Ch16_Test Bank Jeter Advanced Accounting 3rd Edition

Chapter 16

Partnership Liquidation

Multiple Choice

1. Which of the following statements is correct?

1. Personal creditors have first claim on partnership assets.

2. Partnership creditors have first claim on partnership assets.

3. Partnership creditors have first claim on personal assets.

a. 1

b. 2

c. 3

d. Both 2 and 3

2. The first step in the liquidation process is to

a. convert noncash assets into cash.

b. pay partnership creditors

c. compute any net income (loss) up to the date of dissolution.

d. allocate any gains or losses to the partners.

3. A schedule prepared each time cash is to be distributed is called a(n)

a. advance cash distribution schedule.

b. marshaling of assets schedule.

c. loss absorption potential schedule.

d. safe payment schedule.

4. An advance cash distribution plan is prepared

a. each time cash is distributed to partners in an installment liquidation.

b. each time a partnership asset is sold in an installment liquidation.

c. to determine the order and amount of cash each partner will receive as it becomes available for

distribution.

d. none of these.

5. The first step in preparing an advance cash distribution plan is to

a. determine the order in which partners are to participate in cash distributions.

b. compute the amount of cash each partner is to receive as it becomes available for distribution.

c. allocate any gains (losses) to the partners in their profit-sharing ratio.

d. determine the net capital interest of each partner.

6. Offsetting a partner's loan balance against his debit capital balance is referred to as the

a. marshaling of assets.

b. right of offset.

c. allocation of assets.

d. liquidation of assets.

7. If a partner with a debit capital balance during liquidation is personally solvent, the

a. partner must invest additional assets in the partnership.

b. partner's debit balance will be allocated to the other partners.

c. other partners will give the partner enough cash to absorb the debit balance.

d. partnership will loan the partner enough cash to absorb the debit balance.

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Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd

Edition

16-2

8. The following condensed balance sheet is presented for the partnership of Jim, Bill, and Fred who

share profits and losses in the ratio of 4:3:3, respectively:

Cash $ 180,000

Other assets 1,940,000

Jim, receivable 60,000

$ 2,180,000

Accounts payable $ 480,000

Bill, loan 80,000

Jim, capital 720,000

Bill, capital 440,000

Fred, capital 460,000

$2,180,000

Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership

decides to admit Tom as a new partner, with a 25% interest. No goodwill or bonus is to be recorded.

How much should Tom contribute in cash or other assets?

a. $270,000

b. $405,000

c. $540,000

d. $520,000

9. The partnership of Joe, Al, and Mike shares profits and losses 60%, 30%, and 10%, respectively. On

January 1, 2011, the partners voted to dissolve the partnership, at which time the assets, liabilities,

and capital balances were as follows:

Assets Liabilities and Capital

Cash $ 400,000 Accounts Payable $ 580,000

Other Assets 1,200,000 Joe, Capital 440,000

Al, Capital 380,000

Mike, Capital 200,000

Total assets $1,600,000 Total liabilities $1,600,000

All of the partners are personally insolvent.

Assume that all noncash assets are sold for $840,000 and all available cash is distributed in final

liquidation of the partnership. Cash should be distributed to the partners as follows

a. Joe, $744,000; Al, $372,000; Mike, $124,000.

b. Joe, $440,000; Al, $380,000; Mike, $200,000.

c. Joe, $224,000; Al, $272,000; Mike, $164,000.

d. Joe, $396,000; Al, $198,000; Mike, $66,000.




Chapter 16 Partnership Liquidation

16-3

10. The partnership of Pratt, Ellis, and Mack share profits and losses in the ratio of 4:4:2, respectively.

The partners voted to dissolve the partnership when its assets, liabilities, and capital were as

follows:

Assets

Cash $ 250,000

Other assets 1,000,000

$1,250,000

Liabilities and Capital

Liabilities $ 200,000

Pratt, Capital 300,000

Ellis, Capital 350,000

Mack, Capital 400,000

$1,250,000

The partnership will be liquidated over a prolonged period of time. As cash is available, it will be

distributed to the partners. The first sale of noncash assets having a book value of $600,000 realized

$475,000. How much cash should be distributed to each partner after this sale?

a. Pratt, $90,000; Ellis, $140,000; Mack, $295,000

b. Pratt, $210,000; Ellis, $290,000; Mack, $145,000

c. Pratt, $290,000; Ellis, $210,000; Mack, $105,000

d. Pratt, $150,000; Ellis, $175,000; Mack, $200,000

11. In a partnership liquidation, the final cash distribution to the partners should be made in accordance

with the:

a. partners' profit and loss sharing ratio.

b. balances of the partners' capital accounts.

c. ratio of the capital contributions by the partners.

d. ratio of capital contributions less withdrawals by the partners.

12. In an advance plan for installment distributions of cash to partners of a liquidating partnership, each

partner's loss absorption potential is computed by

a. dividing each partner's capital account balance by the percentage of that partner's capital

account balance to total partners' capital.

b. multiplying each partner's capital account balance by the percentage of that partner's capital

account balance to total partners' capital.

c. dividing the total of each partner's capital account less receivables from the partner plus

payables to the partner by the partner's profit and loss percentage.

d. some other method.

13. Under the Uniform Partnership Act

a. partnership creditors have first claim (Rank I) against the assets of an insolvent partnership.

b. personal creditors of an individual partner have first claim (Rank I) against the personal assets

of all partners.

c. partners with credit capital balances share (Rank I) the personal assets of an insolvent partner

that has a debit capital balance with personal creditors of that partner.

d. personal creditors of the partners of an insolvent partnership share partnership assets on a pro

rata basis (Rank I) with partnership creditors.





Edition

16-4

14. During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in partial settlement

of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of

$70,000, and a current fair value of $110,000. The partners share net income and loss equally. The

net debit to Karr's account (including any gain or loss on disposal of the machine) is

a. $90,000.

b. $100,000.

c. $110,000.

d. $150,000.

15. X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are

allocated 35% to X, 35% to Y, and 30% to Z. The partners have decided to dissolve and liquidate

the partnership. After paying all creditors, the amount available for distribution is $60,000. X, Y,

and Z are all personally solvent. Under the circumstances, Z will

a. receive $18,000.

b. receive $30,000.

c. personally have to contribute an additional $6,000.

d. personally have to contribute an additional $36,000.

16. The ABC partnership has the following capital accounts on its books at December 31, 2011:

Credit

A, Capital $400,000

B, Capital 240,000

C, Capital 80,000

All liabilities have been liquidated and the cash balance is zero. None of the partners have personal

assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5.

If the noncash assets are sold for $400,000, the partners should receive as a final payment:

a. A, $304,000; B, $176,000; C, $80,000

b. A, $256,000; B, $144,000; C, $-0-

c. A, $304,000; B, $176,000; C, $-0-

d. A, $120,000; B, $80,000; C, $200,000

17. The summarized balances of the accounts of MNO partnership on December 31, 2011, are as

follows:

Assets Liabilities and Capital

Cash $ 15,000 Liabilities $ 15,000

Noncash 90,000 M, Capital 45,000

N, Capital 30,000

O, Capital 15,000

Total Assets $105,000 Total Equities $105,000

The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above,

which one of the following amounts, if any, is the loss absorption potential of partner N as of

December 31, 2011?

a. $20,000

b. $35,000

c. $75,000

d. $120,000





16-5

18. Adamle, Boyer, and Clay are partners with a profit and loss ratio of 4:3:3. The partnership was

liquidated and, prior to the liquidation process, the partnership balance sheet was as follows:

ADAMLE, BOYER, AND CLAY

Balance Sheet

January 1, 2011

Assets Liabilities and Equity

Cash $ 60,000 Adamle, Capital $216,000

Other assets 540,000 Boyer, Capital 240,000

Clay, Capital 144,000

Total Assets $600,000 Total Liabilities & Equities $600,000

After the partnership was liquidated and the cash was distributed, Boyer received $96,000 in cash in

full settlement of his interest.

The liquidation loss must have been:

a. $360,000

b. $144,000

c. $504,000

d. $480,000

19. The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On

July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along

with residual profit sharing ratios were as follows:

Assets Liabilities & Equities


Receivables-net 50,000 Hall, Capital 50% 100,000

Inventories 150,000 Jones, Capital 30% 175,000

Equipment-net 100,000 Otto, Capital 20% 75,000

Total assets $ 500,000 Total Lia & Equity 500,000

Assume that the available cash is distributed immediately, except for a $25,000 contingency fund

that is withheld pending complete liquidation of the partnership. How much cash should be paid to

each of the partners?

Hall Jones Otto

a. $87,500 $52,500 $35,000

b. 12,500 7,500 10,000

c. - 0 - 25,000 - 0 -

d. - 0 - 15,000 10,000





Edition

16-6

20. The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On





Receivables-net 50,000 Hall, Capital 50% 100,000

Inventories 150,000 Jones, Capital 30% 175,000

Equipment-net 100,000 Otto, Capital 20% 75,000

Total assets $ 500,000 Total Lia & Equity 500,000

Assume that Hall takes equipment with a fair value of $40,000 and a book value of $50,000 in

partial satisfaction of his equity in the partnership. If all the $200,000 cash is then distributed, the

partners should receive:

Hall Jones Otto

a. $100,000 $60,000 $40,000

b. 25,000 15,000 10,000

c. - 0 45,000 5,000

d. - 0 50,000 - 0

21. The partnership of Starr, Foley, and Pele share profits and losses in the ratio of 4:4:2, respectively.

The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows:


Cash $150,000 Liabilities $120,000

Other assets 600,000 Starr, Capital 180,000

Foley, Capital 210,000

Pele, Capital 240,000

Total assets $750,000 Total Lia & Equity $750,000

The partnership will be liquidated over a prolonged period of time. As cash is available, it will be

distributed to the partners. The first sale of noncash assets having a book value of $360,000 realized

$285,000. How much cash should be distributed to each partner after this sale?

a. Starr, $54,000; Foley, $84,000; Pele, $177,000.

b. Starr, $174,000; Foley, $174,000; Pele, $87,000.

c. Starr, $126,000; Foley, $126,000; Pele, $63,000.

d. Starr, $90,000; Foley, $105,000; Pele, $120,000.

22. A, B, and C have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are

allocated 35% to A, 35% to B and 30% to C. The partners have decided to dissolve and liquidate the

partnership. After paying all creditors the amount available for distribution is $60,000. A, B, and C

are all personally solvent. Under the circumstances, C will

a. receive $18,000.

b. receive $30,000.

c. personally have to contribute an additional $6,000.

d. personally have to contribute an additional $36,000.





16-7

23. The ABC partnership has the following capital accounts on its books at December 31, 2011:

Credit

A, Capital $200,000

B, Capital 120,000

C, Capital 40,000

All liabilities have been liquidated and the cash balance is zero. None of the partners have personal

assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5.

If the noncash assets are sold for $150,000, the partners should receive as a final payment:

a. A, $152,000; B, $88,000 C, $40,000

b. A, $128,000; B, $72,000; C, $ - 0 -

c. A, $152,000; B, $88,000; C, $ - 0 -

d. A, $60,000; B, $40,000; C, $100,000

24. The summarized balances of the accounts of RST partnership on December 31, 2011, are as follows:



Noncash 180,000 R, Capital 90,000

S, Capital 60,000

T, Capital 30,000

Total Assets $210,000 Total Lia & Equities $210,000

The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above,

which one of the following amounts, if any, is the loss absorption potential of partner S as of

December 31, 2011?

a. $60,000

b. $70,000

c. $150,000

d. $240,000

25. The partnership of Hill, Kiner, and Polk has been dissolved and is in the process of liquidation. On





Receivables-net 20,000 Hill, Capital 50% 40,000

Inventories 60,000 Kiner, Capital 30% 70,000

Equipment-net 40,000 Polk, Capital 20% 30,000

Total assets $200,000 Total Lia & Equity $200,000

Assume that the available cash is distributed immediately, except for a $10,000 contingency fund

that is withheld pending complete liquidation of the partnership. How much cash should be paid to

each of the partners?

Hill Kiner Polk

a. $35,000 $21,000 $14,000

b. $5,000 $3,000 $4,000

c. $0 $10,000 $0

d. $0 $6,000 $4,000





Edition

16-8

Problems

16-1 The NOR Partnership is being liquidated. A balance sheet prepared prior to liquidation is presented

below:


Cash $240,000 Liabilities $ 160,000

Other Assets 300,000 Reese, Loan 60,000

Nen, Capital 180,000

Ott, Capital 60,000

Reese, Capital 80,000

Total Assets $540,000 Total Equities $540,000

Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio. All partners are personally

insolvent.

Required:

A. Prepare the journal entries necessary to record the distribution of the available cash.

B. Prepare the journal entries necessary to record the completion of the liquidation process,

assuming the other assets are sold for $120,000.

16-2 The trial balance for the ABC Partnership is as follows just before liquidation:

OTHER BALL ADLER BALL CARL

CASH ASSETS RECEIVABLE = LIABILITIES CAPITAL CAPITAL CAPITAL

180,000 625,000 90,000 150,000 420,000 270,000 180,000

Partners share profits a 50:30:20 ratio.

Required:

Prepare an advance cash distribution plan showing how available cash would be distributed.

16-3 Lewis, Nance, and Otis operate the LNO Partnership. The partnership agreement provides that the

partners share profits in the ratio of 40:40:20, respectively. Unable to satisfy the firm's debts, the

partners decide to liquidate. Account balances just prior to the start of the liquidation process are as

follows:

Debit Credit

Cash $ 90,000

Other Assets 330,000

Liabilities $165,000

Otis, Loan 36,000

Lewis, Capital 165,000

Nance, Capital 36,000

Otis, Capital 39,000

Otis, Drawing 21,000 _______

Totals $441,000 $441,000





16-9

During the first month of liquidation, other assets with a book value of $150,000 are sold for

$165,000, and creditors are paid. In the following month unrecorded liabilities of $12,000 are

discovered and assets carried on the books at a cost of $90,000 are sold for $36,000. During the

third month the remaining other assets are sold for $42,000 and all available cash is distributed.

Required:

Prepare a schedule of partnership realization and liquidation. A safe distribution of cash is to be

made at the end of the second and third months. The partners agreed to hold $30,000 in cash in

reserve to provide for possible liquidation expenses and/or unrecorded liabilities. All of the partners

are personally insolvent.

16-4 Due to the fact that the partnership had been unprofitable for the past several years, A, B, C, and D

decided to liquidate their partnership. The partners share profits and losses in the ratio of

40:30:20:10, respectively. The following balance sheet was prepared immediately before the

liquidation process began:

A B C D Partnership

Balance Sheet

Cash $ 100,000 Liabilities $250,000

Other Assets 350,000 A, Capital 55,000

B, Capital 60,000

C, Capital 50,000

D, Capital 35,000

Total Assets $450,000 Total Lia & Equities $450,000

The personal status of each partner is as follows:

Personal Personal

_Assets_ Liabilities

A $165,000 $ 120,000

B 100,000 140,000

C 180,000 160,000

D 60,000 70,000

The partnership's other assets are sold for $100,000 cash. The partnership operates in a state which

has adopted the Uniform Partnership Act.

Required:

A. Complete the following schedule of partnership realization and liquidation. Assume that a

partner makes additional contributions to the partnership when appropriate based on their

individual status.

OTHER CAPITAL

CASH ASSETS LIABILITIES __A__ __B__ __C__ __D__

$100,000 $350,000 $250,000 55,000 60,000 50,000 35,000





Edition

16-10

B. Complete the following schedule to show the total amount that will be paid to the personal

creditors.

From Distribution Total Paid

Personal from to Personal

_Assets_ _Partnership_ _Creditors_

A

B

C

D

16-5 A trial balance for the DEF partnership just prior to liquidation is given below:

Debit Credit

Cash $ 75,000

Noncash Assets 750,000

Nonpartner Liabilities $240,000

Dugan, Loan 75,000

Dugan, Capital 225,000

Elston, Capital 153,000

Flynn, Capital 132,000

Totals $825,000 $825,000

The partners share income and loss on the following basis:

Dugan 50%

Elston 30%

Flynn 20%

Required:

Prepare an advance cash distribution plan for the partners.

16-6 David, Paul, and Burt are partners in a CPA firm sharing profits and losses in a ratio of 2:2:3,

respectively. Immediately prior to liquidation, the following balance sheet was prepared:


Cash $ 100,000 Liabilities $280,000

Noncash assets 580,000 David, Capital 160,000

Paul, Capital 160,000

_______ Burt, Capital 80,000

Total Assets $680,000 Total Liabilities & Equities $680,000





16-11

Required: Assuming the noncash assets are sold for $300,000, determine the amount of cash to be distributed

to each partner. Complete the worksheet and clearly indicate the amount of cash to be distributed to

each partner in the spaces provided. No cash is available from any of the three partners.

Noncash David Paul Burt

Cash Assets Liabilities Capital Capital Capital

Beginning Bal. 100,000 580,000 280,000 160,000 160,000 80,000

16-7 Using the information from Problem 16-6, assume the noncash assets are sold for $160,000.

Determine the amount of cash to be distributed to each partner assuming all partners are personally

solvent.

16-8 The December 31, 2010, balance sheet of the Deng, Danielson, and Gibson partnership, along with

the partners’ residual profit and loss sharing ratios, is summarized as follows:


Cash $ 150,000 Accounts Payable $ 225,000

Receivables 300,000 Loan from Danielson 50,000

Inventories 375,000 Deng, Capital (20%) 250,000

Other Assets 475,000 Danielson, Capital (30%) 400,000

Gibson, Capital (50%) 375,000

Total Assets $1,300,000 Total Lia & Equities $1,300,000

The partners agree to liquidate their partnership as soon as possible after January 1, 2011 and to

distribute all cash as it becomes available.

Required: Prepare an advance cash distribution plan to show how cash will be distributed as it becomes

available.





Edition

16-12

Short Answer

1. The Uniform Partnership Act specifies specific steps in distributing available partnership assets in

liquidation. Describe the steps used to distribute partnership assets during the liquidation process.

2. An advance cash distribution plan specifies the order in which each partner will receive cash and the

dollar amount each will receive as it becomes available for distribution. Identify the four steps in the

preparation of an advance cash distribution plan.

Short Answer Questions from the Textbook

1. Why are realization gains or losses allocated to partners in their profit and loss ratios?

2. In what manner should the final cash distribution be made in partnership liquidation?

3. Why does a debit balance in a partners’ capital account create problems in the UPA order of

payment for a partnership liquidation?

4. Is it important to maintain separate accounts for a partner’s outstanding loan and capital ac-

counts? Explain why or why not.

5. Discuss the possible outcomes in the situation where the equity interest of one partner is

inadequate to absorb realization losses.

6. During a liquidation, at which point may cash be distributed to any of the partners?

7. What is “marshaling of assets”?

8. To what extent can personal creditors seek re-covery from partnership assets?

9. In an installment liquidation, why should the partners view each cash distribution as if it were

the final distribution?

10. Discuss the three basic assumptions necessary for calculating a safe cash distribution. How is

this safe cash distribution computed?

11. How are unexpected costs such as liquidation expenses, disposal costs, or unrecorded liabilities

covered in the safe distribution schedule?

12. What is the objective of the procedures used for the preparation of an advance cash distribution

plan?

13. What is the “loss absorption potential”?

14. In what order must partnership assets be distributed?





16-13

Business Ethics Question from the Textbook

You and two of your former college friends, Freeman and Oxyman, formed a partnership called

FOB, which builds and installs fabricated swimming pools. The business has been operating for 15

years and has become one of the top swimming pool companies in the area. Typically, you have

been providing the on-site estimates for the pools, while your partners do most of the onsite

construction. While visiting one of the sites, you hear a conversation between one of your partners

and a customer. Your partner is explaining that the cost will increase by $10,000 because of

unexpected rock removal. You are a bit surprised by this, since you had tested the area for rocks.

Later, back at the office, you review the core-sample results done on that job, which did not reveal

any rock. You decide to talk to the partner when he returns to the office. When the partner returns

to the office, he is arguing with someone from a local bank concerning an outstanding personal

loan.

1.What do you see as your duty with respect to the partnership?

2.What should you do? Explain your reasoning.





Edition

16-14

ANSWER KEY

Multiple Choice

1. b 8. c 15. c 22. c

2. c 9. c 16. b 23. b

3. d 10. a 17. c 24. c

4. c 11. b 18. d 25. c

5. d 12. c 19. c

6. b 13. a 20. d

7. a 14. b 21. a

Problems

16-1 A. Nen Ott Reese_

Net interest $(180,000) $(60,000) $(140,000)

Potential loss–$300,000 120,000 120,000 60,000

(60,000) 60,000 (80,000)

Potential loss–$60,000 40,000 (60,000) 20,000

Cash distribution $(20,000) $ -0- $(60,000)

Liabilities 160,000

Cash 160,000

Reese, Loan 60,000

Nen, Capital 20,000

Cash 80,000

B.

Cash 120,000

Nen, Capital ($180,000 × .40) 72,000

Ott, Capital ($180,000 × .40) 72,000

Reese, Capital ($180,000 × .20) 36,000

Other Assets 300,000

Nen, Capital ($12,000 × [40/60]) 8,000

Reese, Capital ($12,000 × [20/60]) 4,000

Ott, Capital ($72,000 - $60,000) 12,000

Nen, Capital 80,000

Reese, Capital 40,000

Cash 120,000





16-15

16-2 __Adler__ __Ball__ __Carl__

Net capital interest $420,000 $180,000 $180,000

Profit-loss ratio / .50 / .30 / .20

Loss absorption potential $840,000 $600,000 $900,000

Order of cash distribution 2 3 1

Loss Absorption Potential

Adler Ball Carl

Profit-Loss Ratio .50 .30 .20


Distribution to Cole 60,000

Balances after distribution 840,000 600,000 840,000

Distribution to Adams & Cole 240,000 240,000

Balances after distribution $600,000 $600,000 $600,000

Asset Distribution

Adler Ball Carl

Profit-Loss Ratio .50 .30 .20


Distribution to Cole 12,000

Balances after distribution 420,000 180,000 168,000

Distribution to Adams & Cole _120,000 _ 48,000

Balances after distribution $300,000 $180,000 $120,000

Remainder of asset distributions .50 .30 .20

Cash Distribution Plan

Adler Ball Carl

Order of Cash Distribution Liabilities .5 .3 .2

1. First $150,000 100%

2. Next $12,000 100%

3. Next $168,000 71% 29%

4. Remainder 50% 30% 20%





Edition

16-16

16-3 Cash Assets = Liabilities

Balances 90,000 330,000 = (165,000)

Sale of assets 165,000 (150,000)

255,000 180,000 = (165,000)

Distribute cash to creditors (165,000) 165,000

90,000 180,000 = -0-

Record liabilities (12,000)

90,000 180,000 = (12,000)

Sale of assets 36,000 (90,000)

126,000 90,000 (12,000)

Distribute cash (96,000) 12,000

30,000 90,000 -0-

Sale of assets 42,000 (90,000)

72,000 -0- -0-

Allocate Nance's deficit

72,000 -0- -0-

Distribute cash (72,000)

Balances -0- -0- -0-__

Capital Interest

Lewis Nance = Otis

Balances (165,000) (36,000) = (54,000)

Sale of assets (6,000) (6,000) (3,000)

(171,000) (42,000) = (57,000)

Distribute cash to creditors

(171,000) (42,000) = (57,000)

Record liabilities 4,800 4,800 2,400

(166,200) (37,200) = (54,600)

Sale of assets 21,600 21,600 10,800

(144,600) (15,600) (43,800)

Distribute cash 75,000 9,000

(69,600) (15,600) (34,800)

Sale of assets 19,200 19,200 9,600

(50,400) 3,600 (25,200)

Allocate Nance's deficit 2,400 (3,600) 1,200

(48,000) -0- (24,000)

Distribute cash 48,000 24,000

Balances -0- -0- -0-

Lewis Nance Otis

Capital interest (144,600) (15,600) (43,800)

Potential loss plus

cash reserve (120,000) 48,000 48,000 32,000

(96,600) 32,400 (19,800)

Allocate potential deficit (2/3) 14,400 (21,600)(1/3) 10,800

Cash distribution (75,000) -0- ( 9,000)





16-17

16-4 A.

Other

Cash Assets = Liabilities

Account Balances 100,000 350,000 = (250,000)

Sale of Assets 100,000 (350,000)

200,000 -0- = (250,000)

Allocated Debit

Balance of B* 200,000 -0- = (250,000)

Investment from C 10,000

Investment from A 45,000

255,000 -0- (250,000)

Distribute Cash (255,000) 250,000

-0- -0- -0-

Capital

A B C D

.4 .3 .2 .1

Account Balances (55,000) (60,000) (50,000) (35,000)

Sale of Assets 100,000 75,000 50,000 25,000

45,000 15,000 -0- (10,000)

Allocate Debit

Balance of B* (15,000) 10,000 5,000

45,000 -0- 10,000 (5,000)

Investment from C (10,000)

Investment from A (45,000)

-0- -0- -0- (5,000)

Distribute Cash 5,000

-0- -0- -0- -0-

*Allocate only to C and D, since A is able to contribute only $45,000 from personal assets.

B. From Distribution Total Paid

Personal from to Personal

Assets Partnership Creditors

A 120,000 120,000

B 100,000 100,000

C 160,000 160,000

D 60,000 5,000 65,000





Edition

16-18

16-5 Dugan Elston Flynn

Capital balances $225,000 $153,000 $132,000

Loan balances 75,000

Net capital interest 300,000 153,000 132,000

Profit and loss ratio / .5 / .3 / .2



Loss Absorption Potential Asset Distribution

Dugan Elston Flynn Dugan Elston Flynn

Profit & loss ratio .5 .3 .2 .5 .3 .2

Loss absorption

potential $600,000 $510,000 $660,000

Net cap. interest $300,000 $153,000 $132,000

Distrib. to Flynn 60,000

(60,000 × .2) 12,000

600,000 510,000 600,000 300,000 153,000 120,000

Distrib. to Dugan

and Flynn 90,000 90,000

(90,000 × .2) 18,000

(90,000 × .5) 45,000

$510,000 $510,000 $510,000 $255,000 $153,000 $102,000

Remainder .5 .3 .2


Order of cash distribution after

creditors have been paid:

Dugan Elston Flynn

First $12,000 100%

Next $63,000 5/7 2/7

Remainder 50% 30% 20%

16-6



Beginning Balance 100,000 580,000 280,000 160,000 160,000

80,000

Sale of Assets 300,000 (580,000) (80,000) (80,000)

(120,000

Balances 400,000 -0- 280,000 80,000 80,000

(40,000)

Pay Liabilities (280,000) (280,000)

Balances 120,000 -0- -0- 80,000 80,000

(40,000)

Allocate deficit (20,000) (20,000)

40,000

Balances 120,000 -0- -0- 60,000 60,000

-0-





16-19

Cash payment to partners (120,000) (60,000) (60,000)

Balances -0- -0- -0- -0- -0- -0-





Edition

16-20

16-7



Beginning Balance 100,000 580,000 280,000 160,000 160,000

80,000

Sale of Assets 160,000 (580,000) (120,000) (120,000)

(180,000)

Balances 260,000 -0- 280,000 40,000 40,000

(100,000)

Cash payment from Burt 100,000

100,000

Balances 360,000 -0- 280,000 40,000 40,000

-0-

Pay Liabilities (280,000) (280,000)

Balances 80,000 -0- -0- 40,000 40,000

-0-

Cash payment to partners (80,000) (40,000) (40,000)

Balances -0- -0- -0- -0- -0- -0-

16-8

Deng Danielson Gibson


Profit/Loss ratio / .20 / .30 / .50

Loss absorption potential $1,250,000 $1,500,000 $750,000


Loss Absorption Potential


Loss absorption potential $1,250,000 $1,500,000 $750,000

Distribution to Danielson (250,000) ________ ________

Balances $1,250,000 $1,250,000 $750,000

Distribution to Deng & Danielson (500,000) (500,000) _ ______

Balances $750,000 $ 750,000 $750,000

Asset Distribution



Distribution to Danielson __75,000 ___ ___

Balances 250,000 375,000 375,000

Distribution to Deng & Danielson (100,000) (150,000)

_______

Balances $150,000 $225,000 $375,000

Remainder of asset distributions 0.20 0.30 0.50





16-21



Order of Cash Distribution Liabilities 0.20 __0.30__ __0.50__

1. First $225,000 100%

2. Next $75,000 100%

3. Next $250,000 40% 60%

4. Remainder 20% 30% 50%

Short Answer

1. The first step in the liquidation process is to compute any net income/loss up to the date of dissolution.

Any net income/loss is allocated to the partners according to their profit and loss agreement. In the

next step, the assets that are not acceptable for distribution in their present form are converted into

cash, and any gains/losses realized are allocated according to the profit and loss ratio. The last step is

to distribute the available cash to creditors and partners.

2. Steps in the preparation of an advance cash distribution plan include:

a. Determine the net capital interest of each partner by combining partners’ capital accounts with any

loans to or receivables from the partners.

b. Determine the order in which the partners are to participate in cash distributions.

c. Compute the amount of cash each partner is to receive as it becomes available for distribution.

d. Prepare the cash distribution plan.

Short Answer Questions from the Textbook Solutions

1. Realization gains or losses are allocated to partners in their profit and loss ratio because the changes in

asset values are the result of risk assumed by the partnership. Also, because it may be difficult to

separate gains and losses that result from liquidation from the under- or over-statement in book values

that result from accounting policies followed in prior years.

2. The final cash distribution is based on capital balances, not on profit and loss ratios, since the capital

balance represents the partners' "residual claims" to the assets remaining after settlement of partnership

obligations.

3. Because the UPA order of payment ranks partnership obligations to a partner ahead of asset

distributions to a partner for capital investments, a debit balance in a partner's capital account will create

problems when that partner has an outstanding loan balance. Other partners will have a claim against

this partner for the amount of his/her debit balance which is considered to be an asset of the partnership

by the UPA. If the partner with a debit balance settles his/her obligation with the partnership, there is no

problem. However, if he/she can't settle, the other partners must absorb the deficit as a loss, even though

the partner with the debit balance had received cash for his/her outstanding loan balance. To avoid this

inequity, the courts have recognized the right of the partnership to offset the loan balance against the

debit capital balance.

4. Maintaining separate accounts for outstanding loan and capital accounts recognizes the legal distinction

between the two. This would be important if the liquidation is carried on over an extended period, since

the UPA provides that a partner is entitled to accrued interest on the loan balance.

5. When the equity interest of one partner is inadequate to absorb realization losses several alternative

outcomes are possible. If the partner is personally solvent, he may pay the partnership for the amount he





Edition

16-22

is liable. If he/she is personally insolvent then the other partners must absorb his/her debit balance in

their respective profit and loss ratio. If the other partners are unsure of what the partner with the debit

balance will do, but still wish to distribute cash, they can assume the worst (absorbing their share of the

debit balance) to determine what amount of cash can be safely distributed.

6. Cash should not be distributed to any partner until all liquidation losses are recognized in the accounts

or are provided for in determining a safe cash payment.

7. The classification of assets into personal and partnership categories in recognition of the rights of both

partnership creditors and creditors of the individual partners is referred to as "marshalling of assets."

8. To the extent that personal creditors do not recover from personal assets they can seek recovery from

those partnerships assets still available after partnership obligations have been met. This recovery,

however, is limited to the extent that the partner involved has a credit interest in partnership assets.

9. Because in an installment liquidation the amount of cash to be received from the unsold assets

and the resulting gain or loss is unknown, the partners should view each cash distribution as if it

were the final distribution.

10. The three assumptions upon which a safe cash distribution is determined are (1) any loan balances to

partners are offset against their capital accounts, (2) the remaining noncash assets will not generate any

more cash, and (3) any partner with a deficit capital balance will not settle his/her obligation to the

partnership. In other words, assume the worst.

The safe cash balance is computed as the difference between the current capital balances and the balance

required to maintain the above assumptions.

11. Unexpected costs are added to the book value of noncash assets. When the potential loss on the noncash

assets is allocated in the determination of a safe payment, these costs are also included.

12. The objective of the procedure is to bring the balance of the partners' capital accounts into the agreed

profit and loss ratio as soon as possible so that no one partner is placed in a better position than any

other partner.

13. The "loss absorption potential" is determined by dividing the partners' net capital balances by their

respective profit ratio. This determines the maximum amount of loss each partner can absorb.

14. The Uniform Partnership Act provides that the liabilities of the partnership shall rank in order of

payment as follows:

(1) Those owing to creditors other than partners,

(2) Those owing to partners other than for capital and profits,

(3) Those owing to partners in respect of capital,

(4) Those owing to partners in respect of profits.

Business Ethics from the Textbook Solution

Business ethics solutions are merely suggestions of points to address. The objective is to raise the students'

awareness of the topics, and to invite discussion. In most cases, there is clear room for disagreement or

conflicting viewpoints.





16-23

1) Partnership laws grant each partner the right to information about the firm’s business. This allows

each partner to monitor the firm’s activities. Given the circumstances of the case, it would be your

duty to inspect any questionable transaction. Furthermore, you should ask the partner to explain the

reason for increasing the cost by $10,000. This would give you the opportunity to raise the concern

regarding the presence of the previously undetected rock. If the additional charge is not based on

fact, the cost should be removed.

2) In the present scenario, it appears that the partner might be experiencing personal financial

pressures. However, the firm’s reputation and future implications of the action must be considered

for the benefit of the partnership. Your loyalty to your partner does not alter these responsibilities.

You may wish to find other, more constructive ways to offer assistance to your partner in meeting

his personal obligations, and surviving what may be a difficult time in his life. However, ignoring

the situation is dishonest to the client and is likely to result in more serious long-term consequences.

Reference: http://www.lrc.ky.gov/KRS/362-01/403.PDF



http://www.lrc.ky.gov/KRS/362-01/403.PDF


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Ch16_Test Bank Jeter Advanced Accounting 3rd Edition

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