and to invite discussion In most cases, there is clear room for disagreement or conflicting viewpoints http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 16 Partnership Liquidation 16-23 1) Partnership laws grant each partner the right to information about the firm’s business This allows each partner to monitor the firm’s activities Given the circumstances of the case, it would be your duty to inspect any questionable transaction Furthermore, you should ask the partner to explain the reason for increasing the cost by $10,000 This would give you the opportunity to raise the concern regarding the presence of the previously undetected rock If the additional charge is not based on fact, the cost should be removed 2) In the present scenario, it appears that the partner might be experiencing personal financial pressures However, the firm’s reputation and future implications of the action must be considered for the benefit of the partnership Your loyalty to your partner does not alter these responsibilities You may wish to find other, more constructive ways to offer assistance to your partner in meeting his personal obligations, and surviving what may be a difficult time in his life However, ignoring the situation is dishonest to the client and is likely to result in more serious long-term consequences Reference: http://www.lrc.ky.gov/KRS/362-01/403.PDF http://downloadslide.blogspot.com ... solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16- 16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 16- 3 Balances... andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16- 8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Problems 16- 1... solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 16- 18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 16- 5 Capital