Midterm Review On Theories (Dissolution And Liquidation) Flashcards
The dissolution of a partnership occurs only when the partnership is terminating operations and going out of business.
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False
Bonus refers to the transfer of capital from one partner/s to another.
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True
Bonus is an account title, so that it can be debited or credited.
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False
A new partner in a partnership accepts unlimited liability for actions that occurred before that partner joined the partnership.
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False
There can be partnership dissolution without liquidation, but liquidation is always preceded by dissolution.
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True
The admission of a new partner into a partnership can occur without any new assets being invested into the partnership.
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True
If a new partner is going to acquire an ownership interest in a partnership directly from another partner, the other partners do not need to approve the admission.
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False
The term “interest” refers to partners’ equity in the partnership as well as the profit and loss ratios.
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True
If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the new partner is also entitled to 40 percent of the existing partner’s profit and loss allocation.
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False
In an admission by “purchase of interest” the only concern of the partnership is the transfer of interest from the selling partner to the buying partner only.
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True
The amount that assets are revalued when a new partner joins a partnership is always shared by existing partners
equally.
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False
Admission by purchase of interest is a personal transaction between the selling partner and buying partner yet there is no change in the partnership capitalization.
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True
When the old partners receive bonus, the bonus is divided according to their capital ratios.
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False
When a partner buys interest of the partnership, the transaction is between the buying partner and the selling partner.
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False
If a new partner’s capital account is created for an amount less than the value of net assets contributed, an error has been made in the partnership’s accounting records.
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False
The bonus recognized by existing partners when a new partner is admitted to a partnership is commonly shared among the existing partners based on the existing partners’ relative profit and loss residual ratios.
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True
It is possible for a new partner’s capital account to be established at an amount greater than the market value of the identifiable assets invested.
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True
When existing partners give bonus to the new partner, the existing partners’ capital accounts are credited.
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False
New partners are never recipients of bonuses when they join the partnership.
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False
A bonus paid to a new partner result in a reduction to the capital accounts of the existing partners in proportion to their profit and loss sharing ratios.
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True
A partner may withdraw from a partnership at any time without notice given to the existing partners.
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False
The amount of money that the buying partner pays to the selling partner will go to the partnership and not the partners concerned.
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False
A withdrawing partner may have his/her partnership interest acquired by an outside investor agreed to by the remaining partners.
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True
If existing partners acquire a withdrawing partner’s equity, the existing partners must purchase the withdrawing partner’s equity in proportion to their residual profit and loss ratios.
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False
A partnership’s assets must be revalued when a partner withdraws.
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False
Admission of a partner through investment will not affect the total capitalization of the partnership.
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False
Total agreed capitalization refers to the amount of new capital set by the partners.
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True
Under bonus method, the capital of the new partner is computed by multiplying the contributed capital of both new and old partners by the interest acquired by the new partner.
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True
Withdrawing partners from a partnership may receive a bonus or pay a bonus to remaining partners.
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True
A bonus can be recorded for a retiring partner only if the partnership acquires the equity of the partner.
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True
A contract of partnership is one of a mutual trust and confidence that one has the right to choose his associates.
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True
Only admission of a new partner by purchase of interest necessitates adjustments on non-current assets into its fair market value.
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False
There can be partnership dissolution without liquidation but no liquidation can take place without first having the partnership dissolved.
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True
When a new partner is admitted in an existing partnership, automatically the previous partnership contract that has been executed by the existing partners is “dissolved”.
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True
When a new partner is admitted in an existing partnership, it is always with the common knowledge and consent of all the existing partners.
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True
Updating the books of the partnership included not only revaluation of assets, but adjustment of errors and omissions as well.
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True
Admission by purchase of interest is a personal transaction between the selling partner and buying partner yet there is an increase in the capitalization of the new partnership.
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False
When whole interest in the Partnership is being sold to one person, this transaction tantamounts to conversion of a partnership into proprietorship.
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True
The term “interest” refers to Partners’ equity or capital in the partnership which comprises of his original investment, share of the partnership profit and loss and withdrawals.
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True
The amount of money that the buying partner pays to selling partner will go to partnership and not to the partners concerned.
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False
In an admission by “purchase of interest” the only concern of the partnership is the transfer of interest from the selling partner to the buying partner only.
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True
Admission by investment will not affect the capitalization of the partnership before and after the admission.
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False
One of the characteristics of admission by investment is that both assets and capitalization of the partnership will increase.
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True
When the existing partners give bonus to the new partner, the existing partners capital accounts are debited.
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True
When the newly admitted partner gives bonus to the old partners, the old partners’ capital accounts are credited.
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True
When the old partners receive bonus, the bonus is divided between or among them based on their respective profit and loss ratio.
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True
Bonus refers to transfer of capital from one partner to another in consideration for the good reputation or earning capacity.
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True
Bonus is not an account title so that, it cannot be debited or credited.
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True
Bonus has the effect of decreasing the capital balance of the partner giving the bonus and increasing the capital balance of the partner receiving the bonus.
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True
Total agreed capital refers to the amount of new capital set by the partners.
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True
Total contributed capital refers to the combined capital of both new and old partners.
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True
Under bonus method, the capital of the new partner is computed by multiplying the contributed capital of both new and old partners by the interest acquired by the new partner.
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True
If the capital credit of the new partner is equal to his contribution, no bonus will be given to both the new and old partners.
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True
A bonus given to the old partners by a new partner, increases the capital account balance of the old partners.
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True
Bonus to a new partner is given by old partners.
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True
Partnership dissolution is entirely similar to partnership liquidation.
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False
The partnership is dissolved when such partnership changes its name and address of its location.
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False
Partnership may be dissolved when a partner is admitted by purchase of interest rather than admission by investment.
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False
When one is already admitted in the existing partnership, he will start to share the partnership obligation as of that date.
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True
When a partner retires from the partnership, he has no option other than to sell his share to the partnership.
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False
Insolvency of a partner will result to dissolution, but dissolution will not be a result of insolvency of any of the partner.
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True
When a partner sells his share of interest to his co-partner, the transaction is personal in nature and will not involve the partnership.
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True
A withdrawing or retiring partner cannot sell his interest to any person without informing first the other partner.
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True
When there are only two persons comprising the partnership, the sale of one’s share to the other will make the partnership become a sole partnership.
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False
The heir of the partner who dies can automatically take his place upon his death and this does not give way to a dissolution of the partnership.
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False
A and B are partners in AB partnership. When B retires in the partnership, it tantamounts to dissolution with liquidation.
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True
When a partner buys interest of the partnership, the transaction is between the buying partner and the partnership.
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False
A valid reason why death of a partner dissolves the partnership that will result to liquidation is when the surviving partner does not like the heir of his partner.
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True
In the partnership of XYZ, if X and Z retire as partners, Y will become a sole proprietor, if he continues with the business.
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True
Insolvency of partnership is where its remaining assets are confined to the settlement of its obligation resulting in its inability to go on with normal operations.
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True
An admission by purchase of interest, the selling partners may sell their share of partnership’s interest to the incoming partner at-
a. book value
b. less than book value
c. more than book value
d. any of the above
d. any of the above
When a new partner is admitted in an existing partnership either by purchase of interest or by investment, which of the following statement is true?
а. the partnership book is required to be changed with a new one
b. bonus should be recorded
c. the partnership’s non-cash assets should be adjusted to conform with their fair market values
d. both requires to undergo the liquidation process
c. the partnership’s non-cash assets should be adjusted to conform with their fair market values
In the partnership of A and B with capital balances of P50,000 and P75,000 respectively and C is admitted by buying 1/2 of B’s interest for P36,000-
a. B, suffered a personal loss of P1,500
b. the loss is divided between them on an agreed ratio
c. the sale is at its book value
d. the sale is more than the book value
a. B, suffered a personal loss of P1,500
Partnership is said to be dissolved when a-
a. new partner is admitted in an existing partnership
b. partner dies
c. partner retires
d. any of the above
d. any of the above
The following instances may dissolved the partnership except-
a. change in partnership name
b. retirement of a partner
c. admission of a new partner
d. incorporation of a partnership
a. change in partnership name
Admission of a partner by purchase of interest is a-
a. personal transaction between the selling partner and the buying partner
b. transaction that increases assets and capital of the partners
c. transaction where interest of the buying partner is to be transferred to the selling partner
d. transaction where the incoming partner can claim bonus
a. personal transaction between the selling partner and the buying partner
Admission of a new partner by investment will -
a. increase both the asset and capitalization of the partnership
b. increase the asset of the partnership only
c. increase the capitalization of the partnership only
d. none of these
a. increase both the asset and capitalization of the partnership
When bonus is given to the old partners-
a. old partners’ capital accounts are credited
b. the bonus is divided based on P/L Ratio
c. new partners’ capital account is debited
d. all of the above
d. all of the above
When the bonus formula indicates that there is bonus to be given to old partners-
a. the new partner’s capital account will be credited
b. the new partner’s capital account will be debited
c. the old partners’ capital account will be credited
d. the old partners’ capital account will be debited
b. the new partner’s capital account will be debited
Or
c. the old partners’ capital account will be credited
In the partnership of ABC, B sold his partnership interest share to D. Who will receive the cash payment made by D?
a. partner B
b. the partnership
c. partners A and B
d. partners A, B and C
a. partner B
- Which of the following activity that will result to partnership liquidation?
a. withdrawal of a partner
b. death of a partner
c. winding-up of partnership affairs
d. admission of a new partner
c. winding-up of partnership affairs
Tiquidation refers to payment of all partnership’s obligations during the process of dissolution.
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True
When non-cash assets are sold less than the book value, the sale results to a gain on realization.
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False
During the liquidation process, the partnership will focus on terminal activities.
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True
Example of terminal activities are the sale of non-cash assets, payment of partnership’s creditors and distribution of excess cash to the partners.
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True
Right of offset is an established legal doctrine that a deficient partner can exercise to partly or fully apply his loan account to the partnership against his capital deficiency in the process of liquidation.
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True
Theoretical loss refers to the balance of non-cash assets that were not sold during the liquidation process.
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True
The first step of the liquidation process is the sale of the non-cash assets and distribution of realization gain or loss.
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True
Any partner who may develop a debit balance in his capital account may exercise the right of offset.
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True
In every partnership liquidation, a general partner’s separate/personal asset can be subjected to claims from creditors after the partnership assets are exhausted.
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True
When non-assets are sold more than the book value, the sale results to a loss on realization.
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False
Realization in its simplest term means dissolution with liquidation.
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False
Solvent partner is a deficient partner who is capable of paying his capital deficiency.
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True
A partner who develops a debit balance after distribution of realization loss may contribute additional cash to the partnership.
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True
A parther who is declared insolvent, his capital deficiency will be absorbed by the remaining partners with credit balances based on profit and loss sharing ratio.
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True
In partnership liquidation, partner’s loan account and the obligation of the partnership to outsiders need to be separated although these are both liabilities.
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True
There can be no liquidation unless the business has to be dissolved.
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True
In the order of payments, payment to outside creditors ranks second in priority than payment to partner’s loan.
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False
The statement of partnership liquidation is prepared first before journalizing and posting processes take place in the book of the partnership.
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True
The statement of partnership liquidation is patterned after the fundamental accounting equation, A = L + OE.
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True
The loss absorption ability refers to the maximum loss that the partners could absorb.
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True
The journal entry needed in the right of offset is to debit the capital account of the deficient partner and credit to loan account of the said partner.
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False
In liquidation by installment, the main problem is how to equitably distribute cash as it becomes available while some non-cash assets are waiting to be sold.
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True
In liquidation by installment, the distribution of cash could not be a problem if said cash will not be distributed as it becomes available but has to wait until the whole liquidation process is through.
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True
The problem of equitable distribution of cash to the partners can be resolved by preparing the “cash safety payment schedule”.
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True
When partners A, B and C which has a profit and loss sharing ratio of 2:3:5, and B is insolvent in the liquidation process, the theoretical loss will be absorbed by A and C in a fractional share of 2/7 and 5/7.
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True
When a partnership goes out of business, all
the remaining non-cash assets will be declared as a total loss. This loss on liquidation shall be divided among the partners in their profit and loss ratio.
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False
In partnership liquidation one partner cannot
make up for the deficit in another partner’s account.
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True
A partner’s unrestricted interest represents the
portion of a partner’s interest which should remain available to absorb possible future losses.
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False
A partner’s inability to meet his obligations at
the time of liquidation relieves that individual of his liabilities to the other partners.
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True
A partnership may be liquidated without being
dissolved but dissolution is always preceded by liquidation.
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False
Gains and losses on the sale of assets in
liquidation are divided equally among partners.
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False
The loss absorption balances represent the
mininum loss that partners could absorb without reducing their equity below zero.
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False
The creditors of the partnership shall not haves priority over those of the partners separate creditors as regards the partnership properties.
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False
Restricted interests are provided for assumed non-sale of remaining non-cash assets and for assumed insolvency of deficient partners.
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True
Under the installment method of partnership liquidation, realization of non-cash assets is accomplished over one setting.
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False
A partnership is said to be dissolved when the
business is terminated
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True
The entry to record the exercise of offset will debit the partner’s loan account and credit capital.
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True
When cash is insufficient to fully satisfy the
cash requirements in a particular priority, then the available cash will be distributed using the profit and loss ratio.
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True
Partnership creditors shall have priority in
payments than those of the partners separate creditors as regards the separate properties of the partners.
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True
Liquidation of a partnership is the winding up
of its business activities characterized by sale of all non-cash assets, settlement of all liabilities and distribution of the remaining cash to the partners.
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True
The account credited for loans made by the partners to the partnership.
Partner’s Loan/ Loan Payable
A liquidation in which the proceeds
from all assets are fully realized before a distribution of cash is made
Lumpsum
The principle that allows a partner
to apply his receivable from the partnership against a debit balance in his account.
The process of winding up a business.
Liquidation
The process of converting non-cash assets into cash.
Realization
Amount of money advanced by the partnership to the partners.
Loans Receivable
A liquidation that is spread over a long period and the partners distribute cash as it becomes available without waiting until all assets are realized.
Installment
A partner with a debit balance in
his capital account after the transfer of the loss on realization.
Deficient Partner
An accounting statement summarizing the winding up of the affairs of the partnership.
Statement of Partnership Liquidation
A partner whose personal liabilitles exceed his personal needs.
Insolvent Partner
The order of creditors’ rights against the partnership’s assets and the personal assets of the individual partners.
The excess of a partner’s share on losses over his capital.
Capital Deficiency
The excess of the selling price over the cost or book value of the assets disposed or sold through realization.
Gain on Realization
Expenses incurred in order to facilitate the Immediate realization of non-cash assets.
Liquidation Expenses
The manner of eliminating the capital deficiency of an insolvent partner; after exercising the right of offset, when applicable.
Loss Absorption
