Afar Liquidation

Chapter 16 - Partnerships: Liquidation
Chapter 16
Partnerships: Liquidation
Multiple Choice Questions
1. The capital balances, prior to the liquidation of the XYZ partnership, were as follows:
X, Y, and Z share profits and losses in the ratio of 5:3:2. As a result of a loan, the partnership
owes Y $80,000. Using the information above, which partner has the highest Loss Absorption
Power (LAP) prior to liquidation?
A. X
B. Y
C. Z
D. Both X and Y
2. The balance sheet given below is presented for the partnership of Janet, Anton, and Millet:
The partners share profits and losses in the ratio of 5:3:2, respectively. The partners agreed to
dissolve the partnership after selling the other assets for $50,000. On dissolution of the
partnership, Janet should receive:
A. $0.
B. $80,000.
C. $10,000.
D. $30,000.
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3. On December 1, 2009, the partners of Tim, Williams, and Levin, who share profits and losses
in the ratio of 4:4:2, decided to liquidate their partnership. On this date the partnership
condensed balance sheet was as follows:
On December 11, 2009, the first cash sale of other assets with a carrying amount of $200,000
realized $140,000. Safe installment payments to the partners were made on the same date. How
much cash should be distributed to each partner?
A. Option A
B. Option B
C. Option C
D. Option D
Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to
generate the type of revenue expected by the partners. They share profits and losses in a ratio of
5:3:2. They have decided to liquidate the business and have sold all the assets except for one
piece of heavy machinery. All partnership liabilities have been settled and all the partners are
personally insolvent. The machinery has a book value of $85,000, and the partners have capital
account balances as follows:
Each of the following are independent cases.
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4. Refer to the information given above. What amount of cash will each partner receive as a
liquidating distribution if the machinery is sold for 65,000 dollars?
A. Option A
B. Option B
C. Option C
D. Option D
A. Option A
B. Option B
C. Option C
D. Option D
A. Option A
B. Option B
C. Option C
D. Option D
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Partners Dennis and Lilly have decided to liquidate their business. The following information
is available:
Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation,
half the inventory is sold for $60,000, and $60,000 of the accounts payable is paid. During the
second month, the rest of the inventory is sold for $45,000, and the remaining accounts payable
are paid. Cash is distributed at the end of each month, and the liquidation is completed at the
end of the second month.
7. Refer to the information provided above. Using a safe payments schedule, how much cash
will be distributed to Dennis at the end of the first month?
A. $64,000
B. $60,000
C. $24,000
D. $36,000
will be distributed to Lilly at the end of the first month?
A. $24,000
B. $40,000
C. $16,000
D. $64,000
will be distributed to Dennis at the end of the second month?
A. $18,000
B. $27,000
C. $36,000
D. $60,000
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will be distributed to Lilly at the end of the second month?
A. $27,000
B. $36,000
C. $18,000
D. $0
11. Refer to the information provided. Assume instead that the remaining inventory was sold for
$10,000 in the second month. What payments will be made to Dennis and Lilly at the end of the
second month?
A. Option A
B. Option B
C. Option C
D. Option D
12. In the computation of a partner's Loss Absorption Power (LAP), the individual partner's
capital balance and profit-and-loss percentage are used in which of the following ways?
A. Option A
B. Option B
C. Option C
D. Option D
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13. During the liquidation of the FGH partnership, a cash distribution was made to all the
partners, who share profits and losses 60 percent, 20 percent, and 20 percent, respectively.
Assuming that the cash distribution referred to was made properly, how much would G receive
if an additional $60,000 was distributed?
A. $60,000
B. $20,000
C. $17,000
D. $12,000
14. Which of the following items are important in the determination of safe installment
payments to partners?
I. Deficits created in capital accounts are distributed to the remaining partners.
II. All unsold noncash assets are assumed to be worthless.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
15. In the computation of a partner's Loss Absorption Power (LAP), which of the following
statements is incorrect?
I. The computation of LAPs for all partners allows cash to be distributed before all partnership
assets have been sold and all creditors have been paid.
II. The computation of LAPs for all partners indicates the relative strength of each partner's net
capital position so that available cash is distributed in respective loss-sharing ratios.
A. I
B. II
C. Both I and II
D. Neither I nor II
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16. The BIG Partnership has decided to liquidate at December 31, 2008. The capital and loan
balances of the partners at December 31, 2008, are provided below:
If you were to calculate the Loss Absorption Power for each partner, how would the partners
rank (from highest to lowest LAP)?
A. B, I, G
B. I, B, G
C. B, G, I
D. G, I, B
17. Partner A has a smaller capital balance than Partner L. Partner A, however, has a higher
profit-and-loss-sharing percentage than Partner L. The LA partnership has decided to liquidate.
As a result of the information given,
A. Partner L will have a smaller loss absorption power than A.
B. Partner L will receive cash only after A has received cash.
C. Partner A will have a smaller loss absorption power than L.
D. Partner A will never receive any cash from partnership liquidation.
18. In the calculation of the loss absorption power for a partner, a partner's loan balance (an
amount that is owed by the partnership) should be:
I. Added to the partner's capital balance.
II. Paid to the partner as a creditor of the partnership.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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19. On a partner's personal statement of financial condition, how should liabilities be valued?
I. Present value
II. Lower of present value or cash settlement amount
A. I
B. II
C. Both I and II
D. Neither I nor II
20. On a partner's personal statement of financial condition, assets and liabilities are presented:
I. As current and noncurrent.
II. In order of liquidity and maturity.
A. I
B. II
C. Both I and II
D. Neither I nor II
21. The personal financial statements of a partner include which of the following?
I. Statement of financial condition.
II. Statement of changes in net worth.
III. Statement of cash flows.
A. I and II
B. I and III
C. II and III
D. I, II, and III
22. On a partner's personal statement of financial condition, how are assets valued?
A. Historical cost
B. Book value
C. Discounted value
D. Estimated current value
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23. On a partner's personal statement of changes in net worth, what type(s) of income is (are)
recognized?
I. Realized
II. Unrealized
A. I only
B. II only
C. Both I and II
D. Neither I nor II
Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's
balance sheet at the time they decide to wind up is as follows:
During the winding up of the partnership, the other assets are sold for $150,000 and the
accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are
personally insolvent. The partners share profits and losses in the ratio of 4:2:1:3.
24. Based on the preceding information, what amount will be paid out to Bill upon liquidation
of the partnership?
A. $0
B. $25,000
C. $11,667
D. $2,500
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25. Based on the preceding information, what amount will be paid out to Scott upon liquidation
of the partnership?
A. $0
B. $2,500
C. $25,000
D. $65,000
26. Based on the preceding information, what amount will be distributed to Page and Larry
upon liquidation of the partnership?
A. Option A
B. Option B
C. Option C
D. Option D
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of the partnership?
A. $0
B. $5,000
C. $25,000
D. $2,500
of the partnership?
A. $0
B. $2,500
C. $5,000
D. $6,429
29. Based on the preceding information, what amounts will be distributed to Page and Larry
A. Option A
B. Option B
C. Option C
D. Option D
30. When a partnership is liquidated on a piecemeal basis and cash has been distributed
properly to all partners as noncash assets have been turned into cash, all future cash
distributions should be made:
I. In the profit and loss ratio.
II. According to the balances in the partners' capital accounts.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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31. When is a partnership considered to be insolvent?

I. When the total of all partners' capital accounts results in a debit balance.
II. When at least one of the partners is personally insolvent.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
32. The computation of a safe installment payment for the XYZ partnership resulted in only
partner Z receiving cash. Which of the following statements is correct?
I. Partner Z lent the partnership cash, and the partnership had to pay back the loan to Z before
distributing cash to X and Y.
II. After assuming all noncash assets were potentially worthless and that assumed capital
deficits created in X's and Y's capital balances were losses to be allocated to Z; Z's capital
balance was the only capital balance left with a credit.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
33. The JKL partnership liquidated its business in 2009. Due to an expected long liquidation
period, a cash distribution plan was developed. The initial sale and realization of cash from
noncash assets resulted in partner K properly getting $24,000. No other partners received cash
along with K. Based upon this information, which of the following statements is correct?
I. K's loss absorption power (LAP) was higher than J's LAP and L's LAP.
II. K's capital balance was substantially larger than the balances of J and L.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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34. On December 31, 2008, Mr. and Mrs. Williams owned a parcel of land held as an
investment. The land was purchased for $40,000 in 2006, and was encumbered by a mortgage
with a principal balance of $30,000 at December 31, 2008. On this date the fair value of the
land was $75,000. In the Williams' December 31, 2008, personal statement of financial
condition, at what amount should the land investment and mortgage payable be reported?
A. Option A
B. Option B
C. Option C
D. Option D
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The trial balance of WM Partnership is as follows:
Wilfred and Mike decides to incorporate their partnership. The partnership's books will be
closed, and new books will be used for W & M Corporation. The following additional
information is available:
1. The estimated fair values of the assets follow:
2. All assets and liabilities are transferred to the corporation.

3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares.
4. The partners share profits and losses in the ratio 7:3.
35. Based on the preceding information, the journal entry on the partnership's books to record
the Investment in W&M Corporation Stock will be debited for:
A. $181,000
B. $131,000
C. $200,000
D. $150,000
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distribution of stock to prior partners will include a debit to Wilfred, Capital for:
A. $140,000.
B. $91,700.
C. $86,700.
D. $126,700.
distribution of stock to prior partners will include a debit to Mike, Capital for:
A. $38,010.
B. $31,500.
C. $42,000.
D. $44,300.
38. Based on the preceding information, the journal entry on W & M Corporation's books to
record the assets and the issuance of the common stock will include a credit to Additional Paid-
In Capital for:
A. $0.
B. $81,000.
C. $31,000.
D. $50,000.
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The following condensed balance sheet is presented for the partnership of D, E, and F who
share profits and losses in the ratio of 5:3:2, respectively:
The partners agreed to liquidate the partnership after selling the other assets.
39. Refer to the above information. If the other assets are sold for $280,000, how much should
F receive upon liquidation?
A. $44,000
B. $50,000
C. $76,000
D. $90,000
40. Refer to the above information. If the other assets are sold for $80,000, and all partners are
personally insolvent, how much should E receive upon liquidation?
A. $0
B. $6,000
C. $10,000
D. $20,000
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41. The CRT partnership has decided to terminate operations and to liquidate the partnership
assets. There are no partner loans, and all partners have positive capital balances. Gains and
losses on liquidation and cash distributions to partners should be allocated as follows:
A. Option A
B. Option B
C. Option C
D. Option D
Essay Questions
42. A partnership may be involved in "Dissociation" or "Dissolution".

Required:
Describe "Dissociation" and "Dissolution."
43. Listen and Hear are thinking of dissolving their partnership. Listen has a friend who told
him to complete a "lump-sum" liquidation. Hear wants to complete an "installment" liquidation.
They have come to you for advice. What do you recommend and Why?
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44. On March 1, 2009, the ABC partnership decides to complete a lump-sum liquidation as
soon as possible. The partnership balance sheet prepared on March 1 appears below:
The partners share profits and losses in the ratio of 3:4:3. Partner B is personally insolvent, but
partners A and C have sufficient personal assets to satisfy any capital deficits. On March 15,
2009, the non-cash assets are sold for $550,000. Lump sum payments are made to the partners
on March 16, immediately after the creditors have been paid.
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45. A personal statement of financial condition dated December 31, 2008, is to be prepared for
Wilhelm Holz. He provides the following information for your use in preparing the statements.
All amounts are as of December 31, 2008.
1) Cash on hand and in bank is $4,000.

2) Investments costing $30,000 have a market value of $78,000.
3) His personal residence cost $150,000 ten years ago, and is currently worth $320,000.
4) The payoff balance of his home mortgage is $80,000.
5) The fair value of his 401(k) retirement account is $700,000. All withdrawals from the
account will be fully taxable.
6) Amounts due on credit card debt total $5,000.
7) Estimated income taxes on his calendar 2008 earnings amount to $15,000. Taxes withheld in
2008 were $14,000.
8) Assume an income tax rate of 30 percent.
Required: Prepare a statement of financial condition for Mr. Holz as of December 31, 2008.
Assume any gain on subsequent sale of the residence will not be tax-exempt.
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46. The partnership of Rachel, Adams, and Nixon has the following trial balance on September
30, 2009:
The partners share profits and losses as follows: Rachel, 50 percent; Adams, 30 percent; and
Nixon, 20 percent. The partners are considering an offer of $180,000 for the accounts
receivable, inventory, and plant and equipment as of September 30. The $180,000 will be paid
to creditors and the partners in installments, the number and amounts of which are to be
negotiated.
Required:
Prepare a cash distribution plan as of September 30, 2009, showing how much cash each
partner will receive if the offer to sell the assets is accepted.
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47. Refer to the facts in Question 46. The partners have decided to liquidate their partnership by
installments instead of accepting the offer of $180,000. Cash is distributed to the partners at the
end of each month. A summary of the liquidation transactions follows:
October
1. $25,000 is collected on accounts receivable; balance is uncollectible.
2. $20,000 received for the entire inventory.
3. $1,500 liquidation expense paid.
4. $40,000 paid to creditors.
5. $10,000 cash retained in the business at the end of the month.
November
6. $2,000 in liquidation expenses paid.
7. As part payment of his capital, Nixon accepted an item of special equipment that he
developed, which had a book value of $8,000. The partners agreed that a value of $12,000
should be placed on this item for liquidation purposes.
December
9. $150,000 received on sale of remaining plant and equipment.
10. $1,000 liquidation expenses paid. No cash retained in the business.
Required:
Prepare a statement of partnership realization and liquidation with supporting schedules of safe
payments to partners.
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48. When Disney and Charles decided to incorporate their partnership, the trial balance was as
follows:
The partnership's books will be closed, and new books will be used for D & C Corporation. The
following additional information is available:

3. The common stock is $5 par. Alice and Betty receive a total of 24,000 shares.
4. Disney and Charles share profits and losses in the ratio 6:4.
Required
a. Prepare the entries on the partnership's books to record (1) the revaluation of assets, (2) the
transfer of the assets to the D & C Corporation and the receipt of the common stock, and (3) the
closing of the books.
b. Prepare the entries on D & C Corporation's books to record the assets and the issuance of the
common stock.
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Chapter 16 Partnerships: Liquidation Answer Key
Multiple Choice Questions
1. The capital balances, prior to the liquidation of the XYZ partnership, were as follows:
X, Y, and Z share profits and losses in the ratio of 5:3:2. As a result of a loan, the partnership
owes Y $80,000. Using the information above, which partner has the highest Loss Absorption
Power (LAP) prior to liquidation?
A. X
B. Y
C. Z
D. Both X and Y
AACSB: Analytic
AICPA: Measurement
16-23
2. The balance sheet given below is presented for the partnership of Janet, Anton, and Millet:
The partners share profits and losses in the ratio of 5:3:2, respectively. The partners agreed to
dissolve the partnership after selling the other assets for $50,000. On dissolution of the
partnership, Janet should receive:
A. $0.
B. $80,000.
C. $10,000.
D. $30,000.
AACSB: Analytic
AICPA: Measurement
16-24
3. On December 1, 2009, the partners of Tim, Williams, and Levin, who share profits and losses
in the ratio of 4:4:2, decided to liquidate their partnership. On this date the partnership
condensed balance sheet was as follows:
On December 11, 2009, the first cash sale of other assets with a carrying amount of $200,000
realized $140,000. Safe installment payments to the partners were made on the same date. How
much cash should be distributed to each partner?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to
generate the type of revenue expected by the partners. They share profits and losses in a ratio of
5:3:2. They have decided to liquidate the business and have sold all the assets except for one
piece of heavy machinery. All partnership liabilities have been settled and all the partners are
personally insolvent. The machinery has a book value of $85,000, and the partners have capital
account balances as follows:
Each of the following are independent cases.
16-25
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
16-26
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
Partners Dennis and Lilly have decided to liquidate their business. The following information
is available:
Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation,
half the inventory is sold for $60,000, and $60,000 of the accounts payable is paid. During the
second month, the rest of the inventory is sold for $45,000, and the remaining accounts payable
are paid. Cash is distributed at the end of each month, and the liquidation is completed at the
end of the second month.
16-27
will be distributed to Dennis at the end of the first month?
A. $64,000
B. $60,000
C. $24,000
D. $36,000
AACSB: Analytic
AICPA: Measurement
will be distributed to Lilly at the end of the first month?
A. $24,000
B. $40,000
C. $16,000
D. $64,000
AACSB: Analytic
AICPA: Measurement
will be distributed to Dennis at the end of the second month?
A. $18,000
B. $27,000
C. $36,000
D. $60,000
AACSB: Analytic
AICPA: Measurement
16-28
will be distributed to Lilly at the end of the second month?
A. $27,000
B. $36,000
C. $18,000
D. $0
AACSB: Analytic
AICPA: Measurement
11. Refer to the information provided. Assume instead that the remaining inventory was sold for
$10,000 in the second month. What payments will be made to Dennis and Lilly at the end of the
second month?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
16-29
12. In the computation of a partner's Loss Absorption Power (LAP), the individual partner's
capital balance and profit-and-loss percentage are used in which of the following ways?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking

AICPA: Decision Making
13. During the liquidation of the FGH partnership, a cash distribution was made to all the
partners, who share profits and losses 60 percent, 20 percent, and 20 percent, respectively.
Assuming that the cash distribution referred to was made properly, how much would G receive
if an additional $60,000 was distributed?
A. $60,000
B. $20,000
C. $17,000
D. $12,000
AACSB: Analytic
AICPA: Measurement
14. Which of the following items are important in the determination of safe installment
payments to partners?
I. Deficits created in capital accounts are distributed to the remaining partners.
II. All unsold noncash assets are assumed to be worthless.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

16-30
15. In the computation of a partner's Loss Absorption Power (LAP), which of the following
statements is incorrect?
I. The computation of LAPs for all partners allows cash to be distributed before all partnership
assets have been sold and all creditors have been paid.
II. The computation of LAPs for all partners indicates the relative strength of each partner's net
capital position so that available cash is distributed in respective loss-sharing ratios.
A. I
B. II
C. Both I and II
D. Neither I nor II

16. The BIG Partnership has decided to liquidate at December 31, 2008. The capital and loan
balances of the partners at December 31, 2008, are provided below:
If you were to calculate the Loss Absorption Power for each partner, how would the partners
rank (from highest to lowest LAP)?
A. B, I, G
B. I, B, G
C. B, G, I
D. G, I, B

16-31
17. Partner A has a smaller capital balance than Partner L. Partner A, however, has a higher
profit-and-loss-sharing percentage than Partner L. The LA partnership has decided to liquidate.
As a result of the information given,
A. Partner L will have a smaller loss absorption power than A.
B. Partner L will receive cash only after A has received cash.
C. Partner A will have a smaller loss absorption power than L.
D. Partner A will never receive any cash from partnership liquidation.

18. In the calculation of the loss absorption power for a partner, a partner's loan balance (an
amount that is owed by the partnership) should be:
I. Added to the partner's capital balance.
II. Paid to the partner as a creditor of the partnership.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

19. (p. Appendix: A) On a partner's personal statement of financial condition, how should liabilities be
valued?
I. Present value
II. Lower of present value or cash settlement amount
A. I
B. II
C. Both I and II
D. Neither I nor II

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20. (p. Appendix: A) On a partner's personal statement of financial condition, assets and liabilities are
presented:
I. As current and noncurrent.
II. In order of liquidity and maturity.
A. I
B. II
C. Both I and II
D. Neither I nor II

21. (p. Appendix: A) The personal financial statements of a partner include which of the following?
I. Statement of financial condition.
II. Statement of changes in net worth.
III. Statement of cash flows.
A. I and II
B. I and III
C. II and III
D. I, II, and III

22. (p. Appendix: A) On a partner's personal statement of financial condition, how are assets valued?
A. Historical cost
B. Book value
C. Discounted value
D. Estimated current value

16-33
23. (p. Appendix: A) On a partner's personal statement of changes in net worth, what type(s) of
income is (are) recognized?
I. Realized
II. Unrealized
A. I only
B. II only
C. Both I and II
D. Neither I nor II

of the partnership?
A. $0
B. $25,000
C. $11,667
D. $2,500
AACSB: Analytic
AICPA: Measurement
16-34
of the partnership?
A. $0
B. $2,500
C. $25,000
D. $65,000
AACSB: Analytic
AICPA: Measurement
26. Based on the preceding information, what amount will be distributed to Page and Larry
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
16-35
of the partnership?
A. $0
B. $5,000
C. $25,000
D. $2,500
AACSB: Analytic
AICPA: Measurement
of the partnership?
A. $0
B. $2,500
C. $5,000
D. $6,429
AACSB: Analytic
AICPA: Measurement
16-36
29. Based on the preceding information, what amounts will be distributed to Page and Larry
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
30. When a partnership is liquidated on a piecemeal basis and cash has been distributed
properly to all partners as noncash assets have been turned into cash, all future cash
distributions should be made:
I. In the profit and loss ratio.
II. According to the balances in the partners' capital accounts.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

31. When is a partnership considered to be insolvent?

I. When the total of all partners' capital accounts results in a debit balance.
II. When at least one of the partners is personally insolvent.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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32. The computation of a safe installment payment for the XYZ partnership resulted in only
partner Z receiving cash. Which of the following statements is correct?
I. Partner Z lent the partnership cash, and the partnership had to pay back the loan to Z before
distributing cash to X and Y.
II. After assuming all noncash assets were potentially worthless and that assumed capital
deficits created in X's and Y's capital balances were losses to be allocated to Z; Z's capital
balance was the only capital balance left with a credit.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

33. The JKL partnership liquidated its business in 2009. Due to an expected long liquidation
period, a cash distribution plan was developed. The initial sale and realization of cash from
noncash assets resulted in partner K properly getting $24,000. No other partners received cash
along with K. Based upon this information, which of the following statements is correct?
I. K's loss absorption power (LAP) was higher than J's LAP and L's LAP.
II. K's capital balance was substantially larger than the balances of J and L.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

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34. On December 31, 2008, Mr. and Mrs. Williams owned a parcel of land held as an
investment. The land was purchased for $40,000 in 2006, and was encumbered by a mortgage
with a principal balance of $30,000 at December 31, 2008. On this date the fair value of the
land was $75,000. In the Williams' December 31, 2008, personal statement of financial
condition, at what amount should the land investment and mortgage payable be reported?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
16-39
The trial balance of WM Partnership is as follows:
Wilfred and Mike decides to incorporate their partnership. The partnership's books will be
closed, and new books will be used for W & M Corporation. The following additional
information is available:

3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares.
4. The partners share profits and losses in the ratio 7:3.
the Investment in W&M Corporation Stock will be debited for:
A. $181,000
B. $131,000
C. $200,000
D. $150,000
AACSB: Analytic
AICPA: Measurement
16-40
distribution of stock to prior partners will include a debit to Wilfred, Capital for:
A. $140,000.
B. $91,700.
C. $86,700.
D. $126,700.
AACSB: Analytic
AICPA: Measurement
distribution of stock to prior partners will include a debit to Mike, Capital for:
A. $38,010.
B. $31,500.
C. $42,000.
D. $44,300.
AACSB: Analytic
AICPA: Measurement
38. Based on the preceding information, the journal entry on W & M Corporation's books to
record the assets and the issuance of the common stock will include a credit to Additional Paid-
In Capital for:
A. $0.
B. $81,000.
C. $31,000.
D. $50,000.
AACSB: Analytic
AICPA: Measurement
16-41
The following condensed balance sheet is presented for the partnership of D, E, and F who
share profits and losses in the ratio of 5:3:2, respectively:
The partners agreed to liquidate the partnership after selling the other assets.
39. Refer to the above information. If the other assets are sold for $280,000, how much should
F receive upon liquidation?
A. $44,000
B. $50,000
C. $76,000
D. $90,000
AACSB: Analytic
AICPA: Measurement
40. Refer to the above information. If the other assets are sold for $80,000, and all partners are
personally insolvent, how much should E receive upon liquidation?
A. $0
B. $6,000
C. $10,000
D. $20,000
AACSB: Analytic
AICPA: Measurement
16-42
41. The CRT partnership has decided to terminate operations and to liquidate the partnership
assets. There are no partner loans, and all partners have positive capital balances. Gains and
losses on liquidation and cash distributions to partners should be allocated as follows:
A. Option A
B. Option B
C. Option C
D. Option D

Essay Questions
16-43
42. A partnership may be involved in "Dissociation" or "Dissolution".

Required:
Describe "Dissociation" and "Dissolution."
Dissociation is the legal description of the withdrawal of a partner including the following:
i. Partner's death.
ii. Partner's voluntary withdrawal, i.e. retirement.
iii. Judicial determination.
Not all dissociations result in a partnership's liquidation. Many partner dissociations involve
only a buyout of the withdrawing partner's interest rather than a winding up and liquidation of
the partnership's business.
Dissolution involves dissolving of the partnership and winding up of the partnership business.
Dissolutions can occur:
i. In a partnership at will. A partnership agreement can avoid this situation.
ii. In a partnership for a definite term or specific undertaking.
iii. By an event that makes it unlawful to carry on the partnership business.
iv. By a judicial determination.
A "Dissociation" that results in liquidation has the same end result as "Dissolution".
AACSB: Communication
43. Listen and Hear are thinking of dissolving their partnership. Listen has a friend who told
him to complete a "lump-sum" liquidation. Hear wants to complete an "installment" liquidation.
They have come to you for advice. What do you recommend and Why?
A. "Lump-sum" liquidation and Installment" liquidation does not represent a choice in

procedures. They represent different points in time. A Lump-Sum" liquidation takes place
when all of the affairs of the partnership can be ended at the same time and all of the resulting
cash can be distributed to the partners at that time. "Installment" liquidation is what normally
occurs because the partners want access to some cash as soon as possible, and all of the
partnership assets have to be sold and liabilities paid. The preparation of a "Safe-Payments
Schedule" can allow this to happen in an orderly manner.
AACSB: Communication
AICPA: Critical Thinking
16-44
44. On March 1, 2009, the ABC partnership decides to complete a lump-sum liquidation as
soon as possible. The partnership balance sheet prepared on March 1 appears below:
The partners share profits and losses in the ratio of 3:4:3. Partner B is personally insolvent, but
partners A and C have sufficient personal assets to satisfy any capital deficits. On March 15,
2009, the non-cash assets are sold for $550,000. Lump sum payments are made to the partners
on March 16, immediately after the creditors have been paid.
AACSB: Analytic
AICPA: Measurement
16-45
45. A personal statement of financial condition dated December 31, 2008, is to be prepared for
Wilhelm Holz. He provides the following information for your use in preparing the statements.
All amounts are as of December 31, 2008.
1) Cash on hand and in bank is $4,000.

2) Investments costing $30,000 have a market value of $78,000.
3) His personal residence cost $150,000 ten years ago, and is currently worth $320,000.
4) The payoff balance of his home mortgage is $80,000.
5) The fair value of his 401(k) retirement account is $700,000. All withdrawals from the
account will be fully taxable.
6) Amounts due on credit card debt total $5,000.
7) Estimated income taxes on his calendar 2008 earnings amount to $15,000. Taxes withheld in
2008 were $14,000.
8) Assume an income tax rate of 30 percent.
16-46
Required: Prepare a statement of financial condition for Mr. Holz as of December 31, 2008.
Assume any gain on subsequent sale of the residence will not be tax-exempt.
AACSB: Analytic
AICPA: Measurement
16-47
46. The partnership of Rachel, Adams, and Nixon has the following trial balance on September
30, 2009:
The partners share profits and losses as follows: Rachel, 50 percent; Adams, 30 percent; and
Nixon, 20 percent. The partners are considering an offer of $180,000 for the accounts
receivable, inventory, and plant and equipment as of September 30. The $180,000 will be paid
to creditors and the partners in installments, the number and amounts of which are to be
negotiated.
Required:
Prepare a cash distribution plan as of September 30, 2009, showing how much cash each
partner will receive if the offer to sell the assets is accepted.
16-48
16-49
16-50
AACSB: Analytic
AICPA: Measurement
47. Refer to the facts in Question 46. The partners have decided to liquidate their partnership by
installments instead of accepting the offer of $180,000. Cash is distributed to the partners at the
end of each month. A summary of the liquidation transactions follows:
October
1. $25,000 is collected on accounts receivable; balance is uncollectible.
2. $20,000 received for the entire inventory.
3. $1,500 liquidation expense paid.
4. $40,000 paid to creditors.
November
6. $2,000 in liquidation expenses paid.
7. As part payment of his capital, Nixon accepted an item of special equipment that he
developed, which had a book value of $8,000. The partners agreed that a value of $12,000
should be placed on this item for liquidation purposes.
December
9. $150,000 received on sale of remaining plant and equipment.
10. $1,000 liquidation expenses paid. No cash retained in the business.
Required:
Prepare a statement of partnership realization and liquidation with supporting schedules of safe
payments to partners.
16-51
16-52
AACSB: Analytic
AICPA: Measurement
16-53
48. When Disney and Charles decided to incorporate their partnership, the trial balance was as
follows:
The partnership's books will be closed, and new books will be used for D & C Corporation. The
following additional information is available:

3. The common stock is $5 par. Alice and Betty receive a total of 24,000 shares.
4. Disney and Charles share profits and losses in the ratio 6:4.
Required
a. Prepare the entries on the partnership's books to record (1) the revaluation of assets, (2) the
transfer of the assets to the D & C Corporation and the receipt of the common stock, and (3) the
closing of the books.
b. Prepare the entries on D & C Corporation's books to record the assets and the issuance of the
common stock.
16-54
a)
b)
AACSB: Analytic
AICPA: Measurement
16-55

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Chapter 16 - Partnerships: Liquidation

Multiple Choice Questions

Each of the following are independent cases.

31. When is a partnership considered to be insolvent?

The trial balance of WM Partnership is as follows:

2. All assets and liabilities are transferred to the corporation.

42. A partnership may be involved in "Dissociation" or "Dissolution".

1) Cash on hand and in bank is $4,000.

2. All assets and liabilities are transferred to the corporation.

Chapter 16 Partnerships: Liquidation Answer Key

Multiple Choice Questions

Each of the following are independent cases.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

31. When is a partnership considered to be insolvent?

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

The trial balance of WM Partnership is as follows:

2. All assets and liabilities are transferred to the corporation.

AACSB: Reflective Thinking

42. A partnership may be involved in "Dissociation" or "Dissolution".

A. "Lump-sum" liquidation and Installment" liquidation does not represent a choice in

1) Cash on hand and in bank is $4,000.

2. All assets and liabilities are transferred to the corporation.

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