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When a partnership is insolvent and a partner has a deficit capital account balance, that partner is legally required to:

A) Declare personal bankruptcy.

B) Initiate legal proceedings against the partnership.

C) Contribute cash to the partnership.

D) Deliver a note payable to the partnership with specific payment terms.

E) None of these answer choices are correct.  The partner has no legal responsibility to cover the capital deficit balance.

Answer: C

Learning Objective: 15-03  

Topic: Partner deficit balance―General

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Legal

AICPA: FN Measurement

 

REFERENCE: 15-01

The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following balance sheet:

 

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5.  Liquidation expenses are expected to be $12,000.

[QUESTION]

REFER TO: 15-01

2.  If the noncash assets were sold for $234,000, what amount of the loss would have been allocated to Bartle with respect to the noncash assets?

A) $43,200.

B) $46,800.

C) $40,000.

D) $42,400.

E) $43,100.

Answer: C

Learning Objective: 15-02  

Topic: Statement of liquidation―Effect of transactions

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Non-Cash Assets BV $434,000 – Cash Received $234,000 = Loss on Non-Cash Assets ($200,000) × 20% = Loss to Bartle ($40,000)

[QUESTION]

REFER TO: 15-01

3. Assuming that the noncash assets were sold for $134,000, which partner(s) would have been required to contribute assets to the partnership to cover a deficit in his or her capital account, prior to considering the liquidation expenses incurred?

A) Abrams.

B) Bartle.

C) Creighton.

D) Abrams and Creighton.

E) Abrams and Bartle.

Answer: D

Learning Objective: 15-03  

Topic: Statement of liquidation―Deficit balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Analytical Thinking

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 30% = Loss to Abrams ($90,000) – Capital account balance $80,000 = Abrams’ Deficit and Need Contribution to Cover $10,000

Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 20% = Loss to Abrams ($60,000) – Capital account balance $90,000 = Bartle Excess after Loss Allocation of $30,000

Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 50% = Loss to Abrams ($150,000) – Capital account balance $130,000 = Creighton’s Deficit and Need Contribution to Cover $20,000

  

[QUESTION]

REFER TO: 15-01

4. Assuming that, after the payment of liquidation expenses in the amount of $12,000 was made and the noncash assets were sold, if Creighton has a deficit of $8,000, for what amount would the noncash assets have been sold?

A) $170,000.

B) $264,000.

C) $158,000.

D) $146,000.

E) $185,000.

Answer: A

Learning Objective: 15-03  

Topic: Safe payments―Allocate potential loss―Deficit

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: The resulting deficit of $8,000 is after depleting Creighton’s capital account balance of $130,000. Thus, a total of $138,000 was allocated to reduce Creighton’s capital account balance. Since Creighton was allocated one-half of the total reduction, the total allocation of expenses and losses was $276,000 of which $12,000 was for liquidation expenses, leaving a total loss on the sale of non-cash assets of $264,000.  The non-cash assets were sold for $264,000 less than book value = sale of non-cash assets for $170,000. The result is provided as: [Non-Cash Assets BV $434,000 – Cash Received $170,000] + Liquidation Expenses $12,000 = Loss on Non-Cash Assets ($276,000) × 50% = Loss to Abrams ($138,000) – Capital Account Balance $130,000 = Creighton’s Deficit  $8,000.

REFERENCE: 15-02

The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering liquidation:

Cash
$ 100,000

Liabilities
$    40,000
Noncash assets
   210,000

Keaton, Capital
      90,000

Lewis, Capital
      60,000

Meador, Capital
    120,000
     Total
$ 310,000

     Total
$  310,000

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. 

[QUESTION]

REFER TO: 15-02

5.  Assume that noncash assets were sold for $58,000 and liquidation expenses in the amount of $10,000 were incurred. If Lewis was personally insolvent and could not contribute any assets to the partnership, and Keaton and Meador were both solvent, what amount of cash would Keaton receive from the distribution of partnership assets?

A) $0.

B) $56,000.

C) $57,600.

D) $59,600.

E) $60,000.

Answer: B

Learning Objective: 15-03  

Topic: Statement of liquidation―Deficit balance

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Proceeds from sale of noncash assets in the amount of $58,000 results in a total loss of $152,000 (BV noncash assets ($210,000) less FV of assets ($58,000) = $152,000). The allocation of this loss is as follows: Keaton ($152,000 × 20% = $30,400); Lewis ($152,000 × 40% = $60,800); Meador ($152,000 × 40% = $60,800).

Each partner’s allocation of liquidation expenses are calculated as follows: Keaton ($10,000 × 20% = $2,000); Lewis ($10,000 × 40% = $4,000); Meador ($10,000 × 40% = $4,000).

Capital account balances, after the allocation of these losses, were as follows: Keaton ($90,000 – $30,400 (Loss on Noncash Assets) – $2,000 (Liquidation Expenses) = $57,600); Lewis ($60,000 – $60,800 (Loss on Noncash Assets) –  $4,000 (Liquidation Expenses) = Deficit ($4,800)); Meador ($120,000 – $60,800 (Loss on Noncash Assets) – $4,000 (Liquidation Expenses) = $55,200.

Allocation of Lewis’ $4,800 Deficit to Keaton and Meador: $1,600 to Keaton ($4,800 × 1/3 = $1,600) and $3,200 to Meador ($4,800 × 2/3 = $3,600).

Keaton’s ending Capital account balance: $57,600 – $1,600 = $56,000.

 

[QUESTION]

REFER TO: 15-02   

6.  Assuming noncash assets were sold for $60,000, how much will each partner receive in the liquidation?

       

Keaton

Lewis

Meador

A)

$  40,000

$  26,667

$  53,333

B)

$  24,000

$  48,000

$  48,000

C)

$  56,667

$          0               

$  53,333

D)

$          0

$          0

$120,000

E)

$  36,000

$  12,000

$  72,000

Answer: C

Learning Objective: 15-03  

Topic: Statement of liquidation―Deficit balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback:

[QUESTION]

REFER TO: 15-02 7.  The partnership feels confident it will be able to eventually sell the noncash assets and wants to distribute some cash before paying liabilities.  Assuming there will be no liquidation expenses, how much would each partner receive of a total $60,000 distribution of cash?

Keaton

Lewis

Meador

A)

$  40,000

$          0

$  20,000

B)

$  12,000

$  24,000

$  24,000

C)

$  20,000

$  13,333               

$  26,667

D)

$  60,000

$          0

$          0         

E)

$  10,000

$          0

$  50,000

Answer: A

Learning Objective: 15-04  

Topic: Schedule of liquidation―Safe capital balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Non-Cash Assets BV $210,000 = Maximum Loss on Non-Cash Assets ($210,000) × 20% = Loss to Keaton ($42,000); ($210,000) × 40% = ($42,000)Loss to Lewis and to Meador.

Potential Balances: Keaton $90,000 – Loss ($42,000) = Keaton Potential Balance $48,000.

Lewis $60,000 – Loss ($84,000) = Lewis Potential Balance ($24,000).

Meador $120,000 – Loss ($84,000) = Meador Potential Balance $36,000.

Lewis’ Deficit ($24,000) × 1/3 = Lewis’ Deficit Portion to Keaton ($8,000) and 2/3 × ($24,000) = Lewis’ Deficit Portion to Meador ($16,000).  Lewis will receive $0.

Keaton Potential Balance $48,000 + Lewis’ Deficit Portion ($8,000) = Keaton’s Safe Payment $40,000.

Meador Potential Balance $36,000 + Lewis’ Deficit Portion ($16,000) = Meador’s Safe Payment $20,000.

REFERENCE: 15-03

 The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances:

 

Estimated expenses of liquidation were $5,000.  Henry, Isaac, and Jacobs shared profits and losses in a ratio of 2:4:4.

[QUESTION]

REFER TO: 15-03

8.  What amount of cash was available for safe payments, based on the above information?

A) $30,000.

B) $85,000.

C) $25,000.

D) $35,000.

E) $40,000.

Answer: C

Learning Objective: 15-04  

Topic: Schedule of liquidation―Safe capital balances

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Cash $90,000 – Liabilities $60,000 – Liquidation Expenses $5,000 = “Safe” Cash $25,000

 

[QUESTION]

REFER TO: 15-03

9.  Before liquidating any assets, the partners determined the amount of cash available for safe payments.  How should the amount of safe cash payments be distributed?

A) In a ratio of 2:4:4 among all the partners.

B) $18,333 to Henry and $16,667 to Jacobs.

C) In a ratio of 1:2 between Henry and Jacobs.

D) $15,000 to Henry and $10,000 to Jacobs.

E) $21,667 to Henry and $3,333 to Jacobs.

Answer: D

Learning Objective: 15-04  

Topic: Schedule of liquidation―Safe capital balances

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback:

Non-Cash Assets BV $300,000 = Maximum Loss on Non-Cash Assets ($300,000) × 20% = Loss to Henry ($60,000); ($300,000) × 40% = ($120,000) Loss each to Isaac and to Jacobs.

Liquidation expenses of $5,000 not yet recorded are allocated 20% ($1,000) to Henry; and 40% ($2,000) each to Isaac and Jacobs.

Potential Balances: Henry $80,000 – Loss ($60,000) – Liquidation expenses ($1,000) = Henry’s Potential Balance $19,000.

Isaac $110,000 – Loss ($120,000) – Liquidation expenses ($2,000) = Isaac’s Provisional Balance ($12,000) Deficit.

Jacobs $140,000 – Loss ($120,000) – Liquidation expenses ($2,000) = Jacobs’ Provisional Balance $18,000.

Isaac’s Deficit ($12,000) × 1/3 = Isaac’s Deficit Portion to Henry ($4,000) and 2/3 × ($12,000) = Isaac’s Deficit Portion to Jacobs ($8,000).  Isaac will receive $0.

Henry Potential Balance $19,000 + Isaac’s Deficit Portion ($4,000) = Henry’s Safe Payment $15,000.

Jacobs’ Potential Balance $18,000 + Isaac’s Deficit Portion ($8,000) = Jacobs’ Safe Payment $10,000.

 

[QUESTION]

REFER TO: 15-03

10.  Before liquidating any assets, the partners determined the amount of cash for safe payments and distributed it.  The noncash assets were then sold for $120,000. The liquidation expenses of $5,000 were paid prior to the sale of noncashassets.  How would the $120,000 be distributed to the partners? (Hint: Either a predistribution plan or a schedule of safe capital balances would be appropriate for solving this item.)

Henry

Isaac

Jacobs

A)

$  33,000

$  36,000

$  51,000

B)

$  28,000

$  36,000

$  56,000

C)

$  29,333

$  32,000                

$  58,667

D)

$  24,000

$  48,000

$  48,000         

E)

$  38,000

$  26,000

$  56,000

Answer: B

Learning Objective: 15-04 

Learning Objective: 15-05  

Topic: Schedule of liquidation―Safe capital balances

Topic: Predistribution plan―Order of available cash

Difficulty: 3 Hard  

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Cash from Sale $120,000 – Liquidation Expenses $5,000 = $115,000 Cash to Distribute to Partners.

Distribution before liquidating assets: $15,000 to Henry and $10,000 to Jacobs.

Liquidating expenses paid and allocated as loss to partners in 2:4:4 ratio of $1,000 to Henry and $2,000 each to Isaac and Jacobs.

Capital account balances before sale of noncash assets:

Henry $80,000 – $15,000 – $1,000 = $64,000. Isaacs $110,000 – no distribution – $2,000 = $108,000. Jacobs $140,000 – $10,000 – $2,000 = $128,000.

Noncash assets sold for $120,000 = Loss of $180,000 ($300,000 – $120,000).

Loss allocated in 2:4:4 ratio of $36,000 to Henry, and $72,000 each to Isaac and Jacobs.

Updated balances for safe payments = Henry $64,000 – Loss ($36,000) = $28,000.

Isaac $108,000 – Loss ($72,000) = $36,000.  Jacobs $128,000 – Loss ($72,000) + $56,000.

Alternatively, the predistribution plan would be for the first $10,000 to go to Henry and the next $45,000 to go to Henry and Jacobs in a 1:2 ratio. Thus, if $120,000 is available, Henry receives $10,000 + $15,000 (1/3 × $45,000) and Jacobs receives $30,000 (2/3 × $45,000) = $55,000.

REFERENCE: 15-04

  The following account balances were available for the Perry, Quincy, and Renquist partnership just before it entered liquidation:

 

Included in Perry’s Capital account balance is a $20,000 partnership loan owed to Perry.  Perry, Quincy, and Renquist shared profits and losses in a ratio of 2:4:4.  Liquidation expenses were expected to be $15,000. All partners were insolvent.

 

[QUESTION]

REFER TO: 15-04

11. For what amount would noncash assets need to be sold to generate enough cash in order that at least one partner would receive some cash upon liquidation?

A) $185,000

B) $170,000

C) $165,000

D) $  95,000

E) $  90,000

Answer: D

Learning Objective: 15-02

Topic: Statement of liquidation―Updated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Cash $90,000 – Liquidation Expenses $15,000 – Liabilities $170,000 = Balance Needed from Non-Cash Assets ($95,000). After this amount from non-cash assets to pay all expenses and liabilities, any additional cash could be paid to partners in their liquidation order until all partners could receive cash in their 2:4:4 ratio.

 

[QUESTION]

REFER TO: 15-04

12. For what amount would the noncash assets need to be sold in order for Quincy to receive some cash from the liquidation?

A) Any amount in excess of $170,000.

B) Any amount in excess of $190,000.

C) Any amount in excess of $260,000.

D) Any amount in excess of $280,000.

E) Any amount in excess of $300,000.

Answer: B

Learning Objective: 15-04

Learning Objective: 15-05

Topic: Schedule of liquidation―Safe capital balances 

Topic: Predistribution plan―Maximum loss to be absorbed

Difficulty: 3 Hard  

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Capital account balance $50,000 – (40% × $15,000) Liquidation Expenses not yet recorded $6,000 – (40% × $300,000 Maximum loss on non-cash assets) Non-cash Loss $120,000 = $76,000 divided by 40% = $190,000 Proceeds Needed from Non-Cash Assets. Alternatively, Capital balance $50,000 – Share of liquidation expenses not yet recorded $6,000 =  $44,000 Capital balance for loss allocation. $44,000/40% = $110,000 maximum loss that can be absorbed by Quincy. $300,000 non-cash assets – $110,000 maximum loss = $190,000 proceeds needed from sale of non-cash assets for Quincy to recover funds from the liquidation process.

 REFERENCE: 15-05

A local partnership was in the process of liquidating and reported the following Capital account balances:

 

Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution.  However, the two remaining partners asked to receive the $31,000 that was then in the cash account.

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