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advanced accounting baker test bank chap016 (1)

Chapter 16 - Partnerships: Liquidation

Chapter 16
Partnerships: Liquidation
Multiple Choice Questions

1. The capital balances, prior to the liquidation of the XYZ partnership, were as follows:

X, Y, and Z share profits and losses in the ratio of 5:3:2. As a result of a loan, the partnership
owes Y $80,000. Using the information above, which partner has the highest Loss Absorption
Power (LAP) prior to liquidation?
A. X
B. Y
C. Z
D. Both X and Y

2. The balance sheet given below is presented for the partnership of Janet, Anton, and Millet:

The partners share profits and losses in the ratio of 5:3:2, respectively. The partners agreed to
dissolve the partnership after selling the other assets for $50,000. On dissolution of the
partnership, Janet should receive:

A. $0.
B. $80,000.
C. $10,000.
D. $30,000.

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Chapter 16 - Partnerships: Liquidation

3. On December 1, 2009, the partners of Tim, Williams, and Levin, who share profits and losses
in the ratio of 4:4:2, decided to liquidate their partnership. On this date the partnership
condensed balance sheet was as follows:

On December 11, 2009, the first cash sale of other assets with a carrying amount of $200,000
realized $140,000. Safe installment payments to the partners were made on the same date. How
much cash should be distributed to each partner?

A. Option A
B. Option B
C. Option C
D. Option D

Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to
generate the type of revenue expected by the partners. They share profits and losses in a ratio of
5:3:2. They have decided to liquidate the business and have sold all the assets except for one
piece of heavy machinery. All partnership liabilities have been settled and all the partners are
personally insolvent. The machinery has a book value of $85,000, and the partners have capital
account balances as follows:

Each of the following are independent cases.

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Chapter 16 - Partnerships: Liquidation

4. Refer to the information given above. What amount of cash will each partner receive as a
liquidating distribution if the machinery is sold for 65,000 dollars?


A. Option A
B. Option B
C. Option C
D. Option D

5. Refer to the information given above. What amount of cash will each partner receive as a
liquidating distribution if the machinery is sold for 33,000 dollars?

A. Option A
B. Option B
C. Option C
D. Option D

6. Refer to the information given above. What amount of cash will each partner receive as a
liquidating distribution if the machinery is sold for 21,100 dollars?

A. Option A
B. Option B
C. Option C
D. Option D

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Chapter 16 - Partnerships: Liquidation

Partners Dennis and Lilly have decided to liquidate their business. The following information
is available:

Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation,
half the inventory is sold for $60,000, and $60,000 of the accounts payable is paid. During the
second month, the rest of the inventory is sold for $45,000, and the remaining accounts payable
are paid. Cash is distributed at the end of each month, and the liquidation is completed at the
end of the second month.

7. Refer to the information provided above. Using a safe payments schedule, how much cash
will be distributed to Dennis at the end of the first month?
A. $64,000
B. $60,000
C. $24,000
D. $36,000

8. Refer to the information provided above. Using a safe payments schedule, how much cash
will be distributed to Lilly at the end of the first month?
A. $24,000
B. $40,000
C. $16,000
D. $64,000

9. Refer to the information provided above. Using a safe payments schedule, how much cash
will be distributed to Dennis at the end of the second month?
A. $18,000
B. $27,000
C. $36,000
D. $60,000

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Chapter 16 - Partnerships: Liquidation

10. Refer to the information provided above. Using a safe payments schedule, how much cash
will be distributed to Lilly at the end of the second month?
A. $27,000
B. $36,000
C. $18,000
D. $0

11. Refer to the information provided. Assume instead that the remaining inventory was sold for
$10,000 in the second month. What payments will be made to Dennis and Lilly at the end of the
second month?

A. Option A
B. Option B
C. Option C
D. Option D

12. In the computation of a partner's Loss Absorption Power (LAP), the individual partner's
capital balance and profit-and-loss percentage are used in which of the following ways?

A. Option A
B. Option B
C. Option C
D. Option D

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Chapter 16 - Partnerships: Liquidation

13. During the liquidation of the FGH partnership, a cash distribution was made to all the
partners, who share profits and losses 60 percent, 20 percent, and 20 percent, respectively.
Assuming that the cash distribution referred to was made properly, how much would G receive
if an additional $60,000 was distributed?
A. $60,000
B. $20,000
C. $17,000
D. $12,000

14. Which of the following items are important in the determination of safe installment
payments to partners?
I. Deficits created in capital accounts are distributed to the remaining partners.
II. All unsold noncash assets are assumed to be worthless.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

15. In the computation of a partner's Loss Absorption Power (LAP), which of the following
statements is incorrect?
I. The computation of LAPs for all partners allows cash to be distributed before all partnership
assets have been sold and all creditors have been paid.
II. The computation of LAPs for all partners indicates the relative strength of each partner's net
capital position so that available cash is distributed in respective loss-sharing ratios.
A. I
B. II
C. Both I and II
D. Neither I nor II

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Chapter 16 - Partnerships: Liquidation

16. The BIG Partnership has decided to liquidate at December 31, 2008. The capital and loan
balances of the partners at December 31, 2008, are provided below:

If you were to calculate the Loss Absorption Power for each partner, how would the partners
rank (from highest to lowest LAP)?
A. B, I, G
B. I, B, G
C. B, G, I
D. G, I, B

17. Partner A has a smaller capital balance than Partner L. Partner A, however, has a higher
profit-and-loss-sharing percentage than Partner L. The LA partnership has decided to liquidate.
As a result of the information given,
A. Partner L will have a smaller loss absorption power than A.
B. Partner L will receive cash only after A has received cash.
C. Partner A will have a smaller loss absorption power than L.
D. Partner A will never receive any cash from partnership liquidation.

18. In the calculation of the loss absorption power for a partner, a partner's loan balance (an
amount that is owed by the partnership) should be:
I. Added to the partner's capital balance.
II. Paid to the partner as a creditor of the partnership.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Chapter 16 - Partnerships: Liquidation

19. On a partner's personal statement of financial condition, how should liabilities be valued?
I. Present value
II. Lower of present value or cash settlement amount
A. I
B. II
C. Both I and II
D. Neither I nor II

20. On a partner's personal statement of financial condition, assets and liabilities are presented:
I. As current and noncurrent.
II. In order of liquidity and maturity.
A. I
B. II
C. Both I and II
D. Neither I nor II

21. The personal financial statements of a partner include which of the following?
I. Statement of financial condition.
II. Statement of changes in net worth.
III. Statement of cash flows.
A. I and II
B. I and III
C. II and III
D. I, II, and III

22. On a partner's personal statement of financial condition, how are assets valued?
A. Historical cost
B. Book value
C. Discounted value
D. Estimated current value

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Chapter 16 - Partnerships: Liquidation

23. On a partner's personal statement of changes in net worth, what type(s) of income is (are)
recognized?
I. Realized
II. Unrealized
A. I only
B. II only
C. Both I and II
D. Neither I nor II

Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's
balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the
accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are
personally insolvent. The partners share profits and losses in the ratio of 4:2:1:3.

24. Based on the preceding information, what amount will be paid out to Bill upon liquidation
of the partnership?
A. $0
B. $25,000
C. $11,667
D. $2,500

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Chapter 16 - Partnerships: Liquidation

25. Based on the preceding information, what amount will be paid out to Scott upon liquidation
of the partnership?
A. $0
B. $2,500
C. $25,000
D. $65,000

26. Based on the preceding information, what amount will be distributed to Page and Larry
upon liquidation of the partnership?

A. Option A
B. Option B
C. Option C
D. Option D

Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's
balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the
accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are
personally insolvent. The partners share profits and losses in the ratio of 3:2:1:4.

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Chapter 16 - Partnerships: Liquidation

27. Based on the preceding information, what amount will be paid out to Bill upon liquidation
of the partnership?
A. $0
B. $5,000
C. $25,000
D. $2,500

28. Based on the preceding information, what amount will be paid out to Scott upon liquidation
of the partnership?
A. $0
B. $2,500
C. $5,000
D. $6,429

29. Based on the preceding information, what amounts will be distributed to Page and Larry
upon liquidation of the partnership?

A. Option A
B. Option B
C. Option C
D. Option D

30. When a partnership is liquidated on a piecemeal basis and cash has been distributed
properly to all partners as noncash assets have been turned into cash, all future cash
distributions should be made:
I. In the profit and loss ratio.
II. According to the balances in the partners' capital accounts.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Chapter 16 - Partnerships: Liquidation

31. When is a partnership considered to be insolvent?
I. When the total of all partners' capital accounts results in a debit balance.
II. When at least one of the partners is personally insolvent.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

32. The computation of a safe installment payment for the XYZ partnership resulted in only
partner Z receiving cash. Which of the following statements is correct?
I. Partner Z lent the partnership cash, and the partnership had to pay back the loan to Z before
distributing cash to X and Y.
II. After assuming all noncash assets were potentially worthless and that assumed capital
deficits created in X's and Y's capital balances were losses to be allocated to Z; Z's capital
balance was the only capital balance left with a credit.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

33. The JKL partnership liquidated its business in 2009. Due to an expected long liquidation
period, a cash distribution plan was developed. The initial sale and realization of cash from
noncash assets resulted in partner K properly getting $24,000. No other partners received cash
along with K. Based upon this information, which of the following statements is correct?
I. K's loss absorption power (LAP) was higher than J's LAP and L's LAP.
II. K's capital balance was substantially larger than the balances of J and L.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

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Chapter 16 - Partnerships: Liquidation

34. On December 31, 2008, Mr. and Mrs. Williams owned a parcel of land held as an
investment. The land was purchased for $40,000 in 2006, and was encumbered by a mortgage
with a principal balance of $30,000 at December 31, 2008. On this date the fair value of the
land was $75,000. In the Williams' December 31, 2008, personal statement of financial
condition, at what amount should the land investment and mortgage payable be reported?

A. Option A
B. Option B
C. Option C
D. Option D

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Chapter 16 - Partnerships: Liquidation

The trial balance of WM Partnership is as follows:

Wilfred and Mike decides to incorporate their partnership. The partnership's books will be
closed, and new books will be used for W & M Corporation. The following additional
information is available:
1. The estimated fair values of the assets follow:

2. All assets and liabilities are transferred to the corporation.
3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares.
4. The partners share profits and losses in the ratio 7:3.

35. Based on the preceding information, the journal entry on the partnership's books to record
the Investment in W&M Corporation Stock will be debited for:
A. $181,000
B. $131,000
C. $200,000
D. $150,000

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Chapter 16 - Partnerships: Liquidation

36. Based on the preceding information, the journal entry on the partnership's books to record
distribution of stock to prior partners will include a debit to Wilfred, Capital for:
A. $140,000.
B. $91,700.
C. $86,700.
D. $126,700.

37. Based on the preceding information, the journal entry on the partnership's books to record
distribution of stock to prior partners will include a debit to Mike, Capital for:
A. $38,010.
B. $31,500.
C. $42,000.
D. $44,300.

38. Based on the preceding information, the journal entry on W & M Corporation's books to
record the assets and the issuance of the common stock will include a credit to Additional PaidIn Capital for:
A. $0.
B. $81,000.
C. $31,000.
D. $50,000.

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Chapter 16 - Partnerships: Liquidation

The following condensed balance sheet is presented for the partnership of D, E, and F who
share profits and losses in the ratio of 5:3:2, respectively:

The partners agreed to liquidate the partnership after selling the other assets.

39. Refer to the above information. If the other assets are sold for $280,000, how much should
F receive upon liquidation?
A. $44,000
B. $50,000
C. $76,000
D. $90,000

40. Refer to the above information. If the other assets are sold for $80,000, and all partners are
personally insolvent, how much should E receive upon liquidation?
A. $0
B. $6,000
C. $10,000
D. $20,000

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Chapter 16 - Partnerships: Liquidation

41. The CRT partnership has decided to terminate operations and to liquidate the partnership
assets. There are no partner loans, and all partners have positive capital balances. Gains and
losses on liquidation and cash distributions to partners should be allocated as follows:

A. Option A
B. Option B
C. Option C
D. Option D

Essay Questions

42. A partnership may be involved in "Dissociation" or "Dissolution".
Required:
Describe "Dissociation" and "Dissolution."

43. Listen and Hear are thinking of dissolving their partnership. Listen has a friend who told
him to complete a "lump-sum" liquidation. Hear wants to complete an "installment" liquidation.
They have come to you for advice. What do you recommend and Why?

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Chapter 16 - Partnerships: Liquidation

44. On March 1, 2009, the ABC partnership decides to complete a lump-sum liquidation as
soon as possible. The partnership balance sheet prepared on March 1 appears below:

The partners share profits and losses in the ratio of 3:4:3. Partner B is personally insolvent, but
partners A and C have sufficient personal assets to satisfy any capital deficits. On March 15,
2009, the non-cash assets are sold for $550,000. Lump sum payments are made to the partners
on March 16, immediately after the creditors have been paid.

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Chapter 16 - Partnerships: Liquidation

45. A personal statement of financial condition dated December 31, 2008, is to be prepared for
Wilhelm Holz. He provides the following information for your use in preparing the statements.
All amounts are as of December 31, 2008.
1) Cash on hand and in bank is $4,000.
2) Investments costing $30,000 have a market value of $78,000.
3) His personal residence cost $150,000 ten years ago, and is currently worth $320,000.
4) The payoff balance of his home mortgage is $80,000.
5) The fair value of his 401(k) retirement account is $700,000. All withdrawals from the
account will be fully taxable.
6) Amounts due on credit card debt total $5,000.
7) Estimated income taxes on his calendar 2008 earnings amount to $15,000. Taxes withheld in
2008 were $14,000.
8) Assume an income tax rate of 30 percent.
Required: Prepare a statement of financial condition for Mr. Holz as of December 31, 2008.
Assume any gain on subsequent sale of the residence will not be tax-exempt.

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Chapter 16 - Partnerships: Liquidation

46. The partnership of Rachel, Adams, and Nixon has the following trial balance on September
30, 2009:

The partners share profits and losses as follows: Rachel, 50 percent; Adams, 30 percent; and
Nixon, 20 percent. The partners are considering an offer of $180,000 for the accounts
receivable, inventory, and plant and equipment as of September 30. The $180,000 will be paid
to creditors and the partners in installments, the number and amounts of which are to be
negotiated.
Required:
Prepare a cash distribution plan as of September 30, 2009, showing how much cash each
partner will receive if the offer to sell the assets is accepted.

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Chapter 16 - Partnerships: Liquidation

47. Refer to the facts in Question 46. The partners have decided to liquidate their partnership by
installments instead of accepting the offer of $180,000. Cash is distributed to the partners at the
end of each month. A summary of the liquidation transactions follows:
October
1. $25,000 is collected on accounts receivable; balance is uncollectible.
2. $20,000 received for the entire inventory.
3. $1,500 liquidation expense paid.
4. $40,000 paid to creditors.
5. $10,000 cash retained in the business at the end of the month.
November
6. $2,000 in liquidation expenses paid.
7. As part payment of his capital, Nixon accepted an item of special equipment that he
developed, which had a book value of $8,000. The partners agreed that a value of $12,000
should be placed on this item for liquidation purposes.
8. $4,000 cash retained in the business at the end of the month.
December
9. $150,000 received on sale of remaining plant and equipment.
10. $1,000 liquidation expenses paid. No cash retained in the business.
Required:
Prepare a statement of partnership realization and liquidation with supporting schedules of safe
payments to partners.

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Chapter 16 - Partnerships: Liquidation

48. When Disney and Charles decided to incorporate their partnership, the trial balance was as
follows:

The partnership's books will be closed, and new books will be used for D & C Corporation. The
following additional information is available:
1. The estimated fair values of the assets follow:

2. All assets and liabilities are transferred to the corporation.
3. The common stock is $5 par. Alice and Betty receive a total of 24,000 shares.
4. Disney and Charles share profits and losses in the ratio 6:4.
Required
a. Prepare the entries on the partnership's books to record (1) the revaluation of assets, (2) the
transfer of the assets to the D & C Corporation and the receipt of the common stock, and (3) the
closing of the books.
b. Prepare the entries on D & C Corporation's books to record the assets and the issuance of the
common stock.

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Chapter 16 - Partnerships: Liquidation

Chapter 16 Partnerships: Liquidation Answer Key

Multiple Choice Questions

1. The capital balances, prior to the liquidation of the XYZ partnership, were as follows:

X, Y, and Z share profits and losses in the ratio of 5:3:2. As a result of a loan, the partnership
owes Y $80,000. Using the information above, which partner has the highest Loss Absorption
Power (LAP) prior to liquidation?
A. X
B. Y
C. Z
D. Both X and Y

AACSB: Analytic
AICPA: Measurement

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Chapter 16 - Partnerships: Liquidation

2. The balance sheet given below is presented for the partnership of Janet, Anton, and Millet:

The partners share profits and losses in the ratio of 5:3:2, respectively. The partners agreed to
dissolve the partnership after selling the other assets for $50,000. On dissolution of the
partnership, Janet should receive:
A. $0.
B. $80,000.
C. $10,000.
D. $30,000.

AACSB: Analytic
AICPA: Measurement

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Chapter 16 - Partnerships: Liquidation

3. On December 1, 2009, the partners of Tim, Williams, and Levin, who share profits and losses
in the ratio of 4:4:2, decided to liquidate their partnership. On this date the partnership
condensed balance sheet was as follows:

On December 11, 2009, the first cash sale of other assets with a carrying amount of $200,000
realized $140,000. Safe installment payments to the partners were made on the same date. How
much cash should be distributed to each partner?

A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AICPA: Measurement

Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to
generate the type of revenue expected by the partners. They share profits and losses in a ratio of
5:3:2. They have decided to liquidate the business and have sold all the assets except for one
piece of heavy machinery. All partnership liabilities have been settled and all the partners are
personally insolvent. The machinery has a book value of $85,000, and the partners have capital
account balances as follows:

Each of the following are independent cases.

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