On January 1, 2011, the partners voted to dissolve the partnership, at which time the assets, liabilities, and capital balances were as follows: All of the partners are personally insolv
Trang 1Chapter 16 Partnership Liquidation
Multiple Choice
1 Which of the following statements is correct?
1 Personal creditors have first claim on partnership assets
2 Partnership creditors have first claim on partnership assets
3 Partnership creditors have first claim on personal assets
a 1
b 2
c 3
d Both 2 and 3
2 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
3 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
4 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
5 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
6 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
7 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
Trang 28 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:
a $270,000
b $405,000
c $540,000
d $520,000
9 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:
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
Trang 310 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
$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
Trang 414 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:
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
Trang 518 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
Total Assets $600,000 Total Liabilities & Equities $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:
Total assets $ 500,000 Total Lia & Equity 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?
a $87,500 $52,500 $35,000
b 12,500 7,500 10,000
c - 0 - 25,000 - 0 -
d - 0 - 15,000 10,000
Trang 620 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:
Total assets $ 500,000 Total Lia & Equity 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:
a $100,000 $60,000 $40,000
b 25,000 15,000 10,000
c - 0 45,000 5,000
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:
Total assets $750,000 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
Trang 723 The ABC partnership has the following capital accounts on its books at December 31, 2011:
24 The summarized balances of the accounts of RST partnership on December 31, 2011, are as follows:
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
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:
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?
a $35,000 $21,000 $14,000
Trang 8Nen, 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 Prepare the journal entries necessary to record the completion of the liquidation process,
assuming the other assets are sold for $120,000
16-2 The trial balance for the ABC Partnership is as follows just before liquidation:
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:
Trang 9During 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
Total Assets $450,000 Total Lia & Equities $450,000
The personal status of each partner is as follows:
Personal Personal _Assets_ Liabilities
Trang 10B Complete the following schedule to show the total amount that will be paid to the personal creditors
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:
Trang 11Required:
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
Cash Assets Liabilities Capital Capital Capital
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:
Gibson, Capital (50%) 375,000 Total Assets $1,300,000 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
Trang 12Short Answer
1 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
2 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
1 Why are realization gains or losses allocated to partners in their profit and loss ratios?
2 In what manner should the final cash distribution be made in partnership liquidation?
3 Why does a debit balance in a partners’ capital account create problems in the UPA order of payment for a partnership liquidation?
4 Is it important to maintain separate accounts for a partner’s outstanding loan and capital counts? Explain why or why not
ac-5 Discuss the possible outcomes in the situation where the equity interest of one partner is
inadequate to absorb realization losses
6 During a liquidation, at which point may cash be distributed to any of the partners?
7 What is “marshaling of assets”?
8 To what extent can personal creditors seek re-covery from partnership assets?
9 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”?