DISSOLUTION AND LIQUIDATION OF A PARTNERSHIP

1 A partnership dissolution differs from a liquidation in that

a. payments are made to creditors before partners receive value.

b. periodic payments to partners are made when cash becomes available.

c. a partner withdraws from the business and the enterprise continues to function.

d. full payment is made to all outside creditors before remaining cash is distributed to
partners in a final lump sum payment.

2 In partnership liquidation, how are partner salary allocations treated?

a. Salary allocations take precedence over creditor payments.

b. Salary allocations take precedence over amounts due to partners with respect to their
capital interests, but not profits.

c. Salary allocations take precedence over amounts due to partners with respect to their
capital profits, but not capital interests.

d. Salary allocations are disregarded.

3 In a simple partnership liquidation, the last remaining cash distribution should be made
according to the ratio of

a. the individual partner’s profit and loss agreement.

b. the individual partner's capital accounts, increased by partner loans to the partnership.

c. the individual partner’s capital accounts, increased by partnership loans to the

partners and decreased by partner loans to the partnership.

d. the individual partner’s capital accounts, decreased by partnership loans to the

partners and increased by partner loans to the partnership.
On June 30, 2006, the Warle, Xin, and Yates partnership had the following fiscal year-end balance
sheet:

Cash $ 4,000 Accounts payable $ 7,000

Accounts receivable 6,000 Loan from Xin 5,000

Inventory 14,000 Warle, capital(20%) 14,000

Plant assets-net 12,000 Xin, capital(30%) 10,000

Loan to Warle 6,000 Yates, capital(50%) 6,000

Total assets $ 42,000 Total liab./equity $ 42,000

The percentages shown are the residual profit and loss sharing ratios. The partners dissolved the
partnership on July 1, 2006,. and began the liquidation process. During July the following events
occurred:

* Receivables of $3,000 were collected.

* The inventory was sold for $4,000.

* All available cash was distributed on

July 31, except for $2,000 that was set aside for
contingent expenses.
4 The book value of the partnership equity (i.e., total equity of the partners) on June 30,
2006 is

a. $60,000.

b. $29,000.

c. $30,000.

d. $42,000.
5 How much cash would Xin receive from the cash that is available for distribution on July
31?

a. $ 0.

b. $ 600.

c. $1,000.

d. $2,000.