Chapter 15 Flashcards
In a partnership liquidation, how is the final allocation of business assets made to the partners?
A) equally
B) according to the profit and loss ratio
C) according to the balances of the partners’ loan and capital accounts
D) according to the initial investments made by the partners
E) according to the method stipulated by the partnership agreement
C) according to the balances of the partners’ loan and capital accounts
Which one of the following statements is incorrect regarding a predistribution plan?
A) A predistribution plan is developed by simulating a series of losses that are just large enough to eliminate, one at a time, all of the partners’ claims to cash.
B) A predistribution plan recognizes that the individual capital accounts exhibit differing degrees of sensitivity to losses.
C) A predistribution plan serves as a guideline for all future cash payments in a liquidation.
D) A predistribution plan is prepared at the end of a liquidation to confirm actual cash distributions.
D) A predistribution plan is prepared at the end of a liquidation to confirm actual cash distributions.
Protecting the interests of partnership creditors is a significant duty because:
A) the Uniform Partnership Act requires that they be paid in full.
B) a partnership never has secured creditors, and therefore they have no recourse for collection.
C) the partners are limited in liability to the amount they have contributed.
D) the Uniform Partnership Act specifies that they have first priority to the assets held by the partnership at dissolution.
D) the Uniform Partnership Act specifies that they have first priority to the assets held by the partnership at dissolution.
Stanley, a partner of the Newtown partnership, made a loan to the partnership. The partnership is now in liquidation. Which one of the following statements is incorrect regarding the status of this loan during the liquidation process?
A) The loan must be repaid before any cash distribution is made to the other partners, even if Stanley does not have a sufficient amount of capital to absorb all possible losses.
B) The loan has a lower priority than obligations to outside creditors.
C) If the partner has a negative safe capital balance, a portion or even all of the loan should be retained as an offset against the capital account.
A) The loan must be repaid before any cash distribution is made to the other partners, even if Stanley does not have a sufficient amount of capital to absorb all possible losses.
In accounting for the liquidation of a partnership, cash payments to partners after all creditors’ claims have been satisfied, but before final cash distribution, should be according to:
A) profit and loss ratios.
B) capital account balances.
C) relative share of gain or loss on liquidation.
D) ratio of capital contributions by partners.
E) safe payment computations.
E) safe payment computations.
A guideline for the cash distributions to be made to the partners during a liquidation is called:
A) proposed schedule of liquidation.
B) marshalling of assets.
C) safe payments.
D) predistribution plan.
E) partnership agreement.
D) predistribution plan.
A partnership is liquidating and one of the partner’s capital accounts has a deficit balance. What should happen?
A) The deficit balance should be removed from the accounting records and the remaining partners would share in any additional profits.
B) The partner with the deficit should contribute enough personal assets to eliminate the deficit balance.
C) The other partners must file a legal suit against the partner with a deficit.
B) The partner with the deficit should contribute enough personal assets to eliminate the deficit balance.
If a partnership is liquidated, how is the final allocation of business assets made to the partners?
Equally.
According to the initial investment made by each of the partners.
According to the final capital account balances.
According to the profit and loss ratio.
According to the final capital account balances.
Which of the following statements is true concerning the accounting for a partnership going through liquidation?
Gains and losses are reported directly as increases and decreases in the appropriate capital account.
Because gains and losses rarely occur during liquidation, no special accounting treatment is warranted.
A separate income statement is created to measure only the profit or loss generated during liquidation.
Within a liquidation, all gains and losses are divided equally among the partners.
Gains and losses are reported directly as increases and decreases in the appropriate capital account.
During a liquidation, if a partner’s capital account balance drops below zero, what should happen?
The partner with the highest capital balance contributes sufficient assets to eliminate the deficit.
The partner with a deficit contributes enough assets to offset the deficit balance.
The deficit balance is removed from the accounting records with only the remaining partners sharing in future gains and losses.
The other partners file a legal suit against the partner with the deficit balance.
The partner with a deficit contributes enough assets to offset the deficit balance.
What is a predistribution plan?
A list of the procedures to be performed during a liquidation.
A determination of the final cash distribution to the partners on the settlement date.
A guide for the cash distributions to partners during a liquidation.
A detailed list of the transactions that will transpire in the reorganization of a partnership.
A guide for the cash distributions to partners during a liquidation.
A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners’ capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2.
If the building is sold for $50,000, how much cash will Waters receive in the final settlement?
$5,000. $9,000. $18,000. $28,000. $55,000.
$9,000.
W = $15,000 - Loss on Blg ($30,000 × .20) $6,000 = $9,000
White, Sands, and Luke has the following capital balances and profit and loss ratios:
$60,000 (30%); $100,000 (20%); and $200,000 (50%).
The partnership has received a predistribution plan.
How would $200,000 be distributed?
White $12,000
Sands $68,000
Luke $120,000
White: ($200,000 - $20,000 - $140,000) × 30% = $12,000
Sands: $20,000 + $40,000 ($140,000 × 2/7) + $8,000 (($200,000 - $20,000 - $140,000) × 20%) = $68,000
Luke: $100,000 ($140,000 × 5/7) + $20,000 (($200,000 - $20,000 - $140,000) × 50%) = $120,000
Which of the following could result in the termination and liquidation of a partnership?
1) Partners are incompatible and choose to cease operations.
2) There are excessive losses that are expected to continue.
3) Retirement of a partner.
1, 2, and 3
A local partnership was in the process of liquidating and reported the following capital balances:
Justice (40%) $23,000
Zobart (35%) $22,000
Douglas (25%) ($14,000)
Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. However, the two remaining partners asked to receive the $31,000 that was then in the cash account.
How much of this money should Justice receive?
A. $15,467
B. $15,533
$15,533
Douglass’ Deficit ($14,000) × (.40/.75) = ($7,467) + Justice’s Capital Balance $23,000 = $15,533 Distribution to Justice
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