Deck 14: Partnerships: Ownership Changes and Liquidations

Question 1

Callie is admitted to the Adams & Beal Partnership under the goodwill method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. Adams & Beal shared profits and losses at a ratio of 80/20, respectively.
Which of the following goodwill amounts would be recorded?

A)$25,000 to Callie capital
B)$70,000 to Callie capital
C)$14,000 decrease to Beal capital
D)$56,000 increase to Adams capital

Answer 1

D
Adams goodwill will be 70,000 x 80% = 56,000 which will increase his capital balance

Question 2

If goodwill is traceable to the previous partners, it is

A)allocated among the previous partners according to their interest in capital.
B)allocated among the previous partners only if there are no other assets to be revalued.
C)allocated among the previous partners according to their original profit-and-loss-sharing percentages.
D)not possible for goodwill to also be traceable to the incoming partner.

Answer 2

C
Goodwill that is traceable to the previous partners is allocated to those partners based upon the profit-sharing percentages of the previous partnership.

Question 3

Assume that the capital of an existing partnership is $130,000 and that existing assets are overvalued by $10,000. If an incoming partner acquires a 25% interest in the partnership for $37,000, goodwill traceable to the incoming partner is ____.

A)$2,250
B)$4,750
C)$3,000
D)$5,000

Answer 3

A
New Partnership Capital = 130,000 - 10,000 + 37,000 = $157,000
New Partner Capital = 25%  157,000 = 39,250
Bonus to the new partner = 39,250 - 37,000 = 2,250

Question 4

Changes in partnership ownership are presumed to be arm's length transactions that may require which of the following actions?

A)recognitions of goodwill to existing partners
B)revaluation of existing partnership assets
C)recognition of goodwill or other intangible assets attributable to the incoming partner
D)all of the above are possible

Question 5

Under the bonus method, when a new partner is admitted to the partnership, the total capital of the new partnership is equal to:

A)the book value of the previous partnership plus the fair market value of the consideration paid to the existing partnership by the incoming partner
B)the book value of the previous partnership plus any necessary asset write ups from book value to market value plus the fair market value of the consideration paid to the existing partnership by the incoming partner
C)the book value of the previous partnership minus any asset write downs from book to market value plus the fair market value of the consideration paid to the existing partnership by the incoming partner
D)the fair market value of the new partnership as implied by the value of the incoming partner's consideration in exchange for an ownership percentage in the new partnership

Question 6

The admission of a new partner under the bonus method will result in a bonus to

A)the old partners only.
B)the new partner only.
C)either the new partner or the old partners, but not both.
D)none of the above.

Question 7

If a bonus is traceable to the previous partners rather than an incoming partner, it is allocated among the partners according to the

A)profit-sharing percentages of the previous partnership.
B)profit-sharing percentages of the new partnership.
C)capital percentages of the previous partners.
D)capital percentages of the new partnership.

Question 8

Callie is admitted to the Adams & Beal Partnership under the goodwill method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. What will be Callie's initial capital balance?

A)$36,000
B)$50,000
C)$35,000
D)$45,000

Question 9

Assume that the capital of an existing partnership is $130,000 and that existing assets are overvalued by $10,000. If an incoming partner acquires a 25% interest in the partnership for $37,000, goodwill traceable to the incoming partner is ____.

A)$2,250
B)$9,667
C)$3,000
D)$5,000

Question 10

Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. Adams & Beal shared profits and losses at a ratio of 80/20, respectively.
Which of the following bonus amounts would be recorded?

A)$14,000 to Callie capital
B)$2,800 increase to Beal capital
C)$2,800 decrease to Beal capital
D)$7,000 increase to Adams capital

Question 11

When a new partner is admitted to a partnership under the goodwill method, an original partner's capital account may be adjusted for

A)a proportionate share of the incoming partner's investment.
B)his or her share of previously unrecorded intangible assets traceable to the original partners.
C)his or her share of previously unrecorded intangible assets traceable to the incoming partner.
D)none of the above.

Question 12

Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. What will be Callie's initial capital balance?

A)$36,000
B)$50,000
C)$35,000
D)$30,000

Question 13

If goodwill is traceable only to the previous partners,

A)the book value of the previous partnership plus the investment of the incoming partner will be greater than the fair market value of the partnership as suggested by the incoming partner's investment.
B)the new partner's initial capital balance is equal to his or her investment in the partnership.
C)existing assets of the previous partnership will never be revalued.
D)none of the above.

Question 14

Assume that the capital of an existing partnership is $90,000 and all existing assets reflect fair market values. If an incoming partner acquires a 40% interest in the partnership for $55,000, the bonus traceable to the incoming partner is

A)$15,000
B)$5,000
C)$3,000
D)$2,000

Question 15

Assume that the capital of an existing partnership is $90,000 and all existing assets reflect fair market values. If an incoming partner acquires a 40% interest in the partnership for $55,000, the goodwill traceable to the incoming partner is

A)$15,000
B)$5,000
C)$3,000
D)$2,000

Question 16

If goodwill is traceable to the incoming partner, the new partner's capital balance equals

A)the fair market value of consideration paid by the incoming partner
B)the book value of the older partnership divided by the existing partners' ownership percentage in the new partnership minus the book value of the old partnership.
C)incoming partner's ownership percentage multiplied by the capital of the new partnership
D)none of the above.

Question 17

The bonus method

A)is conservative.
B)follows a book-value approach.
C)may result in a new partner's capital balance being less in amount than his or her contribution.
D)All of the above.

Question 18

Assume the existing capital of a partnership is $100,000. Two partners currently own the partnership and split profits 40/60. A new partner is to be admitted and will contribute net assets with a fair value of $50,000. An appraisal of existing partnership assets indicates accounts receivable overstated by $10,000, inventory overstated by $12,000 and land understated by $25,000. What is the total capital of the new partnership if the bonus method is being used?

A)$153,000
B)$128,000
C)$175,000
D)$150,000

Question 19

The fair market value of a partnership can be implied by

A)adding the incoming partner's market value of consideration to the book value of the existing partnership.
B)the tax basis of the old partner's assets added to the incoming partner's consideration.
C)The incoming partner's market value of consideration divided by the incoming partner's percentage share in profit and loss.
D)The incoming partner's market value of consideration divided by the incoming partner's percentage ownership share in the new partnership.

Question 20

Under the goodwill method,

A)declines in asset values prior to new partner admission are recorded, but not asset appreciation.
B)the total capital of the new partnership must approximate the fair value of the entity.
C)a new partner's capital balance may be less than his or her contribution.
D)All of the above.

Question 21

When a new partner buys an ownership interest in a partnership directly from an existing partner for more than the balance in that partner's capital account, under the more common method of accounting for those transactions,

A)the partnership recognizes a gain.
B)the partner who sold his or her interest makes exit payments to the other partners.
C)the transaction is comparable to the sale of corporate shares of stock in the secondary market.
D)the new partner must pay the remaining previous partners a "premium" to be admitted.

Question 22

Hetzer and Whalen partnership is insolvent and has liabilities of $5,000. Other information follows: What is Hetzer's required contribution if the partnership creditors move against Whalen first.

A)$4,800
B)$200
C)$5,000
D)$12,000

Question 23

Partners Able, Baker, and Chapman have the following personal assets, personal liabilities, and partnership capital balances: Assume profits and losses are allocated equally.
If Baker is in bankruptcy and is able to make a contribution, the capital balance for Able would be

A)$50,000.
B)$48,000.
C)$49,000.
D)$49,610.

Question 24

Which of the following characterizes the bonus method, compared to the goodwill method, when unrecorded intangibles are traceable to the previous partners?

A)The intangibles are actually recorded.
B)The legal significance of a change in ownership structure of the partnership is emphasized.
C)This method generally produces more equitable results if the former partners do not share profits and losses in the same relationship to each other as they did before a new partner was admitted.
D)The market value concept rather than the historical cost concept is emphasized.

Question 25

Verst, Brown and Sullivan have a partnership. Pertinent information is as follows: Sullivan retires and the partnership pays him $35,000. What is the balance in Verst's capital account after the sale assuming this transaction was accounted for using the bonus method?

A)50,000
B)51,667
C)45,000
D)48,333

Question 26

If goodwill is suggested by the consideration paid to a withdrawing partner,

A)only the goodwill traceable to the withdrawing partner may be recorded.
B)goodwill traceable to the original partnership is allocated among the partners according to their respective interests in capital.
C)the goodwill traceable to the withdrawing partner represents the difference between the partner's capital balance and the consideration he or she receives.
D)none of the above.

Question 27

Under the Revised Uniform Partnership Agreement,

A)unsatisfied partnership creditors share pro rata with personal creditors in the assets of the partner's estate.
B)unsatisfied partnership creditors have first priority against partnership assets.
C)unsatisfied personal creditors have first priority against partnership assets.
D)None of the above.

Question 28

Verst, Brown and Sullivan have a partnership. Pertinent information is as follows: Sullivan retires and the partnership pays him $35,000. What is the balance in Verst's capital account after the sale assuming goodwill was recognized by all of the partners?

A)50,000
B)51,667
C)55,000
D)58,333

Question 29

Allen, Branden & Caylin are in the process of liquidating their partnership. They have the following capital balances and profit and loss percentages: The partnership balance sheet shows cash of $5,000, non-cash assets of $14,000, and no liabilities. Assuming no liquidation expenses, what safe payment could be made?

A)$5,000 split between Branden & Caylin by a ratio of 5/8 and 3/8, respectively.
B)$5,000 to Branden only
C)$1,000 to Allen, $2,500 to Branden, and $1,500 to Caylin
D)$18,000 to Branden only

Question 30

If an existing partner withdraws from a partnership,

A)his or her interest may be sold to the partnership or an individual partner.
B)the consideration received for that partner's interest may suggest the existence of undervalued existing assets and/or goodwill.
C)either the bonus or the goodwill method may be used to record the transaction if the partnership acquires the withdrawing partner's interest.
D)all of the above.

Question 31

Below are steps in which partnership distribution takes place:
1) Profits and losses are allocated to partner accounts.
2) Distributions are made to partners.
3) Assets must be used to discharge creditor obligations.
4) Partners with deficit balances should make up the balance or other partners make it up.
In what order should these occur?

A)3,1,2,4
B)1,3,4,2
C)1,3,2,4
D)3,1,4,2

Question 32

Verst, Brown and Sullivan have a partnership. Pertinent information is as follows: Sullivan sells his partnership interest to Verst for $35,000. What is the balance in Verst's capital account after the sale?

A)80,000
B)58,750
C)85,000
D)65,000

Question 33

Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker, and Chapman of $70,000, $30,000, and $50,000. If all outside creditors and loans to partners had been paid, how would the balance of the assets be distributed assuming that Chapman had already received assets with a value of $30,000 assuming profits and losses are allocated equally?

A)Each of the partners would receive $25,000.
B)Each of the partners would receive $40,000.
C)Able: $70,000, Baker: $30,000, Chapman: $20,000
D)Able: $55,000, Baker: $15,000, Chapman: $5,000

Question 34

Which of the following is not an assumption that is made when determining safe payments during a partnership liquidation?

A)Liquidation expenses may be incurred.
B)Partners with deficit balances will not be able to make them up.
C)The partner with the highest capital balance will be the first to receive a safe payment.
D)Unsold noncash assets are assumed to be worthless.

Question 35

If a partnership has only non-cash assets, all liabilities have been properly disbursed, and no additional liquidation expenses are expected, the maximum potential loss to the partnership in the liquidation process is:

A)the fair market value of the non-cash assets
B)the book value of the non-cash assets
C)the estimated proceeds from the sale of the assets less the book value of the non-cash assets
D)none of the above

Question 36

Hetzer and Whalen partnership is insolvent and has liabilities of $5,000. Other information follows: What is Hetzer's required contribution if the partnership creditors move against him first.

A)$4,800
B)$12,000
C)$5,000
D)$0

Question 37

The right of offset doctrine

A)sets aside the ranking that partnership loans have higher legal priority than capital to facilitate the liquidation process.
B)enables the partnership fiduciary to offset the deficit capital balance of one partner with the surplus capital balance of another.
C)allows individual partner creditors to offset their claims against that partner's capital balance.
D)dictates that liquidation expenses must be offset against the partners' capital balances prior to distributions taking place.

Question 38

Which of the following statements is correct regarding a partner's debit capital balances in a liquidation?

A)The partner should make contributions to reduce the debit balance to whatever extent possible.
B)If contributions are not possible, the other partners with credit capital balances will be allocated a portion of the debit balance based on their proportionate profit-and-loss-sharing percentages.
C)Partners who absorb another's debit capital balance have a legal claim against the deficient partner.
D)All of these statements are correct.

Question 39

Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker, and Chapman of $70,000, $30,000, and $50,000. How much would Able receive upon liquidation of the partnership assuming profits and losses are allocated equally?

A)$70,000
B)$90,000
C)$75,000
D)$55,000

Question 40

Palit buys Quincy's partnership interest in the Q-R-S partnership. Quincy thus retires, leaving Reale and Susien as Palit's co-partners. Prior to Palit entering the partnership, Quincy, Reale, and Susien split profits and losses equally. Palit pays $75,000 for Quincy's capital which, at the time, totaled $60,000. No revaluation of partnership assets or liabilities occurs at the time. In recording this event on the partnership books

A)Goodwill is booked based on the book value/fair value difference.
B)$7,500 bonuses are added to Reale and Susien capital.
C)$5,000 bonuses are added to Quincy, Real, and Susien capital.
D)Palit capital is created in the amount of $60,000.

Question 41

The ALPHA, BETA, AND DELTA partnership has total assets of $260,000. Capital balances for partners ALPHA, BETA, and DELTA are $50,000, $30,000, and $50,000, respectively. The profit/loss percentages for partners ALPHA, BETA, and DELTA are 30%, 40%, and 30%, respectively. Included in the liabilities is a $9,000 loan payable to ALPHA. The partnership has elected to liquidate over the next several months. Liquidation expenses are estimated to be $15,000.
Required:
Assuming assets with a book value of $80,000 were sold for $60,000, and that $160,000 cash is available after the sale, how should the available cash be distributed?

Question 42

The Nice, Rice, and Dice Partnership has not been successful. The partners have determined they must liquidate their partnership. The partners have agreed to liquidate the partnership and anticipate that liquidation expenses will total $1,000. Prior to the liquidation, the partnership balance sheet reflects the following book values:
Profits and losses are shared 45% to Nice, 35% to Rice, and 20% to Dice. A review of the individual partner's personal net worth reveals the following:
The following transactions occur:
a.Assets having a book value of $40,000 are sold for $22,000 cash
b.Liabilities are paid, where possible
c.Partners contribute from their personal net worth, according to RUPA requirementsRequired:Prepare liquidation schedule and determine how the available assets will be distributed using a schedule of safe payments.

Question 43

Rogers, Davis, and Smukalla have capital balances of $50,000, $26,100, and $10,900, respectively. The partners share profits/losses equally.
Required:
Calculate Rogers' new capital balance resulting from each of the following independent situations:
Situation 1:
Smukalla sells his interest in the partnership to Rogers for $25,000.
Situation 2:
Meyers purchases a one-fourth interest from the partnership for $35,000. The bonus method is used to account for the incoming partner.
Situation 3:
The same as Situation 2 except that the goodwill method is used to account for the incoming partner.
Situation 4:
Davis sells her interest to the partnership for $30,000. The total amount of suggested goodwill is to be recorded.

Question 44

On July 1, 20X9, the Crawford Company has the following balance sheet:
As of July 1, 20X9, the partners have personal net worth as follows:
The personal net worth of each partner does not include any amounts due to or from the partnership.
Required:
Assume the other assets are sold for $103,000 after incurring liquidation expenses of $4,000. After liquidation of the partnership, determine how much is available to Lake's unsatisfied personal creditors based on the following:
a.Application of the Uniform Partnership Act
b.Application of common law

Question 45

The partnership of Able, Bower, and Cramer was liquidated. The partners have shared profits and losses in the ratio of 2:4:4. Prior to liquidation, their capital balances were the following*:
* Deficit shown in parentheses
Cash totaled $20,000, with liabilities amounting to $30,000. A review of the individual partners' personal financial status reveals the following:
Required:
Prepare a worksheet to liquidate the partnership.

Question 46

Luc, Denis, and Rollande have capital balances of $30,000, $70,000, and $15,000, respectively. The partners share profits/losses 2:6:2. All assets' book values equal market except as noted. The partnership agreement states the bonus method is to be used to account for partner sale of interest to the partnership.
Required:
Calculate Luc's new capital balance resulting from each of the following independent situations:
Situation 1:
Rollande sells his interest to the partnership for $25,000. Bonus method is used.
Situation 2:
Rollande sells his interest to Luc for $25,000.
Situation 3:
Martel purchases a 20% interest from the partnership for $35,000. The bonus method is used to account for the incoming partner.
Situation 4:
The same as Situation 3 except that the goodwill method is used to account for the incoming partner.

Question 47

Oak, Pine, and Maple are partners with present capital balances of $42,000, $39,000, and $90,000, respectively. The partners share profits and losses according to the following percentages: 20% for Oak, 20% for Pine, and 60% for Maple. The existing assets of the original partnership have market values equal to book values except for the following:
Pine has agreed to sell her interest to the partnership for $45,000.
Required:
Calculate the capital balances for each individual in the new partnership, assuming use of the bonus and goodwill methods. The goodwill method should recognize the goodwill traceable to all partners.

Question 48

Partners Thomas, Adams and Jones have capital balances of $24,000, $45,000, and $90,000 respectively. They split profits in the ratio of 3:3:4, respectively. Under a predistribution plan, one of the partners will get the following total amount in liquidation before any other partners get anything:

A)$22,500
B)$30,000
C)$40,000
D)$75,000

Question 49

Smith, Thompson and Nickels have a partnership. Their capital balances are $90,000, $130,000 and $150,000, respectively. They share profits and losses 25%, 35% and 40%, respectively. Foster wants to become a partner with a 10 percent share in partnership capital with a $60,000 cash contribution to the partnership. Appraisal of the partnership reveals that the assets of the partnership are fairly valued.
Required:
Calculate Smith, Thompson, and Nickel's ending capital balances under the:
a.Bonus Method
b.Goodwill Method

Question 50

The Tyler, Russell, and Colby partnership is liquidating. The three partners share profits and losses equally. The following is the post-closing trial balance for the partnership:
Required:
Draft a predistribution plan for the partnership liquidation and provide a schedule of payments.

Question 51

Long-term partners, Pop, Ping, and Pam have capital balances of $60,000, $45,000 and $30,000, respectively. They share in profits and losses 50%-to-30%-to-20%, respectively. All assets are valued fairly. Pam decides to retire from the partnership. Calculate the remaining partners' capital balances after the Pam withdrawal under the following situations:
a.Pam sells the interest to Ping for $25,000.
b.Pam sells the interest to the partnership for $25,000; bonus method is used
c.Pam sells the interest to the partnership for $40,000; goodwill attributable only to the exiting partner is recorded

Question 52

Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker, and Chapman of $70,000, $30,000, and $50,000. How would the first $100,000 of available assets be distributed assuming profits and losses are allocated equally?

A)$70,000 to outside liabilities, $20,000 to Able, and the balance equally among the partners
B)$70,000 to outside liabilities and $30,000 to Able
C)$70,000 to outside liabilities, $25,000 to Able, and $5,000 to Chapman
D)$40,000 to Able, $20,000 to Chapman, and the balance equally among the partners

Question 53

The Revised Uniform Partnership Agreement establishes rules governing the priority in which partnership assets are distributed to creditors and partners. Subject to any agreement to the contrary, what is the sequence of events to accomplish the settlement of accounts and distributions to the partners?

Question 54

Merz, Dechter, and Flowers are partners in a partnership and share profits and losses 40%, 40%, and 20%, respectively. The partners have agreed to liquidate the partnership and anticipate that liquidation expenses will total $14,000. Prior to the liquidation, the partnership balance sheet reflects the following book values:
Required:
Assuming that the actual liquidation expenses are $20,000 and that noncash assets are sold for $160,000, determine how the assets will be distributed. Flowers has net personal assets of $10,000.

Question 55

A partner's maximum loss absorbable is calculated by

A)dividing the partner's capital balance by his or her profit-and-loss-sharing percentage.
B)multiplying the partner's capital balance by his or her profit-and-loss-sharing percentage.
C)multiplying distributable assets by the partner's profit-sharing percentage.
D)dividing the partner's capital balance by his or her percentage interest in capital.

Question 56

Partners Dalton, Edwards, and Finley have capital balances of $40,000, 90,000 and $30,000, respectively, immediately prior to liquidation. Total remaining assets have a book value of $160,000, the liabilities having been paid. Among these remaining assets is a machine with a fair value of $35,000. The partners split profits and losses equally. Edwards covets the machine and is willing to accept it for $35,000 in lieu of cash. The other partners have no designs on specific assets, only cash in liquidation. How much cash, in addition to the machine, would be first distributed to Edwards, before any of the other partners received anything?

A)$15,000
B)$50,000
C)$166,667
D)$300,000

Question 57

Wright, Smith, and Young are partners with present capital balances of $60,000, $35,000, and $30,000, respectively. The partners share profits and losses according to the following percentages: 40% for Wright, 30% for Smith, and 30% for Young. Locke is to join the partnership upon contributing $40,000 to the partnership in exchange for a 20% interest in capital and a 20% interest in profits and losses. The existing assets of the original partnership are undervalued by $20,000. The original partners will share the balance of profits and losses in proportion to their original percentages.
Required:
Calculate the capital balances for each individual in the new partnership, assuming use of the bonus and goodwill methods.