PARTNERSHIP DISSOLUTION - THEORIES

1. _________ of partnership changes the existing relationship between partners

but the firm may continue its business as before.
a. Liquidation c. Dissolution
b. Formation d. Birth

2. The dissolution of partnership may take place in any of the following ways.
Which of the following is not included?
a. Change in existing profit-sharing ratio among partners
b. Admission of a new partner
c. Insolvency of a partner
d. Accomplishment of the purpose of the partnership

3. Which of the following statement/s is/are true?

Statement 1: Dissolution of a partnership firm may take place without the
intervention of court or by the order of a court.
Statement 2: It may be noted that dissolution of the firm necessarily brings in
dissolution of the partnership.
a. Statement 1 only c. Both statements are correct.
b. Statement 2 only d. Neither of the two statements is correct.

4. A new partner may be admitted when he purchases part or all of the interest of
one or more of the existing partners. Which of the following is false?
a. This transaction is personal between and among the partners.
b. There is no new capital account established for the new partner but
there is a corresponding decrease on the capital account(s) of the
selling partner.
 c. Any consideration paid or received is not recorded in the partnership
books.
d. No gain or loss is recognized in the partnership books.

5. When the outgoing partner’s interest is settled at an amount greater than or less
than the value of his interest, the ______ method is used.
a. bonus c. exact
b. goodwill d. acquisition

6. A partnership dissolution differs from a liquidation in that

a. payments are made to creditors before partners receive value.
b. periodic payments to partners are made when cash becomes available.
c. a partner withdraws from the business and the enterprise continues to
function.
d. full payment is made to all outside creditors before remaining cash is
distributed to partners in a final lump sum payment.
Based on the availability of funds, the sale proceeds are distributed in the following
order: creditors, debt security owners, preferred shareholders and lastly common
shareholders. In the case of dissolution, shareholders or owners do not receive any
proceeds, whereas in case of liquidation, the shareholders or owners receive
proceeds from the company if there are enough assets, after paying the debts
owed to the creditors of the company.

7. Statement 1: A partnership may be dissolved without being liquidated.

Statement 2: Liquidation is always preceded by dissolution.
A. Both statements are true
B. Only statement 1 is true
C. Only statement 2 is true
D. Both statements are false
Dissolution should be distinguished from liquidation of the partnership. A
partnership is said to be liquidated when the business is terminated, a partnership
may be dissolved without being terminated but liquidation is always preceded by
dissolution.

8. When a partnership dissolves, the first step in the dissolution process is to

________.

A. allocate the gain or loss on sale based on income sharing ratio

B. pay off liabilities
C. sell noncash assets
D. divide the remaining cash among the partners

The liquidation or dissolution of a partnership is synonymous with closing the

business. four steps remain in the accounting for the liquidation, each requiring an
accounting entry. They are:

 Step 1: Sell noncash assets for cash and recognize a gain or loss
on realization. Realization is the sale of noncash assets for cash.
 Step 2: Allocate the gain or loss from realization to the partners based on
their income ratios.
 Step 3: Pay partnership liabilities in cash.
 Step 4: Distribute any remaining cash to the partners on the basis of their
capital balances.

9. All the assets of the firm are _____ and all outsiders’ liabilities and partners’ loan
and partners capitals are ___ at the time of dissolution of firm.

a. Disposed Off, Paid

b. Paid, Disposed Off
c. Acquired , Paid
d. Disposed Off, Acquired

Dissolution is when a partnership firm ceases operations and its assets are
disposed of. A firm may be dissolved in accordance with a contract between the
partners, by law, on happening of certain contingencies or by court. Or where the
partnership is at will it may be dissolved by any partner giving notice in writing to all
other partners of his intention to dissolve the partnership or firm.
10. When a partnership dissolves, the last step in the dissolution process is to
________.

A. allocate the gain or loss on sale based on income sharing ratio

B. pay off liabilities
C. sell noncash assets
D. divide the remaining cash among the partners

The liquidation or dissolution of a partnership is synonymous with closing the

business. four steps remain in the accounting for the liquidation, each requiring an
accounting entry. They are:

 Step 1: Sell noncash assets for cash and recognize a gain or loss
on realization. Realization is the sale of noncash assets for cash.
 Step 2: Allocate the gain or loss from realization to the partners based on
their income ratios.
 Step 3: Pay partnership liabilities in cash.
 Step 4: Distribute any remaining cash to the partners on the basis of their
capital balances.