Deck 14: Partnerships: Ownership Changes and Liquidations

Question 1

Although the admission of new partner does not result in the dissolution and winding up of the previous partnership, the goodwill method views the admission of a new partner as an opportunity to: revalue net assets as though a new entity had been create

A)​Increase the Goodwill account
B)​Increase the cash account
C)​Decrease Expense of the new partnership
D)​revalue net assets

Answer 1

D

Question 2

In the Goodwill method of recognizing the admission of a new partner which of the following is likely to happen:

A)​book value is not recognized
B)​fair market value is not recognized
C)​Book value would be used to recognize the new partners assets
D)​The new partnership is recognized at fair market value

Answer 2

D

Question 3

In the BONUS method of partnership recognition existing book values should be:

A)​Adjusted to current values
B)​Not adjusted to current values
C)​Left alone
D)​Recorded at a price greater than book value

Answer 3

B

Question 4

The propriety theory of partnership, which views this form of entity as:

A)​Individuals acting separate
B)​Group of individual investors
C)​One primary managing partner
D)​One partner on salary

Question 5

The entity theory of partnership conceptually suggests that the partner-ship entity should continue if a partner is:

A)​Alive
B)​In another state
C)​In another country
D)​Dissociated

Question 6

The withdrawal of a partner requires a determination of the fair value of the partnership entity and a measurement of:

A)​Revenue
B)​Expense
C)​Cash
D)​partnership income to the date of withdrawal.

Question 7

The book-value approach of the bonus method does not directly recognize increases in asset values suggested by the consideration that the incoming partner pays.However, the method does indirectly recognize:

A)​Increase by adjusting capital balances
B)​Increase by adjusting the operating cash account
C)​Increase by reevaluation of partners assets
D)Increase in partners distribution​

Question 8

When the new partner invests some intangible asset, such as business acumen or an established clientele, it is possible to have a bonus credited to the new partner.This bonus may be viewed as:

A)​Cost incurred to acquire Goodwill of new partner
B)​Revenue recognition
C)​Personal Drawing in excess of Goodwill
D)​Additional investment by all partners.

Question 9

If objective evidence supports the write-down of existing assets, the previous partners' capital balances would be reduced accordingly in proportion to

A)​Capital investment
B)​Profit and loss ratio
C)​Amount of Drawing
D)​Amount of Expense

Question 10

If differences between the fair value and the book value of recorded assets are identifiable, appropriate adjustments to asset balances should be considered.Since a change in ownership structure creates a new, distinct legal entity, every attempt should be made to identify differences between fair and:

A)​Depreciation
B)Book Values​
C)​Partners Capital
D)​Goodwill

Question 11

When an incoming partner's contribution is different from that indicated by the book values of the original partnership, the admission of the partner, which method may be used to record the admission:

A)​RUPA
B)​Straight Line
C)​Acceptance
D)​Goodwill

Question 12

Assuming a new partner has been approved by the existing partners, the new partner, normally, will experience the same general risks and rights of ownership as do the other existing partners.A new partner is liable for all of the obligations of a partnership that arose before their admission except:

A)​obligations can only be satisfied out of partnership assets and not the personal assets of the new partner.
B)​personal assets of the new partners
C)​Obligations of previous partners
D)​Non personal assets of all existing partners.

Question 13

A new partner also may be admitted to the partnership by acquiring all or part of the capital interest of one or more existing partners in exchange for some consideration (assets).In this case, the new partner deals directly with

A)​Existing partners
B)​Selling partner(s)
C)​Partnership itself
D)​Legal Council

Question 14

It may be argued that the difficulties associated with the measurement of the fair value of existing assets unjustifiably forces:

A)​Partners liability to increase
B)​Partners' capital to decrease
C)​Recognition of expense
D)​Recognition of Goodwill

Question 15

Recording a write down from an original partner's capital of book value to its implied fair market value would involve a debit to which account:

A)​Cash
B)​Revenue
C)​Expense
D)​Capital

Question 16

If a new partner were to purchase 99% of an existing partner's share of a business which account would be debited:

A)​Existing Partners Drawing
B)​New Partners Drawing
C)​Existing Partners Capital
D)​New Partners Capital

Question 17

An incoming partner may acquire an interest in the partnership for a price in excess of that indicated by the book value of the original partnership's net assets.This situation would suggest the existence of:

A)​Unrecognized capital
B)​Unrecognized excess of cash
C)​Unrecognized Goodwill
D)​Recognized Profit

Question 18

It is possible that an incoming partner may acquire an interest in the partnership at a price less than that indicated by the book value.This situation would suggest the existence of:

A)​Write downs on recorded net assets
B)​Recognition of loss by all partners
C)​Increase in other partners net worth
D)Decrease in other partners net worth​

Question 19

Assuming there are no differences between the fair value and book value of recorded assets, the new partner's willingness to pay more than the proportionate book value of the new entity indicates

A)​Assets are over valued
B)​Liabilities were paid down prior to admission
C)​Goodwill existed prior to admission
D)Partners' Capital should be decreased​

Question 20

When a new partnership is formed and Goodwill is recognized what should follow:

A)​Nothing
B)​Re- evaluation of net assets
C)​Distribution of cash
D)​Increase all partners' capital

Question 21

A,B and C have a partnership as follows:
$$\begin{array} { | l | l | l | l | } \hline & \text { A } & \text { B } & \text { C } \\\hline \text { Capital balances } & \$ 60,000 & \$ 150,000 & \$ 40,000 \\\hline \text { Profit/Loss percent } & 30 \% & 40 \% & 30 \% \\\hline\end{array}$$
Partner C retires and the partnership pays him $45,000.what is the balance is Partner A Capital account after the sale and assuming Goodwill is recognized by Partner C only

A)$60,000
B)$72,000
C)$65,000
D)$75,000

Question 22

Partners X, Y and Z have capital balances of $80, 000, $180,000 and $60,000 respectively.Immediately prior to liquidation.Total remaining assets have a book value of $320,000 and assume liabilities have been paid.There is one remaining asset with a fair market value of $70,000.All three partners agree to share profit and loss equally.Z wishes to take the asset with him and start a new business and would accept $70,000 in cash; the remaining partners agree this would be fair.How much cash in addition to the asset would first be distributed to Z before any of the other partners receive anything?

A)​$100,000
B)​$240,000
C)​$30,000
D)​$50,000

Question 23

In the liquidation of a partnership all liquidation expense and gains form the conversion of partnership assets must be allocated to:

A)​Creditors first
B)​Banks first
C)​Partners first
D)​Investors first

Question 24

Dunn and Brad partnership is considered insolvent and has liabilities of $10,000.Here is a snapshot of the general ledger:
$$\begin{array} { | l | l | l | } \hline & \text { Dunn } & \text { Brad } \\\hline \text { Personal Assets } & \$ 40,000 & \$ 16,000 \\\hline \text { Personal Liabilities } & \$ 16,000 & \$ 20,000 \\\hline \text { Partners Capital } & \$ 20,000 & ( \$ 10,000 ) \\\hline\end{array}$$
What is Dunn's required contribution if the partnership creditors move against him first?

A)$16,000
B)$4,000
C)$10,000
D)$8,000

Question 25

If partner X has a debit balance in capital and the partnership is dissolving which of the following statement would be true:

A)​Partners who absorb debit balance have claims against partner X
B)​Remaining partners discount Partners X profit/loss ratio in dissolution
C)Only the remaining partner with the highest capital balance will have a legal claim against partner X​
D)All of the above​

Question 26

A partner's maximum loss absorbable is calculated by:

A)​Dividing the partners' capital balance by percent in interest
B)​Multiplying distributable assets by partners profit sharing
C)​Multiplying partners' capital by profit/loss ratio
D)​Dividing partners' capital balance by profit/loss agreed ratio

Question 27

Identify the first step in which partnership distribution takes place:

A)?Profit and loss is allocated to partners
B)?Partners with deficit balances make up balance
C)?Assets used to discharge creditors' claims
D)?Distribution made to partners

Question 28

When an existing partner sells interest in the partnership and Goodwill is recognized, what is the likely entry made:

A)​Debit Expense
B)​Debit selling partners' Drawing
C)​Debit Capital
D)Debit cash​

Question 29

This type of liquidation requires that all assets be realized before a distribution is made to partners, thus avoiding the possibility of a premature distribution.

A)​Installment
B)​Lump Sum
C)​Distributive
D)​Dissolutive

Question 30

If a partnership does not have adequate assets to fully dismiss creditors, the unsatisfied creditors must look to the personal assets of:

A)​The deficit partner
B)​The partner with the most capital
C)​The individual partners
D)​The two partners with the largest capital balances

Question 31

S, T and U are in the process of liquidating their partnership.They have the following capital balances and profit and loss percent's:
$$\begin{array} { | l | l | l | } \hline & \text { Capital Balances } & \text { Profit/Loss Percent } \\\hline \mathrm { S } & \$ 10,000 \text { Debit } & 20 \% \\\hline \mathrm { T } & \$ 36,000 \text { Credit } & 50 \% \\\hline \mathrm { U } & \$ 12,000 \text { Credit } & 30 \% \\\hline & & \\\hline\end{array}$$ The balance sheets show cash of $10,000, non-cash assets of $28,000 and no liabilities.
Assuming no liquidation expense what safe payment could be made:

A)$10,000 to Partners T & U
B)Partners spilt according to ratio
C)Partner T gets $10,000 only
D)Partner T & U each receive $5,000

Question 32

Assume a partnership has assets with a book value of $500,000 and a market value of $450,000.Outside liabilities of $100,000, loans payable to Partner A of $30,000 and capital balances of A $200,000, B $180,000 and C $150,000.How much would Partner A receive on liquidation of the partnership assuming partnership profit and loss is allocated equally
$$\begin{array} { | l | l | l | l | l | } \hline & \text { A Loan } & \text { A } & \text { B } & \text { C } \\\hline & \$ 30,000 & \$ 200,000 & \$ 180,000 & \$ 150,000 \\\hline \text { Loss on sale } & & ( \$ 16,666 ) & ( \$ 16,666 ) & ( \$ 16,666 ) \\\hline & & \$ 183,334 & & \\\hline\end{array}$$

A)$200,000
B)$230,000
C)$183,334
D)$195,336

Question 33

In liquidation of a partnership profit and loss become part of:

A)​Partners Drawing
B)​Cash
C)​Partners' capital
D)​Partners personal wealth not related to partnership

Question 34

Which of the following is not an assumption to make when determining safe payments during partnership liquidation?

A)​Unsold non cash assets are assumed to be worthless
B)​The partner with the highest capital balance will be the first to receive a safe payment
C)​Partners will not have deficit balances
D)​Liquidation expenses can exceed capital balances

Question 35

A, B and C have a partnership as follows:
$$\begin{array} { | l | l | l | l | } \hline & \text { A } & \text { B } & \text { C } \\\hline \text { Capital balances } & \$ 60,000 & \$ 150,000 & \$ 40,000 \\\hline \text { Profit/Loss percent } & 30 \% & 40 \% & 30 \% \\\hline\end{array}$$

A)$62,143
B)$65,000
C)$57,825
D)$68,243

Question 36

A,B and C have a partnership as follows:
$$\begin{array} { | l | l | l | l | } \hline & \text { A } & \text { B } & \text { C } \\\hline \text { Capital balances } & \$ 60,000 & \$ 150,000 & \$ 40,000 \\\hline \text { Profit/Loss percent } & 30 \% & 40 \% & 30 \% \\\hline\end{array}$$
Partner C retires and the partnership pays him $45,000.what is the balance is Partner A Capital account after the sale and assuming Goodwill is recognized by all of the partners

A)$100,000
B)$72,000
C)$65,000
D)$75,000

Question 37

The RUPA establishes rules governing the priority in which partnership assets are distributed to creditors and partners.Subject to any agreement to the contrary what would the first step be in partner's liquidation?

A)​Liabilities paid
B)​Assets discharged
C)​Capital reevaluated
D)​Expense paid

Question 38

When a withdrawing partner sells an interest to the partnership rather than to an individual partner, the bonus or goodwill methods may be employed.What is the likely journal entry that would reflect this transaction?

A)​Debit to Partners capital
B)​Debit to Partners Drawing
C)​Debit to Cash
D)​Debit to Expense

Question 39

A & B form a partnership.A invest $35,000 and B Invests $55,000.After 10 years the partnership is dissolved.The net income in the last year is $25,000 and both partners agree to take 10% interest on their initial capital investment and share profit and loss equally.Assume all liabilities have been paid.
Instructions: Calculate the minimal ending capital balance for both partners' upon dissolution assuming there is enough cash for disbursement upon dissolution.

Question 40

Michael, Angel, and Lou are partners and according to their articles of copartnership share profit and loss in the ratio of 2/3/5.The partners' capital balances are as follows: ​
Michael $100,000, Angel $125,000, and Lou $150,000.Angel decided to with draw from the partnership and the partners agree not to have the assets revalued.Assuming Angel sells his interest to DaVinny for $200,000 after both other partners approve of the admission, what likely is the journal entry:​
​

A)​Debit Angel Capital for $125,000, credit DaVinny capital for $125,000
B)Debit Angel Capital for $200,000, credit DaVinny capital for $200,000​
C)​Debit Angel Capital for $200,000 credit Davinny capital for $125,000 and recognize Goodwill
D)​Debit Angel Capital for $75,000 and credit DaVinny Capital for $75,000

Question 41

The balance sheet for the AB Partnership is a s follows;
?
$$\begin{array} { | l | l | } \hline \text { Assets } & \$ 34,000 \\\hline \text { Property \& Plant } & \$ 366,000 \\\hline \text { Wages Payable } & \$ 64,000 \\\hline \text { Loan due to } \mathrm { A } & \$ 24,000 \\\hline \text { Liabilities } & \$ 140,000 \\\hline \text { A Capital } & \$ 48,000 \\\hline \text { B Capital } & \$ 124,000 \\\hline\end{array}$$ The partners have net worth as follows:
?
$$\begin{array} { | l | l | l | } \hline & \text { A } & \text { B } \\\hline \text { Assets } & \$ 104,000 & \$ 152,000 \\\hline \text { Liabilities } & \$ 94,000 & \$ 204,000 \\\hline\end{array}$$ The net worth of each partner' does not include any amounts due to or from the partnership.
?
Instructions:
Assume assets are sold for $206,000 after incurring liquidation expense of $8,000.After liquidation of the partnership determine how much is available to B unsatisfied personal creditors based on the following:

Question 42

Compare and contrast the Bonus method and Goodwill method of in admitting a new partner to a partnership

Question 43

,A,B, and C have a partnership.Their capital balances are $100,000, $140,000, and $60,000 respectively.The agreed profit and loss ratios are 30/40/30.They are considering admitting a new partner D.The net assets of the partnership are worth $360,000.D is willingly to invest $60,000 plus assets with a book value of $24,000 and a fair market value of $40,000.
Instructions:
Provide journal entries assuming
1.D is receiving a 20% share of the new partnership with his investment.His admission is to be recorded using the bonus method
2.D is receiving a 20% share of the new partnership with his investment.His admission is to be recorded using the goodwill method.
1.D is receiving a 30% share of the new partnership with his investment.His admission is to be recorded using the bonus method.\
2.D is receiving a 25% share of the new partnership with his investment.His admission is to be recorded using the goodwill method.\

Question 44

Describe the order in which assets must be distributed upon liquidation of a partnership

Question 45

A, B and C have capital of $120,000, $70,000, and $60,000 respectively.The partners share profit and loss in the agreed ratio of 40/30/30.D joins the partnership with $80,000 in exchange for 20% interest in capital and 20% interest in profit and loss.The existing assets of the original partnership are undervalued by $40,000.The original partners share balance of profit and loss in proportion to the original percent.
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Instructions: Calculate the capital balances for each individual in the new partnership assuming bonus and good will method:

Question 46

D, E & F are partners.According to the articles of copartnership they agree to share profit and loss in the ratio of 40%.40% and 20%...The partners have agreed to liquidate and anticipate liquidation expense would total $28,000.Prior to liquidation the following balance were available:
?
$$\begin{array} { | l | l | } \hline \text { Cash } & \$ 50,000 \\\hline \text { Noncash Assets } & \$ 400,000 \\\hline \text { Notes Payable to E } & \$ 24,000 \\\hline \text { Other liabilities } & \$ 330,000 \\\hline \text { D Capital } & \$ 80,000 \\\hline \text { E Capital } & \$ 36,000 \\\hline \text { F Capital (Deficit) } & ( \$ 20,000 ) \\\hline & \\\hline\end{array}$$ Instructions: Assuming actual liquidation expenses are $40,000 and that noncash assets sold for$360,000.Determine how the assets will be distributed.F had net personal assets of $20,000.

Question 47

The partnership of X,Y, Z was liquidated.The partners shared profit and loss in the ratio of 2/4/4.Prior to liquidation their balances in capital were
X Capital $20,000
Y Capital ($10,000) deficit
Z Capital ($30,00) deficit
?
Cash totaled $40,000 and liabilities amounted to$60,000.The partner's personal finances indicated:
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Instructions:
$$\begin{array} { | l | l | l | } \hline & \text { Assets } & \text { Liabilities } \\\hline \mathrm { X } & \$ 10000 & \$ 40000 \\\hline \mathrm { Y } & \$ 12000 & \$ 8000 \\\hline \mathrm { Z } & \$ 60000 & \$ 40000 \\\hline & & \\\hline\end{array}$$ Prepare a worksheet to show the liquidation: