When a partnership is insolvent and a partner has a deficit capital balance, that partner is legally

required to:

A) declare personal bankruptcy.

B) initiate legal proceedings against the partnership.

C) contribute cash to the partnership.

D) deliver a note payable to the partnership with specific payment terms.

E) None of the above. The partner has no legal responsibility to cover the capital deficit balance.

Answer: C

[QUESTION]

The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following
balance sheet:

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are
expected to be $12,000.

If the noncash assets were sold for $234,000, what amount of the loss would have been allocated to
Bartle?

A) $43,200.

B) $46,800.

C) $40,000.

D) $42,400.

E) $43,100.
Answer: C

Feedback: Non-Cash Assets BV $434,000 – Cash Received $234,000 = Loss on Non-Cash Assets
($200,000) X 20% = Loss to Bartle ($40,000)

[QUESTION]

The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following
balance sheet:

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are
expected to be $12,000.

The noncash assets were sold for $134,000. Which partner(s) would have had to contribute assets to the
partnership to cover a deficit in his or her capital account?

A)

B)

C)

D) Abrams and Creighton.

E) Abrams and Bartle.

Answer: D
Feedback: Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets
($300,000) X 30% = Loss to Abrams ($90,000) – Capital Balance $80,000 = Abrams’ Contribution to Cover
$10,000

Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) X 20% =
Loss to Abrams ($60,000) – Capital Balance $90,000 = Bartle Excess after Loss $30,000

Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) X 50% =
Loss to Abrams ($150,000) – Capital Balance $130,000 = Creighton’s Contribution to Cover $20,000

[QUESTION]

The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following
balance sheet:

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are
expected to be $12,000.

After the liquidation expenses of $12,000 were paid and the noncash assets sold, Creighton had a deficit
of $8,000. For what amount were the noncash assets sold?

A) $170,000.

B) $264,000.
C) $158,000.

D) $146,000.

E) $185,000.

Answer: A

Feedback: [Non-Cash Assets BV $434,000 – Cash Received $170,000] + Liquidation Expenses $12,000 =
Loss on Non-Cash Assets ($276,000) X 50% = Loss to Abrams ($138,000) – Capital Balance $130,000 =
Creighton’s Contribution to Cover $8,000

[QUESTION]

The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering
liquidation:

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for
$180,000. Liquidation expenses were $10,000.

Assume that Lewis was personally insolvent and could not contribute any assets to the partnership,
while Keaton and Meador were both solvent. What amount of cash would Keaton have received from
the distribution of partnership assets?

A) $38,000.

B) $30,000.

C) $24,000.
D) $34,000.

E) $31,600.

Answer: B

[QUESTION]

The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering
liquidation:

Cash $ 100,000 Liabilities $ 40,000

Noncash assets 210,000 Keaton, Capital 90,000

Lewis, Capital 60,000

Meador, Capital 120,000

Total $ 310,000 Total $ 310,000

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for
$60,000. How much will each partner receive in the liquidation?
Keaton Lewis Meador

A) $ 40,000 $ 26,667 $ 53,333

B) $ 24,000 $ 48,000 $ 48,000

C) $ 60,000 $ 0 $ 60,000

D) $ 0 $ 0 $120,000

E) $ 36,000 $ 12,000 $ 72,000

Answer: C

Feedback: Non-Cash Assets BV $210,000 – Cash Received $60,000 = Loss on Non-Cash Assets ($150,000)
X 20% = Loss to Keaton ($30,000) – Capital Balance $90,000 = Keaton Distribution $60,000

[QUESTION]

The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering
liquidation:

Cash $ 100,000 Liabilities $ 40,000

Noncash assets 210,000 Keaton, Capital 90,000

Lewis, Capital 60,000

Meador, Capital 120,000

Total $ 310,000 Total $ 310,000

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. The partnership feels confident it
will be able to eventually sell the noncash assets and wants to distribute some cash before paying
liabilities. How much would each partner receive of a total $60,000 distribution of cash?

Keaton Lewis Meador

A) $ 40,000 $ 0 $ 20,000

B) $ 12,000 $ 24,000 $ 24,000

C) $ 20,000 $ 13,333 $ 26,667

D) $ 60,000 $ 0 $ 0

E) $ 10,000 $ 0 $ 50,000

Answer: A

Feedback: Non-Cash Assets BV $210,000 – Assumed Cash Received $0 = Loss on Non-Cash Assets
($210,000) X 20% = Loss to Keaton ($42,000) – Capital Balance $90,000 = Keaton Tentative Distribution
$48,000

Non-Cash Assets BV $210,000 – Cash Received $0 = Loss on Non-Cash Assets ($210,000) X 40% = Loss to
Lewis ($84,000) – Capital Balance $60,000 = Lewis’ Deficit ($24,000) X 1/3 = Lewis’ Deficit Portion to
Keaton ($8,000)
Keaton Tentative Distribution $48,000 + Lewis’ Deficit Portion to Keaton ($8,000) = Keaton’s Safe
Distribution $40,000

REFERENCE: 10-01

The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account
balances:

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and losses in a
ratio of 2:4:4.

[QUESTION]

REFER TO: 10-01

What amount of cash was available for safe payments, based on the above information?

A) $30,000.

B) $85,000.

C) $25,000.

D) $35,000.

E) $40,000.
Answer: C

Feedback: Cash $90,000 – Liabilities $60,000 – Liquidation Expenses $5,000 = “Safe” Cash $25,000

[QUESTION]

REFER TO: 10-01

Before liquidating any assets, the partners determined the amount of cash available for safe payments.
How should the amount of safe cash payments be distributed?

A) in a ratio of 2:4:4 among all the partners.

B) $18,333 to Henry and $16,667 to Jacobs.

C) in a ratio of 1:2 between Henry and Jacobs.

D) $15,000 to Henry and $10,000 to Jacobs.

E) $21,667 to Henry and $3,333 to Jacobs.

Answer: D

Feedback: Non-Cash Assets BV $300,000 – Assumed Cash Received $0 = Loss on Non-Cash Assets
($300,000) X 20% = Loss to Henry ($60,000) – Capital Balance $80,000 = Henry’s Provisional Balance
$20,000

Non-Cash Assets BV $300,000 – Assumed Cash Received $0 = Loss on Non-Cash Assets ($300,000) X 40%
= Loss to Isaac ($120,000) – Capital Balance $110,000 = Isaac’s Provisional Balance ($10,000)
Feedback: Non-Cash Assets BV $300,000 – Assumed Cash Received $0 = Loss on Non-Cash Assets
($300,000) X 40% = Loss to Jacobs ($120,000) – Capital Balance $140,000 = Jacobs’ Provisional Balance
$20,000

Isaac’s Provisional Balance ($10,000) + Liquidation Expenses ($5,000) = Loss for Remaining Partners
($15,000) /3 = Henry’s Portion ($5,000) + Henry’s Provisional Balance $20,000 = Henry’s Safe Distribution
$15,000

Isaac’s Provisional Balance ($10,000) + Liquidation Expenses ($5,000) = Loss for Remaining Partners
($15,000) X 2 /3 = Jacobs’ Portion ($10,000) + Jacobs’ Provisional Balance $20,000 = Jacobs’ Safe
Distribution $10,000

[QUESTION]

REFER TO: 10-01

Before liquidating any assets, the partners determined the amount of cash for safe payments and
distributed it. The noncash assets were then sold for $120,000. The liquidation expenses of $5,000 were
paid. How would the $120,000 be distributed to the partners? (Hint: Either a predistribution plan or a
schedule of safe payments would be appropriate for solving this item.)

Henry Isaac Jacobs

A) $ 33,000 $ 36,000 $ 51,000

B) $ 28,000 $ 36,000 $ 56,000

C) $ 29,333 $ 32,000 $ 58,667

D) $ 24,000 $ 48,000 $ 48,000

E) $ 38,000 $ 26,000 $ 56,000

Answer: B

Feedback: Cash from Sale $120,000 – Liquidation Expenses $5,000 = Cash to Distribute $115,000 X 20% =
$23,000 + Henry’s Portion of Deficit Balance at Safe Distribution $5,000 = Henry’s Distribution of $28,000

REFERENCE: 10-02

The following account balances were available for the Perry, Quincy, and Renquist partnership just
before it entered liquidation:

Included in Perry’s capital balance is a $20,000 partnership loan owed to Perry. Perry, Quincy, and
Renquist shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $15,000.

All partners were solvent.

[QUESTION]

REFER TO: 10-02

What amount would noncash assets need to be sold for in order for any partner to receive some cash?

A) $185,000

B) $170,000

C) $165,000

D) $ 95,000

E) $ 90,000

Answer: D

Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: Cash $90,000 – Liquidation Expenses $15,000 – Liabilities $170,000 = Balance Needed from
Non-Cash Assets ($95,000)

[QUESTION]
REFER TO: 10-02

What would be the minimum amount for which the noncash assets must have been sold , in order for
Quincy to receive some cash from the liquidation?

A) any amount in excess of $170,000.

B) any amount in excess of $190,000.

C) any amount in excess of $260,000.

D) any amount in excess of $280,000.

E) any amount in excess of $300,000.

Answer: B

Learning Objective: 10-04

Difficulty: Hard

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

REFERENCE: 10-03

A local partnership was in the process of liquidating and reported the following capital balances:

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.

[QUESTION]

REFER TO: 10-03

How much of this money should Justice receive?

A) $15,467.

B) $15,533.

C) $17,333.

D) $16,533.

E) $15,867.

Answer: B

Learning Objective: 10-03

Difficulty: Medium
Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: Douglass’ Deficit ($14,000) X (.40/.75) = ($7,467) + Justice’s Capital Balance $23,000 = $15,533
Distribution to Justice

[QUESTION]

REFER TO: 10-03

How much of this money should Zobart receive?

A) $15,467.

B) $14,467.

C) $17,333.

D) $15,633.

E) $15,867.

Answer: A
Learning Objective: 10-03

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: Douglass’ Deficit ($14,000) X (.35/.75) = ($6,533) + Zobart’s Capital Balance $22,000 = $15,467
Distribution to Zobart

REFERENCE: 10-04

A local partnership was considering the possibility of. Capital balances at that time were as follows.
Profits and losses were divided on a 4:2:2:2 basis, respectively.

At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There
was no cash on hand at the time.
[QUESTION]

REFER TO: 10-04

If the assets could be sold for $228,000, what is the amount that Ding would receive from the
liquidation?

A) $36,000.

B) $

C) $ 2,500.

D) $38,720.

E) $67,250.

Answer: C

Learning Objective: 10-01

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: Non-Cash Assets BV $360,000 – Cash Received $228,000 = Loss on Non-Cash Assets
($132,000) X 40% = Loss to Ding ($52,800) – Capital Balance $60,000 = Ding Excess after Loss $7,200

Non-Cash Assets BV $360,000 – Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) X 20% =
Loss to Ezzard ($26,400) – Capital Balance $17,000 = Ezzard’s Deficit ($9,400) X 4/8 = Deficit to Ding’s
Capital Account ($4,700)

Ding Excess after Loss $7,200 + Ezzard’s Deficit to Ding’s Capital Account ($4,700) = Amount Ding
Receives from Liquidation $2,500

[QUESTION]

REFER TO: 10-04

If the assets could be sold for $228,000, what is the minimum amount that Laurel would receive from
the liquidation?

A) $36,000.

B) $

C) $ 2,500.

D) $38,250.

E) $67,250.

Answer: D

Learning Objective: 10-01

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: Non-Cash Assets BV $360,000 – Cash Received $228,000 = Loss on Non-Cash Assets
($132,000) X 20% = Loss to Laurel ($26,400) – Capital Balance $67,000 = Laurel Excess after Loss $40,600

Non-Cash Assets BV $360,000 – Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) X 20% =
Loss to Ezzard ($26,400) – Capital Balance $17,000 = Ezzard’s Deficit ($9,400) X 2/8 = Deficit to Laurel’s
Capital Account ($2,350)

Laurel Excess after Loss $40,600 + Ezzard’s Deficit to Laurel’s Capital Account ($2,350) = Amount Laurel
Receives from Liquidation $38,250

[QUESTION]

REFER TO: 10-04

If the assets could be sold for $228,000, what is the amount that Ezzard would receive from the
liquidation?

A) $36,000.

B) $

C) $ 2,500.

D) $38,250.

E) $67,250.

Answer: B

Learning Objective: 10-01

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: Non-Cash Assets BV $360,000 – Cash Received $228,000 = Loss on Non-Cash Assets
($132,000) X 20% = Loss to Ezzard ($26,400) – Capital Balance $17,000 = Ezzard’s Deficit ($9,400), so
Ezzard Receives $0 from Liquidation and Owes Other Partners $9,400
[QUESTION]

REFER TO: 10-04

If the assets could be sold, for $228,000 what is the amount that Tillman would receive from the
liquidation?

A) $36,000.

B) $

C) $ 2,500.

D) $38,250.

E) $67,250.

Answer: E

Learning Objective: 10-01

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: Non-Cash Assets BV $360,000 – Cash Received $228,000 = Loss on Non-Cash Assets
($132,000) X 20% = Loss to Tillman ($26,400) – Capital Balance $96,000 = Tillman Excess after Loss
$69,600

Non-Cash Assets BV $360,000 – Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) X 20% =
Loss to Ezzard ($26,400) – Capital Balance $17,000 = Ezzard’s Deficit ($9,400) X 2/8 = Deficit to Tillman’s
Capital Account ($2,350)

Tillman Excess after Loss $69,600 + Ezzard’s Deficit to Laurel’s Capital Account ($2,350) = Amount Tillman
Receives from Liquidation $67,250

[QUESTION]

Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2 basis,
respectively. They were beginning to liquidate their business. At the start of the process, capital
balances were as follows:

Which one of the following statements is true for a predistribution plan?

A) The first available $16,000 would go to Newman.

B) The first available $20,000 would go to Dancey.

C) The first available $8,000 would go to Jahn.

D) The first available $8,000 would go to Newman.

E) The first available $4,000 would go to Jahn.

Answer: A
Learning Objective: 10-05

Difficulty: Easy

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: D=$72,000; R=$32,000; N=$52,000; J=$24,000 with Losses Shared 4:2:2:2

First eliminate lowest value J=$24,000 – $24,000 = 0

D=$72,000 – $48,000 = $24,000 – $16,000 = $8,000 – $8,000 = 0

R=$32,000 – $24,000 = $8,000 – $8,000 = 0

N=$52,000 – $24,000 = $28,000 – $8,000 = $20,000 – $4,000 = $16,000

[QUESTION]

Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2 basis,
respectively. They were beginning to liquidate their business. At the start of the process, capital
balances were as follows:

Which one of the following statements is true for a predistribution plan?

A) The first available $16,000 would go to Newman. The next $12,000 would go $8,000 to Dancey and
$4,000 to Newman. The following $32,000 would be shared by Dancey, Reese, and Newman. The total
distribution would be $60,000 before all four partners share any further payments equally.

B) The first available $16,000 would go to Newman. The next $12,000 would go $8,000 to Dancey and
$4,000 to Newman. The following $32,000 would be shared by Dancey, Reese, and Newman. The total
distribution would be $60,000 before all four partners share any further payments in their profit and loss
sharing ratios.

C) The first $20,000 would go to Newman. The next $8,000 would go to Dancey. The next $12,000 would
be shared by Dancey, Reese, and Newman. The total distribution would be $40,000 before all four
partners share any further payments equally.

D) The first available $8,000 would go to Newman. The next $4,000 would be split equally between
Dancey and Newman. The following $12,000 would be shared by Dancey, Reese, and Newman. The
total distribution would be $24,000 before all four partners share any further payments equally.

E) The first available $8,000 would go to Newman. The next $4,000 would be split equally between
Dancey and Newman. The following $12,000 would be shared by Dancey, Reese, and Newman. The
total distribution would be $24,000 before all four partners share any further payments in their profit
and loss sharing ratios.

Answer: B

Learning Objective: 10-05

Difficulty: Medium
Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: D=$72,000; R=$32,000; N=$52,000; J=$24,000 with Losses Shared 4:2:2:2

First eliminate lowest value J=$24,000 – $24,000 = 0

D=$72,000 – $48,000 = $24,000 – $16,000 = $8,000 – $8,000 = 0

R=$32,000 – $24,000 = $8,000 – $8,000 = 0

N=$52,000 – $24,000 = $28,000 – $8,000 = $20,000 – $4,000 = $16,000

[QUESTION]

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.

A) 1 only

B) 1 and 2 only

C) 2 and 3 only

D) 3 only

E) 1, 2, and 3

Answer: E

Learning Objective: 10-01

Difficulty: Easy

Bloom’s: Understand

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

What accounting transactions are not recorded by an accountant during partnership liquidation?

A) The conversion of partnership assets into cash.

B) The allocation of gains and losses from sales of assets.

C) The payment of liabilities and expenses.

D) The initiation of legal action by creditors of the partnership.

E) Write-off of remaining unpaid debts.

Answer: D

Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

Which of the following statements is false concerning the partnership Schedule of Liquidation?

A) Liquidations may take a considerable length of time to complete.

B) Frequent reporting by the accountant is rarely necessary.

C) The Schedule of Liquidation provides a listing of transactions to date, current cash, and capital
balances.

D) The Schedule of Liquidation provides a listing of property still held by the partnership as well as
liabilities remaining unpaid.

E) The Schedule of Liquidation keeps creditors and partners apprised of the results of the process of
dissolution.

Answer: B

Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

What is the preferred method of resolving a partner’s deficit balance, according to the Uniform
Partnership Act?

A) Partners never have a deficit balance.

B) The other partners must contribute personal assets to cover the deficit balance.

C) The partnership must sell assets in order to cover the deficit balance.

D) The partner with a deficit balance must contribute personal assets to cover the deficit balance.

E) The partner with a deficit balance contributes personal assets only if those personal assets exceed
personal liabilities.

Answer: D

Learning Objective: 10-03

Difficulty: Easy

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

Which of the following statements is true concerning the distribution of safe payments?

A) The distribution of safe payments assumes that any capital deficit balances will prove to be a total loss
to the partnership.

B) Safe payments are equal to the recorded capital balances of partners with positive capital balances.

C) The distribution of safe payments may only be made after all liabilities have been paid.

D) In computing safe payments, partners with positive capital balances are assumed to absorb an equal
share of any deficit balance(s).

E) There are no safe payments until the liquidation is complete.

Answer: A

Learning Objective: 10-03

Difficulty: Medium

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

Which one of the following statements is correct?

A) If a partner of a liquidating partnership is unable to pay a capital account deficit, the deficit is
absorbed by the other partners in the profit and loss ratio of those partners.

B) Gains and losses from the sale of noncash assets are divided in the ratio of the partners’ capital
account balances if there is no income-sharing plan in the partnership contract.

C) A loan receivable from a partner is added to the partner’s capital account balance in the preparation
of a cash distribution plan.

D) Partners may not receive any cash before partnership creditors receive cash when liquidating a
partnership.

E) All cash payments to partners are made using their profit and loss ratio when liquidating the
partnership.

Answer: A

Learning Objective: 10-03

Difficulty: Easy

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

Which item is not shown on the schedule of partnership liquidation?

A) Current cash balances.

B) Property owned by the partnership.

C) Liabilities still to be paid.

D) Personal assets of the partners.

E) Current capital balances of the partners.

Answer: D

Learning Objective: 10-02

Difficulty: Easy

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

Harding, Jones, and Sandy is in the process of liquidating and the partners have the following capital
balances; $24,000, $24,000, and ($9,000) respectively. The partners share all profits and losses 16%,
48%, and 36%, respectively. Sandy has indicated that the ($9,000) deficit will be covered with a
forthcoming contribution. The remaining partners have requested to immediately receive $20,000 in
cash that is available. How should this cash be distributed?

A) Harding $5,000; Jones $15,000.

B) Harding $17,000; Jones $3,000.

C) Harding $11,154; Jones $8,846.

D) Harding $14,297; Jones $5,703.

E) Harding $12,500; Jones $7,500.

Answer: B

Learning Objective: 10-05

Difficulty: Hard

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: Harding = $72,000; Jones = $32,000; Sandy = $52,000 beginning balances with Losses Shared
16:48:36

First eliminate Sandy’s negative capital loss to Harding & Jones

Losses shared 16/64 & 48/64 or 25% & 75%

Harding = $24,000 – ($9,000 X 25%) $2,250 = $21,750 – $5,750 = $16,000 + ($4,000 X 25%) $1,000 =
$17,000

Jones = $24,000 – ($9,000 X 75%) $6,750 = $17,250 – $17,250 = 0 + ($4,000 X 75%) $3,000 = $3,000

[QUESTION]

Gonda, Herron, and Morse is considering possible liquidation because partner Morse is personally
insolvent. The partners have the following capital balances: $60,000, $70,000, and $40,000, respectively,
and share profits and losses 30%, 45%, and 25%, respectively. The partnership has $200,000 in noncash
assets that can be sold for $150,000. The partnership has $10,000 cash on hand, and $40,000 in
liabilities. What is the minimum that partner Morse’s creditors would receive if they have filed a claim
for $50,000?

A) $

B) $27,500.

C) $45,000.

D) $47,500.

E) $50,000.

Answer: B
Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: M = $40,000 – Loss on Non-Cash Asset Sale ($50,000 X .25) $12,500 = $27,500

REFERENCE: 10-05

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.

[QUESTION]

REFER TO: 10-05

How would $90,000 be distributed?

White Sands Luke

A) $ 15,000 $ 25,000 $ 50,000

B) $ 0 $ 18,947 $ 71,053

C) $ 0 $ 40,000 $ 50,000

D) $ 0 $ 10,588 $ 79,412

E) $ 27,000 $ 18,000 $ 45,000

Answer: C

Learning Objective: 10-05

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic
AICPA BB: Legal

AICPA FN: Measurement

Feedback:

Sands: $20,000 + $20,000 ($90,000 – $20,000 = $70,000 x 2/7) = $40,000

Luke $50,000 ($90,000 – $20,000 = $70,000 x 5/7)

[QUESTION]

REFER TO: 10-05

How would $200,000 be distributed?

White Sands Luke

A) $ 60,000 $ 40,000 $ 100,000

B) $ 6,000 $ 44,000 $ 150,000

C) $ 48,148 $ 65,432 $ 86,420

D) $ 12,000 $ 68,000 $ 120,000

E) $ 60,000 $100,000 $ 40,000

Answer: D

Learning Objective: 10-05

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback:

White: ($200,000 – $20,000 – $140,000) x 30% = $12,000

Sands: $20,000 + $40,000 ($140,000 x 2/7) + $8,000 (($200,000 – $20,000 – $140,000) x 20%) = $68,000

Luke $100,000 ($140,000 x 5/7) + $20,000 (($200,000 – $20,000 – $140,000) x 50%) = $120,000
REFERENCE: 10-06

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.

[QUESTION]

REFER TO: 10-06

If the building is sold for $50,000, how much cash will Harry receive in the final settlement?

A) $ 5,000.

B) $ 9,000.

C) $18,000.

D) $28,000.

E) $55,000.

Answer: D

Learning Objective: 10-02

Difficulty: Easy

Bloom’s: Apply
AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: H = $40,000 – Loss on Blg ($30,000 X .40) $12,000 = $28,000

[QUESTION]

REFER TO: 10-06

If the building is sold for $50,000, how much cash will Waters receive in the final settlement?

A) $ 5,000.

B) $ 9,000.

C) $18,000.

D) $28,000.

E) $55,000.

Answer: B

Learning Objective: 10-02

Difficulty: Easy

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: W = $15,000 – Loss on Blg ($30,000 X .20) $6,000 = $9,000

REFERENCE: 10-07

A local partnership has assets of cash of $130,000 and land recorded at $700,000. All liabilities have
been paid and the partners are all personally insolvent. The partners’ capital accounts are as follows
Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The partners share profits and losses 5:3:2.

[QUESTION]

REFER TO: 10-07

If the land is sold for $450,000, how much cash will Roberts receive in the final settlement?

A) $

B) $ 30,000.

C) $217,500.

D) $362,500.

E) $502,500.

Answer: D

Learning Objective: 10-03

Difficulty: Easy

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: R=$500,000; F=$300,000; M=$30,000 with Losses Shared 5:3:2

First eliminate M Balance of $30,000 in $250,000 Loss

Losses now shared 5/8 & 3/8

R=$500,000 – ($220,000 X 5/8) $137,500 = $362,500

F=$300,000 – ($220,000 X 3/8) $82,500 = $217,500

[QUESTION]

REFER TO: 10-07

If the land is sold for $450,000, how much cash will Mones receive in the final settlement?

A) $

B) $ 15,000.

C) $300,000.

D) $217,500.

E) $362,500.

Answer: A

Learning Objective: 10-03

Difficulty: Easy

Bloom’s: Apply
AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Feedback: R=$500,000; F=$300,000; M=$30,000 with Losses Shared 5:3:2

M Share of $250,000 Loss X 20% = $50,000; Capital Balance of $30,000 is Lost; Balance = 0

Essays:

[QUESTION]

Matching

(1.) The schedule of liquidation

(2.) Deficit capital balances

(3.) Safe capital balances

(4.) Predistribution plan

(A.) A schedule should be produced periodically by the accountant to disclose losses and gains that have
been incurred, remaining assets and liabilities, and current capital balances.

(B) At the start of a liquidation, this document provides guidance for all payments made to the partners
throughout the liquidation

(C.) One or more partners may have a negative capital balance often as a result of losses incurred in
disposing of assets.

(D.) A provision for an equitable distribution of assets during liquidation.

Answer: (1) A, (2) C, (3) D, (4) B

Learning Objective: 10-02

Learning Objective: 10-03

Learning Objective: 10-04

Difficulty: Easy

Bloom’s: Understand

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

What is the role of the accountant during the liquidation process?

Answer: The accountant works to ensure the equitable treatment of all parties involved in the
liquidation. The accountant is responsible for recording and reporting the conversion of partnership
assets into cash, the allocation of gains and losses, the payment of liabilities and expenses, and any
remaining unpaid debts and distributions to the partners.

Learning Objective: 10-01

Difficulty: Easy

Bloom’s: Understand

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was insolvent
and did not have enough assets to pay all his personal creditors. Under what conditions might Rayne’s
personal creditors have claimed some of the partnership assets?

Answer: Rayne’s personal creditors might have claimed some partnership assets if Rayne had a credit
balance in his capital account.

Learning Objective: 10-03

Difficulty: Easy

Bloom’s: Analyze

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

The Arnold, Bates, Carlton, and Delbert partnership was liquidating. It had paid all its liabilities and had
some assets yet to be sold. The partners had capital account balances of ($50,000), $90,000, $110,000,
and $130,000. There was $40,000 cash available for distribution to the partners. What procedures
would be followed to determine the amount of cash that could safely be distributed to each partner?

Answer: To determine the amount of cash that can be safely distributed to each partner, one should
assume that maximum losses will be realized on the disposal of noncash assets, estimate liquidation
expenses, and assume that any partners with deficit balances cannot pay them.

Learning Objective: 10-03

Difficulty: Medium

Bloom’s: Understand

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

Xygote, Yen, and Zen were partners who were liquidating their partnership. Each partner has a deficit
balance in their respective capital account. All assets from the partnership have been liquidated and all
of the liabilities had been paid. How should any additional cash coming into the partnership be
distributed to the partners?

Answer: All partners with deficits in their capital accounts should transfer personal assets into the
partnership to eliminate their deficits in the capital accounts. Then each partner should receive any
additional cash equal to his or her profit sharing ratio or specific treatment as noted in the partnership
agreement based on the source of the cash inflow.

Learning Objective: 10-03

Difficulty: Easy

Bloom’s: Understand

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

What is the purpose of a predistribution plan?

Answer: The purpose of a predistribution plan is to determine how assets should be distributed to
creditors and partners as the partnership’s noncash assets are realized. A predistribution plan would be
particularly useful for a liquidation that takes a long time to complete.

Learning Objective: 10-05

Difficulty: Easy
Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

What financial schedule would be prepared for a partnership that has begun liquidation but has not yet
completed the process? What is the purpose of this schedule?

Answer: The appropriate financial schedule is a schedule of liquidation. The purpose of this schedule is
to report to partners and creditors on the progress of the liquidation to date, summarizing the various
transactions that have occurred.

Learning Objective: 10-04

Difficulty: Easy

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

What events or circumstances might force the termination of a partnership and liquidation of its assets?

Answer: There are many events or situations that can lead to the termination of a partnership and the
liquidation of its assets. These circumstances include insolvency of the partnership and dissension
among the partners. A partnership would be liquidated if it was formed to accomplish a specific purpose
and has no further usefulness. Liquidation of the partnership may be required whenever there is a large
claim against the partnership’s assets. Such a claim might occur through the loss of a lawsuit and the
payment of a large judgment, the insolvency of a partner, or the death or retirement of a partner.

Learning Objective: 10-01

Difficulty: Easy

Bloom’s: Understand

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

For a partnership, how should liquidation gains and losses be accounted for?

Answer: Gains and losses on the liquidation of assets should be allocated to the partners’ capital
accounts using the profit and loss sharing ratio.

Learning Objective: 10-02

Difficulty: Easy

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

What should occur when a solvent partner has a deficit balance?

Answer: The partner should contribute personal assets to the extent of the deficit balance.

Learning Objective: 10-03

Difficulty: Easy

Bloom’s: Understand

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

Why is a Schedule of Liquidation prepared?

Answer: To provide information to the creditors and partners about liquidation transactions to date,
property still held by the partnership, liabilities remaining to be paid, and current cash and capital
balances.

Learning Objective: 10-04

Difficulty: Medium
Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

What is a safe cash payment?

Answer: A safe cash payment is a fair allocation of funds made available before liquidation has been
completed. Safe cash payments are based on the assumption that any capital deficits will prove to be a
total loss to the partnership and must be absorbed by the remaining partners based on their relative
profit and loss ratio.

Learning Objective: 10-03

Difficulty: Medium

Bloom’s: Remember

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Problems:

[QUESTION]

The Albert, Boynton, and Creamer partnership was in the process of liquidating its assets and going out
of business. Albert, Boynton, and Creamer had capital account balances of $80,000, $120,000, and
$200,000, respectively, and shared profits and losses in the ratio of 1:3:2. Equipment that had cost
$90,000 and had a book value of $60,000 was sold for $24,000 cash.

Required:

Prepare the appropriate journal entry to record the sale of the equipment, distributing any gain or loss
directly to the partners.

Answer:

Cash 24,000

Accumulated Depreciation 30,000

Albert, Capital 6,000

Boynton, Capital 18,000

Creamer, Capital 12,000

Equipment 90,000

Learning Objective: 10-02

Difficulty: Easy

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

The Amos, Billings, and Cleaver partnership had two assets: (1) cash of $40,000 and (2) an investment
with a book value of $110,000. The ratio for sharing profits and losses is 2:1:1. The balances in the
capital accounts were:

Amos, capital: $45,000

Billings, capital: $75,000

Cleaver, capital: $30,000

Required:

If the investment was sold for $80,000, how much cash would each partner have received?

Answer:

Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

REFERENCE: 10-08

As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and
percentages for the sharing of profits and losses:
Cash $ 80,000

Noncash assets 205,000

Liabilities 47,000

Canton, capital (30%) 138,000

Yulls, capital (40%) 119,500

Garr, capital (30%) (19,500)

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were
expected to be $10,000.

[QUESTION]

REFER TO: 10-08

How much of the existing cash balance could be distributed safely to partners at this time?

Answer:

The amount of cash that could be distributed to partners at this time = current cash balance $80,000 –
liabilities $47,000 – estimate for liquidation expenses $10,000 = $23,000.

Learning Objective: 10-01

Difficulty: Easy

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-08

How much cash should each partner receive at this time, pursuant to a proposed schedule of
liquidation?

Answer: To determine the amount to be distributed to partners, assuming maximum losses on

liquidation:

Canton Yulls Garr Total

Capital balances $138,000 $119,500 $(19,500) $238,000

Loss on sale of assets (61,500) (82,000) (61,500) (205,000)

Liquidation expenses (3,000) (4,000) (3,000) (10,000)

Balances $73,500 $ 33,500 $(84,000) $ 23,000

Allocation of deficit (36,000) (48,000) 84,000 0

Balances $ 37,500 $(14,500) $ 0 $ 23,000

Allocation of deficit (14,500) 14,500_______ ______

Balance$ 23,000 $ 0 $ 0 $ 23,000

The entire $23,000 should be distributed to Canton.

Learning Objective: 10-04

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]
REFER TO: 10-08

What would be the maximum amount Garr might have to contribute to the partnership to eliminate a
deficit balance in his account?

Answer:

Canton Yulls Garr Total

Capital balances $138,000 $119,500 $(19,500) $238,000

Loss on sale of assets (61,500) (82,000) (61,500) (205,000)

Liquidation expenses (3,000) (4,000) (3,000) (10,000)

Balances $73,500 $ 33,500 $(84,000) $ 23,000

The maximum amount that Garr might have to contribute to eliminate a deficit would be $84,000,
assuming that the noncash assets cannot be sold and become a total loss to the partnership.

Learning Objective: 10-03

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-08

53. If the noncash assets are sold for $105,000, what would be the maximum amount of cash that
Canton could expect to receive?

Answer:

The maximum amount that Canton could be expected to recover is $105,000. This assumes that Garr
can cover his deficit:

Canton Yulls Garr Total

Capital balances $138,000 $119,500 $(19,500) $238,000

Loss on sale of assets (30,000) (40,000) (30,000) (100,000)

Liquidation expenses (3,000) (4,000) (3,000) (10,000)

Balances $105,000 $ 75,500 $(52,500) $ 128,000

Learning Objective: 10-03

Difficulty: Medium
Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities,
$338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur,
Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners.

Required:

Who would have received the $10,400?

Answer:

Since the partnership had total capital of $455,000, the $10,400 that was available would have indicated
maximum potential losses of $444,600.

The $10,400 would have gone to Garfield ($8,840) and Arthur ($1,560).
Learning Objective: 10-05

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

A partnership held three assets: Cash, $13,000; Land, $45,000; and a Building, $65,000. There were no
recorded liabilities. The partners anticipated that expenses required to liquidate their partnership would
amount to $6,000. Capital balances were as follows:

King, Capital: $32,700

Murphy, Capital: 36,400

Madison, Capital: 26,000

Pond, Capital: 27,900

The partners shared profits and losses 30:30:20:20, respectively.

Required:

Prepare a proposed schedule of liquidation, showing how cash could be safely distributed to the
partners at this time.

Answer:

Murphy received $700, Madison received $2,200, and Pond received $4,100.

King MurphyMadison Pond

Recorded balances $32,700 $36,400 $26,000 $27,900

Maximum losses on land and

building ($110,000)

allocated on a 3:3:2:2 basis (33,000) (33,000) (22,000) (22,000)

Estimated liquidation

expenses

($6,000) allocated 3:3:2:2 ( 1,800) ( 1,800) ( 1,200) ( 1,200)

Potential balances $( 2,100) $ 1,600$ 2,800$ 4,700

Potential loss from King

($2,100) allocated 3:2:2 2,100 ( 900) ( 600) ( 600)

Cash distributions $ 0 $ 700 $ 2,200$ 4,100

Learning Objective: 10-04

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

REFERENCE: 10-09

On January 1, 2013, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of
5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows:

Debit Credit

Cash $ 23,400

Accounts Receivable 85,800

Inventory 67,600

Machinery and equipment, net 245,700

Won, loan 39,000

Accounts payable $ 68,900

Cadel, loan 26,000

Won, capital 153,400

Cadel, capital 117,000

Dax, capital 96,200

Totals$ 461,500 $ 461,500

The partners planned a program of piecemeal conversion of the business assets to minimize liquidation
losses. All available cash, less an amount retained to provide for future expenses, was to be distributed
to the partners at the end of each month. A summary of liquidation transactions follows:

January $66,300 was collected on the accounts receivable; the balance was deemed to

be uncollectible.

$49,400 was received for the entire inventory.

$2,600 in liquidation expenses were paid.

$65,000 was paid to outside creditors, after receiving a $3,900 credit memo

from a creditor on January 11.

Cash of $13,000 was retained at the end of the month to cover unrecorded

liabilities and anticipated expenses. The balance of cash was distributed to

the partners.

February $3,900 in liquidation expenses were paid.

$7,800 in cash was retained at the end of the month to cover unrecorded

liabilities and anticipated expenses.

March $189,800 was received on the sale of all machinery and equipment.
$6,500 in final liquidation expenses were paid.

No cash was retained as all cash was distributed to partners.

[QUESTION]

REFER TO: 10-09

Prepare a schedule to calculate the safe payments to be made to the partners at the end of January.

Answer:

Won, Cadel, and Dax Partnership

Safe Installment Payments to Partners

January 31, 2013

Won Cadel Dax Total

Profit and loss ratio 50% 30% 20% 100%

Preliquidation capital balances $153,400 $117,000 $96,200 $366,600

Add (deduct) loans (39,000) 26,000 0 (13,000)

Subtotals 114,400 143,000 96,200 353,600

January actual losses (Schedule 1) (18,200) (10,920) (7,280) (36,400)

Partnership equity January 31, 2013 96,200 132,080 88,920 317,200

Potential losses (Schedule 1) (129,350) (77,610) (51,740) (258,700)

Subtotals (33,150) 54,470 37,180 58,500

Potential loss – Won’s deficit balance 33,150 (19,890) (13,260) 0

Safe payments to partners: $ 0 $ 34,580 $23,920 $ 58,500

Proof of cash: Beginning $23,400 + collect A/R $66,300 + collect on inventory $49,400 – paid liq.
expenses $2,600 – paid A/P $65,000 – cash retained $13,000 = $58,500.

Schedule 1

Calculation of Actual and Potential Liquidation Losses

January 2013

Actual Potential

Losses Losses

Collection of accounts receivable ($85,800 – $66,300) $19,500

Sale of inventory ($67,600 – $49,400) 18,200

Liquidation expenses 2,600

Liability reduction from January credit memo (3,900)

Machinery and equipment, net $245,700

Potential unrecorded liabilities and anticipated expenses______ 13,000

Totals $36,400 $258,700

Learning Objective: 10-04

Difficulty: Hard

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-09

Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of
February.

Answer:

Won, Cadel, and Dax Partnership

Safe Installment Payments to Partners

February 28, 2013

Won Cadel Dax Total

Profit and loss ratio 50% 30% 20% 100%

Partnership equity January 31, 2013 $96,200 $132,080 $88,920 $317,200

Safe payments to partners, January 31 0 (34,580) (23,920) (58,500)

February liquidation expenses ( 1,950) ( 1,170) ( 780) ( 3,900)

Partnership equity February 28, 2013 94,250 96,330 64,220 254,800

Potential liabilities and expenses ( 3,900) ( 2,340) ( 1,560) ( 7,800)

Potential loss on machinery and equipment (122,850) ( 73,710) ( 49,140)

( 245,700)

Subtotals ( 32,500) 20,280 13,520 1,300

Potential loss – Won’s deficit 32,500( 19,500) ( 13,000) 0

Safe payments to partners $ 0 $ 780 $ 520 $ 1,300

Proof of cash: Beginning $13,000 – liq. expenses paid $3,900 – cash retained $7,800 = $1,300

Learning Objective: 10-04

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-09

Prepare a schedule to calculate the safe payments to be made to the partners at the end of March.

Answer:

Won, Cadel, and Dax Partnership

Safe Installment Payments to Partners

March 31, 2013

Won Cadel Dax Total

Profit and loss ratio 50% 30% 20% 100%

Partnership equity February 28, 2013 $94,250 $96,330 $64,220 $254,800

Safe payments to partners, February 28 0 (780) (520) (1,300)

Loss on sale of machinery and

Equipment ($245,700 – $189,800) (27,950) (16,770) (11,180) (55,900)

Liquidation expenses (3,250) (1,950) (1,300) (6,500)

Safe payments to partners $63,050 $76,830 $51,220 $191,100

Learning Objective: 10-04

Difficulty: Medium

Bloom’s: Apply
AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

REFERENCE: 10-10

Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits
and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal
financial problems, and is insolvent. To satisfy Williams’ creditors, the partnership has decided to
liquidate.

The following balance sheet has been produced:

Cash $ 10,000 Liabilities $ 80,000

Noncash assets 227,000 Hardin, capital 96,000

Sutton, capital 45,000

Williams, capital 16,000

Total assets $ 237,000 Total liabilities and capital $ 237,000

During the liquidation process, the following transactions take place:

– Noncash assets are sold for $116,000.

– Liquidation expenses of $12,000 are paid. No further expenses are expected.

– Safe capital distributions are made to the partners.

– Payment is made of all business liabilities.

– Any deficit capital balances are deemed to be uncollectible.

[QUESTION]

REFER TO: 10-10

Develop a predistribution plan for this partnership, assuming $12,000 of liquidation expenses are
expected to be paid.

Answer:

(1.) The first $92,000 pays for liabilities and liquidation expenses.

(2.) The next $28,500 goes to Hardin.

(3.) The next $32,500 goes to Hardin (60%) and Sutton (40%).
(4.) The remainder goes to all three partners in their 3:2:1 ratio.

Hardin Sutton Williams

Beginning balances $ 96,000 $ 45,000 $ 16,000

Assumed $96,000 loss (Schedule A) ( 48,000) (32,000) (16,000)

Subtotal $ 48,000 $ 13,000 $ 0

Assumed $32,500 loss (Schedule B) ( 19,500) (13,000) 0

Total $ 28,500 $ 0 $ 0

Schedule A:

Partner

Capital

Balance/Loss Maximum Loss that

Allocation Can Be Absorbed

Harding $96,000/ 1/2 $192,000

Sutton $45,000/ 1/3 $135,000

Williams $16,000/ 1/6 $ 96,000

Schedule B:

Partner
Capital

Balance/Loss Maximum Loss that

Allocation Can Be Absorbed

Harding $48,000/60% $ 80,000

Sutton $13,000/40% $ 32,500

Learning Objective: 10-05

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-10

Compute safe cash payments after the noncash assets have been sold and the liquidation expenses have
been paid.

Answer:

Safe Cash Payments:

Hardin Sutton Williams

Beginning balances $ 96,000 $ 45,000 $ 16,000

$12,000 liquidation expenses ( 6,000) ( 4,000) ( 2,000)

$111,000 loss on sale of assets ( 55,500) (37,000) (18,500)

Subtotals $ 34,500 $ 4,000 ( 4,500)

Absorption of deficit balance 3:2 ( 2,700) ( 1,800) 4,500

Safe Cash Payments $34,000 $ 31,800 $ 2,200$ 0

Learning Objective: 10-03

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-10

Prepare journal entries to record the actual liquidation transactions.

Answer:

Cash 116,000

Hardin, capital 55,500

Sutton, capital 37,000

Williams capital 18,500

Noncash assets 227,000

Hardin, capital 6,000

Sutton, capital 4,000

Williams capital 2,000

Cash 12,000

Hardin, capital 31,800

Sutton, capital 2,200

Cash 34,000

Liabilities 80,000

Cash 80,000
Hardin, capital $ 2,700

Sutton, capital 1,800

Williams, capital $ 4,500

Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September 30, 2013.
After realization of a portion of the noncash assets, the capital account balances were Jones $50,000;
Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000
were on hand. Creditors’ claims totaled $30,000. Jones, Marge, and Tate shared net income and losses in
a 2:1:1 ratio, respectively.
Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at
this time, assuming that no partner is solvent.

Answer:

Learning Objective: 10-04

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

REFERENCE: 10-11

The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash assets were sold
for $60,000. Creditors were paid in full, partners were paid $35,000, and the balance of cash was
retained pending future developments.

[QUESTION]
REFER TO: 10-11

Record the journal entry for the sale of the noncash assets.

Answer:

Cash 60,000

Rogers, Capital 10,000

Dennis, Capital 6,000

Berry, Capital 4,000

Assets 80,000

To record sale of noncash of assets at a loss of $20,000, divided in 5:3:2 ratio

Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-11

Record the journal entry for payment of outstanding liabilities to the creditors.

Answer:

Liabilities 20,000

Cash 20,000

To record payment to creditors.

Learning Objective: 10-02

Difficulty: Easy

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]
REFER TO: 10-11

Determine the cash to be retained and prepare a schedule to distribute $35,000 cash to the partners.

Answer:

Cash balance = $40,000 + sale noncash assets $60,000 – paid liabilities $20,000 – partners paid $35,000
= $45,000 ending balance retained for

future expenses.

Distribution of $35,000:

Rogers Dennis Berry

Capital (including Rogers’s

loan of $10,000)

before liquidation $45,000 $30,000 $25,000

Actual loss on realization of assets (10,000) (6,000) (4,000)

Balances $35,000 $24,000 $21,000

Retained cash for future expenses $45,000 (22,500) (13,500) (9,000)

Cash payments $35,000 $12,500 $10,500 $12,000

Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Apply
AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-11

Record the journal entry for the cash distribution to the partners.

Answer:

Loan Payable to Rogers 10,000

Rogers, Capital 2,500

Dennis, Capital 10,500

Berry, Capital 12,000

Cash 35,000

To record payment to partners, computed as shown above.

Learning Objective: 10-02

Difficulty: Medium
Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

REFERENCE: 10-12

The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The balance sheet of
the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively.

DONALD, CHIEF, & BERRY LLP

Balance Sheet

August 1, 2013

Assets Liabilities & Partners’ Capital

Cash $ 60,000 Trade accounts payable $130,000

Loan receivable from Donald 40,000 Loan payable to Chief 60,000

Other assets 500,000 Donald, capital 140,000

Chief, capital 160,000

_______ Berry, capital 110,000

Total $600,000 Total $600,000

The disposal of Other Assets with a carrying amount of $200,000 realized $140,000, and all available
cash was distributed.
[QUESTION]

REFER TO: 10-12

Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2013, to record the realization of
Other Assets.

Answer:

Cash 140,000

Donald, Capital 15,000

Chief, Capital 27,000

Berry, Capital 18,000

Other Assets 200,000

To record realization of assets at a loss of $60,000, divided among Donald, Chief, and Berry.

Learning Objective: 10-02

Difficulty: Medium

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-12

Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2013, to record payment of
liabilities.

Answer:

Trade accounts payable 130,000

Cash 130,000

To record payment of liabilities.

Learning Objective: 10-02

Difficulty: Easy

Bloom’s: Apply

AACSB: Analytic
AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-12

Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2013, to record the offset of the
loan receivable from Donald.

Answer:

Donald, Capital 40,000

Loan receivable from Donald 40,000

To offset Donald’s loan account against Donald’s capital account.

Learning Objective: 10-02

Difficulty: Easy

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

[QUESTION]

REFER TO: 10-12

Prepare the schedule to compute the cash payments to the partners.

Answer:

Donald Chief Berry

Capital account balances $140,000 $160,000 $110,000

Add: Loan payable to Chief 60,000

Less: Loan receivable from Donald (40,000)

Loss on realization of assets, $60,000 (15,000) ( 27,000) (18,000)

Balances $ 85,000 $193,000 $ 92,000

Maximum potential loss of remaining noncash assets, $300,000 in 25:45:30 ratio

(75,000)

( 135,000)

(90,000)

Cash payment $ 10,000 $ 58,000 $ 2,000

Total cash of $70,000 can be safely distributed. Beginning cash $60,000 + sale of assets $140,000 –
payment of liabilities $130,000 = $70,000.

Learning Objective: 10-04

Difficulty: Hard

Bloom’s: Apply

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement