UNIVERSITY OF STO.

TOMAS – LEGAZPI
Legazpi City

Advanced Financial Accounting

Midterm Examinations

Name:______________________________________ Date: _____________ Score:____________ Eqvt.________

Part 1 – Theories. Encircle the letter of the correct answer. Each correct answer is equivalent to one (1) point.

1. It refers to the extinguishment of the juridical personality of a corporation for causes expressly provided by
law
a. Corporate liquidation c. Corporate rehabilitation
b. Corporate dissolution d. corporate termination
2. It refers to the winding up of the corporation by settling its corporate debts and distributing the remainder
to the stockholders.
a. Corporate liquidation c. Corporate rehabilitation
b. Corporate dissolution d. Corporate termination
3. After the date of corporate dissolution, what is the maximum period allowed by law to a dissolved
corporation to complete its liquidation process?
a. 1 year c. 3 years
b. 2 years d. 4 years
4. What is the term used when stockholder’s equity as a debit balance?
a. Deficit c. Delinquency
b. Deficiency d. Default
5. Which of the following unsecured debts with priority shall be paid first during corporate liquidation?
a. Corporate liabilities to employees
b. Obligation arising from corporate crime
c. Corporate liabilities arising from taxes to government
d. Obligations arising from corporate tort or quasi-delict
6. Which of the following creditors can always fully recover its claims from a dissolved corporation during the
corporate liquidation?
a. Fully secured creditors
b. Partially secured creditors
c. Unsecured creditors with priority
d. Unsecured creditors without priority
7. Which of the following items is not considered in the computation of recovery percentage of unsecured
creditors without priority?
a. Assets reserved for fully secured creditors
b. Assets reserved for partially secured creditors
c. Unsecured portion of partially secured liabilities
d. Assets not used as collateral for any liability
8. Under the rule of offset, what is the proper disposition of a partnership loan that was made from a partner
who has a debit balance?
a. The loan is paid first to the debtor partner before cash payments are made to partners
b. The loan is written off as a partnership loss if the partner does not have the cash to cover the debit
balance
c. The loan is written off as a partnership loss if the partnership does not have the cash to cover the debit
balance
d. The loan is charged off to the capital account of the debtor partner
9. In partnership liquidation, what are safe payments?
a. The amount of distribution that can be made to partners after all creditors have been paid in full
b. The amount of distributions that can be made to the partners with assurance that such amounts will
not have to be returned to the partnership
c. The amounts of distributions that can be made to partners after all noncash assets have been adjusted
to fair market value
d. All of the above are examples of the safe payment concept
10. If all the partners are included in the first installment liquidation, then in future installments
a. Cash will be distributed according to residual profit and loss sharing ratio
b. Cash should not be distributed until all non-cash assets are c0nverted into cash
c. A safe payment schedule must be prepared before each cash distribution to avoid excessive payments
to partners

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 d. A cash distribution plan must be prepared so that partners will know when they will be included in the
cash distribution
11. Partner’s maximum loss absorbable is calculated by
a. Dividing the partner’s capital balance by his/her profit-and-loss sharing percentage
b. Multiplying the partner’s capital balance by his/her profit-and-loss sharing percentage
c. Multiplying distributable assets by the partner’s profit-and-loss sharing percentage
d. Dividing the partner’s capital balance by his/her percentage interest in capital
12. A schedule prepared each time cash is to distributed is called a(an)
a. Advance cash distribution schedule c. Loss absorption potential schedule
b. Marshalling of assets schedule d. Safe payment schedule
13. Which partner is considered the most vulnerable as a result of a computation of vulnerability rankings?
a. The partner with the lowest vulnerability ranking, who also has the lowest loss absorption potential
b. The partner with the lowest vulnerability ranking, who also has the highest loss absorption potential
c. The partner with the highest vulnerability ranking, who also has the lowest loss absorption potential
d. The partner with the highest vulnerability ranking, who also has the highest loss absorption potential
14. The rank order is for claims against a bankrupt partner of
I. Those owing to partners by way of contributions
II. Those owing to separate creditors
III. Those owing to partnership creditors
a. II first; I second; and III third c. I first; III second; and II third
b. III first; II second; and I third d. II first; III second; and I third
15. The partnership of Clapton, Seidel and Thomas was insolvent and will be unable to pay P30,000 in liabilities
currently due. What recourse was available to the partnership’s creditors?
a. They must present equal claims to the three partners as individuals
b. They must try to obtain a payment from the partner with the largest capital account balance
c. They cannot seek remuneration from the partners as individuals
d. They may seek remuneration from any partners they choose
e. They must present their claims to the three partners in the order of the partners’ capital account
balances
16. What accounting transactions are not recorded by an accountant during liquidation?
a. The conversion of partnership’s assets into cash
b. The allocation of the resulting gains and losses
c. The payment of liabilities
d. Remaining unpaid debts settled and the distribution of any remaining assets to the partners based on
their profit and loss ratio
17. Which of the following statements is false concerning the schedule of liquidation?
a. Liquidation may take a considerable length of time to complete
b. Frequent reporting by the accountant s rarely necessary
c. The Schedule of Liquidation provides a listing of transactions to date, current cash and capital balances
d. The Schedule of Liquidation provides a listing of property still being held by the partnership and
liabilities remaining unpaid
18. What is the preferred method of resolving partner’s deficit balance?
a. The other partners must contribute personal assets to cover the deficiency
b. The partnership must sell assets in order to cover the deficit balance
c. The partner with a deficit balance must contribute personal assets to cover the deficit balance
d. The partner with a deficit balance contributes personal assets only if those personal assets exceeds
personal liabilities
19. Which of the following is true concerning the distribution of safe payments?
a. The distribution of safe payments assumes that any capital deficit balance will prove to be a total loss
to the partnership
b. Safe payments are equal to the recorded capital balances of partners with positive capital balances
c. The distribution of safe payments may only be made after all liabilities have been paid
d. In computing safe payments, partners with positive capital balances are assumed to absorb an equal
share in any deficit balance(s)
20. An advance cash distribution plan is prepared
a. Each time cash is distributed to partners in an installment liquidation
b. Each time a partnership asset is sold in an installment liquidation
c. To determine the order and amount of cash each partner will receive as if it becomes available for
distribution
d. None of these
21. In partnership liquidation, the final cash distribution to the partners should be made in accordance with the:
a. Partners’ profit and loss sharing ratio

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 b. Balances of the partner’s capital account
c. Ratio of the capital contributions by the partners
d. Ratio of capital contributions less withdrawals by the partners
22. The first step in preparing an advance cash distribution plan is to –
a. Determine the order in which partners re to participate in cash distribution
b. Compute the amount of cash each partner is to receive as it becomes available for distribution
c. Allocate any gains or losses to the partners in their profit-sharing ratio
d. Determine the net capital interest of each partner
23. Offsetting a partners’ loan balance against his debit capital balance is referred to as the:
a. Marshalling of assets c. Allocation of assets
b. Right of offset d. Liquidation of assets
24. If a partner with a debit capital balance during liquidation is solvent, the
a. Partner must invest additional assets in the partnership
b. Partner’s debit balance will be allocated to the other partners
c. Other partners will give the partner enough cash to absorb the debit balance
d. Partnership will loan the partner enough cash to absorb the debit balance
25. In partnership liquidation, the final cash distribution to the partners should be made in accordance with the-
a. Partner’s profit and loss sharing ratio
b. Balances of partner’s capital accounts
c. Ratio of the capital contributions by the partners
d. Ratio of capital contributions less withdrawals by the partners
26. Which of the following is correct with regards to partnership liquidation?
a. All creditors must be paid in full before distributions can be made to partners
b. Partners’ capital contributions and undistributed partnership income are viewed as distinct in the
Uniform Partnership Act
c. All creditors are equal with regards to priority claim against partnership assets
d. Loans from partners to the partnership have same priority claim against partnership assets as to
creditor claims from other entities
27. Which of the following is not a part of the partnership liquidation process?
a. Allocation of any remaining profit or loss to partner’s capital account
b. Liquidation of non-cash assets
c. Closing of the accounting records
d. Recognition of market value adjustments of assets and liabilities
28. Which of the following is first-ranked of the unsecured liabilities with priority in bankruptcy liquidation?
a. Claims of governmental entities for various taxes and duties
b. Administrative costs
c. Claims for wages, salaries and commissions, subject to limitations of amount and time
d. None of the foregoing
29. In a bankruptcy, which of the following statements is true?
a. An order for relief results only from a voluntary petition
b. Creditors entering an involuntary petition must have debts totaling at least P20,000
c. Secured notes payable are considered liabilities with priority on a statement of affairs
d. None of the above
30. In reporting a company that is to be liquidated, assets are shown at
a. Present value calculated using an appropriate effective rate
b. Net realizable value
c. Historical cost
d. Book value

Part 2 – Problem solving. Encircle the letter of the correct answer. Each correct answer is equivalent to two (2)
points.

Problem I:
Albay Corporation had the following statement of financial position:

Cash P 5,000 Notes Payable (short-term) P 97,000

Marketable securities 30,000 Accounts payable 85,000
Accounts receivable 25,000 Accrued expenses 18,000
Inventory 51,000 Note payable (long-term) 208,000
Prepaid expenses 3,000 Share Capital 95,000
Land 120,000 Retained earnings(deficit) (59,000)
Building 105,000

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 Equipment 95,000
Intangible assets 10,000

 The note payable (short-term) is secured by the inventory and the note payable (long-term) is
secured by land and building
 Marketable securities have a fair value of P35,000 and dividends of P1,000 are due from this
investments
 Only P15,000 can be collected from the accounts receivable
 Inventory can only be sold at p48,500
 Prepaid expenses include a refund of P1,000
 The intangible assets have no resale value
 Fair value of land and building P238,000 and fair value of equipment P58,000
 Administrative expenses of P31,500 are estimated as liquidation expenses
 Salaries of P12,000 and payroll taxes of P3,000 are accrued
 Interest in long-term note payable of P8,000 has not been accrued

1. How much is the estimated deficiency?

a. P 38,000 c. P 43,000
b. P 46,000 d. P 47,000

2. What is the estimated recovery deficiency?

a. 66.30% c. 65.57%
b. 72.16% d. 67.79%

3. What is the estimated recovery for partially secured creditors?

a. 83,497.60 c. 80,655.50
b. 80,301.45 d. 81,378.15

4. How much is the estimated recovery for unsecured creditors without priority?
a. 63,500 c. 59,655
b. 58,344 d. 57,702

5. What is the amount of net free assets?

a. 98,500 c. 87,500
b. 89,500 d. 90,500

Problem II.
The following information was gathered from the book of Masbate Corporation which is currently undergoing
bankruptcy proceedings:
 Note payable of P97,500 is secured by furniture and equipment with a carrying amount of P120,000 that
is estimated to be 75% realizable
 A mortgage payable of P192,500 is secured by building valued at P35,000 less than its carrying amount
of P230,000
 Assets not mentioned above have estimated value of P62,500, an amount that is P15,000 above carrying
amount
 Total liabilities not mentioned above total p96,000, including claims with priority of P18,500

1. How much is the estimated loss on asset realization?

a. 65,000 c. 80,000
b. 50,000 d. 60,000

2. How much is the estimated recovery percentage?

a. 80.65% c. 54.71%
b. 56.77% d. 51.76%

3. How much is the estimated recovery percentage for partially secured creditors?
a. 96.67% c. 98.51%
b. 96.52% d. 96.29%

Problem III
Catanduanes Corporation is under court-supervised liquidation due to its insolvency. The court-appointed
liquidator has provided the following data after conducting an inventory of Catanduanes’ assets and liabilities:

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  The total assets which are not used as security for any liability amounted to P5,000,000 while the total
unsecured liabilities amounted to P20,000,000.
 The total assets which are used as collateral or security for corporate obligations amounted to
P10,000,000. ¾ of these assets secure a mortgage payable with book value of P2,000,000 including
interest while the remainder secure a note payable with book value of P3,500,000 including interests
 Salaries payable amounting to P2,000,000 while taxes due to government amounted to P1,000,000.

1. What is the estimated recovery percentage of unsecured creditors without priority?

a. 25.00%
b. 37.50%
c. 41.67%
d. 52.50%

2. What is the amount received by partially secured creditors?

a. 2,750,000
b. 2,875,000
c. 2,916,700
d. 3,025,000

Problem IV
The balance sheet for the partnership of JJ, CC and TT, whose shares of profit and losses are 40,50, and 10
percent is as follows:
Cash …………………………. P 50,0000 Accounts Payable ……………………………. P 150,000
Inventory ……………………. 360,000 JJ, Capital …………………………………….. 160,000
CC, Capital ……………………………………. 45,000
TT, Capital ……………………………………. 55,000
Total assets …………………. P 410,000 Total liabilities and capital …………………… P 410,000
The partnership will be liquidated in installments. As cash becomes available, it will be distributed to partners. If
inventory costing P200,000 is sold for P140,000, how much cash should be distributed to each partners at this
time?
JJ CC TT JJ CC TT
a. P 56,000; P 70,000; P 14,000 c. P 32,000; P 0; P 8,000
b. P 16,000; P 20,000; P 4,000 d. P 20,000; P 0; P 20,000

Problem V
The partnership of Peter, Paul and Mary share profits and losses in the ratio of 4:4:2 respectively. The partners
voted to dissolve the partnership when its assets, liabilities and capital were as follows:
Cash …………………………. P 250,000 Liabilities ……………………………………. P 200,000
Non-cash assets………………. 1,000,000 Peter, Capital ………………………………… 300,000
Paul, Capital …………………………………. 350,000
Mary, Capital …..……………………………. 400,000
Total assets …………………. P 1,250,000 Total liabilities and capital ……………..… P 1,250,000
The partnership will be liquidated over a prolonged period of time. As cash is available, it will be distributed to
the partners. The first sale of non-cash assets having a book value of P600,000 realized P475,000. How much
cash should be distributed to each partner after this sale?
a. Peter – P90,000; Paul – P140,000; Mary – P 295,000
b. Peter – P210,000; Paul – P290,000; Mary – P 145,000
c. Peter – P290,000; Paul – P210,000; Mary – P 105,000
d. Peter – P150,000; Paul – P175,000; Mary – P 200,000

Problem VI
The balance sheet for the AA, BB and CC Partnership is as follows: Figures shown parenthetically reflect agreed
profit-and-loss sharing agreement.
Cash …………………………. P 20,000 Liabilities ……………………………………. P 50,000
Non-cash assets………………. 180,000 AA, Capital …………………………………… 37,000
BB, Capital …………………………………. . 65,000
CC, Capital ……..……………………………. 48,000
Total assets …………………. P 200,000 Total liabilities and capital ……………..… P 200,000

1. If the firm, as shown on the balance sheet, is dissolved and liquidated by selling assets in installments,
and if the first sale of noncash assets having a book value of P90,000 realizes P50,000 and all cash
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 available after settlement with creditors is distributed, the respective partners would receive (to the
nearest peso)
a. AA – P8,000; BB – P8,000; CC - P4,000
b. AA – P6,667; BB – P6,667; CC – P6,666
c. AA – P0; BB – P13,333; CC – P6,667
d. AA – P0; BB – P3,000; CC - P17,000

2. If the facts are the same, except that P3,000 cash is to be withheld, the respective partners would
receive (to the nearest peso)
a. AA – P6,800; BB – P6,800; CC – P3,400
b. AA – P5,667; BB – P5,667; CC – P5,666
c. AA – P0; BB – P11,333; CC – P5,667
d. AA – P0; BB – P1,000; CC - P16,000

3. If each partner properly received some cash in the distribution after the second sale, if the cash to be
distributed amounts to P12,000 from the third sale, and if the unsold assets with a book value of P8,000
remain, ignoring questions 1 and 2, the respective partners would receive
a. AA – P4,800; BB – P4,800; CC – P2,400
b. AA – P4,000; BB – P4,000; CC – P4,000
c. AA – 36/150 0f P12,000; BB – 65/50 of P12,000; CC – 48/150 of P12,000
d. AA – P0; BB – P8,000; CC – P4,000

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