Partnership liquidation

In the cash priority program (CPP), the loss absorption potential shall be computed by dividing the total interest of the partner by the profit or loss ratio.

True

The higher the loss absorption potential, the lower in rank for the priority distribution.

True

If all the priority distributions were satisfied, all the subsequent distribution will be thru profit or loss ratio.

True

The partner with personal assets higher than his personal liability is a solvent partner, hence, his capital deficiency shall be absorbed by the other partners.

False

In the computation of cash available for distribution, the cash proceeds from the sale of non-cash assets shall be added to the beginning cash while the liabilities settled and liquidation expenses shall be deducted.

False

The process of winding up the affairs of the business with cessation of the operation is called as dissolution.

False

The loans to partnership by a partner and loans from the partner have the same effect in computing the total interest of the partner before liquidation.

True

The upward revaluation of asset and net loss of the operation has the same effect in computing the total interest of the partner before liquidation.

True

In cases when the partner encounters deficiency after the distribution of loss on realization and liquidation expense, such amount shall be first offset against the loan from partnership of the said partner.

True

In the schedule of safe payments, the book value of the non-cash assets which are not yet realized shall be part of the maximum possible loss that will be distributed, using profit or loss ratio, against the total interest of the partners

True

Which of the following is not a characterized of the proprietary theory that influences accounting for partnerships?

A partnership is characterized by limited liability

Don and Key form a partnership. Don contributes into the partnership a personal computer that he has used at home in nonbusiness related activities. Don had paid $10,000 for the computer 2 years ago. The current market value of the computer is $9,000. The partners, after reviewing IRS rules, assigned the computer a useful life of 5 years. For financial reporting purposes, at what amount should the computer be recorded in the partnership ledger?

$9,000

Which of the following would be least likely to be used as a means of allocating profits among partners who are active in the management of the partnership?

Interest on average capital balances

Which of the following best describes the use of interest on invested capital as a means of allocating profits?

Use of beginning or ending measures of invested capital may be subject to manipulation that distorts the measure of invested capital

A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation, interest on capital, with any remainder to be allocated by preset ratios. If a partnership has a loss to allocate, generally which of the following procedures would be applied?

The bonus criteria would not be used

Ace & Barnes partnership has income of $110,000 and Partner A is to be allocated a bonus of 10% of income after the bonus, Partner A’s bonus would be

$10,000

Partner A first contributed $20,000 of capital into an existing partnership on February 1, 20×1. On June 1, 20×1, the partner contributed another $20,000. On September 1, 20×1, the partner withdrew $15,000 from the partnership. Withdrawals in excess of $5,000 are charged to the partner’s capital account. The partnership’s fiscal year end is December 31. The annual weighted-average capital balance is 

$25,000

Partner Alta had a capital balance on January 1, 20×5 of $45,000 and made additional capital contributions during 20×5 totaling $50,000. During the year 20×5, Alta withdrew $8,000 per month. Alta’s post-closing capital balance on December 31, 20×5 is $30,000. Alta’s share of 20×5 partnership income is

$31,000

Partners A and B have a profit and loss agreement with the following provisions: salaries of $20,000 and $25,000 for A and B, respectively; a bonus to A of 10% of net income after bonus; and interest of 20% on average capital balances of $40,000 and $50,000 for A and B, respectively. Any remainder is split equally. If the partnership had net income of $88,000, how much should be allocated to Partner A?

$44,500

Partners A and B have a profit and loss agreement with the following provisions: salaries of $30,000 and $45,000 for A and B, respectively; a bonus to A of 12% of net income after salaries and bonus; and interest of 10% on average capital balances of $50,000 and $65,000 for A and B, respectively. One-fourth of any remaining profits are allocated to A and the balance to B. If the partnership had net income of $108,600, how much should be allocated to Partner A?

$43,225

Partners A and B have a profit and loss agreement with the following provisions: salaries of $40,000 and $45,000 for A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and interest of 15% on average capital balances of $40,000 and $60,000 for A and B, respectively. One-third of any remaining profits or losses are allocated to B and the balance to A. If the partnership had net income of $52,000, how much should be allocated to Partner A?

$30,000

Partners Acker, Becker & Checker have the following profit and loss agreement:

(1) Acker & Becker receive salaries of $40,000 each 

(2) Checker gets a bonus of 10 percent of net income after salaries and bonus (the bonus is zero if salaries exhaust net income)

(3) Remaining profits are shared by Acker, Becker & Checker in the following ratios respectively: 3:4:3.

The partnership had a net income of $91,000. How much should be allocated to Checker?

$4,000

Partners A and B have a profit and loss agreement with the following provisions: salaries of $41,600 and $38,400 for A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and interest of 10% on average capital balances of $20,000 and $35,000 for  A and B, respectively. One-third of any remaining profits are allocated to A and the balance to B. If the partnership had a net income of $36,000, how much should be allocated to Partner A, assuming that the provisions of the profit and loss agreement are ranked by order of priority starting with salaries?

$18,720

Partners Tuba and Drum share profits and losses of their partnership equally after 1) annual salary allowances of $25,000 for Tuba and $20,000 for Drum and 2) 10% interest is provided on average capital balances. During 20×1, the partnership had earnings of $50,000; Tuba’s average capital balance was $60,000 and Drum’s average capital balance was $90,000.

How should the $50,000 of earnings be divided?

Tuba: $26,000

Drum: $24,000

Partners Tuba and Drum share profits and losses of their partnership equally after 1) annual salary allowances of $25,000 for Tuba and $20,000 for Drum and 2) 10% interest is provided on average capital balances. During 20×1, the partnership had earnings of $50,000; Tuba’s average capital balance was $60,000 and Drum’s average capital balance was $90,000.

What would be the correct answer if an order of priority was in the partnership agreement whereby salary allowances have a higher priority than interest on capital allocations?

Tuba: $27,000

Drum: $23,000

Which of the following statements is true concerning the treatment of salaries in partnership accounting?

Partner salaries may be used to allocate profits and losses; they are not considered expenses of the partnership

Partners active in a partnership business should have their share of partnership profits based on the following

a combination of salaries and percentage of net income after salaries and any other allocation basis

Which of the following statements are true when comparing corporations and partnerships?

Unlike shareholders, general partners may have liability beyond their capital balances

Partnership drawings are

usually maintained in a separate draw account with any excess draws being debited directly to the capital account

Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus of 20% of net income after the bonus as a means of allocating profit among the partners. What amount of income would be necessary so that Maxwell would consider the choices to be equal?

$210,000

Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus of 20% of net income after salaries and bonus as a means of allocating profit among the partners. Salaries traceable to the other partners are estimated to be $75,000. What amount of income would be necessary so that Maxwell would consider the choices to be equal?

$310,000

Maxwell is a partner and has an annual salary of $30,000 per year, but he actually draws $3,000 per month. The other partner in the partnership has an annual salary of $40,000 and draws $4,000 per month. What is the total annual salary that should be used to allocate annual net income among the partners?

$70,000

A partnership has the following accounting amounts:

(1) Sales = $70,000

(2) Cost of Goods Sold = $40,000

(3) Operating Expenses = $10,000

(4) Salary allocations to partners = $13,000

(5) Interest paid to banks = $2,000

(6) Partners’ withdrawals = $8,000

Partnership net income (loss) is 

$18,000

Which of the following characteristics of a partnership most likely explains why a public accounting firm is organized as a partnership from a public policy viewpoint?

A partnership is characterized by unlimited liability

For financial accounting purpose, assets of an individual partner contributed to a partnership are recorded by the partnership at

fair market value

Which of the following is not an advantage of a partnership over a corporation?

Unlimited liability

Under the entity theory, a partnership is

viewed as having its own existence apart from the partners

Of the following components used to allocate profits among partners, which is less likely to be found in a partnership of landscape architects?

Interest on invested capital

Della Reise was admitted to a partnership. She contributed $25,000 cash plus equipment she purchased for $50,000 and which had accumulated depreciation for tax purposes of $20,000. The fair value of the equipment was $35,000. She also assumed 1/3 of partnership debt of $15,000. Her beginning capital balance was $48,000. For tax purposes her partnership interest should be initially valued at

$60,000

Which of the following does not decrease a partner’s tax basis in a partnership?

The basis of other partners’ liabilities assumed by the partnership

For tax purposes, assets of an individual partner that are contributed to a partnership are recorded by the partnership at

the individual partner’s tax basis

The disadvantages of double taxation for an entity with two owners may not be avoided if the entity is

distributing all of its income in the form of dividends.

Under the bonus method, when a new partner is admitted to the partnership, the total capital of the new partnership is equal to:

the book value of the previous partnership - any asset write downs from book to market value + the fair market value of the consideration paid to the existing partnership by the incoming partner

When a new partner is admitted to a partnership under the goodwill method, an original partner’s capital account may be adjusted for

his or her share of previously unrecorded intangible assets traceable to the original partners

The admission of a new partner under the bonus method will result in a bonus to

either the new partner or the old partners, but not both

changes in partnership ownership are presumed to be arm’s length transactions that may require which of the following actions?

• recognitions of goodwill to existing partners

• revaluation of existing partnership assets

• recognition of goodwill or other intangible assets attributable to the incoming partner

Which of the following results in dissolution of a partnership?

withdrawal of a partner from a partnership