“You’re going to be SO glad that you kept going”

Answer Key

Chapter 4: Liquidation

1. In a partnership liquidation, the final cash distribution to the partners should be made in accordance
with the
a. ratio of the capital contributions by the partners
b. partners' profit and loss sharing ratio.
c. balances of the partners' loan and capital accounts.
d. ratio of capital contributions less withdrawals by the partners.
2. For the liquidation of a partnership, cash payments to partners after all non-partner creditors' claims have been
satisfied, but before the final cash distribution, should be according to
a. the partners' relative profit and loss sharing ratios.
b. the final balances in partner capital accounts.
c. the partners' relative share of the gain or loss on liquidations.
d. safe payments computations.
3. A liquidation differs from a dissolution in that in a liquidation
a. gains and losses are distributed according to the partnership agreement.
b. there may be an adjustment of partners' capital accounts.
c. assets may be revalued.
d. the business will not continue.
4. Claims against partners' personal assets by creditors if the partnership can't pay its debts refers to
a. unlimited liability.
b. liquidation.
c. dissolution.
d. mutual agency.
5. A partner's loss absorption balance is calculated by
a. dividing the partner's capital balance by his percentage interest in capital.
b. dividing the partner's total interests by his profit and loss sharing percentage.
c. multiplying distributable assets by the partner's profit sharing percentage.
d. multiplying the partner's total interests by his profit and loss sharing percentage.
6. Which of the following is incorrect with regard to an installment liquidation of a partnership?
a. All remaining liquidation expenses are anticipated.
b. Partners with the greatest ability to absorb losses and expenses are the first to receive
installment distributions.
c. Distributions to partners are always made according to their profit sharing
percentages.
d. All non-cash assets are assumed to be worthless.
7. If a partner is insolvent, his personal properties shall first be distributed
a. to partnership creditors.
 b. to separate creditors.
c. to the partners by way of additional contributions when the assets of the partnership
were insufficient to settle all obligations.
d. to partners and separate creditors in the ratio of their loan exposures.
8. In a partnership liquidation, the assets of the partnerships shall be applied lastly to
a. those owing to outside creditors
b. those owing to inside creditors in the form of loans or advances for business expenses by
the partners
c. those owing to the partners with respect to their capital contributions
d. those owing to the partners with respect to their share of the profits
9. The following is the priority sequence in which liquidation proceeds will be distributed for a
partnership:
a. Partnership liabilities, partnership loans and partnership capital balances.
b. Partnership liabilities, partnership loans, partnership drawings and partnership capital
balances.
c. Partnership liabilities, partnership capital balances and partnership loans.
d. Partnership drawings, partnership liabilities, partnership loans and partnership capital
balances.
10. Winding up of partnership by sale of non-cash assets, settlement of liabilities, and distribution of the
remaining cash to partners.
a. Right of offset
b. Liquidation
c. Dissolution
d. Incorporation
11. In partnership liquidation, one partner may have to make up for the deficit in another partner's
account. The loss absorption balances represent the maximum loss that the partners could absorb without
reducing their equity below zero.
a. True, False
b. False, True
c. Both true
d. Both false
12. When cash is insufficient to fully satisfy the cash requirements in a particular priority, then the
available cash will be distributed using the profit and loss ratio.The creditors of the partnership shall have
priority in payments over those of the partners' separate creditors as regards the partnership properties.
a. True, False
b. False, True
c. Both true
d. Both false
13. When a partnership goes out of business, all the remaining non-cash assets will be declared as a total
loss, This loss on liquidation shall be divided among the partners in their profit and loss ratio. The loss
absorption balances represent the maximum loss that the partners could absorb without reducing their
equity below zero.
 a. True, False
b. False, True
c. Both true
d. Both false
14. The entry to record the exercise of offset will debit the partner's loan account and credit cash.
Partnership creditors shall have priority in payments than those of the partners' separate creditors as
regards the separate properties of the partners.
a. True, False
b. False, True
c. Both true
d. Both false
15. A partnership is said to be dissolved when the business is terminated. Liquidation of a partnership is
the process of ending the business.
a. True, False
b. False, True
c. Both true
d. Both false
16. Statement 1. The cash settlement of all liabilities is referred to as realization.
Statement 2. Under the installment method of partnership liquidation, realization of non-cash assets
is accomplished over an extended period of time. When cash is available, creditors may be partially or
fully paid. Any excess may be distributed to the partners in accordance with a program of safe payments
or a cash priority program. This process persists until all the non-cash assets are sold
a. True, False
b. False, True
c. Both true
d. Both false
17. The use of safe payments schedule and cash priority program are alternatives which will yield the
same ultimate cash distributions to the partners. A partner's interest can be obtained by simply adding
the partner's capital account, loans to and from the partnership.
a. True, False
b. False, True
c. Both true
d. Both false
18. The right of offset is the legal right of a partner to apply part or all of his loan account balance against
a capital deficiency resulting from losses in the realization of the partnership assets. In liquidation,
partners are given back the assets that they originally invested.
a. True, False
b. False, True
c. Both true
d. Both false
19. Partnership creditors will be prioritized next to the inside creditors as to partnership assets in case of
liquidation. If liquidation of a partnership results in a negative balance in a partner's account, the partner
must pay into the partnership the amount of the negative balance.
a. True, False
b. False, True
c. Both true
d. Both false
20. If partner is insolvent, his personal assets shall be distributed as
a. Partnership creditors – Separate creditors – Those owing to the partners
b. Separate creditors – Partnership creditors – Those owing to the partners
c. Those owing to the partners – Partnership creditors – Separate creditors
d. In any order.

Problem Solving

1. If Partner A has a capital balance of 30,000, Partner B has a capital balance of 20,000, and Partner C has
a capital balance of 10,000, how much cash will Partner B receive if the total cash available for
distribution is 45,000?
​ a. 10,000
​ b. 15,000
​ c. 20,000
​ d. 25,000
After several years of operations, the ABC partnership is to be liquidated. After making the closing
entries on Dec 31, 2023, the following accounts remained open.
DR CR
Cash 90,000
Non-cash assets 2,750,000
Liabilities 550,000
A, capital 780,000
B, capital 690,000
C, capital 820,000
The non cash assets are sold for 2,950,000. Profits and losses are shared on a 4:2:4 ratio.
2. Using the information above, how much is the total cash after the sale of non-cash assets?
a. 2,490,000
b. 2,950,000
c. 3,040,000
d. (2,950,000)
3. How much cash was distributed to the partners?
a. 2,490,000
 b. 2,950,000
c. (2,490,000)
d. (2,950,000)
4. How much cash was distributed to partners A and C respectively?
a. 730,000; 900,000
b. 860,000;730,000
c. 860,000;900,000
d. 900,000;860,000
5. Using the cash priority program, who should be the first priority?
a. A
b. B
c. C
d. Both A and B
e. Both A and C
6. If 350,000 will be distributed, how much will partner C get?
a. 46,667
b. 23,333
c. 28,000
d. 233,333
Micol, Horeb, and Miah are liquidating their business. They share profit and losses in a 2:3:1 ratio,
respectively, and currently have capital balances of 400,000, 520,000, and 480,000, respectively. In addition,
the partnership has 325,000 in cash, and 390,000 in accounts payable. Micol and Horeb are personally
solvent, but Miah is not. Assuming that the noncash assets are sold for 1,000,000, prepare the liquidation
statement.

7. What is the initial amount of noncash assets before liquidation?

a. 1,564,000
b. 1,456,000
c. 1,645,000
d. 1,465,000
8. What is the amount distributed to the partners after liquidation?
a. 1,325,000
b. (1,325,000)
c. 935,000
d. (935,000)
9. If non cash assets are to be sold for 700,000, how much will Horeb receive?
a. 145,000
 b. 173,500
c. 352,500
d. None of the above
10. If non cash assets are to be sold for 500,000, and the partners profits and losses ratio is 2:3:5, how
much will Micol receive?
a. 206,000
b. 229,000
c. 0
d. None of the above
11. A partnership is undergoing installment liquidation. Non-cash assets are sold in the first installment
for 60,000 and had a loss of 20,000. The partnership has liabilities totaling 20,000 and partners' capital
accounts as follows: Partner A: 25,000 (45%), Partner B: 20,000 (35%), and Partner C: 15,000 (20%). How
much cash is distributed to the partners in the first installment?
a. 15,000
b. 35,000
c. 40,000
d. 45,000
e. 0
12. How much did the partners receive?
a. A 20,000; B 20,000; C 10,000
b. A 16,000; B 16,000; C 8,000
c. A 20,000; B 15,000; C 15,000
d. A 16,000; B 13,000; C 11,000
e. 0
ABC Partnership engaged in real estate business had the following condensed statement of financial
position prior to liquidation:

13. On Jan 1 assets with book value of P 60,000 were sold for P 70,000, how much of the available cash
could be distributed to Partner A?
a. 5,000
b. 0
c. 35,000
d. 37,000
14. On Jan 2 assets with book value of 70,000 were sold for 50,000, 30,000 is to be distributed to the
partners, how much would Partner C receive?
a. 0
b. 6,000
c. 9,000
d. 15,000
e. None of the above
15. On Jan 5, all non cash assets were sold for 60,000, and all partners were paid. How much would partner
B receive?
a. 15,000
b. 80,000
c. 3,000
d. 24,000
e. 16,000
f. 0
g. None of the above
16. A partnership is in process of liquidation and is currently reporting the following balances: Layla,
Capital (50%), 19,000, Balmond, Capital (30%), 18,000, and Alucard, Capital (20%), (12,000).
Alucard has indicated that the 12,000 deficit will be covered by a forthcoming contribution. However, the
two remaining partners asked to receive the 25,000 in cash that is presently available. The available cash
should be distributed as follows:
a. Layla 13,000; Balmond 12,000
b. Layla 11,500; Balmond 13,500
c. Layla 12,000; Balmond 13,000
d. Layla 12,500; Balmond 12,500
e. None of the above

Partners Arce, Bello and Cruz share profits and losses in the ratio of 5:3:2. At the end of a very
unprofitable year, they decided to liquidate the firm. The partner’s capital account balances at this time
are as follows: Arce P 22,000 Bello 24,900 Cruz 15,000. The liabilities accumulate to P 30,000, including a
loan of P 10,000 from Arce. The cash balance is P 6,000. All the partners are personally solvent. The
partners plan to sell the assets in installment.

17. If Arce received a total of P 20,000 as a result of the liquidation, what was the total amount realized
from the sale of the non-cash assets?
a. P 61,900
b. P 85,900
 c. P 73,900
d. P 24,000
e. 0
18. Using the problem above, using the Cash priority program who is the first priority?
a. Arce, 2,400
b. Bello, 2,400
c. Bello, 5,700
d. Cruz, 11,000
e. Cruz, 2,200
f. Bello and Cruz, 5,700 and 2,200
19. If 7,900 is to be distributed, how much will the partners receive?
a. Arce, 2,400
b. Bello, 2,400
c. Bello, 5,700
d. Cruz, 11,000
e. Cruz, 2,200
f. Bello and Cruz, 5,700 and 2,200
g. None of the above
20. If 5,000 is to be distributed how much will Cruz receive?
a. 3,960
b. 2,000
c. 1,040
d. 520
e. 5,000
f. 0
g. None of the above