Test bank advanced accounting 10e by beams chapter 16

After payments are made to other creditors and partners with loans to the partnership, payment can be made to partners with capital interests.. A partner with a negative capital balance

Chapter 16 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?

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

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

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

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 $ 7,000Accounts receivable 6,000 Loan from Xin 5,000Inventory 14,000 Warle, capital(20%) 14,000Plant assets-net 12,000 Xin, capital(30%) 10,000Loan to Warle 6,000 Yates, capital(50%) 6,000Total 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

LO2

9 The book value of the partnership equity (i.e., total equity of

the partners) on June 30, 2006 is

11 How much cash would Xin receive from the cash that is available

for distribution on July 31?

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 $ 200,000Other 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?

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

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

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 $ 200,000Loan 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%) 150,000Total 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?

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:

Other assets 13,000 Loan from Alba 500

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

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

In January, other assets with a book value of $8,000 were sold for

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

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

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:

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 5

The balance sheet of the Jody, Kane, and Lark partnership on May 1,

2006 (before commencement of partnership liquidation) was as follows:

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

The balance sheet of the Nebe, Oak, and Pang partnership on October

1, 2006 (the date of partnership dissolution) was as follows:

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%) 21,000Total assets $ 40,000 Total liab./equity $ 40,000

In October, other assets with a book value of $15,000 were sold for

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

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:

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:

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:

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

balance to Kahl & Lane 21,000 ( 14,000 ) ( 7,000 )

Lang

( 30,000 ) ( 30,000 ) ( 60,000 ) ( 120,000 )Subtotals 0 $ 100,000 $ 90,000 $ 190,000

18 d

19 a

20 d

Non- Cash Assets

First Rank Debt

20%

Alba Equity

40%

Blick Equity

40% Calvo EquityJan 1 Balance $ 2,000 $ 13,000 $ 4,010 $ 1,490 $ 4,500 $ 5,000Sale of assets 5,000 ( 8,000) ( 600) ( 1,200) ( 1,200)Subtotal $ 7,000 $ 5,000 $ 4,010 $ 890 $ 3,300 $ 3,800

Safe Payments Schedule

Alba Equity

Blick Equity

Calvo EquityPartners’ pre-distribution balances $ 890 $ 3,300 $ 3,800Possible losses on non-cash assets ( 1,000)( 2,000) ( 2,000)

( 110) 1,300 1,800Write 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

Cash

Dale Capital

Edgar Capital

Fred Capital Total Balance, July 1 $ 10,000 $( 20,000) $( 10,000) $ 40,000 $ 10,000Dale’s personal

contribution

25,000 ( 5,000) ( 10,000) 40,000 25,000Write-off Dale 5,000 ( 2,500) ( 2,500)

25,000 $ 0 ( 12,500) 37,500 25,000Edgar’s personal

distribution 194,000 96,000 17,600 22,000 58,400Offset loans ( 22,000) ( 8,000) ( 14,000)Pay creditors ( 96,000) ( 96,000)

Partner equity $ 76,000 $ 9,600 $ 22,000 $ 44,400Possible loss:

Plant assets ( 10,000) ( 4,000 ) ( 2,500 ) ( 3,500)Distribution $ 66,000 $ 5,600 $ 19,500 $ 40,900

(Cash Distribution: $58,000 + $70,000 + $34,000 - $96,000 = $66,000)

Nov 1 Inventory Plant Creditors Nov 30

Exercise 4

Priority Creditors Folger Glover Hale First $250,000 $ 250,000

Next $100,000 $ 70,000 $ 30,000

Last $350,000 70,000 122,500 157,500Total $850,000 $ 250,000 $ 250,000 $ 152,500 $ 197,500

Exercise 5

Jody, Kane, and Lark Schedule of Partnership Liquidation

May 30, 2006

distribution 254,000 88,000 33,200 91,800 41,000Offset loans ( 26,000) ( 10,000) ( 16,000)Pay creditors ( 88,000) ( 88,000)

Partner equity $ 140,000 $ 23,200 $ 91,800 $ 25,000Possible loss:

Plant assets ( 60,000) ( 18,000) ( 27,000) ( 15,000 )Distribution $ 80,000 $ 5,200 $ 64,800 $ 10,000

(Cash Distribution: $54,000 + $54,000 + $60,000 - $88,000 = $80,000) May 1 Inventory Plant Creditors May 30