Accounting for Special Transactions

Pre-Session Task 1: Review the following:

PARTNERSHIP FORMATION
PARTNERSHIP OPERATIONS
PARTNERSHIP DISSOLUTION
PARTNERSHIP LIQUIDATION

Pre-Session Task 2: THEORY: Mark the best answer in each of the following questions.

1. Which of the following is a characteristic of a partnership?

a. unlimited life
b. limited liability
 c. mutual agency
d. created by operation of law

2. Which of the following statements about partnership is incorrect?

a. The assets contributed by each partner in a partnership become the common property of all
partners.
b. Each partner acts as agent of the other partners.
 c. The partner is not held personally liable for all debts of the firm.
d. The articles of co-partnership include, among others, the provision for arbitration in settling
disputes.

3. Which of the following statements about partnership is incorrect?

 a. It is created by operation of law.
b. It is created by mere agreement of partners
c It may be constituted in any form.
d. It is dissolved by the death of a partner.

4. The partnership agreement contains a written contract called Articles of Co-Partnership.

Such agreement does not include:
 a. a limitation on partners’ liability to creditors.
b. the rights and duties of the partners
c. the manner in which profits and losses are to be shared
d. the manner of keeping the books of accounts.

5. The assets contributed by the partners are recorded at fair market valued determined
a. based on values of similar assets through the partner’s appraisal
b. by the original owner of the asset
c. based on values agreed upon by some of the partners
 d. based on values agreed upon by all partners
 6. If the partnership agreement does not specify manner in which profit is to be allocated, profit or
loss should be allocated
a. equally
 b. in accordance with their capital contribution
c. in proportion to the average of capital invested during the period
d. equitably so that partners are well compensated for their time and effort

7. Which of the following statements justifies the provision for salary and interest allowances in a
partnership profit and loss sharing agreement?
a. salaries and interest are deductible expenses of the partnership in determining profit
b. salaries and interest are means of recognizing the time spent by each partner in overseeing or
managing the activities of the partnership
c. salaries and interest are means of determining reasonable monthly withdrawals by each partner
 d. salaries and interest are means of recognizing the time spent by each partner in the operations of
the partnership and the capital contribution of each partner

8. The net profit of a partnership engaged in a merchandising business, is [prior to CREATE law]
 a. subject to 30% corporate tax
b. subject to 35% corporate tax
c. not subject to taxation
d. taxed at a rate depending on the approval of the partners

9. Any excess of the capital balance over amount payable to settle the equity of the retiring or
deceased partner is treated as
 a. bonus to the remaining partners and shall be shared based on the remaining partners’ profit and
loss ratio
b. bonus to retiring/deceased partner and shall be allocated based on the old profit and loss ratio
c. bonus to the remaining partners and shall be shared equally
d. bonus to retiring/deceased partner and shall be allocated based on the remaining profit and loss
ratio

10. When a new partner is admitted into the partnership by investment of cash and other assets,
there is said to be a bonus to the incoming partner if
 a. the capital credit to the incoming partner is more than his contribution to the partnership.
b. the capital credit to the incoming partner is less than his contribution to the partnership.
c. the capital credit to the incoming partner is equal to his contribution to the partnership.
 d. the capital contribution of the incoming is greater than his capital credit.

11. Which of the following events would not result to a partnership dissolution?
a. termination of definite partnership terms
 b. achievement of specified undertaking
c. death of a partner
12. Which of the following procedures is not undertaken in a partnership liquidation by installment?
a. Liabilities to outside creditors are paid.
b. Sufficient cash is withheld to ensure the payment of all liabilities to outsiders including estimated
liquidation expenses.
c. The book of any unsold assets is treated as loss and any available cash is distributed to partners in
their profit and loss sharing ratio.
 d. Partnership loans from partners are subtracted while partnership loans to partners are added to
partners’ capital balances in determining the total partners’ interest before liquidation.

13. In a cash priority program, the maximum loss absorption balance of a partner is the
 a. total partner’s interest divided by the partner’s profit and loss sharing ratio
 b. total of his loan and capital balances
c. total interest at the time of cash distribution
d. book value of the remaining non-cash assets

14.b The entry to record the sale of non-cash assets and distribution of loss from realization would
include
a. credits to partners’ capital accounts
b. debits to partners’ capital accounts
 c. a debit to non-cash assets
 d. a credit to cash

15. A creditor’s claim to the partnership is first satisfied by the

 a. personal assets of each partner
 b. capital balances of each partner
c. assets of the partnership
d. partners who have capital deficiencies

16. A partner is said to be deficient if its capital account has a

a. debit balance
b. credit balance
 c. zero balance
d. positive balance

17. This is the event which indicates that the partnership operations have ended, assets have been
sold for cash, cash has been paid to creditors and partners and the partnership has been legally
terminated.
a. dissolution
 b. liquidation
c. realization
d. termination
18. Loss on realization is the result of a sale of non-cash assets at a price
a. equal to its book value
b. higher than its book value
 c. lower than its book value
d. lower than its fair market value

19. In a lump-sum partnership liquidation, the distribution of cash to the partners shall be made
based on the partners’
 a. profit and loss sharing ratio
b. capital balances before liquidation
c. original capital balances
d. total interest before cash distribution

20. When the realization results to a deficiency in a partner’s capital account,

a. the deficient partner immediately contributes additional cash to make good his deficiency
 b. the deficiency is immediately absorbed by the remaining partners
c. any capital deficiency of an insolvent partner which cannot be validly set off against his loan to
the partnership shall be absorbed by the remaining partners
d. the deficient partner, if insolvent, contributes his personal assets to the partnership to make good
his deficiency

21. Which of the following transactions is not normally found in a statement of partnership
liquidation?
 a. realization of assets
b. partners’ payment of cash to personal creditors
c. payment of cash to partnership creditors
d. payment of cash to partners

22. Which of the following situations would indicate that Partner A is personally insolvent?
a. Personal assets – P100,000; Personal liabilities – P80,000
b. Personal assets – P100,000; Personal liabilities – P90,000
 c. Personal assets – P100,000; Personal liabilities – P0
d. Personal assets – P90,000; Personal liabilities – P100,000

23. In an installment liquidation, the following are considered possible losses to the partners, except
 a. carrying value of remaining unsold non-cash assets
b. cash withheld for future liquidation expenses.
c. unrecognized liabilities
d. loss on realization

24. Loss absorption balance is

a. the maximum amount of loss that a partner may absorb without incurring capital deficiency
b. the minimum amount of loss that partner may absorb after incurring capital deficiency
 c. the maximum amount of loss that a partner may absorb after incurring capital deficiency
d. computed as total partner’s interest divided by 2
25. In the cash distribution plan or cash priority program, which partner will first receive cash?
a. the partner with the highest loss absorption balance
b. the partner with the lowest loss absorption balance
 c. the partner with the highest proportion in the profit and loss ratio
d. the partner with the lowest proportion in the profit and loss ratio