Chapter 16 Dissolution and Liquidation of Partnership

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? a. Payments to partners with loans to the partnership are ranked equally with payments to other creditors. b. Payments to partners with loans to the partnership are ranked ahead of payments to partners without loans to the partnership. 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.

©2009 Pearson Education, Inc. publishing as Prentice Hall 16-1

LO1 3.

A partnership dissolution differs from a liquidation in that a. payments are made to creditors before partners receive value. b. periodic payments to partners are made when cash becomes available. c. a partner withdraws from the business and the enterprise continues to function. d. full payment is made to all outside creditors before remaining cash is distributed to partners in a final lump sum payment.

LO1 4.

LO1 5.

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. 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.

LO1 6.

A simple partnership liquidation requires a. periodic payments to creditors and partners determined by a safe payments schedule. b. partnership assets to be converted into cash with full payment made to all outside creditors before remaining cash is distributed to partners in a lump sum payment. c. only creditors to be paid in an orderly manner. ©2009 Pearson Education, Inc. publishing as Prentice Hall 16-2

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 a. the partner receives further allocations of liquidation losses, but not gains. b. the partner receives no further allocation of liquidation losses and gains. c. the partner is no longer obligated to partnership creditors. d. the partner has an obligation of personal net assets to the other partners.

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 Accounts receivable Inventory Plant assets-net Loan to Warle Total assets

$

$

4,000 6,000 14,000 12,000 6,000 42,000

Accounts payable Loan from Xin Warle, capital(20%) Xin, capital(30%) Yates, capital(50%) Total liab./equity

$

$

7,000 5,000 14,000 10,000 6,000 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. * All available cash was distributed on ©2009 Pearson Education, Inc. publishing as Prentice Hall 16-3

July 31, except for $2,000 that was set aside for contingent expenses. LO2 9.

The book value of the partnership equity (i.e., total equity of the partners) on June 30, 2006 is a. b. c. d.

LO2 10.

The cash available for distribution to the partners on July 31, 2006 is a. b. c. d.

LO2 11.

$ 2,000. $ 4,000. $ 7,000. $11,000.

How much cash would Xin receive from the cash that is available for distribution on July 31? a. b. c. d.

LO2 12.

$60,000. $29,000. $30,000. $42,000.

$ 0. $ 600. $1,000. $2,000.

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 Other assets

$

400,000 200,000

Accounts payable Hara, capital (40%) Ives, capital (30%) Jack, capital (30%)

$

200,000 135,000 216,000 49,000

Total assets

$

600,000

Total liab./equity

$

600,000

How much cash should Ives receive in the first distribution? a. $146,000. b. $147,000. ©2009 Pearson Education, Inc. publishing as Prentice Hall 16-4

c. $153,000. d. $156,000

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 as follows:

Cash Inventory Plant assets

$

198,000 80,000 230,000

Accounts payable Jade, capital (40%) Kahl, capital (40%) Lane, capital (20%)

$

149,000 79,000 140,000 140,000

Total assets

$

508,000

Total liab./equity

$

508,000

If the partners then distribute the available cash, Lane will receive a. b. c. d. LO2 14.

$23,000. $29,000 $30,000. $34,000.

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.

©2009 Pearson Education, Inc. publishing as Prentice Hall 16-5

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 Loan to Lang Other assets

$

30,000 40,000 480,000

Total assets

$

550,000

Accounts payable Loan from Maas Lang, capital (25%) Maas, capital (25%) Neal, capital (50%) Total liab./equity

$

$

200,000 50,000 70,000 80,000 150,000 550,000

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. ©2009 Pearson Education, Inc. publishing as Prentice Hall 16-6

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. b. c. d.

LO5 19.

the partner with lowest loss absorption is eliminated last. it is necessary to have a cash distribution plan first. the least vulnerable partner is eliminated first. the most vulnerable partner is eliminated first.

Which partner is considered the most vulnerable as a result of a computation of vulnerability rankings? a. The partner with the lowest vulnerability ranking, who has the lowest loss absorption potential. b. The partner with the lowest vulnerability ranking, who has the highest loss absorption potential. c. The partner with the highest vulnerability ratio, who has the lowest loss absorption potential. d. The partner with the highest vulnerability ranking, also has the highest loss absorption potential.

LO6 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. b. c. d.

II first; I second and III III first; II second and I I first; III second and II II first; III second and I

third. third. third. third.

©2009 Pearson Education, Inc. publishing as Prentice Hall 16-7

also also also who

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: Cash Other assets Loan to Calvo

$

2,000 13,000 1,000

Total assets

$

16,000

Liabilities Loan from Alba Alba, capital (20%) Blick, capital(40%) Calvo, capital(40%) Total liab./equity

$

4,010 500 990 4,500 6,000 16,000

$

In January, other assets with a book value of $8,000 were sold for $5,000 in cash. Required: Determine how distributed.

the

available

cash

on

January

31,

2006

will

be

LO2 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 follows: Cash

$

10,000

Fred, capital(30%) Dale, capital(40%) Edgar, capital(30%)

$

40,000 (20,000) (10,000)

Total assets

$

10,000

Total equity

$

10,000

The value of partners' personal assets and liabilities on July 1, 2006 were as follows:

Personal assets Personal liabilities

$

Dale 45,000 $ 30,000

Edgar 30,000 $ 20,000

Fred 25,000 10,000

Required: Prepare the final statement of partnership liquidation. ©2009 Pearson Education, Inc. publishing as Prentice Hall 16-8

LO2 Exercise 3 The balance sheet of the Omar, Paolo, and Quek partnership on November 1, 2006 (before commencement of partnership liquidation) was as follows: Cash Inventory Loan to Omar Loan to Quek Plant assets-net

$

58,000 60,000 8,000 14,000 70,000

Total assets

$

210,000

Accounts payable Notes payable Omar, capital(40%) Paolo, capital(25%) Quek, capital (35%)

$

34,000 62,000 24,000 26,000 64,000

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: Determine how distributed.

the

available

cash

on

November

31,

2006

should

be

LO2 Exercise 4 A cash distribution plan for the Folger, Glover, and Hale partnership was as follows:

First $250,000 Next $100,000 Next $150,000 Remainder

Priority Creditors 100%

Folger

Glover

70%

30%

11/15 20%

35%

Hale

4/15 45%

Required: If $850,000 of cash was distributed by the partnership, how much was received respectively by the priority creditors, Folger, Glover, and Hale?

©2009 Pearson Education, Inc. publishing as Prentice Hall 16-9

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 Inventory Loan to Jody Loan to Lark Plant assets-net

$

54,000 60,000 10,000 16,000 110,000

Accounts payable Notes payable Jody, capital (30%) Kane, capital (45%) Lark, capital (25%)

$

28,000 60,000 32,000 90,000 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. Required: Determine how the available cash on April 30, 2006 should be distributed. LO2 Exercise 6 The balance sheet of the Nebe, Oak, and Pang partnership on October 1, 2006 (the date of partnership dissolution) was as follows: Cash Other assets Loan to Oak

$

3,000 33,000 4,000

Total assets

$

40,000

Liabilities Loan from Nebe Nebe, capital (20%) Oak, capital (30%) Pang, capital (50%) Total liab./equity

$

9,000 1,000 3,000 6,000 21,000 40,000

$

In October, other assets with a book value of $15,000 were sold for $17,000 in cash. Required: Determine how distributed.

the

available

cash

on

October

31,

2006

will

©2009 Pearson Education, Inc. publishing as Prentice Hall 16-10

be

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%) Ide, capital(20%) Jen, capital(50%)

$

4,000 (60,000) 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:

Personal assets Personal liabilities

$

Hanly 74,000 $ 72,000

Ide 120,000 $ 80,000

Required: Prepare the final statement of partnership liquidation.

©2009 Pearson Education, Inc. publishing as Prentice Hall 16-11

Jen 56,000 60,000

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: Cash Accounts receivable Inventory Loan to Nel Furniture Equipment Goodwill Accounts payable Note payable Loan from Luis Luis, capital (40%) Mac, capital (25%) Nel, capital (25%) Oma, capital (10%) Totals

$

Debits 3,000 19,000 25,000 5,000 15,000 10,000 12,000

Credits

$

$

89,000 $

14,000 30,000 5,000 15,000 9,000 12,000 4,000 89,000

Required: Prepare a cash distribution plan for January 1, 2006, showing how cash installments will be distributed among the partners as it becomes available.

©2009 Pearson Education, Inc. publishing as Prentice Hall 16-12

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: Cash Accounts receivable Inventory Loan to Ray Furniture Equipment Goodwill Accounts payable Note payable Loan from Sen Quan, capital (30%) Ray, capital (20%) Sen, capital (35%) Tad, capital (15%) Totals

$

Debits 3,000 10,000 25,000 4,000 15,000 18,000 10,000

Credits

$

$

12,000 30,000 6,000 12,000 9,000 12,000 4,000 85,000

85,000 $

Required: 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 partnership was as follows:

First $100,000 Next $180,000 Next $270,000 Remainder

Priority Creditors 100%

for

the

Upton,

Valenta,

and

Walker

Upton

Valenta

Walker

44% 2/9 11%

10% 1/9 44%

46% 2/3 45%

Required: If $700,000 of cash was distributed by the partnership, how much was received respectively by the priority creditors, Upton, Valenta, and Walker? ©2009 Pearson Education, Inc. publishing as Prentice Hall 16-13

©2009 Pearson Education, Inc. publishing as Prentice Hall 16-14