Alagos & Bayona - Advanced Accounting 1-6 MCQ

Chapter 1 Partnership Formation 1. A contract where two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. a. Voluntary Association b. Corporation c. Partnership d. Sole Proprietorship Answer: (c) 2. A partnership formed for the exercise of a profession which is duly registered is an example of: a. Universal partnership of profits b. Universal partnership of all present property c. Particular partnership d. Partnership by estoppel Answer: (c) 3. One of the following is not a characteristic of contract of partnership. a. Real, in that the partners must deliver their contributions in order for the partnership contract to be perfected b. Principal, because it can stand by itself c. Preparatory, because it is a means by which other contracts will be entered into d. Onerous, because the parties contribute money, property, or industry to the common fund Answer: (a) 4. One of the following is not a requisite of a contract of partnership. Which is it? a. There must be a valid contract b. There must be a mutual contribution of money, property, or industry to a common fund c. It is established for the common benefit of the partners which is to obtain profits and divide the same among themselves d. The articles are kept secret among members Answer: (d) 5. The minimum capital in money or property except when immovable property or real rights thereto are contributed, that will require the contract of partnership to be in a public instrument and be registered with the Securities and Exchange Commission (SEC). a. P5, 000.00 b. P10, 000.00 c. P3, 000.00 d. P30, 000.00 Answer: (c) 6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership’s formation: Contributed by Roberts Smith

Cash Inventory Building Furniture & Equipment

P 20,000

P 30,000 15,000 40,000

15,000

The building is subject to a mortgage of P 10,000, which the partnership has assumed. The partnership agreement also specifies that profits and losses are to be distributed evenly. What amounts should be recorded as capital for Roberts and Smith at the formation of the partnership? Roberts Smith a. 35,000 85,000 b. 35,000 75,000 c. 55,000 55,000 d. 60,000 60,000 Suggested Answer: (b) 35,000 & 75,000 Roberts: 20,000 + 15,000 = P35, 000 Smith: 30,000 + 15,000 + 40,000 – 10,000 = P75,000. The partner’s capital credit is based upon the net assets contributed by the particular partner, thus the liabilities assumed reduced the fair market value of the building invested. 7. The Grey and Redd Partnership was formed on January 2, 2010. Under the partnership agreement, each partner has an equal initial capital balance. Partnership net income or loss is allocated 60% to Grey and 40% to Redd. To form the partnership, Grey originally contributed assets costing P30,000 with a fair value of P60,000 on January 2, 2010, and Redd contributed P20,000 cash. Drawings by the partners during 2010 totaled P3, 000 by Grey an P9,000 by Redd. The partnership net income in 2010 was P25,000 Under the goodwill method, what is Redd’s initial capital balance in the partnership? a. 20,000 b. 25,000 c. 40,000 d. 60,000 Suggested Answer: (d) 60,000 Contributed Capital Agreed Capital Increase (Decrease) Grey 60,000 60,000 Redd 20,000 60,000 40,000 Total 80,000 120,000 40,000 The partnership agreement provides for equal initial capital. Thus under the goodwill method , the capital credit for Redd should be the same as the contribution of Grey, thereby increasing the total agreed capital to P120,000, which is P40,000 more than the total contributed capital (goodwill). 8. Using the information in No. 2, under the bonus method, what is the amount of bonus? a. 20,000 bonus to Grey b. 20,000 bonus to Redd c. 40,000 bonus to Grey d. 40,000 bonus to Redd

Suggested Answer: (b) 20,000 bonus to Redd Grey Redd Total

Contributed Capital 60,000 20,000 80,000

Agreed Capital 40,000 40,000 80,000

Increase (Decrease) (20,000) 20,000

The partnership agreement provides for equal initial capital. Thus under the bonus method, the capital credit for Redd should be the same as the contribution for Grey, resulting to P20,000 bonus from Grey to Redd. 9. On May 1, 2010, the business assets of John and Paul appear below: Cash Accounts Receivable Inventories Land Building Furniture & Fixture Other Assets Total

P

Accounts Payable Notes Payable John, Capital Paul, Capital\ Total

P

John 11,000 234,536 120,035 603,000

50,345 2,000 P 1, 020, 916 178,940 200,000 641, 976

P 1, 020, 916

P

Paul 22,354 567,890 260,102

428,267 34,789 3,600 P 1, 317, 002 P 243,650 345,000 728,352 P1, 317, 002

John and Paul agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P20, 000 in John’s books and P35, 000 in Paul’s are uncollectible. b. Inventories of P5, 500 n P6, 700 are worthless in John’s and Pail’s respective books. c. Other assets of P2, 000 and P3, 600 in John’s and Paul’s respective books are to be written off. The capital accounts of John and Paul, respectively, after the adjustments will be: a. 614, 476 683, 052 c. 640, 876 712, 345 b. 615, 942 717, 894 d. 613,576 683, 350 Suggested Answer: (a) 614, 476 683, 052 John: 641, 976 – 20, 000 – 5, 500 – 2, 000 = P 614, 476 Smith: 728, 352 – 35, 000 – 6, 700 – 3, 600 = P 683, 052 10. Based on No. 4, how much assets does the partnership have? a. 2, 317, 918 b. 2, 237, 918 c. 2, 265, 118 d. 2, 365, 218 Suggested Answer: (c) 2, 265, 118 John: 1, 020, 916 – 20, 000 – 5, 500

– 2, 000 = P

993, 416

Smith: 1, 317, 002 – 35, 000 – 6, 700 – 3, 600 = P 1, 271, 702 Total: 2, 337, 918 – 55, 000 – 12, 200 – 5, 600 = P 2, 265, 118

Chapter 2 Partnership Operations 1. The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits before bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of 2:3. Which partner has a greater advantage when the partnership has a profit or when it has a loss? PROFIT LOSS a. Flat Iron b. Flat Flat c. Iron Flat d. Iron Iron Answer: B Profit - bonus 20%+ Balance (2/5 x 80%)= 52% Loss - Bonus 0 + P/L (2/5 x 100%) 40%= 40% 2. Downs, Frey and Vick formed the DFV general partnership to act as manufacturer’s representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profit. It was also agreed that the partnership would not terminate for 5 years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners capital accounts were as follows: Downs, 20 000; Frey, 15000 and Vick 10,000. There were undistributed losses of 30 000. Vicks share of losses will be a. 0 b. 1000 c. 9000 d. 10 000 Answer: C 30 000 x 30%= 9 000 3. Red and White formed a partnership in 2010. The partnership agreement provides for annual salary allowances of 55 000 for Red and 45 000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of 80 000 for 2006 before any allowance to partners. What amount of these earnings should be credited to each partners’ capital account? RED WHITE a. 40 000 40 000 b. 43 000 37 000 c. 44 000 36 000 d. 45 000 35 000 Answer: B Red - 55 000 -12 000= 43 000 White – 45 000- 8000 = 37 000 4. Fox, Greg and Howe are partners with average capital balances during 2010 of 120 000, 60 000 and 40 000, respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of 30 000 to Fox, and 20 000 to Howe, the residual P/L is divided equally. In

2010, the partnership sustained a 33 000 loss before interest and salaries to partners. By what amount should Fox’s capital change? a. 7 000 increase b. 11 000 increase c. 35 000 decrease d. 42 000 increase Answer: A Fox- 12 000 + 30 000 – 35 000 = 7 000 5. If a partnership has net income of 44 000 and partner X is to be allocated bonus of 10% of income after the bonus. What is the amount of bonus? a. 3 000 b. 3 300 c. 4 000 d. 4 400 Answer: C 44 000 – 40 000(44 000/110%) = 4 000 6. The partnership agreement of Donn, Eddy and Farr provides for annual distribution of P/L in the ff. sequence:  Donn, the managing partner, receives a bonus of 10% profit  Each partner receives 6% interest on average capital investment  Residual P/L is divided equally Average capital investments were: Donn, 80 000; Eddy, 50 000; Farr, 30 000 What portion of 100 000 profit for 2010 should be allocated to Farr? a. 28 600 b. 29 800 c. 35 133 d. 41 600 Answer: A 1 800 ( 6% on ave. cap.) + 26 800 ( balance/equally) = 28 600 7. Partners AA and BB have P/L agreement with the ff. provisions: salaries of 30 000 for AA and 45 000 for BB. Bonus to AA of 10% net income after salaries and bonus, interest of 10% on average capital balances of 20 000 and 35 000, respectively. One third of any remaining profits will be allocated to AA and the Balance to BB. If the net income is 102 500, how much should be allocated to AA? a. 44 250 b. 47 500 c. 41 000 d. 41 167 Answer: C

30 000 + 2 500 + 2 000 + 6 500 = 41 000 8. Refer to question 7, if the partnership had net income of 22 000, how much should be allocated to AA, assuming that the provisions of the P/L agreement are ranked by order of priority starting with salaries? a. 13 200 b. 12 500 c. 12 000 d. 8 800 Answer: D 22 000 x 30/75 9. Luz, Vi and Minda are partners when the partnership earned a profit of 30 000. Their agreement provides the ff.:  8% interest on partners’ ending capital in excess of 75 000  Salaries of 20 000 for Luz and 30 000 for Vi  Any balance is to be distributed 2:1:1, respectively Assume ending capital balances of 60 000, 80 000 and 100 000, respectively. What is the amount of profit allocated for Minda, if each provision of P/L is satisfied to whatever extent possible using the priority order shown above? a. ( 3 600) b. 3 600 c. (2 000) d. 2 000 Answer: D 2 000 ( 8% x 100 000- 75 000)

10. On October 31, 2010, Zita and Jones formed a partnership by investing cash of 300 000 and 200 000, respectively. The partners agreed to receive an annual salary allowance of 360 000 and to give Zita a bonus of 20% of the net income after partners’ salaries, the bonus being treated as an expense. If the profits after salaries and bonus are to be divided equally, and the profit after salaries but before bonus of Zita is 360 000, how much is the share of Zita in the profit? a. 100 000 b. 120 000 c. 210 000

d. 270 000 Answer: D Salaries + bonus + balance 60 000 + 60 000 + 150 000 = 270 000

Chapter 3 Partnership Dissolution: Changes in Ownership 11. The change in relation of the partners caused by any ceasing to be associated in the carrying of the business is known as: a. Termination of the partnership b. Winding up of the partnership affairs c. Liquidation of the partnership business d. Dissolution of the partnership Answer: (d) 12. A decree by the court is necessary to dissolve a general partnership based on three of the following grounds. Which one will not require such decree but will cause the automatic dissolution of the partnership? a. The business of a partnership can only be carried on at a loss b. A partner is shown to be of unsound mind c. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business d. A partner is civilly interdicted Answer: (d) 13. Three of the following will cause the automatic dissolution of a general partnership. Which one will not? a. When any event makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership b. Expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners c. A partner becomes in any way incapable of performing his part of the partnership contract d. The insolvency of a partner or of the partnership Answer: (c) 14. What is the order of payment of liabilities of a dissolved general partnership using the code number representing each liability? I. Those owing to partners other than for capital or for profits II. Those owing to creditors other than partners III. Those owing to creditors in respect of profits IV. Those owing to partners in respect of capital a. I, II, III, IV b. II, I, IV, III c. II, I, III, IV d. I, II, IV, III Answer: (b) 15. Which of the following will not cause automatic dissolution of a limited partnership? a. Death of a general partner b. Death of a limited partner

c. Insolvency of a general partner d. Insanity of a general partner Answer: (b) 16. On May 1, 2010, the business assets of John and Paul appear below: Cash Accounts Receivable Inventories Land Building Furniture & Fixture Other Assets Total

P

Accounts Payable Notes Payable John, Capital Paul, Capital\ Total

P

John 11,000 234,536 120,035 603,000

50,345 2,000 P 1, 020, 916 178,940 200,000 641, 976

P 1, 020, 916

P

Paul 22,354 567,890 260,102

428,267 34,789 3,600 P 1, 317, 002 P 243,650 345,000 728,352 P1, 317, 002

John and Paul agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: d. Accounts receivable of P20, 000 in John’s books and P35, 000 in Paul’s are uncollectible. e. Inventories of P5, 500 n P6, 700 are worthless in John’s and Pail’s respective books. f. Other assets of P2, 000 and P3, 600 in John’s and Paul’s respective books are to be written off. Peter offered to join for a 20% interest in the firm. How much should he contribute? a. 330, 870 b. 337, 487 c. 344, 237 d. 324, 382 Suggested Answer: (d) 324, 382 New Capital [(614, 476 + 683, 052)/ 80%] Multiply by Cash to be contributed by Peter

P1, 621, 910 20% P 324, 382

17. Based on No. 1, after Peter’s admission, the profit and loss sharing ratio was agreed to be 40:40:20, based on capital credits. How much should the cash settlement be between John and Paul? a. 33, 602 b. 32, 930 c. 32, 272 d. 34, 288 Suggested Answer: (d) 34, 288

Capital Balances after Admission New Capital ratio (40% x 1, 621, 910) Cash settlement between John and Peter

John P 614, 476 648, 764 P 34, 288

Paul P 683, 052 648, 764 P (34, 288)

18. Blue and Rubi are partners who share profits and losses in the ratio 6:4, respectively. On May 1, 2010, their respective capital accounts were as follows: Blue P60, 000 Rubi 50, 000 On that date, Lind was admitted as a partner with one-third interest in capital, and profits for an investment o P40, 000. The new partnership began with a total capital of P150, 000. Immediately after Lind’s admission, Blue’s capital should be: a. 50, 000 b. 54, 000 c. 56, 667 d. 60, 000 Suggested Answer: (b) 54, 000

Old Partners New Partner Total

Contributed Capital P 110, 000 40, 000 P 150, 000

Agreed Capital P 100, 000 (1/3) 50, 000 P 150, 000

Blue’s capital before admission of Lind Less: share in bonus to Lind (10, 000 x 60%) Blue’s capital after Lind’s admission

Increase (Decrease) P (10, 000) 10, 000

P 60, 000 6, 000 P 54, 000

19. Fernando and Jose are partners with capital balances of P30, 000 and P70, 000, respectively. Fernando has a 30% interest in profits and losses. All assets of the partnership are at fair market value except equipment with book value of P300, 000 and fair market value of P320, 000. At this time, the partnership has decided to admit Rosa and Linda as new partners. Rosa contributes cash of 55, 000 for 20% interest in capital and 30% interest in profits and losses. Linda contributes cash of P10, 000 and equipment with a fair value of P50, 000 for a 25% interest in capital and 35% interest in profits and losses. Linda is also bringing special expertise and client contacts into the new partnership. Using the bonus method, what is the amount of bonus? a. 24, 750 b. 18, 250 c. 14, 000 d. 7, 500 Suggested Answer: (b) 18, 250 Contributed Capital

Agreed Capital

Increase (Decrease)

Old Partners New Partners Total

P P

100, 000 115, 000 215, 000

P 118, 250 (45%) 96, 750 P 215, 000

P 18, 250 (18, 250)

20. Based on the information provided in No. 4, using the goodwill method, what is the amount of goodwill traceable to the original partners? a. 60, 000 b. 40, 000 c. 31, 250 d. 28, 750 Suggested Answer: (c) 31, 250 Contributed Capital Old Partners P 100, 000 New Partners 115, 000 Total P 215, 000

Agreed Capital P 151, 250 (45%) 123, 750 P 275, 000

Total increase in capital Less: undervalued equipment (320, 000- 300, 000) Balance Goodwill to Linda Goodwill to Original Partners

Increase (Decrease) P 51, 250 8, 750 P 60, 000

P60, 000 20, 000 P 40, 000 8, 750 P 31, 250

When there is a difference between the book value and fair market value of the partnership when new partners are admitted, the goodwill method revalues assets to market value. To determine the new capital of the partnership, contributed capital of the new partner may be divided by his capital interest. In this case, where Linda will be provided with goodwill for bringing her expertise and clients contact to the partnership, the capital of Rosa is used instead because it serves as concrete basis with no goodwill involved, in determining the new capital of the partnership. Thus, the new capital of the partnership is P275, 000 (55, 000/ 20%).

Chapter 4 Partnership Lump Sum Liquidation 1. In the liquidation of a partnership it is necessary to 1) distribute cash to the partners, 2) sell noncash assets, 3) allocate any gain or loss on realization to the partners, 4) pay liabilities. These steps should be performed in the following order: a. 2 3 4 1 b. 2 3 1 4 c. 3 2 1 4 d. 3 2 4 1 Answer: A 2. Peter and John who share P/L equally, decide to liquidate their partnership when their net assets amounted to 260 000, and capital balances of 170 000 and 90 000, respectively. If non cash assets were sold for amount equal to its book value, what amount of cash should Peter and John received? PETER JOHN a. 130 000 130 000 b. 170 000 90 000 c. 180 000 80 000 d. 195 000 65 000 Answer: B No gain or loss was realized 3. The following condensed balance sheet is prepared for the partnership of Smith and Jones, who share P/L in the ratio of 60:40, Other assets Smith, loan

450 000 20 000 470 000

Accounts Payable Smith, Capital Jones, Capital

120 000 195 000 155 000 470 000

The partners decide to liquidate the partnership. If the other assets are sold for 385 000, what amount of the available cash should be distributed to Smith? a. b. c. d.

136 000 156 000 159 000 195 000

Answer: A Capital balance- loan – loss on realization (60:40) 195 000 – 20 000 – 39 000 = 136 000 4. On December 31, 2010, the partners of MNP partnership decided to liquidate their business. Immediately before liquidation, the ff. condensed balance sheet was prepared:

Cash Non cash assets

50 000 900 000

Total

950 000

Liabilities Nieva,loan Perez, loan Munoz, capital(50%) Nieva, Capital(30%) Perez, capital(20%)

375 000 80 000 25 000 312 500 107 500 50 000 950 000

The non cash assets were sold for 400 000. Assuming Perez is the only solvent partner, what amount of additional cash will be invested by Perez? a. 37 143 b. 25 000 c. 5 000 d. 0 Answer: B Capital balance + loan – loss on realization 50 000 + 25 000 – 100 000 =( 25 000 )

5. Partner Morgan is personally insolvent, owing 600 000. Personal assets will only bring 200 000 when liquidated. At the same time, Morgan has a credit capital balance of 120 000. The capital amounts of the other partners total a credit balance of 250 000. Under the doctrine of marshalling of assets, how much the personal creditors of Morgan can collect? a. 120 000 b. 200 000 c. 320 000 d. 570 000 Answer: C Personal assets + capital credit balance 200 000 + 120 000 = 320 000 6. As of December 31, the books of AME partnership showed capital balances of 40 000, 25 000 and 5 000, respectively. The P/L ratio is 3:2:1. The partners decided to liquidate. They sold all non cash assets for 37 000 cash. After settlement of all liabilities amounting to 12000, they still have 28 000 cash left for distribution. The loss on realization of non cash assets was a. 40 000

b. 42 000 c. 44 000 d. 45 000 Answer: B Total capital before distribution – Cash left for distribution 70 000 – 28 000 = 42 000 7. Refer to no. 5. Assuming that any partner’s capital deficit balance is uncollectible, the share of A in the 28 000 cash would be a. 19 000 b. 18 000 c. 17 800 d. 40 000 Answer: C Capital balance before liquidation – loss on realization – absorption of E 40 000 – 21 000 – 1 200 = 17 800 8. The following balance sheet is presented for the partnership ABC who share profits and losses in the ratio of 5:3:2 Cash Other assets

Total

120 000 1080 000

Liabilities A, capital B, capital C, capital

1 200 000

280 000 560 000 320 000 40 000 1 200 000

Assume that the three partners decided to liquidate. The other assets are sold for 800 000, how much will A receive? a. 280 000 b. 324 000 c. 410 000 d. 412 000 Answer: C Capital balance before liquidation – loss on realization – absorption of C 560 000 – 140 000 – 10 000 = 410 000

9. Refer to no. 8. How much B will receive? a. 320 000 b. 236 000 c. 230 000 d. 228 000

Answer: C Capital balance before liquidation – loss on realization – absorption of C 320 000 – 84 000 – 6 000 = 230 000 10. How much C will receive? a. 40 000 b. 0 c. 16 000 d. 10 000 Answer: B Capital balance before liquidation – loss on realization 40 000- 56 000= - 16 000 ( absorbed by other partners) = 0

Chapter 5 Partnership Installment Liquidation 1. MARK Company is a partnership engaged in the trading business with Marquez, Alconcer, Ramos, and Kanapi as partners. Marquez, Alconcer, and Ramos are capitalist partners contributing P100, 000, P60, 000 and P40, 000, respectively. Kanapi is an industrial partner. The partnership has a stipulation that Marquez shall not be liable for partnership liabilities. After three years of continued losses. The partnership incurred liabilities of P200, 000 at which time its assets had dwindled to P140, 000. After the partnership assets have been exhausted, partnership creditors may go after the separate assets of: a. All the partners b. Marquez, Alconcer, and Ramos but not those of Kanapi c. Alconcer, Ramos and Kanapi but not those of Marquez d. Alconcer and Ramos only Answer: (a) 2. Refers to the process of settling the business or affairs of the partnership after dissolution is known as a. Partnership formation b. Termination c. Partnership Liquidation d. Incorporation Answer: (c) 3. In accounting for the liquidation of a partnership, cash payments to partners after all non-partner creditors’ claims have been satisfied, but before the final cash distribution, should be according to a. The partner’s relative profit and loss sharing ratios b. The final balances in partner’s capital accounts c. The partner’s relative share of the gains and loss on liquidations d. Safe payments computations Answer: (d) 4. In partnership liquidation, the final cash distribution to the partner’s should be made in accordance with the a. Partner’s profit and loss sharing ratio b. Balances of the partners’ loan and capital accounts c. Ratio of the capital contributions by the partners d. Ratio of capital contributions less withdrawals by the partners Answer: (b) 5. Prior to partnership liquidation, a schedule of possible losses is frequently prepared to determine the amount of cash that may be safely distributed to the partners. The schedule of possible losses a. Consist of each partner’s capital account plus loan balance, divided by that partner’s profit and loss sharing ratio b. Show the successive losses necessary to eliminate the capital accounts of partners ( assuming no contribution of personal assets by the partners) c. Indicates the distribution of successive amounts of available cash to each partner d. Assumes contribution of personal assets by partners unless there is a substantial presumption of personal insolvency by partners

Answer: (b) 6. After incurring losses resulting from very unprofitable operations, the Goh Kong Wei Partnership decided to liquidate when the partner’s capital balances were: Goh, Capital P80, 000 Kong, Capital 130, 000 We, Capital 96, 000 The non-cash assets were sold in installment. Available cash were distributed to partners in every sale of non-cash assets. After the second sale of non-cash assets, the partners received the same amount of cash in the distribution. And from the third sale of non-cash assets, cash available for distribution amounts to P28, 000, and unsold non-cash assets has a book value of P12,500. Using cash priority program, what amount did Wei received in the third installment of cash? a. 11, 600 b. 8, 000 c. 5, 600 d. 2, 000 Suggested Answer: (c) 5, 600 P28, 000 x 20% = P5, 600 7. Partners Almond, Barney and Colors have capital balances of P20, 000, P50, 000 and P90, 000, respectively. They split profits in the ratio 2:4:4, respectively. Under a safe cash distribution plan, one of the partners will get the following total amounts in liquidation before any other partners get anything: a. 0 b. 15, 000 c. 40, 000 d. 180, 000 Suggested Answer: (c) 40, 000 Total Interest Divide by P & L Loss Absorption Balance Priority 1 – Colors Balances Priority 2 – Colors & Barney Balances (P & L)

Almond 20, 000 20% 100, 000

Barney 50, 000 40% 125, 000

100, 000

125, 000 (25, 000) 100, 000

100, 000

Colors 90, 000 40% 225, 000 (100, 00) 125, 000 (25, 000) 100, 000

Since the question being asked is “one of the partners will get…before any other partners get anything”, it is the partner under priority no. 1 (Colors). He shall receive, under priority no. 1, P40, 000 (100, 000 x 40%). 8. The ABC Partnership has assets with book value of P240, 000 and a market value of P195, 000, outside liabilities of P70, 000, loans payable to partner Able of P20, 000 and capital balances for partners Able, Baker, and Chapman of P70, 000, P30, 000, and P50, 000, respectively. The

partners share profits and losses equally. How would the first P100, 000 of available assets be distributed? a. P70, 000 to outside liabilities, P20, 000 to Able, and the balance equally among partners b. P70, 000 to outside liabilities, and P30, 000 to Able c. P70, 000 to outside liabilities, P25, 000 to Able, and P5, 000 to Chapman d. P40, 000 to Able, P20, 000 to Chapman, and the balance equally among partners Suggested Answer: (b) P70, 000 to outside liabilities, and P30, 000 to Able Able Baker Chapman Total Interest 90, 000 30, 000 50, 000 Divide by P & L 1/3 1/3 1/3 Loss Absorption Balance 270, 000 90, 000 150, 000 Priority 1 – Able (120, 000) Balances 150, 000 90, 000 150, 000 Priority 2 – Able & Chapman (60, 000) (60, 000) Balances (P & L) 90, 000 90, 000 90, 000 Payments by Priority: Priority 1 (120, 000 x 1/3) Priority 2 (60, 000 x 1/3)

Total Liability Balance Loan – A Balance Priority 1 Total

Cash 100, 000 (70, 000) 30, 000 (20, 000) 10, 000 10, 000

Able 40, 000 20, 000

Baker

Liability

Able

Chapman 20, 000 Baker Chapman

70, 000 20, 000

70, 000

10, 000 30, 000

9. Given the information in No. 3, if all outside creditors and loans to partners had been paid, how would the balance of the assets be distributed assuming Chapman had already received assets with a value of P30, 000? a. Each of the partners would receive P25, 000 b. Each of the partners would receive P40, 000 c. Able: P70, 000, Baker: P30, 000, Chapman: P20, 000 d. Able: P55, 000, Baker: P15, 000, Chapman: P5, 000 Suggested Answer: (d) Able: P55, 000, Baker: P15, 000, Chapman: P5, 000 Able Total Interest (excluding loan) 70, 000 Divide by P & L 1/3 Loss Absorption Balance 210, 000

Baker 30, 000 1/3 90, 000

Chapman 50, 000 1/3 150, 000

Priority 1 – Able Balances Priority 2 – Able & Chapman Balances (P & L)

(60, 000) 150, 000 (60, 000) 90, 000

Payments by Priority: Priority 1 (60, 000 x 1/3) Priority 2 (60, 000 x 1/3) Cash MV of assets 195, 000 Liabilities (70, 000) Able, Loan (20, 000) Balance 105, 000 Priority 1 (20, 000) Balance 85, 000 Priority 2 (40, 000) Balance 45, 000 Priority 3 (45, 000) Total Less: Asset taken by Chapman Balance

90, 000 90, 000

150, 000 (60, 000) 90, 000

Able 20, 000 20, 000

Baker

Chapman

Able

Baker

20, 000 Chapman

20, 000 20, 000

20, 000

15, 000 55, 000

15, 000 30, 000

55, 000

15, 000

15, 000 35, 000 30, 000 5, 000

10. The balance sheet of the partnership of Salve, Galo and Norma, who share in the profits and losses in the ratio 5:3:2, respectively is as follows: Assets Liabilities & Capital Cash 30, 000 Liabilities 50, 000 Other Assets 320, 000 Salve, capital 80, 000 Galo, Capital 115, 000 Norma Capital 105, 000 Total 350, 000 Total 350, 000 The partnership is liquidated by installment. The first sale of non-cash assets with a book value of P150, 000 realizes P100, 000. How should the remaining be distributed? Salve Galo Norma a. 50, 000 30, 000 20, 000 b. 40, 000 24, 000 16, 000 c. 0 31, 000 49, 000 d. 0 48, 000 32, 000 Suggested Answer: (c) 0

31, 000

Capital Balances before liquidation Loss on Realization (50,000) (5:3:2) Balances

49, 000 Salve 80, 000 (25, 000) 55, 000

Galo 115, 000 (15, 000) 100, 000

Norma 105, 000 (10, 000) 95, 000

Less: Possible Loss (170, 000) (5:3:2) Balances Absorption of Salve (3:2) Safe Payment to Partners

(85, 000) (30, 000) 30, 000

(51, 000) 49, 000 (18, 000) 31, 000

(34, 000) 61, 000 (12, 000) 49, 000

Chapter 6 Corporate Liquidation 1. If a dividend of 80% is allocable to class 7 unsecured creditors based on accounting statement of affairs, it correctly may be concluded that a. All unsecured claims will receive the same percentage of return. b. All unsecured claims will be paid in full. c. Class 1 through 6 unsecured claims will be paid in full. d. Stockholders will receive 20% of their equity. Answer: C 2. In the liquidation proceeding, if the proceeds on the realization of an asset exceed the lien against that asset, the excess is assigned to a. The holder of the lien. b. Other lien holders whose assets will not realize a sufficient amount to cover their liens. c. Meet the claims of the unsecured creditors. d. The stockholders of the corporation. Answer: C 3. If the value of pledged property is equal or more than the obligation, what is the treatment? a. Partially secured b. Fully secured c. Collateralized d. Unsecured Answer: B 4. If the firm has more liabilities than assets, it is deemed a. Liquidating b. Bankrupt c. Insolvent d. Normal Answer: C 5. He/she is appointed to take over the debtor’s properties in behalf of the creditor group a. Broker b. Judge c. Trustee d. Dealer Answer: C

6. In May 2009, it was determined that it is necessary to complete the work in process of Wild West Corp. to complete the work in process , 10 000 book value of raw materials and supplies and 10 000 conversion costs will be required. When completed, these goods will probably sell for

approx..50 000. The raw materials, which have a book value of 40 000, have an estimated total realizable value of 20 000. What is the estimated amount that will become available for unsecured creditors as a result of the realization of the work in process? a. 50 000 b. 35 000 c. 30 000 d. 0 Answer: B Estimated value upon completion Less cost to complete: Raw materials[10 000x(20000/40000) 5000 Conversion cost 10 000

50 000

15 000 35 000

7. The following selected account balances were taken from the balance sheet of Quitting Corp. as of December 31,2009, immediately before the takeover of the trustee: Marketable securities 300 000 Inventories 110 000 Land 150 000 Building 400 000 Additional information:  Marketable securities have present MV of 320 000. These have been pledged to secure NP of 280 000  The estimated worth of inventories is 70 000. However, inventories with book value of 50 000 have been pledged to secure NP of 60 000. The realizable value of the inventories pledged is estimated to be 40 000.  Land and building have total realizable value of 450 000. This property is pledged to secure the mortgage payable of 250 000. What is the estimated amount available for preferred claims and unsecured creditors out of assets pledged with fully secured creditors? a. 840 000 b. 810 000 c. 770 000 d. 240 000 Answer: D Marketable instruments Land and building

40 000 200 000 240 000

8. Refer to no.4. What is the total amount of free assets? a. 810 000 b. 770 000 c. 270 000 d. 240 000

Answer: C Marketable securities Land and building Unpledged investment

40 000 200 000 30 000 270 000

9. The accountant of Drifting Corp. prepared a statement of affairs. Assets which there are no claims or liens are expected to produce 700 000. Unsecured claims of all classes totaled to 1 050 000. The ff.data claims deemed outstanding:  Accrued salaries 15 000  Unrecorded note for 10 000 on which 600 of interest has accrued held by Normandy Co  A note for 30 000 secured by 40 000 receivable estimated to be 60% collectible held by Jones Co.  A 15 000 note on which 300 interest has accrued held by James Pty. Property with a BV of 10 000 and MV of 18 000 is pledge to guarantee payment of principal and interest.  Unpaid income taxes of 35 000 What is the total free assets? a. 1 050 000 b. 700 000 c. 650 000 d. 1 000 000 Answer: B Free Assets are assets with no claims or liens 10. What is the amount realized by partially secured creditors? a. 10 600 b. 19 500 c. 24 900 d. 27 900 Answer: D (Free assets- unsecured with priority) ÷ unsecured claims without priority= percent of recovery (700 000 – 50 000 ) /1000 0000= 65 % Realizable amount of AR( 60% x 40 000) Add unsecured portion (30 000-24000)x 65%

24 000 3 900 27 900