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Chapter 14 Partnerships: Ownership Changes and Liquidations

Student: ___________________________________________________________________________ 1. Changes in partnership ownership are presumed to be arm's length transactions that may require which of the following actions? A. recognitions of goodwill to existing partners B. revaluation of existing partnership assets C. recognition of goodwill or other intangible assets attributable to the incoming partner D. all of the above are possible 2. The bonus method A. is conservative. B. follows a book-value approach. C. may result in a new partners capital balance being less in amount than his or her contribution. D. All of the above. 3. Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. What will be Callie's initial capital balance? A. $36,000 B. $50,000 C. $35,000 D. $30,000 4. Assume the existing capital of a partnership is $100,000. Two partners currently own the partnership and split profits 40/60. A new partner is to be admitted and will contribute net assets with a fair value of $50,000. An appraisal of existing partnership assets indicates accounts receivable overstated by $10,000, inventory overstated by $12,000 and land understated by $25,000. What is the total capital of the new partnership if the bonus method is being used? A. $153,000 B. $128,000 C. $175,000 D. $150,000 5. Under the bonus method, when a new partner is admitted to the partnership, the total capital of the new partnership is equal to: A. the book value of the previous partnership plus the fair market value of the consideration paid to the existing partnership by the incoming partner B. the book value of the previous partnership plus any necessary asset write ups from book value to market value plus the fair market value of the consideration paid to the existing partnership by the incoming partner C. the book value of the previous partnership minus any asset write downs from book to market value plus the fair market value of the consideration paid to the existing partnership by the incoming partner D. the fair market value of the new partnership as implied by the value of the incoming partner's consideration in exchange for an ownership percentage in the new partnership

6. If a bonus is traceable to the previous partners rather than an incoming partner, it is allocated among the partners according to the A. profit-sharing percentages of the previous partnership. B. profit-sharing percentages of the new partnership. C. capital percentages of the previous partners. D. capital percentages of the new partnership.

7. Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. Adams & Beal shared profits and losses at a ratio of 80/20, respectively. Which of the following bonus amounts would be recorded? A. $14,000 to Callie capital B. $2,800 increase to Beal capital C. $2,800 decrease to Beal capital D. $7,000 increase to Adams capital

8. Assume that the capital of an existing partnership is $90,000 and all existing assets reflect fair market values. If an incoming partner acquires a 40% interest in the partnership for $55,000, the bonus traceable to the incoming partner is A. $15,000 B. $5,000 C. $3,000 D. $2,000

9. Assume that the capital of an existing partnership is $130,000 and that existing assets are overvalued by $10,000. If an incoming partner acquires a 25% interest in the partnership for $37,000, goodwill traceable to the incoming partner is ____. A. $2,250 B. $4,750 C. $3,000 D. $5,000

10. The admission of a new partner under the bonus method will result in a bonus to A. the old partners only. B. the new partner only. C. either the new partner or the old partners, but not both. D. none of the above.

11. Under the goodwill method, A. declines in asset values prior to new partner admission are recorded, but not asset appreciation. B. the total capital of the new partnership must approximate the fair value of the entity. C. a new partners capital balance may be less than his or her contribution. D. All of the above.

12. The fair market value of a partnership can be implied by A. adding the incoming partner's market value of consideration to the book value of the existing partnership. B. the tax basis of the old partner's assets added to the incoming partner's consideration. C. The incoming partner's market value of consideration divided by the incoming partner's percentage share in profit and loss. D. The incoming partner's market value of consideration divided by the incoming partner's percentage ownership share in the new partnership.

13. When a new partner is admitted to a partnership under the goodwill method, an original partner's capital account may be adjusted for A. a proportionate share of the incoming partner's investment. B. his or her share of previously unrecorded intangible assets traceable to the original partners. C. his or her share of previously unrecorded intangible assets traceable to the incoming partner. D. none of the above. 14. If goodwill is traceable to the previous partners, it is A. allocated among the previous partners according to their interest in capital. B. allocated among the previous partners only if there are no other assets to be revalued. C. allocated among the previous partners according to their original profit-and-loss-sharing percentages. D. not possible for goodwill to also be traceable to the incoming partner. 15. If goodwill is traceable only to the previous partners, A. the book value of the previous partnership plus the investment of the incoming partner will be greater than the fair market value of the partnership as suggested by the incoming partner's investment. B. the new partner's initial capital balance is equal to his or her investment in the partnership. C. existing assets of the previous partnership will never be revalued. D. none of the above. 16. Callie is admitted to the Adams & Beal Partnership under the goodwill method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. What will be Callie's initial capital balance? A. $36,000 B. $50,000 C. $35,000 D. $45,000 17. Callie is admitted to the Adams & Beal Partnership under the goodwill method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. Adams & Beal shared profits and losses at a ratio of 80/20, respectively. Which of the following goodwill amounts would be recorded? A. $25,000 to Callie capital B. $70,000 to Callie capital C. $14,000 decrease to Beal capital D. $56,000 increase to Adams capital

18. If goodwill is traceable to the incoming partner, the new partner's capital balance equals A. the fair market value of consideration paid by the incoming partner B. the book value of the older partnership divided by the existing partners' ownership percentage in the new partnership minus the book value of the old partnership. C. incoming partner's ownership percentage multiplied by the capital of the new partnership D. none of the above. 19. Assume that the capital of an existing partnership is $90,000 and all existing assets reflect fair market values. If an incoming partner acquires a 40% interest in the partnership for $55,000, the goodwill traceable to the incoming partner is A. $15,000 B. $5,000 C. $3,000 D. $2,000 20. Assume that the capital of an existing partnership is $130,000 and that existing assets are overvalued by $10,000. If an incoming partner acquires a 25% interest in the partnership for $37,000, goodwill traceable to the incoming partner is ____. A. $2,250 B. $9,667 C. $3,000 D. $5,000 21. Which of the following characterizes the bonus method, compared to the goodwill method, when unrecorded intangibles are traceable to the previous partners? A. The intangibles are actually recorded. B. The legal significance of a change in ownership structure of the partnership is emphasized. C. This method generally produces more equitable results if the former partners do not share profits and losses in the same relationship to each other as they did before a new partner was admitted. D. The market value concept rather than the historical cost concept is emphasized.

22. When a new partner buys an ownership interest in a partnership directly from an existing partner for more than the balance in that partners capital account, under the more common method of accounting for those transactions, A. the partnership recognizes a gain. B. the partner who sold his or her interest makes exit payments to the other partners. C. the transaction is comparable to the sale of corporate shares of stock in the secondary market. D. the new partner must pay the remaining previous partners a premium to be admitted.

23. Palit buys Quincy's partnership interest in the Q-R-S partnership. Quincy thus retires, leaving Reale and Susien as Palit's co-partners. Prior to Palit entering the partnership, Quincy, Reale, and Susien split profits and losses equally. Palit pays $75,000 for Quincy's capital which, at the time, totaled $60,000. No revaluation of partnership assets or liabilities occurs at the time. In recording this event on the partnership books A. Goodwill is booked based on the book value/fair value difference. B. $7,500 bonuses are added to Reale and Susien capital. C. $5,000 bonuses are added to Quincy, Real, and Susien capital. D. Palit capital is created in the amount of $60,000.

23. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows: Verst 50,000 25% Brown 120,000 50% Sullivan 30,000 25%

Capital balance Profit and loss percentage

Sullivan sells his partnership interest to Verst for $35,000. What is the balance in Versts capital account after the sale? A. 80,000 B. 58,750 C. 85,000 D. 65,000 24. If an existing partner withdraws from a partnership, A. his or her interest may be sold to the partnership or an individual partner. B. the consideration received for that partner's interest may suggest the existence of undervalued existing assets and/or goodwill. C. either the bonus or the goodwill method may be used to record the transaction if the partnership acquires the withdrawing partner's interest. D. all of the above.

25. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows: Verst 50,000 25% Brown 120,000 50% Sullivan 30,000 25%

Capital balance Profit and loss percentage

Sullivan retires and the partnership pays him $35,000. What is the balance in Versts capital account after the sale assuming this transaction was accounted for using the bonus method? A. 50,000 B. 51,667 C. 45,000 D. 48,333 26. If goodwill is suggested by the consideration paid to a withdrawing partner, A. only the goodwill traceable to the withdrawing partner may be recorded. B. goodwill traceable to the original partnership is allocated among the partners according to their respective interests in capital. C. the goodwill traceable to the withdrawing partner represents the difference between the partner's capital balance and the consideration he or she receives. D. none of the above.

27. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows: Verst 50,000 25% Brown 120,000 50% Sullivan 30,000 25%

Capital balance Profit and loss percentage

Sullivan retires and the partnership pays him $35,000. What is the balance in Versts capital account after the sale assuming goodwill was recognized by the retiring partner only? A. 50,000 B. 51,667 C. 45,000 D. 48,333 28. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows:
Capital balance Profit and loss percentage Verst 50,000 25% Brown 120,000 50% Sullivan 30,000 25%

Sullivan retires and the partnership pays him $35,000. What is the balance in Versts capital account after the sale assuming goodwill was recognized by all of the partners?

A. 50,000 B. 51,667 C. 55,000 D. 58,333 29. Below are steps in which partnership distribution takes place: 1. 2. 3. 4. Profits and losses are allocated to partner accounts. Distributions are made to partners. Assets must be used to discharge creditor obligations. Partners with deficit balances should make up the balance or other partners make it up.

In what order should these occur? A. 3,1,2,4 B. 1,3,4,2 C. 1,3,2,4 D. 3,1,4,2

30. Which of the following statements is correct regarding a partner's debit capital balances in a liquidation? A. The partner should make contributions to reduce the debit balance to whatever extent possible. B. If contributions are not possible, the other partners with credit capital balances will be allocated a portion of the debit balance based on their proportionate profit-and-loss-sharing percentages. C. Partners who absorb another's debit capital balance have a legal claim against the deficient partner. D. All of these statements are correct.

31. The right of offset doctrine A. sets aside the ranking that partnership loans have higher legal priority than capital to facilitate the liquidation process. B. enables the partnership fiduciary to offset the deficit capital balance of one partner with the surplus capital balance of another. C. allows individual partner creditors to offset their claims against that partners capital balance. D. dictates that liquidation expenses must be offset against the partners capital balances prior to distributions taking place.

32. Partners Able, Baker, and Chapman have the following personal assets, personal liabilities, and partnership capital balances: Able $30,000 25,000 50,000 Baker $ 80,000 50,000 (32,000) Chapman $60,000 72,000 70,000

Personal assets Personal liabilities Capital balances

Assume profits and losses are allocated equally. If Baker is in bankruptcy and is able to make a contribution, the capital balance for Able would be A. $50,000. B. $48,000. C. $49,000. D. $49,610. 33. Under the Revised Uniform Partnership Agreement, A. unsatisfied partnership creditors share pro rata with personal creditors in the assets of the partners estate. B. unsatisfied partnership creditors have first priority against partnership assets. C. unsatisfied personal creditors have first priority against partnership assets. D. None of the above.

34. Hetzer and Whalen partnership is insolvent and has liabilities of $5,000. Other information follows: Hetzer $20,000 8,000 10,000 Whalen $ 8,000 10,000 (5,000)

Personal assets Personal liabilities Partnership capital balance

What is Hetzers required contribution if the partnership creditors move against him first. A. $4,800 B. $12,000 C. $5,000 D. $0

35. Hetzer and Whalen partnership is insolvent and has liabilities of $5,000. Other information follows:
Personal assets Personal liabilities Partnership capital balance Hetzer $20,000 8,000 10,000 Whalen $ 8,000 10,000 (15,000)

What is Hetzers required contribution if the partnership creditors move against Whalen first.

A. $4,800 B. $200 C. $5,000 D. $12,000 36. Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker, and Chapman of $70,000, $30,000, and $50,000. How much would Able receive upon liquidation of the partnership assuming profits and losses are allocated equally? A. $70,000 B. $90,000 C. $75,000 D. $55,000

37. Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker, and Chapman of $70,000, $30,000, and $50,000. If all outside creditors and loans to partners had been paid, how would the balance of the assets be distributed assuming that Chapman had already received assets with a value of $30,000 assuming profits and losses are allocated equally? A. Each of the partners would receive $25,000. B. Each of the partners would receive $40,000. C. Able: $70,000, Baker: $30,000, Chapman: $20,000 D. Able: $55,000, Baker: $15,000, Chapman: $5,000

38. If a partnership has only non-cash assets, all liabilities have been properly disbursed, and no additional liquidation expenses are expected, the maximum potential loss to the partnership in the liquidation process is: A. the fair market value of the non-cash assets B. the book value of the non-cash assets C. the estimated proceeds from the sale of the assets less the book value of the non-cash assets D. none of the above

39. Which of the following is not an assumption that is made when determining safe payments during a partnership liquidation? A. Liquidation expenses may be incurred. B. Partners with deficit balances will not be able to make them up. C. The partner with the highest capital balance will be the first to receive a safe payment. D. Unsold noncash assets are assumed to be worthless.

40. Allen, Branden & Caylin are in the process of liquidating their partnership. They have the following capital balances and profit and loss percentages: Capital Balance 5,000 18,000 6,000 Profit/Loss % debit credit credit

Allen Branden Caylin

20% 50% 30%

The partnership balance sheet shows cash of $5,000, non-cash assets of $14,000, and no liabilities. Assuming no liquidation expenses, what safe payment could be made? A. $5,000 split between Branden & Caylin by a ratio of 5/8 and 3/8, respectively. B. $5,000 to Branden only C. $1,000 to Allen, $2,500 to Branden, and $1,500 to Caylin D. $18,000 to Branden only 41. Partners Dalton, Edwards, and Finley have capital balances of $40,000, 90,000 and $30,000, respectively, immediately prior to liquidation. Total remaining assets have a book value of $160,000, the liabilities having been paid. Among these remaining assets is a machine with a fair value of $35,000. The partners split profits and losses equally. Edwards covets the machine and is willing to accept it for $35,000 in lieu of cash. The other partners have no designs on specific assets, only cash in liquidation. How much cash, in addition to the machine, would be first distributed to Edwards, before any of the other partners received anything? A. $15,000 B. $50,000 C. $166,667 D. $300,000

42. A partner's maximum loss absorbable is calculated by A. dividing the partner's capital balance by his or her profit-and-loss-sharing percentage. B. multiplying the partner's capital balance by his or her profit-and-loss-sharing percentage. C. multiplying distributable assets by the partner's profit-sharing percentage. D. dividing the partner's capital balance by his or her percentage interest in capital. 43. Partners Thomas, Adams and Jones have capital balances of $24,000, $45,000, and $90,000 respectively. They split profits in the ratio of 3:3:4, respectively. Under a predistribution plan, one of the partners will get the following total amount in liquidation before any other partners get anything: A. $22,500 B. $30,000 C. $40,000 D. $75,000 44. Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker, and Chapman of $70,000, $30,000, and $50,000. How would the first $100,000 of available assets be distributed assuming profits and losses are allocated equally? A. $70,000 to outside liabilities, $20,000 to Able, and the balance equally among the partners B. $70,000 to outside liabilities and $30,000 to Able C. $70,000 to outside liabilities, $25,000 to Able, and $5,000 to Chapman D. $40,000 to Able, $20,000 to Chapman, and the balance equally among the partners