Test bank with answers for advanced accounting 3e by jeter chapter 16

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Chapter 16
Partnership Liquidation
Multiple Choice
1.

Which of the following statements is correct?
1. Personal creditors have first claim on partnership assets.
2. Partnership creditors have first claim on partnership assets.
3. Partnership creditors have first claim on personal assets.
a. 1
b. 2
c. 3
d. Both 2 and 3

2.

The first step in the liquidation process is to
a. convert noncash assets into cash.

b. pay partnership creditors
c. compute any net income (loss) up to the date of dissolution.
d. allocate any gains or losses to the partners.

3.

A schedule prepared each time cash is to be distributed is called a(n)
a. advance cash distribution schedule.
b. marshaling of assets schedule.
c. loss absorption potential schedule.
d. safe payment schedule.

4.

An advance cash distribution plan is prepared
a. each time cash is distributed to partners in an installment liquidation.
b. each time a partnership asset is sold in an installment liquidation.
c. to determine the order and amount of cash each partner will receive as it becomes available for
distribution.
d. none of these.

5.

The first step in preparing an advance cash distribution plan is to
a. determine the order in which partners are to participate in cash distributions.
b. compute the amount of cash each partner is to receive as it becomes available for distribution.
c. allocate any gains (losses) to the partners in their profit-sharing ratio.
d. determine the net capital interest of each partner.

6.

Offsetting a partner's loan balance against his debit capital balance is referred to as the
a. marshaling of assets.
b. right of offset.
c. allocation of assets.
d. liquidation of assets.

7.

If a partner with a debit capital balance during liquidation is personally solvent, the
a. partner must invest additional assets in the partnership.
b. partner's debit balance will be allocated to the other partners.
c. other partners will give the partner enough cash to absorb the debit balance.
d. partnership will loan the partner enough cash to absorb the debit balance.




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16-2

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

8.

The following condensed balance sheet is presented for the partnership of Jim, Bill, and Fred who
share profits and losses in the ratio of 4:3:3, respectively:
Cash
Other assets
Jim, receivable

$ 180,000
1,940,000
60,000
$ 2,180,000

Accounts payable
Bill, loan
Jim, capital
Bill, capital
Fred, capital

$ 480,000
80,000
720,000
440,000
460,000
$2,180,000

Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership
decides to admit Tom as a new partner, with a 25% interest. No goodwill or bonus is to be recorded.
How much should Tom contribute in cash or other assets?
a. $270,000
b. $405,000
c. $540,000
d. $520,000
9.

The partnership of Joe, Al, and Mike shares profits and losses 60%, 30%, and 10%, respectively. On
January 1, 2011, the partners voted to dissolve the partnership, at which time the assets, liabilities,
and capital balances were as follows:
Assets
Cash
Other Assets

$

Total assets

$1,600,000

400,000
1,200,000

Liabilities and Capital
Accounts Payable
Joe, Capital
Al, Capital

Mike, Capital
Total liabilities

$ 580,000
440,000
380,000
200,000
$1,600,000

All of the partners are personally insolvent.
Assume that all noncash assets are sold for $840,000 and all available cash is distributed in final
liquidation of the partnership. Cash should be distributed to the partners as follows
a. Joe, $744,000;
Al, $372,000;
Mike, $124,000.
b. Joe, $440,000;
Al, $380,000;
Mike, $200,000.
c. Joe, $224,000;
Al, $272,000;
Mike, $164,000.
d. Joe, $396,000;
Al, $198,000;
Mike, $66,000.




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Chapter 16 Partnership Liquidation
10.

16-3

The partnership of Pratt, Ellis, and Mack share profits and losses in the ratio of 4:4:2, respectively.
The partners voted to dissolve the partnership when its assets, liabilities, and capital were as
follows:
Assets
Cash
$ 250,000
Other assets
1,000,000
$1,250,000
Liabilities and Capital
Liabilities
Pratt, Capital
Ellis, Capital
Mack, Capital

$ 200,000
300,000
350,000
400,000
$1,250,000

The partnership will be liquidated over a prolonged period of time. As cash is available, it will be
distributed to the partners. The first sale of noncash assets having a book value of $600,000 realized
$475,000. How much cash should be distributed to each partner after this sale?
a. Pratt, $90,000;
Ellis, $140,000;
Mack, $295,000
b. Pratt, $210,000;
Ellis, $290,000;
Mack, $145,000
c. Pratt, $290,000;
Ellis, $210,000;
Mack, $105,000
d. Pratt, $150,000;
Ellis, $175,000;
Mack, $200,000
11.

In a partnership liquidation, the final cash distribution to the partners should be made in accordance
with the:
a. partners' profit and loss sharing ratio.
b. balances of the partners' capital accounts.
c. ratio of the capital contributions by the partners.
d. ratio of capital contributions less withdrawals by the partners.

12.

In an advance plan for installment distributions of cash to partners of a liquidating partnership, each
partner's loss absorption potential is computed by
a. dividing each partner's capital account balance by the percentage of that partner's capital
account balance to total partners' capital.
b. multiplying each partner's capital account balance by the percentage of that partner's capital
account balance to total partners' capital.
c. dividing the total of each partner's capital account less receivables from the partner plus
payables to the partner by the partner's profit and loss percentage.
d. some other method.

13.

Under the Uniform Partnership Act
a. partnership creditors have first claim (Rank I) against the assets of an insolvent partnership.
b. personal creditors of an individual partner have first claim (Rank I) against the personal assets
of all partners.
c. partners with credit capital balances share (Rank I) the personal assets of an insolvent partner
that has a debit capital balance with personal creditors of that partner.
d. personal creditors of the partners of an insolvent partnership share partnership assets on a pro
rata basis (Rank I) with partnership creditors.




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16-4

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

14.

During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in partial settlement
of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of
$70,000, and a current fair value of $110,000. The partners share net income and loss equally. The
net debit to Karr's account (including any gain or loss on disposal of the machine) is
a. $90,000.
b. $100,000.
c. $110,000.
d. $150,000.

15.

X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are
allocated 35% to X, 35% to Y, and 30% to Z. The partners have decided to dissolve and liquidate
the partnership. After paying all creditors, the amount available for distribution is $60,000. X, Y,

and Z are all personally solvent. Under the circumstances, Z will
a. receive $18,000.
b. receive $30,000.
c. personally have to contribute an additional $6,000.
d. personally have to contribute an additional $36,000.

16.

The ABC partnership has the following capital accounts on its books at December 31, 2011:
Credit
A, Capital
$400,000
B, Capital
240,000
C, Capital
80,000
All liabilities have been liquidated and the cash balance is zero. None of the partners have personal
assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5.
If the noncash assets are sold for $400,000, the partners should receive as a final payment:
a. A, $304,000; B, $176,000;
C, $80,000
b. A, $256,000; B, $144,000;
C, $-0c. A, $304,000; B, $176,000;
C, $-0d. A, $120,000; B, $80,000;
C, $200,000

17.

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

Assets
Cash
Noncash

Total Assets

$ 15,000
90,000

$105,000

Liabilities and Capital
Liabilities
$ 15,000
M, Capital
45,000
N, Capital
30,000
O, Capital
15,000
Total Equities
$105,000

The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above,
which one of the following amounts, if any, is the loss absorption potential of partner N as of
December 31, 2011?
a. $20,000
b. $35,000
c. $75,000
d. $120,000

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Chapter 16 Partnership Liquidation
18.

16-5

Adamle, Boyer, and Clay are partners with a profit and loss ratio of 4:3:3. The partnership was
liquidated and, prior to the liquidation process, the partnership balance sheet was as follows:
ADAMLE, BOYER, AND CLAY
Balance Sheet
January 1, 2011
Assets
Cash
Other assets

$ 60,000
540,000

Total Assets

$600,000

Liabilities and Equity
Adamle, Capital
Boyer, Capital
Clay, Capital
Total Liabilities & Equities

$216,000
240,000
144,000
$600,000

After the partnership was liquidated and the cash was distributed, Boyer received $96,000 in cash in
full settlement of his interest.
The liquidation loss must have been:
a. $360,000
b. $144,000
c. $504,000
d. $480,000
19.

The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On
July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along

with residual profit sharing ratios were as follows:
Assets
Cash
Receivables-net
Inventories
Equipment-net
Total assets

$ 200,000
50,000
150,000
100,000
$ 500,000

Liabilities & Equities
Liabilities
$
Hall, Capital 50%
Jones, Capital 30%
Otto, Capital 20%
Total Lia & Equity

150,000
100,000
175,000
75,000
500,000

Assume that the available cash is distributed immediately, except for a $25,000 contingency fund
that is withheld pending complete liquidation of the partnership. How much cash should be paid to

each of the partners?
Hall
a. $87,500
b. 12,500
c.
-0d.
-0-

Jones
$52,500
7,500
25,000
15,000

Otto
$35,000
10,000
-010,000




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16-6

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

20.

The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On
July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along
with residual profit sharing ratios were as follows:
Assets
Cash
Receivables-net
Inventories
Equipment-net
Total assets

$ 200,000
50,000
150,000
100,000
$ 500,000

Liabilities & Equities
Liabilities
$

Hall, Capital 50%
Jones, Capital 30%
Otto, Capital 20%
Total Lia & Equity

150,000
100,000
175,000
75,000
500,000

Assume that Hall takes equipment with a fair value of $40,000 and a book value of $50,000 in
partial satisfaction of his equity in the partnership. If all the $200,000 cash is then distributed, the
partners should receive:
Hall
Jones
Otto
a. $100,000
$60,000
$40,000
b. 25,000
15,000
10,000
c.
-0
45,000
5,000
d.
-0
50,000

-0
21.

The partnership of Starr, Foley, and Pele share profits and losses in the ratio of 4:4:2, respectively.
The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows:
Assets
Cash
Other assets

Total assets

$150,000
600,000

$750,000

Liabilities and Equity
Liabilities
$120,000
Starr, Capital
180,000
Foley, Capital
210,000
Pele, Capital
240,000
Total Lia & Equity
$750,000

The partnership will be liquidated over a prolonged period of time. As cash is available, it will be
distributed to the partners. The first sale of noncash assets having a book value of $360,000 realized

$285,000. How much cash should be distributed to each partner after this sale?
a. Starr, $54,000;
Foley, $84,000;
Pele, $177,000.
b. Starr, $174,000;
Foley, $174,000;
Pele, $87,000.
c. Starr, $126,000;
Foley, $126,000;
Pele, $63,000.
d. Starr, $90,000;
Foley, $105,000;
Pele, $120,000.
22.

A, B, and C have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are
allocated 35% to A, 35% to B and 30% to C. The partners have decided to dissolve and liquidate the
partnership. After paying all creditors the amount available for distribution is $60,000. A, B, and C
are all personally solvent. Under the circumstances, C will
a. receive $18,000.
b. receive $30,000.
c. personally have to contribute an additional $6,000.
d. personally have to contribute an additional $36,000.




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Chapter 16 Partnership Liquidation
23.

16-7

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

A, Capital
B, Capital
C, Capital

Credit
$200,000
120,000
40,000

All liabilities have been liquidated and the cash balance is zero. None of the partners have personal
assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5.
If the noncash assets are sold for $150,000, the partners should receive as a final payment:
a. A, $152,000; B, $88,000

C, $40,000
b. A, $128,000; B, $72,000;
C, $ - 0 c. A, $152,000; B, $88,000;
C, $ - 0 d. A, $60,000;
B, $40,000;
C, $100,000
24.

The summarized balances of the accounts of RST partnership on December 31, 2011, are as follows:
Assets
Liabilities and Equity
Cash
$ 30,000
Liabilities
$ 30,000
Noncash
180,000
R, Capital
90,000
S, Capital
60,000
T, Capital
30,000
Total Assets
$210,000
Total Lia & Equities
$210,000
The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above,
which one of the following amounts, if any, is the loss absorption potential of partner S as of
December 31, 2011?

a.
$60,000
b.
$70,000
c.
$150,000
d.
$240,000

25.

The partnership of Hill, Kiner, and Polk has been dissolved and is in the process of liquidation. On
July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along
with residual profit sharing ratios were as follows:
Assets
Liabilities and Equity
Cash
$ 80,000
Liabilities
$ 60,000
Receivables-net
20,000
Hill, Capital 50%
40,000
Inventories
60,000
Kiner, Capital 30%
70,000
Equipment-net
40,000

Polk, Capital 20%
30,000
Total assets
$200,000
Total Lia & Equity
$200,000
Assume that the available cash is distributed immediately, except for a $10,000 contingency fund
that is withheld pending complete liquidation of the partnership. How much cash should be paid to
each of the partners?
Hill
Kiner
Polk
a.
$35,000
$21,000
$14,000
b.
$5,000
$3,000
$4,000
c.
$0
$10,000
$0
d.
$0
$6,000
$4,000

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16-8

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

Problems
16-1

The NOR Partnership is being liquidated. A balance sheet prepared prior to liquidation is presented
below:
Assets
Cash
Other Assets

Total Assets

$240,000
300,000

$540,000

Liabilities & Equities
Liabilities
$ 160,000
Reese, Loan
60,000
Nen, Capital
180,000
Ott, Capital
60,000
Reese, Capital
80,000
Total Equities
$540,000

Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio. All partners are personally
insolvent.
Required:
A.
Prepare the journal entries necessary to record the distribution of the available cash.
B.

16-2

CASH
180,000

Prepare the journal entries necessary to record the completion of the liquidation process,
assuming the other assets are sold for $120,000.

The trial balance for the ABC Partnership is as follows just before liquidation:
OTHER
ASSETS
625,000

BALL
RECEIVABLE =
90,000

LIABILITIES
150,000

ADLER
CAPITAL
420,000

BALL
CAPITAL
270,000

CARL
CAPITAL
180,000

Partners share profits a 50:30:20 ratio.
Required:

Prepare an advance cash distribution plan showing how available cash would be distributed.
16-3

Lewis, Nance, and Otis operate the LNO Partnership. The partnership agreement provides that the
partners share profits in the ratio of 40:40:20, respectively. Unable to satisfy the firm's debts, the
partners decide to liquidate. Account balances just prior to the start of the liquidation process are as
follows:
Debit
Credit
Cash
$ 90,000
Other Assets
330,000
Liabilities
$165,000
Otis, Loan
36,000
Lewis, Capital
165,000
Nance, Capital
36,000
Otis, Capital
39,000
Otis, Drawing
21,000
_______
Totals
$441,000
$441,000

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Chapter 16 Partnership Liquidation

16-9

During the first month of liquidation, other assets with a book value of $150,000 are sold for
$165,000, and creditors are paid. In the following month unrecorded liabilities of $12,000 are
discovered and assets carried on the books at a cost of $90,000 are sold for $36,000. During the
third month the remaining other assets are sold for $42,000 and all available cash is distributed.
Required:
Prepare a schedule of partnership realization and liquidation. A safe distribution of cash is to be
made at the end of the second and third months. The partners agreed to hold $30,000 in cash in
reserve to provide for possible liquidation expenses and/or unrecorded liabilities. All of the partners
are personally insolvent.
16-4

Due to the fact that the partnership had been unprofitable for the past several years, A, B, C, and D
decided to liquidate their partnership. The partners share profits and losses in the ratio of
40:30:20:10, respectively. The following balance sheet was prepared immediately before the
liquidation process began:
A B C D Partnership
Balance Sheet
Cash
Other Assets

Total Assets

$ 100,000
350,000

$450,000

Liabilities
A, Capital
B, Capital
C, Capital
D, Capital
Total Lia & Equities

The personal status of each partner is as follows:
Personal
_Assets_
A
$165,000
B

100,000
C
180,000
D
60,000

$250,000
55,000
60,000
50,000
35,000
$450,000

Personal
Liabilities
$ 120,000
140,000
160,000
70,000

The partnership's other assets are sold for $100,000 cash. The partnership operates in a state which
has adopted the Uniform Partnership Act.
Required:
A. Complete the following schedule of partnership realization and liquidation. Assume that a
partner makes additional contributions to the partnership when appropriate based on their
individual status.

CASH
$100,000

OTHER
ASSETS
$350,000

LIABILITIES
$250,000

__A__
55,000

__B__
60,000

CAPITAL
__C__
50,000



__D__
35,000


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16-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
B. Complete the following schedule to show the total amount that will be paid to the personal
creditors.
From
Personal
_Assets_

Distribution
from
_Partnership_

Total Paid
to Personal
_Creditors_

A
B
C
D

16-5

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

Cash
Noncash Assets
Nonpartner Liabilities
Dugan, Loan
Dugan, Capital
Elston, Capital
Flynn, Capital
Totals

Debit
$ 75,000
750,000

$825,000

Credit

$240,000
75,000
225,000
153,000
132,000
$825,000

The partners share income and loss on the following basis:
Dugan
50%
Elston
30%
Flynn

20%
Required:
Prepare an advance cash distribution plan for the partners.
16-6

David, Paul, and Burt are partners in a CPA firm sharing profits and losses in a ratio of 2:2:3,
respectively. Immediately prior to liquidation, the following balance sheet was prepared:
Assets
Cash
Noncash assets

$ 100,000
580,000

Total Assets

_______
$680,000

Liabilities & Equities
Liabilities
David, Capital
Paul, Capital
Burt, Capital
Total Liabilities & Equities



$280,000
160,000

160,000
80,000
$680,000


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Chapter 16 Partnership Liquidation 16-11
Required:
Assuming the noncash assets are sold for $300,000, determine the amount of cash to be distributed
to each partner. Complete the worksheet and clearly indicate the amount of cash to be distributed to
each partner in the spaces provided. No cash is available from any of the three partners.

Beginning Bal.

Cash
100,000

Noncash

Assets
580,000

Liabilities
280,000

David
Capital
160,000

Paul
Capital
160,000

Burt
Capital
80,000

16-7

Using the information from Problem 16-6, assume the noncash assets are sold for $160,000.
Determine the amount of cash to be distributed to each partner assuming all partners are personally
solvent.

16-8

The December 31, 2010, balance sheet of the Deng, Danielson, and Gibson partnership, along with
the partners’ residual profit and loss sharing ratios, is summarized as follows:
Assets
Cash

Receivables
Inventories
Other Assets
Total Assets

$ 150,000
300,000
375,000
475,000
$1,300,000

Liabilities & Equities
Accounts Payable
$ 225,000
Loan from Danielson
50,000
Deng, Capital (20%)
250,000
Danielson, Capital (30%)
400,000
Gibson, Capital (50%)
375,000
Total Lia & Equities
$1,300,000

The partners agree to liquidate their partnership as soon as possible after January 1, 2011 and to
distribute all cash as it becomes available.
Required:
Prepare an advance cash distribution plan to show how cash will be distributed as it becomes
available.

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16-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
Short Answer
1.

The Uniform Partnership Act specifies specific steps in distributing available partnership assets in
liquidation. Describe the steps used to distribute partnership assets during the liquidation process.

2.

An advance cash distribution plan specifies the order in which each partner will receive cash and the
dollar amount each will receive as it becomes available for distribution. Identify the four steps in the
preparation of an advance cash distribution plan.

Short Answer Questions from the Textbook
1. Why are realization gains or losses allocated to partners in their profit and loss ratios?
2. In what manner should the final cash distribution be made in partnership liquidation?
3. Why does a debit balance in a partners’ capital account create problems in the UPA order of
payment for a partnership liquidation?
4. Is it important to maintain separate accounts for a partner’s outstanding loan and capital accounts? Explain why or why not.
5. Discuss the possible outcomes in the situation where the equity interest of one partner is
inadequate to absorb realization losses.
6. During a liquidation, at which point may cash be distributed to any of the partners?
7. What is “marshaling of assets”?
8. To what extent can personal creditors seek re-covery from partnership assets?
9. In an installment liquidation, why should the partners view each cash distribution as if it were
the final distribution?
10. Discuss the three basic assumptions necessary for calculating a safe cash distribution. How is
this safe cash distribution computed?
11. How are unexpected costs such as liquidation expenses, disposal costs, or unrecorded liabilities
covered in the safe distribution schedule?
12. What is the objective of the procedures used for the preparation of an advance cash distribution
plan?
13. What is the “loss absorption potential”?
14. In what order must partnership assets be distributed?




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Chapter 16 Partnership Liquidation 16-13

Business Ethics Question from the Textbook
You and two of your former college friends, Freeman and Oxyman, formed a partnership called
FOB, which builds and installs fabricated swimming pools. The business has been operating for 15
years and has become one of the top swimming pool companies in the area. Typically, you have
been providing the on-site estimates for the pools, while your partners do most of the onsite
construction. While visiting one of the sites, you hear a conversation between one of your partners
and a customer. Your partner is explaining that the cost will increase by $10,000 because of
unexpected rock removal. You are a bit surprised by this, since you had tested the area for rocks.
Later, back at the office, you review the core-sample results done on that job, which did not reveal
any rock. You decide to talk to the partner when he returns to the office. When the partner returns
to the office, he is arguing with someone from a local bank concerning an outstanding personal
loan.
1.What do you see as your duty with respect to the partnership?
2.What should you do? Explain your reasoning.




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16-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
ANSWER KEY
Multiple Choice
1.
2.
3.
4.
5.
6.
7.

b
c
d
c
d
b
a

8.
9.
10.
11.
12.
13.
14.

c
c
a
b
c
a
b

15.
16.
17.
18.
19.
20.
21.

c
b
c
d
c
d

a

22.
23.
24.
25.

c
b
c
c

Problems
16-1

A.
Net interest
Potential loss–$300,000

Nen
Ott
$(180,000)
$(60,000)
120,000
120,000
(60,000)
60,000
40,000
(60,000)
$(20,000) $ -0-

Potential loss–$60,000
Cash distribution

Liabilities
Cash

160,000

Reese, Loan
Nen, Capital
Cash

60,000
20,000

160,000

80,000

B.
Cash
Nen, Capital ($180,000 × .40)
Ott, Capital ($180,000 × .40)
Reese, Capital ($180,000 × .20)
Other Assets
Nen, Capital ($12,000 × [40/60])
Reese, Capital ($12,000 × [20/60])
Ott, Capital ($72,000 - $60,000)
Nen, Capital

Reese, Capital
Cash

Reese_
$(140,000)
60,000
(80,000)
20,000
$(60,000)

120,000
72,000
72,000
36,000
300,000
8,000
4,000
12,000
80,000
40,000
120,000




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Chapter 16 Partnership Liquidation 16-15
16-2
Net capital interest
Profit-loss ratio
Loss absorption potential
Order of cash distribution

__Adler__
$420,000
/ .50
$840,000
2

__Ball__
$180,000
/ .30
$600,000
3

__Carl__
$180,000
/ .20

$900,000
1

Profit-Loss Ratio
Loss absorption potential
Distribution to Cole
Balances after distribution
Distribution to Adams & Cole
Balances after distribution

Loss Absorption Potential
Adler
Ball
Carl
.50
.30
.20
$840,000
$600,000
$900,000
60,000
840,000
600,000
840,000
240,000
240,000
$600,000
$600,000
$600,000

Profit-Loss Ratio
Net capital interest
Distribution to Cole
Balances after distribution
Distribution to Adams & Cole
Balances after distribution

Asset Distribution
Ball
Carl
.30
.20
$180,000
$180,000
12,000
180,000
168,000
_ 48,000
$180,000
$120,000

Remainder of asset distributions

Order of Cash Distribution
1. First $150,000
2. Next $12,000
3. Next $168,000
4. Remainder

Adler

.50
$420,000
420,000
_120,000
$300,000
.50

.30

Cash Distribution Plan
Adler
Liabilities
.5
100%
71%
50%



.20

Ball
.3

Carl
.2

30%

100%

29%
20%


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16-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
16-3
Balances
Sale of assets
Distribute cash to creditors

Cash
90,000
165,000
255,000
(165,000)
90,000

Record liabilities
90,000
36,000
126,000
(96,000)
30,000
42,000
72,000

Sale of assets
Distribute cash
Sale of assets

Assets
= Liabilities
330,000
=
(150,000)
180,000
=
165,000
180,000
= -0(12,000)
180,000
=
(90,000)
90,000
(12,000)
12,000
90,000

-0(90,000)
-0-0-

(165,000)
(165,000)

(12,000)

Allocate Nance's deficit
72,000
(72,000)
-0-

Distribute cash
Balances

-0-

-0-

-0-

-0-__

Capital Interest
Lewis
Nance
=
(165,000)
(36,000)

(6,000)
(6,000)
(171,000)
(42,000)

Balances
Sale of assets

Otis
=
(3,000)
=

(54,000)

=
2,400
=
10,800
(43,800)
9,000
(34,800)
9,600
(25,200)
1,200
(24,000)
24,000
-0-

(57,000)

(57,000)

Distribute cash to creditors
(171,000)
4,800
(166,200)
21,600
(144,600)
75,000
(69,600)
19,200
(50,400)
2,400
(48,000)
48,000
-0-

Record liabilities
Sale of assets
Distribute cash
Sale of assets
Allocate Nance's deficit
Distribute cash
Balances

Capital interest
Potential loss plus
cash reserve (120,000)
Allocate potential deficit

Cash distribution

Lewis
(144,600)
48,000
(96,600)
(2/3) 14,400
(75,000)

(42,000)
4,800
(37,200)
21,600
(15,600)
(15,600)
19,200
3,600
(3,600)
-0-0Nance
(15,600)

Otis
(43,800)

48,000
32,000
32,400
(19,800)
(21,600)(1/3) 10,800
-0( 9,000)

(54,600)


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Chapter 16 Partnership Liquidation 16-17
16-4

A.
Other
Assets
= Liabilities
350,000
=
(350,000)
-0=

(250,000)

Cash
100,000
100,000
200,000

Account Balances
Sale of Assets
Allocated Debit
Balance of B*
Investment from C
Investment from A

200,000
10,000
45,000
255,000
(255,000)
-0-

Distribute Cash

A
.4
(55,000)
100,000
45,000

Account Balances

Sale of Assets
Allocate Debit
Balance of B*

=

-0-0Capital
B
.3
(60,000)
75,000
15,000
(15,000)
-0-

45,000
Investment from C
Investment from A

-0-

(250,000)

(250,000)

(250,000)
250,000
-0-

C

.2
(50,000)
50,000
-0-

D
.1
(35,000)
25,000
(10,000)

10,000
10,000
(10,000)

5,000
(5,000)

(45,000)
-0-

-0-

-0-

-0-

-0-

-0-

(5,000)
5,000

Distribute Cash
-0-

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

From
Personal
Assets
A
B
C
D

120,000
100,000
160,000
60,000

Distribution
from
Partnership

5,000

Total Paid
to Personal
Creditors
120,000
100,000
160,000
65,000


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16-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
16-5
Capital balances
Loan balances
Net capital interest
Profit and loss ratio
Loss absorption potential

Order of cash distribution

Profit & loss ratio
Loss absorption
potential
Net cap. interest
Distrib. to Flynn
(60,000 × .2)

Elston
$153,000

Flynn
$132,000

153,000
/ .3
$510,000
3

132,000
/ .2
$660,000
1

Loss Absorption Potential
Dugan
Elston
Flynn
.5

.3
.2
$600,000

$510,000

Dugan
.5

Asset Distribution
Elston
.3

Flynn
.2

$660,000
$300,000

$153,000

$132,000

153,000

12,000
120,000

60,000
600,000

Distrib. to Dugan
and Flynn
(90,000 × .2)
(90,000 × .5)

Dugan
$225,000
75,000
300,000
/ .5
$600,000
2

510,000

600,000

90,000

300,000

90,000
18,000

$510,000

$510,000

$510,000

Remainder

45,000
$255,000
.5

$153,000
.3

$102,000
.2

Cash Distribution Plan
Order of cash distribution after
creditors have been paid:
First $12,000
Next $63,000
Remainder

Dugan

Elston

5/7
50%

30%

Flynn

100%
2/7
20%

16-6

Beginning Balance
Sale of Assets
Balances
Pay Liabilities
Balances

Noncash
Cash
Assets
100,000
80,000
300,000
(120,000
400,000
(40,000)
(280,000)
120,000
(40,000)

Liabilities
580,000

David
Capital

280,000

(580,000)
-0-

280,000

Burt
Capital
160,000

(80,000)

(80,000)

80,000

80,000

80,000

80,000

(280,000)
-0-

-0-

Allocate deficit
Balances

Paul
Capital
160,000

(20,000)
40,000
120,000
-0-

-0-

-0-



60,000

(20,000)
60,000


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Chapter 16 Partnership Liquidation 16-19
Cash payment to partners (120,000)

Balances

-0-

(60,000)
-0-

-0-



-0-

(60,000)
-0-

-0-


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16-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
16-7
Noncash
Cash
Assets
Beginning Balance
100,000
80,000
Sale of Assets
160,000
(180,000)
Balances
260,000
(100,000)
Cash payment from Burt
100,000
100,000
Balances
360,000
-0Pay Liabilities

(280,000)
Balances

80,000

Liabilities
580,000

David
Capital
280,000

Paul
Capital
160,000

(580,000)

Burt
Capital
160,000

(120,000)

(120,000)

-0-

280,000

40,000

40,000

-0-

280,000

40,000

40,000

40,000

40,000

(40,000)

(40,000)

(280,000)
-0-

-0-

-0Cash payment to partners

(80,000)

Balances

-0-

-0-

-0-

-0-

-0-

-0-

16-8

Net capital interest
Profit/Loss ratio
Loss absorption potential
Order of cash distribution

Deng
$250,000
/ .20
$1,250,000
2

Danielson
$450,000
/ .30
$1,500,000

1

Gibson
$375,000
/ .50
$750,000
3

Loss Absorption Potential
Loss absorption potential
Distribution to Danielson
Balances
Distribution to Deng & Danielson
Balances

Deng
Danielson
Gibson
$1,250,000
$1,500,000 $750,000
(250,000) ________
________
$1,250,000
$1,250,000 $750,000
(500,000)
(500,000) _ ______
$750,000
$ 750,000
$750,000

Asset Distribution
Net capital interest
Distribution to Danielson
Balances
Distribution to Deng & Danielson
Balances
Remainder of asset distributions

Deng
Danielson
Gibson
$250,000
$450,000
$375,000
__75,000 ___ ___
250,000
375,000
375,000
(100,000)
(150,000)
_______
$150,000
$225,000
$375,000
0.20



0.30

0.50


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Chapter 16 Partnership Liquidation 16-21
Cash Distribution Plan

Order of Cash Distribution
1. First $225,000
2. Next $75,000
3. Next $250,000
4. Remainder

Liabilities
100%

Deng
0.20

Danielson
__0.30__

40%
20%

100%
60%
30%

Gibson
__0.50__

50%

Short Answer
1.
The first step in the liquidation process is to compute any net income/loss up to the date of dissolution.
Any net income/loss is allocated to the partners according to their profit and loss agreement. In the
next step, the assets that are not acceptable for distribution in their present form are converted into
cash, and any gains/losses realized are allocated according to the profit and loss ratio. The last step is
to distribute the available cash to creditors and partners.
2.

Steps in the preparation of an advance cash distribution plan include:
a. Determine the net capital interest of each partner by combining partners’ capital accounts with any
loans to or receivables from the partners.
b. Determine the order in which the partners are to participate in cash distributions.
c. Compute the amount of cash each partner is to receive as it becomes available for distribution.

d. Prepare the cash distribution plan.

Short Answer Questions from the Textbook Solutions
1. Realization gains or losses are allocated to partners in their profit and loss ratio because the changes in
asset values are the result of risk assumed by the partnership. Also, because it may be difficult to
separate gains and losses that result from liquidation from the under- or over-statement in book values
that result from accounting policies followed in prior years.
2. The final cash distribution is based on capital balances, not on profit and loss ratios, since the capital
balance represents the partners' "residual claims" to the assets remaining after settlement of partnership
obligations.
3. Because the UPA order of payment ranks partnership obligations to a partner ahead of asset
distributions to a partner for capital investments, a debit balance in a partner's capital account will create
problems when that partner has an outstanding loan balance. Other partners will have a claim against
this partner for the amount of his/her debit balance which is considered to be an asset of the partnership
by the UPA. If the partner with a debit balance settles his/her obligation with the partnership, there is no
problem. However, if he/she can't settle, the other partners must absorb the deficit as a loss, even though
the partner with the debit balance had received cash for his/her outstanding loan balance. To avoid this
inequity, the courts have recognized the right of the partnership to offset the loan balance against the
debit capital balance.
4. Maintaining separate accounts for outstanding loan and capital accounts recognizes the legal distinction
between the two. This would be important if the liquidation is carried on over an extended period, since
the UPA provides that a partner is entitled to accrued interest on the loan balance.
5. When the equity interest of one partner is inadequate to absorb realization losses several alternative
outcomes are possible. If the partner is personally solvent, he may pay the partnership for the amount he




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16-22 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
is liable. If he/she is personally insolvent then the other partners must absorb his/her debit balance in
their respective profit and loss ratio. If the other partners are unsure of what the partner with the debit
balance will do, but still wish to distribute cash, they can assume the worst (absorbing their share of the
debit balance) to determine what amount of cash can be safely distributed.
6. Cash should not be distributed to any partner until all liquidation losses are recognized in the accounts
or are provided for in determining a safe cash payment.
7. The classification of assets into personal and partnership categories in recognition of the rights of both
partnership creditors and creditors of the individual partners is referred to as "marshalling of assets."
8. To the extent that personal creditors do not recover from personal assets they can seek recovery from
those partnerships assets still available after partnership obligations have been met. This recovery,
however, is limited to the extent that the partner involved has a credit interest in partnership assets.

9. Because in an installment liquidation the amount of cash to be received from the unsold assets
and the resulting gain or loss is unknown, the partners should view each cash distribution as if it
were the final distribution.
10. The three assumptions upon which a safe cash distribution is determined are (1) any loan balances to
partners are offset against their capital accounts, (2) the remaining noncash assets will not generate any
more cash, and (3) any partner with a deficit capital balance will not settle his/her obligation to the

partnership. In other words, assume the worst.
The safe cash balance is computed as the difference between the current capital balances and the balance
required to maintain the above assumptions.
11. Unexpected costs are added to the book value of noncash assets. When the potential loss on the noncash
assets is allocated in the determination of a safe payment, these costs are also included.
12. The objective of the procedure is to bring the balance of the partners' capital accounts into the agreed
profit and loss ratio as soon as possible so that no one partner is placed in a better position than any
other partner.
13. The "loss absorption potential" is determined by dividing the partners' net capital balances by their
respective profit ratio. This determines the maximum amount of loss each partner can absorb.
14. The Uniform Partnership Act provides that the liabilities of the partnership shall rank in order of
payment as follows:
(1)
(2)
(3)
(4)

Those owing to creditors other than partners,
Those owing to partners other than for capital and profits,
Those owing to partners in respect of capital,
Those owing to partners in respect of profits.

Business Ethics from the Textbook Solution
Business ethics solutions are merely suggestions of points to address. The objective is to raise the students'
awareness of the topics, and to invite discussion. In most cases, there is clear room for disagreement or
conflicting viewpoints.

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Chapter 16 Partnership Liquidation 16-23
1) Partnership laws grant each partner the right to information about the firm’s business. This allows
each partner to monitor the firm’s activities. Given the circumstances of the case, it would be your
duty to inspect any questionable transaction. Furthermore, you should ask the partner to explain the
reason for increasing the cost by $10,000. This would give you the opportunity to raise the concern
regarding the presence of the previously undetected rock. If the additional charge is not based on
fact, the cost should be removed.
2) In the present scenario, it appears that the partner might be experiencing personal financial
pressures. However, the firm’s reputation and future implications of the action must be considered
for the benefit of the partnership. Your loyalty to your partner does not alter these responsibilities.
You may wish to find other, more constructive ways to offer assistance to your partner in meeting
his personal obligations, and surviving what may be a difficult time in his life. However, ignoring
the situation is dishonest to the client and is likely to result in more serious long-term consequences.
Reference: />