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 partners 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.

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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.
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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 partners profit and loss agreement.
b. the individual partner's capital accounts, increased by
partner loans to the partnership.
c. the individual partners capital accounts, increased by
partnership loans to the partners and decreased by partner
loans to the partnership.
d. the individual partners 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 partners 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
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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.
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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.

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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.
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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.

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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.
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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?

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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

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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.

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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.

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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?
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