Chapter 1

Partnership Formation
1. A contract where two or more persons bind themselves to contribute money, property, or industry
to a common fund with the intention of dividing the profits among themselves.
a. Voluntary Association
b. Corporation
c. Partnership
d. Sole Proprietorship
Answer: (c)
2. A partnership formed for the exercise of a profession which is duly registered is an example of:
a. Universal partnership of profits
b. Universal partnership of all present property
c. Particular partnership
d. Partnership by estoppel
Answer: (c)
3. One of the following is not a characteristic of contract of partnership.
a. Real, in that the partners must deliver their contributions in order for the partnership contract
to be perfected
b. Principal, because it can stand by itself
c. Preparatory, because it is a means by which other contracts will be entered into
d. Onerous, because the parties contribute money, property, or industry to the common fund
Answer: (a)
4. One of the following is not a requisite of a contract of partnership. Which is it?
a. There must be a valid contract
b. There must be a mutual contribution of money, property, or industry to a common fund
c. It is established for the common benefit of the partners which is to obtain profits and divide
the same among themselves
d. The articles are kept secret among members
Answer: (d)
5. The minimum capital in money or property except when immovable property or real rights
thereto are contributed, that will require the contract of partnership to be in a public instrument
and be registered with the Securities and Exchange Commission (SEC).
a. P5, 000.00
b. P10, 000.00
c. P3, 000.00
d. P30, 000.00
Answer: (c)
6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at
the partnerships formation:
Contributed by
Roberts
Smith

Cash
Inventory
Building
Furniture & Equipment

P 20,000

P 30,000
15,000
40,000

15,000

The building is subject to a mortgage of P 10,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the partnership?
Roberts
Smith
a. 35,000
85,000
b. 35,000
75,000
c. 55,000
55,000
d. 60,000
60,000
Suggested Answer: (b) 35,000 & 75,000
Roberts: 20,000 + 15,000 = P35, 000
Smith: 30,000 + 15,000 + 40,000 10,000 = P75,000.
The partners capital credit is based upon the net assets contributed by the particular partner,
thus the liabilities assumed reduced the fair market value of the building invested.
7. The Grey and Redd Partnership was formed on January 2, 2010. Under the partnership
agreement, each partner has an equal initial capital balance. Partnership net income or loss is
allocated 60% to Grey and 40% to Redd. To form the partnership, Grey originally contributed
assets costing P30,000 with a fair value of P60,000 on January 2, 2010, and Redd contributed
P20,000 cash. Drawings by the partners during 2010 totaled P3, 000 by Grey an P9,000 by Redd.
The partnership net income in 2010 was P25,000
Under the goodwill method, what is Redds initial capital balance in the partnership?
a. 20,000
b. 25,000
c. 40,000
d. 60,000
Suggested Answer: (d) 60,000
Contributed Capital
Agreed Capital
Increase (Decrease)
Grey
60,000
60,000
Redd
20,000
60,000
40,000
Total
80,000
120,000
40,000
The partnership agreement provides for equal initial capital. Thus under the goodwill method ,
the capital credit for Redd should be the same as the contribution of Grey, thereby increasing the
total agreed capital to P120,000, which is P40,000 more than the total contributed capital
(goodwill).
8. Using the information in No. 2, under the bonus method, what is the amount of bonus?
a. 20,000 bonus to Grey
b. 20,000 bonus to Redd
c. 40,000 bonus to Grey
d. 40,000 bonus to Redd

Suggested Answer: (b) 20,000 bonus to Redd

Grey
Redd
Total

Contributed Capital
60,000
20,000
80,000

Agreed Capital
40,000
40,000
80,000

Increase (Decrease)
(20,000)
20,000

The partnership agreement provides for equal initial capital. Thus under the bonus method, the
capital credit for Redd should be the same as the contribution for Grey, resulting to P20,000
bonus from Grey to Redd.
9. On May 1, 2010, the business assets of John and Paul appear below:
Cash
Accounts Receivable
Inventories
Land
Building
Furniture & Fixture
Other Assets
Total

Accounts Payable
Notes Payable
John, Capital
Paul, Capital\
Total

John
11,000
234,536
120,035
603,000

50,345
2,000
P 1, 020, 916
178,940
200,000
641, 976

P 1, 020, 916

Paul
22,354
567,890
260,102

428,267
34,789
3,600
P 1, 317, 002
P 243,650
345,000
728,352
P1, 317, 002

John and Paul agreed to form a partnership contributing their respective assets and equities
subject to the following adjustments:
a. Accounts receivable of P20, 000 in Johns books and P35, 000 in Pauls are uncollectible.
b. Inventories of P5, 500 n P6, 700 are worthless in Johns and Pails respective books.
c. Other assets of P2, 000 and P3, 600 in Johns and Pauls respective books are to be written
off.
The capital accounts of John and Paul, respectively, after the adjustments will be:
a. 614, 476 683, 052
c. 640, 876
712, 345
b. 615, 942 717, 894
d. 613,576
683, 350
Suggested Answer: (a) 614, 476
683, 052
John: 641, 976 20, 000 5, 500 2, 000 = P 614, 476
Smith: 728, 352 35, 000 6, 700 3, 600 = P 683, 052
10. Based on No. 4, how much assets does the partnership have?
a. 2, 317, 918
b. 2, 237, 918
c. 2, 265, 118
d. 2, 365, 218
Suggested Answer: (c) 2, 265, 118
John: 1, 020, 916 20, 000 5, 500

2, 000 = P

993, 416

Smith: 1, 317, 002 35, 000 6, 700 3, 600 = P 1, 271, 702

Total: 2, 337, 918 55, 000 12, 200 5, 600 = P 2, 265, 118

Chapter 2
Partnership Operations
1. The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits
before bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of 2:3.
Which partner has a greater advantage when the partnership has a profit or when it has a loss?
PROFIT
LOSS
a.
Flat
Iron
b.
Flat
Flat
c.
Iron
Flat
d.
Iron
Iron
Answer: B
Profit - bonus 20%+ Balance (2/5 x 80%)= 52%
Loss - Bonus 0 + P/L (2/5 x 100%) 40%= 40%
2. Downs, Frey and Vick formed the DFV general partnership to act as manufacturers
representatives. The partners agreed Downs would receive 40% of any partnership profits and
Frey and Vick would each receive 30% of such profit. It was also agreed that the partnership
would not terminate for 5 years. After the fourth year, the partners agreed to terminate the
partnership. At that time, the partners capital accounts were as follows: Downs, 20 000; Frey,
15000 and Vick 10,000. There were undistributed losses of 30 000. Vicks share of losses will be
a. 0
b. 1000
c. 9000
d. 10 000
Answer: C
30 000 x 30%= 9 000
3. Red and White formed a partnership in 2010. The partnership agreement provides for annual
salary allowances of 55 000 for Red and 45 000 for White. The partners share profits equally and
losses in a 60/40 ratio. The partnership had earnings of 80 000 for 2006 before any allowance to
partners. What amount of these earnings should be credited to each partners capital account?
RED
WHITE
a.
40 000
40 000
b.
43 000
37 000
c.
44 000
36 000
d.
45 000
35 000
Answer: B
Red - 55 000 -12 000= 43 000
White 45 000- 8000 = 37 000
4. Fox, Greg and Howe are partners with average capital balances during 2010 of 120 000, 60 000
and 40 000, respectively. Partners receive 10% interest on their average capital balances. After
deducting salaries of 30 000 to Fox, and 20 000 to Howe, the residual P/L is divided equally. In

2010, the partnership sustained a 33 000 loss before interest and salaries to partners. By what
amount should Foxs capital change?
a. 7 000 increase
b. 11 000 increase
c. 35 000 decrease
d. 42 000 increase
Answer: A
Fox- 12 000 + 30 000 35 000 = 7 000
5. If a partnership has net income of 44 000 and partner X is to be allocated bonus of 10% of
income after the bonus. What is the amount of bonus?
a. 3 000
b. 3 300
c. 4 000
d. 4 400
Answer: C
44 000 40 000(44 000/110%) = 4 000
6. The partnership agreement of Donn, Eddy and Farr provides for annual distribution of P/L in the
ff. sequence:
Donn, the managing partner, receives a bonus of 10% profit
Each partner receives 6% interest on average capital investment
Residual P/L is divided equally
Average capital investments were: Donn, 80 000; Eddy, 50 000; Farr, 30 000
What portion of 100 000 profit for 2010 should be allocated to Farr?
a. 28 600
b. 29 800
c. 35 133
d. 41 600
Answer: A
1 800 ( 6% on ave. cap.) + 26 800 ( balance/equally) = 28 600
7. Partners AA and BB have P/L agreement with the ff. provisions: salaries of 30 000 for AA and 45
000 for BB. Bonus to AA of 10% net income after salaries and bonus, interest of 10% on average
capital balances of 20 000 and 35 000, respectively. One third of any remaining profits will be
allocated to AA and the Balance to BB. If the net income is 102 500, how much should be
allocated to AA?
a. 44 250
b. 47 500
c. 41 000
d. 41 167
Answer: C

30 000 + 2 500 + 2 000 + 6 500 = 41 000

8. Refer to question 7, if the partnership had net income of 22 000, how much should be allocated to
AA, assuming that the provisions of the P/L agreement are ranked by order of priority starting
with salaries?
a. 13 200
b. 12 500
c. 12 000
d. 8 800
Answer: D
22 000 x 30/75
9. Luz, Vi and Minda are partners when the partnership earned a profit of 30 000. Their agreement
provides the ff.:
8% interest on partners ending capital in excess of 75 000
Salaries of 20 000 for Luz and 30 000 for Vi
Any balance is to be distributed 2:1:1, respectively
Assume ending capital balances of 60 000, 80 000 and 100 000, respectively. What is the amount of profit
allocated for Minda, if each provision of P/L is satisfied to whatever extent possible using the priority
order shown above?
a. ( 3 600)
b. 3 600
c. (2 000)
d. 2 000
Answer: D
2 000 ( 8% x 100 000- 75 000)

10. On October 31, 2010, Zita and Jones formed a partnership by investing cash of 300 000 and 200
000, respectively. The partners agreed to receive an annual salary allowance of 360 000 and to
give Zita a bonus of 20% of the net income after partners salaries, the bonus being treated as an
expense. If the profits after salaries and bonus are to be divided equally, and the profit after
salaries but before bonus of Zita is 360 000, how much is the share of Zita in the profit?
a. 100 000
b. 120 000
c. 210 000

d. 270 000
Answer: D
Salaries + bonus + balance
60 000 + 60 000 + 150 000 = 270 000

Chapter 3
Partnership Dissolution: Changes in Ownership
11. The change in relation of the partners caused by any ceasing to be associated in the carrying of
the business is known as:
a. Termination of the partnership
b. Winding up of the partnership affairs
c. Liquidation of the partnership business
d. Dissolution of the partnership
Answer: (d)
12. A decree by the court is necessary to dissolve a general partnership based on three of the
following grounds. Which one will not require such decree but will cause the automatic
dissolution of the partnership?
a. The business of a partnership can only be carried on at a loss
b. A partner is shown to be of unsound mind
c. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of
the business
d. A partner is civilly interdicted
Answer: (d)
13. Three of the following will cause the automatic dissolution of a general partnership. Which one
will not?
a. When any event makes it unlawful for the business of the partnership to be carried on or for
the members to carry it on in partnership
b. Expulsion of any partner from the business bona fide in accordance with such a power
conferred by the agreement between the partners
c. A partner becomes in any way incapable of performing his part of the partnership contract
d. The insolvency of a partner or of the partnership
Answer: (c)
14. What is the order of payment of liabilities of a dissolved general partnership using the code
number representing each liability?
I.
Those owing to partners other than for capital or for profits
II.
Those owing to creditors other than partners
III.
Those owing to creditors in respect of profits
IV.
Those owing to partners in respect of capital
a. I, II, III, IV
b. II, I, IV, III
c. II, I, III, IV
d. I, II, IV, III
Answer: (b)
15. Which of the following will not cause automatic dissolution of a limited partnership?
a. Death of a general partner
b. Death of a limited partner

c. Insolvency of a general partner

d. Insanity of a general partner
Answer: (b)
16. On May 1, 2010, the business assets of John and Paul appear below:
Cash
Accounts Receivable
Inventories
Land
Building
Furniture & Fixture
Other Assets
Total

Accounts Payable
Notes Payable
John, Capital
Paul, Capital\
Total

John
11,000
234,536
120,035
603,000

50,345
2,000
P 1, 020, 916
178,940
200,000
641, 976

P 1, 020, 916

Paul
22,354
567,890
260,102

428,267
34,789
3,600
P 1, 317, 002
P 243,650
345,000
728,352
P1, 317, 002

John and Paul agreed to form a partnership contributing their respective assets and equities
subject to the following adjustments:
d. Accounts receivable of P20, 000 in Johns books and P35, 000 in Pauls are uncollectible.
e. Inventories of P5, 500 n P6, 700 are worthless in Johns and Pails respective books.
f. Other assets of P2, 000 and P3, 600 in Johns and Pauls respective books are to be written
off.
Peter offered to join for a 20% interest in the firm. How much should he contribute?
a. 330, 870
b. 337, 487
c. 344, 237
d. 324, 382
Suggested Answer: (d) 324, 382
New Capital [(614, 476 + 683, 052)/ 80%]
Multiply by
Cash to be contributed by Peter

P1, 621, 910

20%
P 324, 382

17. Based on No. 1, after Peters admission, the profit and loss sharing ratio was agreed to be
40:40:20, based on capital credits. How much should the cash settlement be between John and
Paul?
a. 33, 602
b. 32, 930
c. 32, 272
d. 34, 288
Suggested Answer: (d) 34, 288

Capital Balances after Admission

New Capital ratio (40% x 1, 621, 910)
Cash settlement between John and Peter

John
P 614, 476
648, 764
P 34, 288

Paul
P 683, 052
648, 764
P (34, 288)

18. Blue and Rubi are partners who share profits and losses in the ratio 6:4, respectively. On May 1,
2010, their respective capital accounts were as follows:
Blue P60, 000
Rubi
50, 000
On that date, Lind was admitted as a partner with one-third interest in capital, and profits for an
investment o P40, 000. The new partnership began with a total capital of P150, 000. Immediately
after Linds admission, Blues capital should be:
a. 50, 000
b. 54, 000
c. 56, 667
d. 60, 000
Suggested Answer: (b) 54, 000

Old Partners
New Partner
Total

Contributed Capital
P 110, 000
40, 000
P 150, 000

Agreed Capital
P 100, 000
(1/3) 50, 000
P 150, 000

Blues capital before admission of Lind

Less: share in bonus to Lind (10, 000 x 60%)
Blues capital after Linds admission

Increase (Decrease)
P (10, 000)
10, 000

P 60, 000
6, 000
P 54, 000

19. Fernando and Jose are partners with capital balances of P30, 000 and P70, 000, respectively.
Fernando has a 30% interest in profits and losses. All assets of the partnership are at fair market
value except equipment with book value of P300, 000 and fair market value of P320, 000. At this
time, the partnership has decided to admit Rosa and Linda as new partners. Rosa contributes cash
of 55, 000 for 20% interest in capital and 30% interest in profits and losses. Linda contributes
cash of P10, 000 and equipment with a fair value of P50, 000 for a 25% interest in capital and
35% interest in profits and losses. Linda is also bringing special expertise and client contacts into
the new partnership.
Using the bonus method, what is the amount of bonus?
a. 24, 750
b. 18, 250
c. 14, 000
d. 7, 500
Suggested Answer: (b) 18, 250
Contributed Capital

Agreed Capital

Increase (Decrease)

Old Partners
New Partners
Total

P
P

100, 000
115, 000
215, 000

P
118, 250
(45%) 96, 750
P 215, 000

P 18, 250
(18, 250)

20. Based on the information provided in No. 4, using the goodwill method, what is the amount of
goodwill traceable to the original partners?
a. 60, 000
b. 40, 000
c. 31, 250
d. 28, 750
Suggested Answer: (c) 31, 250
Contributed Capital
Old Partners
P
100, 000
New Partners
115, 000
Total
P
215, 000

Agreed Capital
P
151, 250
(45%) 123, 750
P
275, 000

Total increase in capital

Less: undervalued equipment (320, 000- 300, 000)
Balance
Goodwill to Linda
Goodwill to Original Partners

Increase (Decrease)
P 51, 250
8, 750
P 60, 000

P60, 000
20, 000
P 40, 000
8, 750
P 31, 250

When there is a difference between the book value and fair market value of the partnership when
new partners are admitted, the goodwill method revalues assets to market value. To determine the
new capital of the partnership, contributed capital of the new partner may be divided by his
capital interest. In this case, where Linda will be provided with goodwill for bringing her
expertise and clients contact to the partnership, the capital of Rosa is used instead because it
serves as concrete basis with no goodwill involved, in determining the new capital of the
partnership. Thus, the new capital of the partnership is P275, 000 (55, 000/ 20%).

Chapter 4
Partnership Lump Sum Liquidation
1. In the liquidation of a partnership it is necessary to 1) distribute cash to the partners, 2) sell noncash assets, 3) allocate any gain or loss on realization to the partners, 4) pay liabilities. These
steps should be performed in the following order:
a. 2 3 4 1
b. 2 3 1 4
c. 3 2 1 4
d. 3 2 4 1
Answer: A
2. Peter and John who share P/L equally, decide to liquidate their partnership when their net assets
amounted to 260 000, and capital balances of 170 000 and 90 000, respectively.
If non cash assets were sold for amount equal to its book value, what amount of cash should Peter
and John received?
PETER
JOHN
a.
130 000
130 000
b.
170 000
90 000
c.
180 000
80 000
d.
195 000
65 000
Answer: B
No gain or loss was realized
3. The following condensed balance sheet is prepared for the partnership of Smith and Jones, who
share P/L in the ratio of 60:40,
Other assets
Smith, loan

450 000
20 000
470 000

Accounts Payable
Smith, Capital
Jones, Capital

120 000
195 000
155 000
470 000

The partners decide to liquidate the partnership. If the other assets are sold for 385 000, what
amount of the available cash should be distributed to Smith?
a.
b.
c.
d.

136 000
156 000
159 000
195 000

Answer: A
Capital balance- loan loss on realization (60:40)
195 000 20 000 39 000 = 136 000
4. On December 31, 2010, the partners of MNP partnership decided to liquidate their business.
Immediately before liquidation, the ff. condensed balance sheet was prepared:

Cash
Non cash assets

50 000
900 000

Total

950 000

Liabilities
Nieva,loan
Perez, loan
Munoz, capital(50%)
Nieva, Capital(30%)
Perez, capital(20%)

375 000
80 000
25 000
312 500
107 500
50 000
950 000

The non cash assets were sold for 400 000. Assuming Perez is the only solvent partner, what
amount of additional cash will be invested by Perez?
a. 37 143
b. 25 000
c. 5 000
d. 0
Answer: B
Capital balance + loan loss on realization
50 000
+ 25 000 100 000 =( 25 000 )

5. Partner Morgan is personally insolvent, owing 600 000. Personal assets will only bring 200 000
when liquidated. At the same time, Morgan has a credit capital balance of 120 000. The capital
amounts of the other partners total a credit balance of 250 000. Under the doctrine of marshalling
of assets, how much the personal creditors of Morgan can collect?
a. 120 000
b. 200 000
c. 320 000
d. 570 000
Answer: C
Personal assets + capital credit balance
200 000 + 120 000 = 320 000
6. As of December 31, the books of AME partnership showed capital balances of 40 000, 25 000
and 5 000, respectively. The P/L ratio is 3:2:1. The partners decided to liquidate. They sold all
non cash assets for 37 000 cash. After settlement of all liabilities amounting to 12000, they still
have 28 000 cash left for distribution. The loss on realization of non cash assets was
a. 40 000

b. 42 000
c. 44 000
d. 45 000
Answer: B
Total capital before distribution Cash left for distribution
70 000 28 000 = 42 000
7. Refer to no. 5. Assuming that any partners capital deficit balance is uncollectible, the share of A
in the 28 000 cash would be
a. 19 000
b. 18 000
c. 17 800
d. 40 000
Answer: C
Capital balance before liquidation loss on realization absorption of E
40 000 21 000 1 200 = 17 800
8. The following balance sheet is presented for the partnership ABC who share profits and losses in
the ratio of 5:3:2
Cash
Other assets

Total

120 000
1080 000

Liabilities
A, capital
B, capital
C, capital

1 200 000

280 000
560 000
320 000
40 000
1 200 000

Assume that the three partners decided to liquidate. The other assets are sold for 800 000, how
much will A receive?
a. 280 000
b. 324 000
c. 410 000
d. 412 000
Answer: C
Capital balance before liquidation loss on realization absorption of C
560 000 140 000 10 000 = 410 000

9. Refer to no. 8. How much B will receive?

a. 320 000
b. 236 000
c. 230 000
d. 228 000

Answer: C
Capital balance before liquidation loss on realization absorption of C
320 000 84 000 6 000 = 230 000
10. How much C will receive?
a. 40 000
b. 0
c. 16 000
d. 10 000
Answer: B
Capital balance before liquidation loss on realization
40 000- 56 000= - 16 000 ( absorbed by other partners) = 0

Chapter 5
Partnership Installment Liquidation
1. MARK Company is a partnership engaged in the trading business with Marquez, Alconcer,
Ramos, and Kanapi as partners. Marquez, Alconcer, and Ramos are capitalist partners
contributing P100, 000, P60, 000 and P40, 000, respectively. Kanapi is an industrial partner. The
partnership has a stipulation that Marquez shall not be liable for partnership liabilities. After three
years of continued losses. The partnership incurred liabilities of P200, 000 at which time its assets
had dwindled to P140, 000. After the partnership assets have been exhausted, partnership
creditors may go after the separate assets of:
a. All the partners
b. Marquez, Alconcer, and Ramos but not those of Kanapi
c. Alconcer, Ramos and Kanapi but not those of Marquez
d. Alconcer and Ramos only
Answer: (a)
2. Refers to the process of settling the business or affairs of the partnership after dissolution is
known as
a. Partnership formation
b. Termination
c. Partnership Liquidation
d. Incorporation
Answer: (c)
3. In accounting for the liquidation of a partnership, cash payments to partners after all non-partner
creditors claims have been satisfied, but before the final cash distribution, should be according to
a. The partners relative profit and loss sharing ratios
b. The final balances in partners capital accounts
c. The partners relative share of the gains and loss on liquidations
d. Safe payments computations
Answer: (d)
4. In partnership liquidation, the final cash distribution to the partners should be made in
accordance with the
a. Partners profit and loss sharing ratio
b. Balances of the partners loan and capital accounts
c. Ratio of the capital contributions by the partners
d. Ratio of capital contributions less withdrawals by the partners
Answer: (b)
5. Prior to partnership liquidation, a schedule of possible losses is frequently prepared to determine
the amount of cash that may be safely distributed to the partners. The schedule of possible losses
a. Consist of each partners capital account plus loan balance, divided by that partners profit
and loss sharing ratio
b. Show the successive losses necessary to eliminate the capital accounts of partners ( assuming
no contribution of personal assets by the partners)
c. Indicates the distribution of successive amounts of available cash to each partner
d. Assumes contribution of personal assets by partners unless there is a substantial presumption
of personal insolvency by partners

Answer: (b)
6. After incurring losses resulting from very unprofitable operations, the Goh Kong Wei Partnership
decided to liquidate when the partners capital balances were:
Goh, Capital
P80, 000
Kong, Capital
130, 000
We, Capital
96, 000
The non-cash assets were sold in installment. Available cash were distributed to partners in every
sale of non-cash assets. After the second sale of non-cash assets, the partners received the same
amount of cash in the distribution. And from the third sale of non-cash assets, cash available for
distribution amounts to P28, 000, and unsold non-cash assets has a book value of P12,500. Using
cash priority program, what amount did Wei received in the third installment of cash?
a. 11, 600
b. 8, 000
c. 5, 600
d. 2, 000
Suggested Answer: (c) 5, 600
P28, 000 x 20% = P5, 600
7. Partners Almond, Barney and Colors have capital balances of P20, 000, P50, 000 and P90, 000,
respectively. They split profits in the ratio 2:4:4, respectively. Under a safe cash distribution plan,
one of the partners will get the following total amounts in liquidation before any other partners
get anything:
a. 0
b. 15, 000
c. 40, 000
d. 180, 000
Suggested Answer: (c) 40, 000
Total Interest
Divide by P & L
Loss Absorption Balance
Priority 1 Colors
Balances
Priority 2 Colors & Barney
Balances (P & L)

Almond
20, 000
20%
100, 000

Barney
50, 000
40%
125, 000

100, 000

125, 000
(25, 000)
100, 000

100, 000

Colors
90, 000
40%
225, 000
(100, 00)
125, 000
(25, 000)
100, 000

Since the question being asked is one of the partners will getbefore any other partners get
anything, it is the partner under priority no. 1 (Colors). He shall receive, under priority no. 1, P40, 000
(100, 000 x 40%).
8. The ABC Partnership has assets with book value of P240, 000 and a market value of P195, 000,
outside liabilities of P70, 000, loans payable to partner Able of P20, 000 and capital balances for
partners Able, Baker, and Chapman of P70, 000, P30, 000, and P50, 000, respectively. The

partners share profits and losses equally. How would the first P100, 000 of available assets be
distributed?
a. P70, 000 to outside liabilities, P20, 000 to Able, and the balance equally among partners
b. P70, 000 to outside liabilities, and P30, 000 to Able
c. P70, 000 to outside liabilities, P25, 000 to Able, and P5, 000 to Chapman
d. P40, 000 to Able, P20, 000 to Chapman, and the balance equally among partners
Suggested Answer: (b) P70, 000 to outside liabilities, and P30, 000 to Able
Able
Baker
Chapman
Total Interest
90, 000
30, 000
50, 000
Divide by P & L
1/3
1/3
1/3
Loss Absorption Balance
270, 000
90, 000
150, 000
Priority 1 Able
(120, 000)
Balances
150, 000
90, 000
150, 000
Priority 2 Able & Chapman (60, 000)
(60, 000)
Balances (P & L)
90, 000
90, 000
90, 000
Payments by Priority:
Priority 1 (120, 000 x 1/3)
Priority 2 (60, 000 x 1/3)

Total
Liability
Balance
Loan A
Balance
Priority 1
Total

Cash
100, 000
(70, 000)
30, 000
(20, 000)
10, 000
10, 000

Able
40, 000
20, 000

Baker

Liability

Able

Chapman
20, 000
Baker Chapman

70, 000
20, 000

70, 000

10, 000
30, 000

9. Given the information in No. 3, if all outside creditors and loans to partners had been paid, how
would the balance of the assets be distributed assuming Chapman had already received assets
with a value of P30, 000?
a. Each of the partners would receive P25, 000
b. Each of the partners would receive P40, 000
c. Able: P70, 000, Baker: P30, 000, Chapman: P20, 000
d. Able: P55, 000, Baker: P15, 000, Chapman: P5, 000
Suggested Answer: (d) Able: P55, 000, Baker: P15, 000, Chapman: P5, 000
Able
Total Interest (excluding loan) 70, 000
Divide by P & L
1/3
Loss Absorption Balance
210, 000

Baker
30, 000
1/3
90, 000

Chapman
50, 000
1/3
150, 000

Priority 1 Able
Balances
Priority 2 Able & Chapman
Balances (P & L)

(60, 000)
150, 000
(60, 000)
90, 000

Payments by Priority:
Priority 1 (60, 000 x 1/3)
Priority 2 (60, 000 x 1/3)
Cash
MV of assets 195, 000
Liabilities
(70, 000)
Able, Loan
(20, 000)
Balance
105, 000
Priority 1
(20, 000)
Balance
85, 000
Priority 2
(40, 000)
Balance
45, 000
Priority 3
(45, 000)
Total
Less: Asset taken by Chapman
Balance

90, 000
90, 000

150, 000
(60, 000)
90, 000

Able
20, 000
20, 000

Baker

Chapman

Able

Baker

20, 000
Chapman

20, 000
20, 000

20, 000

15, 000
55, 000

15, 000
30, 000

55, 000

15, 000

15, 000
35, 000
30, 000
5, 000

10. The balance sheet of the partnership of Salve, Galo and Norma, who share in the profits and
losses in the ratio 5:3:2, respectively is as follows:
Assets
Liabilities & Capital
Cash
30, 000
Liabilities
50, 000
Other Assets
320, 000
Salve, capital
80, 000
Galo, Capital
115, 000
Norma Capital
105, 000
Total
350, 000
Total
350, 000
The partnership is liquidated by installment. The first sale of non-cash assets with a book value of
P150, 000 realizes P100, 000. How should the remaining be distributed?
Salve
Galo
Norma
a.
50, 000
30, 000
20, 000
b.
40, 000
24, 000
16, 000
c.
0
31, 000
49, 000
d.
0
48, 000
32, 000
Suggested Answer: (c) 0

31, 000

Capital Balances before liquidation

Loss on Realization (50,000) (5:3:2)
Balances

49, 000
Salve
80, 000
(25, 000)
55, 000

Galo
115, 000
(15, 000)
100, 000

Norma
105, 000
(10, 000)
95, 000

Less: Possible Loss (170, 000) (5:3:2)

Balances
Absorption of Salve (3:2)
Safe Payment to Partners

(85, 000)
(30, 000)
30, 000

(51, 000)
49, 000
(18, 000)
31, 000

(34, 000)
61, 000
(12, 000)
49, 000

Chapter 6
Corporate Liquidation
1. If a dividend of 80% is allocable to class 7 unsecured creditors based on accounting statement of
affairs, it correctly may be concluded that
a. All unsecured claims will receive the same percentage of return.
b. All unsecured claims will be paid in full.
c. Class 1 through 6 unsecured claims will be paid in full.
d. Stockholders will receive 20% of their equity.
Answer: C
2. In the liquidation proceeding, if the proceeds on the realization of an asset exceed the lien against
that asset, the excess is assigned to
a. The holder of the lien.
b. Other lien holders whose assets will not realize a sufficient amount to cover their liens.
c. Meet the claims of the unsecured creditors.
d. The stockholders of the corporation.
Answer: C
3. If the value of pledged property is equal or more than the obligation, what is the treatment?
a. Partially secured
b. Fully secured
c. Collateralized
d. Unsecured
Answer: B
4. If the firm has more liabilities than assets, it is deemed
a. Liquidating
b. Bankrupt
c. Insolvent
d. Normal
Answer: C
5. He/she is appointed to take over the debtors properties in behalf of the creditor group
a. Broker
b. Judge
c. Trustee
d. Dealer
Answer: C

6. In May 2009, it was determined that it is necessary to complete the work in process of Wild West
Corp. to complete the work in process , 10 000 book value of raw materials and supplies and 10
000 conversion costs will be required. When completed, these goods will probably sell for

approx..50 000. The raw materials, which have a book value of 40 000, have an estimated total
realizable value of 20 000. What is the estimated amount that will become available for unsecured
creditors as a result of the realization of the work in process?
a. 50 000
b. 35 000
c. 30 000
d. 0
Answer: B
Estimated value upon completion
Less cost to complete:
Raw materials[10 000x(20000/40000) 5000
Conversion cost
10 000

50 000

15 000
35 000

7. The following selected account balances were taken from the balance sheet of Quitting Corp. as
of December 31,2009, immediately before the takeover of the trustee:
Marketable securities
300 000
Inventories
110 000
Land
150 000
Building
400 000
Additional information:
Marketable securities have present MV of 320 000. These have been pledged to secure
NP of 280 000
The estimated worth of inventories is 70 000. However, inventories with book value of
50 000 have been pledged to secure NP of 60 000. The realizable value of the inventories
pledged is estimated to be 40 000.
Land and building have total realizable value of 450 000. This property is pledged to
secure the mortgage payable of 250 000.
What is the estimated amount available for preferred claims and unsecured creditors out
of assets pledged with fully secured creditors?
a. 840 000
b. 810 000
c. 770 000
d. 240 000
Answer: D
Marketable instruments
Land and building

40 000
200 000
240 000

8. Refer to no.4. What is the total amount of free assets?

a. 810 000
b. 770 000
c. 270 000
d. 240 000

Answer: C
Marketable securities
Land and building
Unpledged investment

40 000
200 000
30 000
270 000

9. The accountant of Drifting Corp. prepared a statement of affairs. Assets which there are no claims
or liens are expected to produce 700 000. Unsecured claims of all classes totaled to 1 050 000.
The ff.data claims deemed outstanding:
Accrued salaries 15 000
Unrecorded note for 10 000 on which 600 of interest has accrued held by Normandy Co
A note for 30 000 secured by 40 000 receivable estimated to be 60% collectible held by
Jones Co.
A 15 000 note on which 300 interest has accrued held by James Pty. Property with a BV
of 10 000 and MV of 18 000 is pledge to guarantee payment of principal and interest.
Unpaid income taxes of 35 000
What is the total free assets?
a. 1 050 000
b. 700 000
c. 650 000
d. 1 000 000
Answer: B
Free Assets are assets with no claims or liens
10. What is the amount realized by partially secured creditors?
a. 10 600
b. 19 500
c. 24 900
d. 27 900
Answer: D
(Free assets- unsecured with priority) unsecured claims without priority= percent of recovery
(700 000 50 000 ) /1000 0000= 65 %
Realizable amount of AR( 60% x 40 000)
Add unsecured portion (30 000-24000)x 65%

24 000
3 900
27 900