Chapter 15 Smartbook

At the time of partnership termination, Partner A is personally insolvent and has a negative capital balance. Partners B and C must absorb A's deficit through

a reduction in their capital accounts.

Preparation of a proposed schedule of liquidation is based on the assumption any partner with a deficit capital balance wil

not make any cash contribution to the partnership to cover their deficit.

A single plan drawn up at the beginning of a liquidation that serves as a guide to all future distributions of cash to partners is known as a _____ plan.

predistribution

When a partner has a negative capital balance, but is personally solvent,

that partner makes a capital contribution to the partnership.

When other partners are unable to recover any part of an insolvent partner's deficit capital balance, the insolvent partner's capital account should be closed by making

a credit to his/her capital account.

A statement of partnership liquidation discloses

liquidation transactions already carried out.

Dividing a partner's capital balance by their profit and loss allocation determines that partner's _____ loss that can be absorbed.

maximum

Cash can be safely distributed to an individual partner in a preliminary distribution of partnership assets only if

that partner's capital balance is large enough to absorb all possible future losses.

A partner with a negative capital balance should make a contribution to the partnership in an amount equal to

that partner's negative capital balance.

Gains and losses on the sale of assets during a partnership liquidation are recorded directly in partners' capital accounts

to keep track of changes in partners' capital balances.

When other partners are unable to recover any part of an insolvent partner's deficit capital balance, the insolvent partner's capital account should be closed and the other partners' capital accounts should be

debited for each partner's share of the deficit.

The procedures involved in terminating and liquidating a partnership include

distributing partnership cash to individual partners after partnership liabilities and liquidation expenses have been paid.

In addition to accounting for the transactions that occur during a partnership liquidation, the partnership's accountant should work to ensure the _____ treatment of all parties involved in the liquidation.

equitable

During a partnership liquidation, debits are made to individual partners' capital accounts to recognize each partner's share of

losses on sales of partnership assets.

Liquidation expenses are allocated to individual partners' capital accounts on the basis of

partners' relative profit and loss ratios.

When partnership assets are sold on a piecemeal basis over time and cash is distributed to partners after each sale of assets,

a new proposed schedule of liquidation should be prepared before each distribution of cash to partners.

In preparing a proposed schedule of liquidation, the accountant assumes that all future partnership transactions will result in

total losses.

In preparing a proposed schedule of liquidation, the deficit in a partner's capital account resulting from simulated losses should be allocated to the other partners' capital accounts

based on their relative profit and loss ratios.

Partners might decide to terminate their partnership because they

- believe profits have become inadequate to justify their continued investment. - no longer wish to work together.

Partners' relative profit and loss ratios are used as the basis for allocating

- gains on sales of assets to partners' capital accounts. - liquidation expenses to partners' capital accounts.

The procedures involved in terminating and liquidating a partnership include

- using cash from the sale of partnership assets to pay any expenses incurred in the liquidation process. - using cash from the sale of partnership assets to pay off partnership liabilities.

Partners A, B,and C share profits and losses in a ratio of 50%, 40%, 10%, respectively. Simulated losses result in A having a deficit capital balance. The amount of A's deficit that should be allocated to B's capital account in a proposed statement of liquidation is

80%. Reason: The correct answer is 80%, calculated as 40%/(40% + 10%).

One reason why partners might decide to terminate their partnership is that

- partners disagree over how the partnership should continue to operate. - the partnership is not successful enough to adequately compensate partners for their time and capital investment.

By creating a predistribution plan, an accountant can avoid creating several proposed schedules of liquidation over the life of a partnership liquidatio

True

A statement of partnership liquidation reports updated balances in the partnership's assets, liabilities, and capital accounts

at periodic intervals.

A safe payment is the amount that can be distributed to an individual partner during the liquidation process while ensuring that the partner's capital account maintains a

safe balance.

In addition to accounting for the transactions that transpire during a partnership liquidation, the partnership's accountant

- should work to make sure that all parties involved in the liquidation are treated equitably. - might be asked to make recommendations regarding the distribution of partnership funds.

At the beginning of a liquidation, a loan made by an individual partner to the partnership would be

added to that partner's capital account.

The predistribution plan should indicate that, as cash become available for distribution in a partnership liquidation, the first recipient(s) of cash

are the partnership's creditors.

Distributing cash to partners over time during the liquidation process is referred to as a

liquidation made in installments.

Only those partners with a capital balance that is large enough to absorb all possible future _____ will receive cash in a preliminary distribution of partnership assets.

losses

In preparing a proposed schedule of liquidation, the accountant assumes that liquidation expenses will be the

maximum amount in the range of probable future expenses

Gains and losses incurred from the sale of assets during a partnership liquidation are

recorded directly in partners' capital accounts rather than being recognized as gains and losses in net income.

The amount that can be distributed to an individual partner during the liquidation process while ensuring that partner has a safe capital balance can be referred to as a _____ payment.

safe

The procedures involved in terminating and liquidating a partnership include

selling partnership assets to convert them into cash.

The earliest date at which some partnership cash can be distributed to partners is

the date of termination.

Angela, Barb, and Chris have decided to terminate their partnership. A $100,000 loss would reduce Angela's capital account balance to zero, an additional $50,000 loss would reduce Barb's capital account to zero, and a further $20,000 loss would reduce Chris's capital account to zero. As cash becomes available for distribution to partners,

the first $20,000 should be paid to Chris.

Any partnership cash remaining after the payment of partnership liabilities and liquidation expenses is distributed to individual partners based upon

the partners' ending capital account balances.

Some amount of partnership cash can be safely distributed to partners at the date of partnership termination if

the partnership is solvent.

Once all partners have begun to receive cash based on a predistribution plan, additional amounts of cash generated from the liquidation of noncash assets can be distributed to partners based on

their original profit and loss ratios.

A proposed schedule of liquidation is based on the assumption that all future partnership transactions will result in _____ losses.

total

The partner with the smallest "maximum loss that can be absorbed" is the partner

who is least likely to receive any cash from liquidation of the partnership.

The document prepared by accountants at the start of a liquidation that will serve as a guide for all future payments of cash during the partnership liquidation is known as a

predistribution plan.

A statement of partnership liquidation reports updated balances in the partnership's assets, liabilities, and

partners' capital accounts.

Gains on sales of partnership assets are allocated to individual partners' capital accounts based on

partners' relative profit and loss ratios.

During a partnership liquidation, credits are made to individual partners' capital accounts to recognize each partner's share of

gains on sales of partnership assets.

A predistribution plan indicates

- the order in which partners receive cash as it becomes available from the sale of noncash assets. - the amount (or percentage) each partner receives in each distribution of cash that becomes available from the sale of noncash assets.

The ending balances in individual partners' capital accounts determines the amount of partnership cash that will be distributed to each partner upon termination of the partnership.

True

The proposed schedule of liquidation developed at the start of the liquidation can be used to determine the amount of cash to distribute to individual partners when partnership assets are sold on a piecemeal basis and cash is distributed to partners in installments.

False

A "liquidation made in installments" results in

several distributions of cash to partners during the liquidation process.

The maximum amount of loss that can be absorbed by an individual partner is calculated

by dividing the partner's capital balance by their profit and loss allocation.

When a predistribution plan is used to determine distributions of cash to partners, distributions are made to partners on the basis of their original profit and loss percentages

only after all partners begin to receive cash based on the predistribution plan.

When making distributions of cash to partners during the liquidation process, the accountant must ensure that each partner has a _____ capital balance, which is the minimum amount that a partner must retain in their capital account to be able to absorb future losses.

safe

At the beginning of a liquidation, a loan made by the partnership to an individual partner would be

subtracted from that partner's capital account.

A partner's safe capital balance is the amount

that must remain in that partner's capital account to absorb any future losses.

A statement of partnership liquidation discloses

- partnership liabilities remaining to be paid. - assets still held by the partnership. - current capital balances.

Preparation of a proposed schedule of liquidation is based on the assumption any partner with a deficit capital balance will

not make any cash contribution to the partnership to cover their deficit.

At the time of the termination of the ABCD partnership, Partner A and Partner B have negative capital balances, and Partner A is personally insolvent. After Partner A's deficit capital balance is written-off, the balance in Partner B's capital account

is a larger negative amount.

At the time of partnership termination, Partner A is personally insolvent and has a negative capital balance. Partners B and C must absorb A's deficit

on the basis of their respective profit and loss ratios.

A safe payment is the amount that can be distributed to an individual partner during the liquidation process while ensuring that future liquidation transactions cannot result in

the partner having a deficit capital balance.

Two partners (X and Y) have equal balances in their capital accounts and have agreed to share profits and losses on a 55:45 basis, respectively. When partnership assets are liquidated, partner Y's capital account will be increased for

45% of gains on sales of partnership assets.

The ending balances in individual partners' capital accounts is the basis for allocating

partnership cash that remains after payment of partnership liabilities.

A partnership's accountant determines that Partner A has a "maximum loss that can be absorbed" of $50,000. If the partnership incurs a loss of $50,000 in liquidating noncash assets, Partner A will

not receive any cash distribution from the partnership liquidation.

A statement of partnership liquidation should include several columns of information that show changes in

- partnership cash. - partnership liabilities. - individual partners' capital accounts

The parties most interested in the financial information produced during a partnership liquidation are the partnership's

- partners. - creditors.

A partnership has four partners, two of whom have negative capital balances and one of these is personally insolvent. When the personally insolvent partner's deficit capital balance is written off

all of the other partners absorb the loss.

After simulating a series of losses that reduces each partner's capital account to a zero balance, the partner whose capital account balance is reduced to zero last is the partner who will be

first to receive a cash distribution as partnership assets are sold.

Two partners (L and M) have equal balances in their capital accounts and have agreed to share profits and losses on a 70:30 basis, respectively. When the partnership is liquidated, partner L's capital account will be reduced for

70% of liquidation expenses.