Quiz advanced Accounting II

Chapter 16 Chapter 18
Monika Kussetya C.SE,M.ak
1.
2.
3.
4.
5.

Explain why the noncash investments of partners should be recorded at their fair values.
Is there a conceptual difference between partner drawings and withdrawals? Is there a practical difference?
When a profit sharing agreement specifies that profits should be divided using the ratio of capital balances, how
should capital balances be computed?
Explain how a partner could have a loss from partnership operations for a period even though the partnership
had net income.
If a partner sells his or her partnership interest directly to a third party, the partnership may or may not be
dissolved. Under what conditions is the partnership dissolved?

6.

How does the purchase of an interest from existing partners differ from the acquisition of an interest by
investment in a partnership?
7. What alternative approaches can be used in recording the admission of a new partner?
8. Why is the goodwill procedure best described as a revaluation procedure?
9. Explain the bonus procedure for recording an investment in a partnership. When is the bonus applicable to old
partners, and when is it applicable to new partners?
10. The goodwill procedure was used to record the investment of a new partner in the XYZ Partnership, but
immediately thereafter, the entire business was sold for an amount equal to the recorded capital of the
partnership. Under what conditions would the amounts received in final liquidation of the partnership have been
the same as if the bonus procedure had been used?
11. How does partnership liquidation differ from partnership dissolution?
12. What assumptions are made in determining the amount of distributions (or safe payments) to individual partners
prior to the recognition of all gains and losses on liquidation?
13. What is a statement of partnership liquidation, and how is the statement helpful to partners and other parties
involved in partnership liquidation?
14. A partnership in liquidation has satisfied all of its nonpartner liabilities and has cash available for distribution to
partners. Under what circumstances would it be permissible to divide available cash in the profit and loss
sharing ratios of the partners?
15. When all partnership assets have been distributed in the liquidation of a partnership, some partners may have
debit capital balances and others may have credit capital balances. How are such balances eliminated if the
partners with debit balances are personally solvent? If they are personally insolvent?
16. What is the distinction between equity insolvency and bankruptcy insolvency ?
17. What obligations does a debtor corporation have in a bank? What is the purpose of a statement of affairs, and
how are assets valued in this statement?
18. What is a debtor-in-possession reorganization case?
19. The balance sheet of the Fred, Gini, and Peggy partnership on December 31, 2011, together with profit sharing
ratios, revealed the following:
Cash
$240,000
Fred capital (30%)
$
200,000
Other assets
360,000
Gini capital (30%)
170,000
Peggy capital (40%)
230,000
$600,000
$ 600,000
Gini is retiring from the partnership, and the partners agreed that she should receive $200,000
cash as payment in full for her share of partnership assets. If the goodwill implied by the
settlement with Gini is recorded on the partnership books, how much should total partnership
assets after Ginis withdrawal be?
20. The following balance sheet summary, together with residual profit sharing ratios, was developed
on April 1, 2011, when the Dick, Frank, and Helen partnership began its liquidation:
Cash
$140,000
Liabilities
$ 60,000
Accounts receivable
60,000
Loan from Frank
20,000
Inventories
85,000
Dick capital (20%)
75,000
Plant assetsnet
200,000
Frank capital (40%)
200,000
Loan to Dick
25,000
Helen capital (40%)
155,000
$510,000
$510,000

If available cash except for a $5,000 contingency fund is distributed immediately, how much
should Dick, Frank, and Helen, respectively receive?

Noncash investments of partners should be recorded at their fair values in order to provide
equitable treatment to the individual partners. The recording of noncash assets at less than
fair value will result in allocating the amount of understatement between the partners in their
relative profit and loss sharing ratios as the undervalued assets are used for partnership
business or when they are sold by the partnership.
Conceptually, there is no difference between the drawings and the withdrawals of partners
since both represent disinvestments of resources from the partnership entity. From a practical
viewpoint, the distinction between withdrawals and drawings may be important because
allowable drawings are not usually deducted in determining the amount of partnership capital
to be used for purposes of dividing profits among the partners. Since withdrawals are
deducted, the distinction can affect the division of profits and losses.
When profits are divided in the ratio of capital balances, capital balances should be computed
on the basis of weighted average capital balances in the absence of evidence that another
interpretation of capital balances is intended by the partners.
An individual partner may have a loss from his share of partnership operating activities even
though the partnership has income. This situation results if priority allocations to other
partners exceed partnership net income. For example, if net income for the A and B
Partnership is $5,000 and profits are divided equally after a salary allowance of $8,000 to A, A
will have partnership income of $6,500 and B will have a partnership loss of $1,500.
The sale of a partnership interest to a third party dissolves the old partnership if the continuing
partners accept the third party purchaser as their partner. In this case, the relation among the
partners is changed and a new partnership agreement is necessary.
When a new partner acquires an interest by purchase from existing partners, the partnership
receives no new assets because the payment for the new partners interest is distributed to
the old partners.
Alternatively, an investment in a partnership increases the net assets of the partnership. This
difference is important in accounting for the admission of a new partner.
The admission of a new partner may be recorded by the goodwill approach (or revaluation
approach) or by the bonus approach (or nonrevaluation approach).
The goodwill procedure for recording the admission of a new partner is best described as a
revaluation approach because identifiable assets and liabilities that are over or undervalued
are adjusted to their fair values before the unidentifiable asset goodwill is recorded. For
example, if a new partners investment reflects the fact that land owned by the old partnership
is undervalued, it would be misleading to record the amount of revaluation as goodwill, rather
than as a revaluation of the land account.