Multiple Choice Questions Compilation by de Jesus and Galgo ACCTG 112 Chapter 1 Theories (Jeter and Chaney Advanced Accounting 3 Ed.)
Multiple Choice Questions Compilation by de Jesus and Galgo ACCTG 112 Chapter 1 Theories (Jeter and Chaney Advanced Accounting 3 Ed.)
ACCTG 112
CHAPTER 1 THEORIES
(Jeter and Chaney Advanced Accounting 3rded.)
1. When a partner retires and withdraws assets in excess of his book value, the remaining
partners absorb the excess
a. equally.
b. in their profit-sharing ratio.
c. based on their average capital balances.
d. based on their ending capital balances.
3. A partnership in which one or more of the partners are general partners and one or more are
not is called a(n)
a. joint venture.
b. general partnership.
c. limited partnership.
d. unlimited partnership.
5. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first
year of operation, the partnership incurs a $20,000 loss. The partners should share the losses
a. based on their average capital balances.
b. in a 2 to 1 ratio.
c. equally.
d. based on their ending capital balances.
6. When the goodwill method is used to record the admission of a new partner, total partnership
capital increases by an amount
a. equal to the new partner’s investment.
b. greater than the new partner’s investment.
c. less than the new partner’s investment.
d. that may be more or less than the new partner’s investment.
7. The bonus and goodwill methods of recording the admission of a new partner will produce the
same result if the:
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1. new partner’s profit-sharing ratio equals his capital interest
2. old partners’ profit-sharing ratio in the new partnership is the same relatively as it was in the
old partnership.
a. 1
b. 2
c. both 1 and 2 are met.
d. none of these.
8. When the goodwill method is used and the book value acquired is less than the value of the
assets invested, total implied capital is computed by
a. multiplying the new partner’s capital interest by the capital balances of existing partners.
b. dividing the total capital balances of existing partners by their collective capital interest.
c. dividing the new partner’s investment by his (her) capital interest.
d. dividing the new partner’s investment by the existing partners’ collective capital interest.
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CHAPTER 1 PROBLEMS
Solution. (c) For financial accounting purposes, non-cash contributions are recorded at the fair
market value of the net assets contributed as of the date of contribution.
2. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at
the partnership’s formation:
Contributed by
Roberts Smith
Cash $20,000 $30,000
Inventory — 15,000
Building — 40,000
Furniture & Equipment 15,000 —
The building is subject to a mortgage of $10,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the partnership
Roberts Smith
a. $35,000 $85,000
b. $35,000 $75,000
c. $55,000 $55,000
d. $60,000 $60,000
Solution: (b) For financial accounting purposes, non-cash contributions are recorded at the fair
market value of the net assets contributed, as of the date of contribution. The mortgage balance
att/ ributable to the building reduces Smith’s capital by the amount of the mortgage assumed
by the partnership. Even though profits and losses will be split evenly, the capital balances do not
need to be in that ratio.
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3. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though
Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus
approach to adjust the capital accounts, Carr's unidentifiable asset should be debited for
a. $46,000
b. $16,000
c. $8,000
d. $0
Solution: (d) $0. Under the bonus method an unidentifiable asset (goodwill) is not recorded,
rather partners' capital balances are adjusted (bonus) to reflect their proper interest in capital.
4. Cor-Eng Partnership was formed on January 2, 20X4. Under the partnership agreement, each
partner has an equal initial capital balance accounted for under the goodwill method. Partnership
net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor
originally contribute assets costing $30,000 with a fair value of $60,000 on January 2, 20X4,
while Eng contributed $20,000 in cash. Drawings by the partners during 20X4 totalled $3,000 by
Cor and $9,000 by Eng. Cor-Eng’s20X4 net income was $25,000. Eng’s initial capital balance in
Cor-Eng is
a. $20,000
b. $25,000
c. $40,000
d. $60,000
Solution: (d) Under the partnership agreement, each partner has an equal initial capital balance,
and goodwill is to be recognized. Cor’s original capital balance will be $60,000, the fair market
value of the net assets contributed as of the date of contribution. Therefore, Eng’s original capital
balance will be $60,000, an equal amount, and goodwill of $40,000 will be attributed to Eng
($60,000 capital – $20,000 cash contribution).
5. Ayers and Smith formed a partnership on July 1,
20X8. Ayers contributed cash of $50,000. Smith contributed property with a $36,000 carrying
amount, a $40,000 original cost, and a fair value of $80,000.
The partnership assumed the $35,000 mortgage attached to the property. What should Smith's
capital account be on July 1, 20X8?
a. $36,000
b. $40,000
c. $45,000
d. $80,000
Solution. (c) The solution approach would be to prepare the journal entry to form the
partnership.
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JE Cash 50,000
Property 80,000
Mortgage Payable 35,000
Ayers, capital 50,000
Smith, capital 45,000
6. Mason & Nelson LLP was formed on February 28. On that date, the following assets were
invested (at current fair values):
Mason Nelson
Cash $25,000 $ 35,000
Inventories 55,000
Building 100,000
Equipment 15,000
The building was subject to a mortgage note payable of $30,000 that was to be assumed by the
partnership. The partnership contract provided that Mason and Nelson were to share net income
or losses 25% and 75% respectively. Nelson's capital account balance on February 28 is:
a. $190, 000
b. $160, 000
c. $172, 500
d. $150, 000
7. A new partner is admitted to the ABC partnership by contributing land that to the partnership.
The land had cost the partner $50,000 approximately 10 years earlier and had a mortgage of
$35,000. The fair market value of the land was $95,000. The land should be recorded in the ABC
partnership at the following dollar amount:
a.$15,000
b. $60, 000
c. 95, 000
d. $40, 0000
8. Mr. Zoom and his very close friend, Mr. Boom, formed a partnership on January 1, 2009, with
Zoom contributing P16, 000 in cash and Boom contributing equipment with book value of P6,
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400 and fair value of P4, 800 and inventory items, with book value of P2, 400 and fair value of
3, 200. During 2009 Boom made n additional investments of P1, 600 on April and P1, 600 on
June1, and withdrew P 4, 000 on September 1. Zoom had no additional investment or withdrawal
during the year. What was the average capital balance of Mr. Boom during 2009?
a. P8,000
b.P 9,600
c. 8, 800
d. 7,200
9. Isa and Ben formed a partnership on March 1, 2012, Isa contributed cash amounting to P120,
000. And Ben contributed equipment with book value of P45, 000 and fair value of P60, 000.
The equipment was subject to P20, 000 mortgage that was assumed by the partnership. The
partners agreed to divide profits and losses equally, Ben capital account at March 1, 2012 should
be
a. P50, 000
b. P45, 000
c. P40, 000
d. P 30, 000
10. On June 1, 2014, Urbano and Sumulong formed a partnership and agreed to share profits and
losses in the ratio of 3:7 respectively. Urbano contributed a parcel of land that costs P10, 000 but,
according to Urbano, has a fair value of P20, 000. Sumulong contributed P42, 000 cash. The land
was sold for P18,000 on June 1, immediately after formation of the partnership . At what amount
should Urbano’s capital account be recorded on the formation of the partnership?
a.P20, 000
b.P15, 000
c. P18, 000
d. P10,000
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CHAPTER 2 THEORIES
(Advance Accounting 10thed, by Beams)
1. Which statement is correct in describing the rank order of payments as specified by the
Uniform Partnership Act?
a. Payments to partners with loans to the partnership are ranked equally with payments to other
creditors.
b. Payments to partners with loans to the partnership are ranked ahead of payments to partners
without loans to the partnership.
c. Payments to other creditors are ranked ahead of payments to partners with loans to the
partnership.
d. After payments are made to other creditors and partnerswith loans to the partnership, payment
can be made to partners with capital interests.
a. A partner with a negative capital balance must contribute personal assets to the partnership that
are sufficient to bring the capital account to zero.
b. If a partner with a negative capital balance is personally insolvent, the negative capital balance
may be absorbed by those partners having a positive capital balance according to the residual
profit and loss sharing ratios that apply to all the partners.
c. If a partner with a negative capital balance is personally insolvent, the negative capital balance
may be absorbed by those partners having a positive capital balance according to the residual
profit and loss sharing ratios that apply to those partners having positive balances.
d. All the above procedures are acceptable.
4. A partnership in liquidation has converted all assets into cash and paid all liabilities. According
to the Uniform Partnership Act, the order of payment
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a. will have amounts due to partners with respect to their capital accounts take precedence over
amounts owed by partners other than for capital and profits.
b. will be according to the partners’ residual profit and loss sharing ratios.
c. will have amounts owed by partners other than for capital and profits take precedence over
amounts due to partners with respect to their capital accounts.
d. Will be by any manner that is both reasonable and rational for the partnership.
7. In a simple partnership liquidation, the last remaining cash distribution should be made
according to the ratio of
8. If conditions produce a debit balance in a partner’s capital account when liquidation losses are
allocated
a. the partner receives further allocations of liquidation losses, but not gains.
b. the partner receives no further allocation of liquidation losses and gains.
c. the partner is no longer obligated to partnership creditors.
d. the partner has an obligation of personal net assets to the other partners.
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9. Under the rule of offset, what is the proper disposition of a partnership loan that was made
from a partner who has a debit balance?
a. The loan is first paid to the debtor partner before cash payments are made to partners.
b. The loan is written off as a partnership loss if the partner does not have the cash to cover the
debit balance.
c. The loan is charged off to the capital accounts of all the partners in their profit and loss sharing
ratios.
d. The loan is charged off to the capital account of the debtor partner.
a. The amounts of distributions that can be made to the partners, after all creditors have been paid
in full.
b. The amounts of distributions that can be made to the partners with assurance that such
amounts will not have to be returned to the partnership.
c. The amounts of distributions that can be made to the partners, after all non-cash assets have
been adjusted to fair market value.
d. All the above are examples of the safe payments concept.
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CHAPTER 2 PROBLEMS
1. The partnership agreement of Donn, Eddy, and Farr provides for annual distribution of profit
or loss in the following sequence:
Donn $80,000
Eddy 50,000
Farr 30,000
What portion of the $100,000 partnership profit for 20X8 should be allocated to Farr?
a. $28,600
b. $29,800
c. $35,133
d. $41,600
2. Fox, Greg, and Howe are partners with average capital balances during 20X6 of $120,000,
$60,000, and $40,000, respectively. Partners receive 10% interest on their average capital
balances. After deducting salaries of $30,000 to Fox and $20,000 to Howe, the residual profit or
loss is divided equally. In 20X6 the partnership sustained a $33,000 loss before interest and
salaries to partners. By what amount should Fox's capital account change?
a. $7,000 increase.
b. $11,000 decrease.
c. $35,000 decrease.
d. $42,000 increase.
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Solution:
. (a) Partnership loss before interest and salaries to partners $ 33,000
Partners' interest on average capital balances 22,000
10% ($120,000 + $60,000 + $40,000)
Partners' salaries ($30,000 + 20,000) 50,000
"Residual" partnership loss $105,000
Change in Fox's Capital Account:
Interest—10% x $120,000 $12,000
Salary 30,000
Share of "residual" partnership loss
1/3 x $105,000 (35,000)
Increase in Fox's capital $7,000
3. Ral Corp. has an incentive compensation plan under which a branch manager receives 10% of
the branch's income after deduction of the bonus but before deduction of income tax. Branch
income for 20X8 before the bonus and income tax was $165,000. The tax rate was 30%. The
20X8 bonus amounted to
a. $12,600
b. $15,000
c. $16,500
d. $18,000
a. $5,400.
b. $6,000.
c. $6,250.
d. $10,000.
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5. Partners C and K share profits and losses equally after each has been credited in all
circumstances with annual salary allowances of $15,000 and $12,000, respectively. Under this
arrangement, C will benefit by $3,000 more than K in which of the following circumstances?
a. Only if the partnership has earnings of $27,000 or more for the year.
b. Only if the partnership does not incur a loss for the year.
c. In all earnings or loss situations.
d. Only if the partnership has earnings of at least
$3,000 for the year.
Solution: (c) Partners C and K are always credited or charged with the same amount of profit and
loss, and C's salary is always $3,000 greater than K's. Therefore, C will benefit $3,000 more than
K in all earnings or loss situations.
6.. The Wisper Company provides an incentive compensation plan under which its president is to
receive a bonus equal to 10% of the company's income in excess of $100,000 before deducting
income tax but after deducting the bonus. If income before income tax and bonus is $320,000
and the effective tax rate is 40%, the amount of the bonus should be
a. $20,000.
b. $22,000.
c. $32,000.
d. $44,000.
Solution:. (a) X = Net income applicable to 10% bonus
X = $320,000 – $100,000 – 10%X
X = $220,000 – 10%X 110%
X = $220,000
X = $200,000
Bonus = 10%X
= $20,000 (10% of net income in excess of $100,000 before tax, after bonus) or
B = .10 (Net income before taxes – $100,000)
B = .10 ($320,000 – Bonus – $100,000)
B = $32,000 – .1B – $10,000
1.1 B = $22,000
B = $20,000
7. The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits
before the bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of 2
to 3, respectively. Which partner has a greater advantage when the partnership has a profit or
when it has a loss?
Profit Loss
a. Flat Iron
b. FlatFlat
c. Iron Flat
d. Iron Iron
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7. (b) Flat has the greater advantage when the partnership has a profit or a loss. When the
partnership has a profit, Flat would be allocated 52% of the profits [a 20% bonus plus 32% (40%
of the remaining 80% of profits)]. When the partnership has a loss, Flat would be allocated only
40% of the loss (2/5ths).
8.. Beck, the active partner in Beck &Cris, receives an annual bonus of 25% of partnership net
income after deducting the bonus. For the year endedDecember 31, 1988, partnership net income
before the bonus amounted to $300,000. Beck's 1988 bonus should be
a. $56,250
b. $60,000
c. $62,500
d. $75,000
a. Increase.
b. Not change.
c. Decrease the same as Low's.
d. Decrease.
Solutions. (d) Low's 15% bonus and salary exceed the partnership net income, resulting in a
$2,500 "loss" to be distributed equally to Low and Rhu.
Distribution of partnership income:
Low Rhu Total
Bonus (15% × $50,000) $ 7,500 $ — $ 7,500
Salary 45,000 — 45,000
$52,500
Excess in P&L ratio (1,250) (1,250 ) (2,500)
Profit distribution $51,250 $(1,250) $50,000
10. The partnership agreement of Reid and Simm provides that interest at 10% per year is to be
credited to each partner on the basis of weighted average
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capital balances. A summary of Simm's capital account for the year ended December 31, 20X5, is
as follows:
What amount of interest should be credited to Simm's capital account for 20X5?
a. $15,250
b. $15,375
c. $16,500
d. $17,250
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CHAPTER 3 PROBLEMS
1. The following balance sheet is presented for the partnership of Davis, Wright, and Dover who
share profits and losses in the ratio of 5:3:2 respectively:
Cash $ 60,000
Other assets 540,000
$600,000
Liabilities $140,000
Davis, Capital 280,000
Wright, Capital 160,000
Dover, Capital 20,000
$600,000
Assume that the assets and liabilities are fairly valued on the balance sheet and the partnership
decided to admit Hank as a new partner with a one-fifth interest.
No goodwill or bonus is to be recorded. How much should Hank contribute in cash or other
assets?
a. $120,000.
b. $115,000.
c. $ 92,000.
d. $ 73,600.
Solution. (b) $115,000. The investment by Hank must be an amount that, when added to the
present capital, represents one- fifth of the new total capital. This can be expressed as follows
(NC = new capital):
1/5 NC + $460,000 = NC
$460,000 = 4/5 NC
NC = $575,000
New capital $575,000 - old capital $460,000 = $115,000
2. Dunn and Grey are partners with capital account balances of $60,000 and $90,000,
respectively. They agree to admit Zorn as a partner with a one-third interest in capital and profits,
for an investment of
$100,000, after revaluing the assets of Dunn and
Grey. Goodwill to the original partners should be
a. $0
b. $33,333
c. $50,000
d. $66,667
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Solution. (c) $50,000
Implied value of new partnership:
New partner's investment $100,000
Multiple of interest acquired (1/3) × 3
$300,000
Less capital balance before recognition of goodwill:
Dunn $ 60,000
Grey 90,000
Zorn (new partner) 100,000 250,000
Goodwill to original partners $ 50,000
3. William desires to purchase a one-fourth capital and profit and loss interest in the partnership
of Eli, George, and Dick. The three partners agree to sell
William one-fourth of their respective capital and profit and loss interests in exchange for a total
payment of $40,000. The capital accounts and the respective percentage interests in profits and
losses immediately before the sale to William follow:
Percentage
Capital Interests in
Accounts Profits and Losses
All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to
the acquisition by William. Immediately after William's acquisition, what should be the capital
balances of Eli, George, and Dick, respectively?
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Implied Goodwill $ 20,000
Eli George
Dick
Capital Balances $80,000 $40,000
$20,000
Implied Goodwill ($20,000 in P/L Ratio) 12,000 6,000
2,000 (1)
Total $92,000 $46,000
$22,000
Sale—1/4 Interest to Williams (23,000) (11,500
(5,500) (2)
Capital Balances after Sale $69,000 $34,500
$16,500
Journal Entries for #2:
4. At December 31, 20X5, Reed and Quinn are partners with capital balances of $40,000 and
$20,000, and they share profit and loss in the ratio of 2:1, respectively. On this date Poe invests
$17,000 cash for a one-fifth interest in the capital and profit of the new partnership. Assuming
that goodwill is notrecorded, how much should be credited to Poe's capital account on December
31, 20X5?
a. $12,000
b. $15,000
c. $15,400
d. $17,000
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5. Ames and Buell are partners who share profits and losses in the ratio of 3:2, respectively. On
August 31, 20X6, their capital accounts were as follows:
Ames $70,000
Buell 60,000
$130,000
On date they agreed to admit Carter as a partner with a one-third interest in the capital and profits
and losses, for an investment of $50,000. The new partnership will begin with a total capital of
$180,000. Immediately after Carter's admission, what are the capital balances of the partners?
6.. On June 30, the balance sheet for the partnership of Williams, Brown and Lowe together with
their respective profit and loss ratios was as follows:
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Williams has decided to retire from the partnership and by mutual agreement the assets are to be
adjusted to their fair value of $360,000 at June 30. It was agreed that the partnership would pay
Williams $102,000 cash for his partnership interest exclusive of his loan which is to be repaid in
full. No goodwill is to be recorded in this transaction. After William's retirement what are the
capital account balances of Brown and Lowe, respectively?
7. James Dixon, a partner in an accounting firm, decided to withdraw from the partnership.
Dixon's share of the partnership profits and losses was 20%.
Upon withdrawing from the partnership he was paid $74,000 in final settlement for his interest.
The total of the partners' capital accounts before recognition of partnership goodwill prior to
Dixon's withdrawal was $210,000. After his withdrawal the remaining partners' capital accounts,
excluding their share of goodwill, totalled $160,000. The total agreed upon goodwill of the firm
was
a. $120,000
b. $140,000
c. $160,000
d. $250,000
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Payment to Dixon (74,000)
Goodwill attributed to Dixon $ 24,000
Dixon P/L ratio ÷ .20
Total goodwill $120,000
Cash $ 45,000
Other assets 625,000
Beda, loan 30,000
$700,000
8. The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda decide to admit
Capp as a new partner with a 20% interest. No goodwill or bonus is to be recorded. What amount
should Capp contribute in cash or other assets?
a. $110,000
b. $116,000
c. $140,000
d. $145,000
Solution(d) $145,000. The investment by Capp must be an amount that, when added to the
present capital ($580,000), represents one-fifth of the new total capital. This can be expressed as
follows (NC = New Capital):
NC = $580,000 + 1/5 NC
4/5 NC = $580,000
NC = $725,000
9.. Instead of admitting a new partner, Alfa and Beda decide to liquidate the partnership. If other
assets are sold for $500,000, what amount of the available cash should be distributed to Alfa?
a. $225,000
b. $273,000
c. $327,000
d. $348,000
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10. Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They
agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have
a 25% interest in capital and profits, for an investment of $30,000. What amount should be
recorded as goodwill to the original partners?
a. $0
b. $5,000
c. $7,500
d. $20,000
Solution: (d) Robb's investment of $30,000 for a 25% partnership interest represents an objective
basis for the determination of the fair value of the partnership and for the calculation of goodwill.
If $30,000 is 25% of the fair value of the partnership, then the total fair value is $120,000
($30,000 / 25%). The difference between the fair value of the partnership ($120,000) and the
total book value of the three partner's capital of $100,000 ($45,000 + $25,000 + $30,000) is
goodwill of $20,000.
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6. Offsetting a partner's loan balance against his debit capital balance is referred to as the
a. marshalling of assets.
b. right of offset.
c. allocation of assets.
d. liquidation of assets.
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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.
8. 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.
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.
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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CHAPTER 4 THEORIES (Advance Accounting 10thed. By Beams)
a. advances to the partnership for which interest shall be paid from the date of the advance.
b. advances to the partnership that are carried in the
partners' capital accounts.
c. Accounts Payable of the partnership for which interest is
paid.
d. advances to the partnership for which interest does not
have to be paid.
I. mutual agency.
II.unlimited liability.
a. I only.
b. II only.
c. I and II.
d. Neither I nor II.
4. Partnerships
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credited to Langley’s partnership capital?
6. Drawings
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10. Which partner is considered the most vulnerable as a result of
a computation of vulnerability rankings?
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27
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ACCTG 112
CHAPTER 4 PROBLEMS (Lambers CPA Reviewer &Advance Accounting 10thed. By
Beams)
1. The following balance sheet is for the partnership of Able, Bayer, and Cain which shares
profits and losses in the ratio of 4:4:2, respectively.
Assets
Cash $ 20,000
Other assets 180,000
$200,000
The original partnership was dissolved when its assets, liabilities, and capital were as shown on
the above balance sheet and liquidated by selling assets in installments. The first sale of noncash
assets having a book value of $90,000 realized $50,000, and all cash available after settlement
with creditors was distributed. How much cash should the respective partners receive (to the
nearest dollar)?
Solution. (d)
Other
Cash Assets
Liabilities
Balances $20,000 $180,000
$(50,000)
Sale of Assets ($40,000 Loss in P/L Ratio) 50,000 (90,000)
—
Balances $70,000 $ 90,000
$(50,000)
Allow for worst possible loss on
remaining assets (90,000)
Payment to creditors (50,000) ______
50,000
Balances $20,000 —
—
Distribution of Cash (20,000) —
—
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Balances -0-
Capital
Accounts
Able Bayer
Cain
Balances $(37,000) $(65,000)
$(48,000)
Sale of Assets ($40,000 Loss in P/L Ratio) 16,000 16,000
8,000
Balances $(21,000) $(49,000)
$(40,000)
Allow for worst possible loss on
remaining assets 36,000 36,000
18,000
Payment to creditors — —
—
Balances $ 15,000 $(13,000)
$(22,000)
Distribution of Able's deficit - 4:2 ratio (15,000) 10,000
5,000
Balances — ( 3,000)
(17,000)
Distribution of cash — 3,000
17,000
2. The following condensed balance sheet is presented for the partnership of Cooke, Dorry, and
Evans who share profits and losses in the ratio of 4:3:3, respectively:
Cash $ 90,000
Other assets 820,000
Cooke, loan 30,000
$940,000
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MULTIPLE CHOICE QUESTIONS COMPILATION BY DE JESUS AND GALGO
ACCTG 112
Assume that the partners decide to liquidate the partnership. If the other assets are sold for
$600,000, how much of the available cash should be distributed to Cooke?
a. $170,000.
b. $182,000.
c. $212,000.
d. $300,000.
Solution (b)
Cooke Dorry Evans
Capital balances $300,000 $200,000 $190,000
Offset Cooke Loan (30,000) ______ ______
270,000 200,000 190,000
Distribution of loss on
sale of assets in P/L ratio (88,000) (66,000) (66,000)
Cash distribution $182,000 $134,000 $124,000
NOTE: Evans' loan account would be offset to capital if his balance were negative; otherwise it
would maintain its priority as a liability.
3. Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying
claims. Unsecured claims will be paid at the rate of forty cents on the dollar. Hale holds a
$30,000 non-interest bearing note receivable from Seco collateralized by an asset with a book
value of $35,000 and a liquidation value of $5,000. The amount to be realized by Hale on this
note is
a. $5,000
b. $12,000
c. $15,000
d. $17,000
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4. The partnership of Jenson, Smith, and Hart share profits and losses in the ratio of 5:3:2,
respectively. The partners voted to dissolve the partnership when its assets, liabilities, and capital
were as follows:
Assets
Cash $ 40,000
Other assets 210,000
$250,000
Liabilities $ 60,000
Jenson, Capital 48,000
Smith, Capital 72,000
Hart, Capital 70,000
$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 $120,000
realized $90,000. How much cash should be distributed to each partner after this sale?
1st $22,000 to H
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Next $48,000—3/5 to S; 2/5 to H or $28,800 to S; $19,200 to H.
Total: S—$28,800; H—$19,200 + 22,000 = $41,200
5. Kent Co. filed a voluntary bankruptcy petition on August 15, 20X5, and the statement of
affairs reflects the following amounts:
Estimated
Book value current value
Assets:
Liabilities:
Liabilities with priority $ 70,000
Fully secured creditors 260,000
Partially secured creditors 200,000
Unsecured creditors 540,000
$1,070,000
Assume that the assets are converted to cash at the estimated current values and the
business is liquidated. What amount of cash will be available to pay unsecured non-priority
claims?
a. $240,000
b. $280,000
c. $320,000
d. $360,000
*Claim of partially secured creditors in excess of security, $80,000 ($200,000 claim – $120,000
assets pledged), would be an unsecured liability (claim).
6. Simon who share profits and losses in the ratio of 6:2:2, respectively:
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Cash $ 40,000
Other assets 140,000
$180,000
Liabilities $ 70,000
Fisher, capital 50,000
Taylor, capital 50,000
Simon, capital 10,000
$180,000
The assets and liabilities are fairly valued on the above balance sheet, and it was agreed to by all
the partners that the partnership would be liquidated after selling the other assets. What would
each of the partners receive at this time if the other assets are sold for $80,000?
FisherTaylor Simon
a. $12,500 $37,500 $0
b. $13,000 $37,000 $0
c. $14,000 $38,000 $2,000
d. $50,000 $50,000 $10,000
7. Kamy Corp. is in liquidation under Chapter 7 of the Federal Bankruptcy Code. The
bankruptcy trustee has established a new set of books for the bankruptcy estate. After assuming
custody of the estate, the trustee discovered an unrecorded invoice of $1,000 for machinery
repairs performed before the bankruptcy filing. In addition, a truck with a carrying amount of
$20,000 was sold for $12,000 cash. This truck was bought and paid for in the year before the
bankruptcy. What amount should be debited to estate equity as a result of these transactions?
a. $0
b. $1,000
c. $8,000
d. $9,000
Solution: (d) Both an unrecorded invoice for repairs (an expense) and the sale of an asset below
its carrying value would result in a reduction of “estate equity” for a business liquidating under
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Chapter 7 of the Federal Bankruptcy Code. Voluntary or involuntary bankruptcy proceedings
under Chapter 7 of the Federal Bankruptcy Code (liquidation), creates an “estate” for the
liquidating entity which consists of the entity’s assets and is administered by a trustee.
9. On January 1, 2002, the partners of Snell & Thomas LLP had capital account balances of
$40,000 and $20,000, respectively. They shared net income and losses equally, and the
partnership had a net income of $10,000 during 2002. On December 31, 2002, the partnership
was liquidated. If, after realization of noncash assets and payment of liabilities, $30,000
remained for distribution to the partnership, Snell received:
a. $15000
b. $25,000
c.20, 000
d.30, 000
Solution: b. $40,000 + $5,000 – $20,000 = $25,000
10. Iwa, Jenny and Kaye are partners with capital balances of P350, 000, P250, 000 and P350,
000 and they share profits in a 30%, 20% and 50% respectively. Partners agreed to dissolve the
business and liquidation of the partnership, assets are sold and sufficient cash is realized to pay
all the liabilities except for one P50, 000, Kaye is personally insolvent, while the other two are
solvent. On the remaining claims against the partnership Iwa is to absorb the loss of?
a. 20, 000
b. 15,000
c.12, 000
d. 10, 000
Solution
Share of Kaye in P50, 000 x 50% P25, 000
Multiply by 30/50 60%
Share of Iwa from the deficiency of Kaye P15, 000
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