Chapter 21

Multiple Choice Problems

1. d
JJ CC TT Total

Profit ratio 40% 50% 10% 100%

Prior capital 160,000 45,000 55,000 260,000
Loss on sale
of inventory ( 24,000) (30,000) (6,000) (60,000)
136,000 15,000 49,000 200,000
Possible loss for unrealized
assets
P360,000 – P200,000 = ( 64,000 ( 80,000) (16,000) 160,000)
P160,000 )
72,000 (65,000) 33,000 40,000
Possible insolvency (4:1) (52,000) 65,000 (13,000) ______
20,000 20,000 40,000

2. a
Peter Paul Mary Total
Capital balances 300,000 350,000 400,000 1,050,000
Loss on sale of assets
(475,000 – 600,000) – 4:4:2 ( 50,000) (50,000) (25,000) (125,000)
250,000 300,000 375,000 925,000
Possible loss for unrealized
assets
P1,000,000 – P600,000 = 160,000 160,000 80,000 400,000
400,000
90,000 140,000 295,000 525,000

3. d

4 d AA BB CC
.
Capital balances 37,000 65,000 48,000
Divided by: Profit and loss ratio 40% 40% 20
%
Loss absorption power 92,500 162,500 240,000
Loss to reduce CC to BB:
(77,500 x .20 = 15,500) 77,500
Balances 92,500 162,500 162,500
Loss to reduce BB & CC to AA:
(B:70,000 x .40 = 28,000) 70,000
(C:70,000 x .20 = 14,000) 70,000
Balances 92,500 92,500 92,500

Cash of P20,000 after settlement of liabilities: CC receives first P15,500;

remaining P4,500 split 2/3 to BB and 1/3 to CC

5 d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB

. and 1/3 to CC.
 6 a If all partners received cash after the second sale, then the remaining
. 12,000 is distributed in the loss ratio.

7. b
A B C
Total
Capital before realization 37,000 65,000 48,000 150,00
0
Loss on sale (2:2:1); [90 – 50] (16,000 ( 16,000 ( 8,000) (40,000)
) )
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized (36,000 (36,000 (18,000) 90,000
NCA ) )
(15,000) 13,000 22,000
20,000
Possible insolvency loss (2:1) 15,000 (10,000) ( 5,000)
0
3,000 17,000
8. b
A B C
Total
Capital before realization 37,000 65,000 48,000 150,00
0
Loss on sale (2:2:1); [90 – 50] (16,000 ( 16,000 ( 8,000) (40,000)
) )
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized
NCA (37,200) (37,200 (18,600) 93,000
plus P3,000 = P93,000 )
(16,200) 11,800 21,400
17,000
Possible insolvency loss (2:1) 16,200 (10,800) ( 5,400)
0
1,000 16,000
17,000

9. A AE BT KT
Profit and loss ratio 40% 30% 30%
Capital balances (40,000) (180,000) (30,000)
Loss of P100,000 40,000 30,000 30,000
Remaining equities -0- (150,000) -0-

AE will receive nothing; the entire P150,000 will be paid to BT.

10. c
11. d
Dennis Lily Total
Capital before realization 120,000 80,000 200,000
Reduction in capital (3:2) ( 84,000 ( 56,000) (140,000
) )
Payment to partners 36,000 24,000 60,000
*

*Payment to partners:
Cash, beginning………………………………………………………………………………P100,000
 Proceeds……………………………………………………………………………………….. 60,000
Payment of liabilities – to be conservative – it should be in full……………………..
( 100,000)
Payment to partners…………………………………………………………………………..P 60,000

12. d
Dennis Lily Total__
Capital before realization – refer to no. 11 84,000 56,000 140,000
Reduction in capital (3:2) (78,000) ( 52,000) (130,000
)
Payment to partners 6,000 4,000 10,000
*

*since cash was fully distributed last month, only the proceeds of P10,000 for the second
remains to be distributed.
13. c

14. a
CC DD EE Total
Profit and loss ratio 5/10 3/10 2/10 10/10
Beginning capital 80,000 90,000 70,000 240,000
Actual loss on assets (5:3:2) (15,000) (9,000) (6,000) ( 30,000
)
65,000 81,000 64,000 210,000
Possible loss – unrealized NCA ( 50,000 (30,000) (20,000) ( 20,000
) )
Safe payments 15,000 51,000 44,000 190,000

15. c
X Y Z
Capital before realization 130,000 130,000 100,000
Divided by: 50% 30 20%
%
Loss absorption abilities 260,000 260,000 500,000

16. a
The loan payable to AA has the same legal status as the partnership’s
other liabilities. After payment of the loan, then any available cash can
be distributed to the partners using the safe payments computations.

17. a
D R N J
Capital balances 72,000 32,000 52,000 24,000
Divided by: Profit and loss 40 20% 20 20
ratio % % %
Loss absorption power 180,00 160,000 260,000 120,000
0
Loss to reduce N to D:
(80,000 x .20 = 16,000) 80,000 ____0

18. d – Harding, P6,107; Jones, P12,275

H J S Total
Capital balances 20,000 22,000 (10,000 32,000
)
Potential loss from Sandy (5,882 (4,118) 10,000 0
 deficit )
14,118 17,882 0 32,000
Loss to reduce H and J:
(50:35) (8,011) (5,607) (13,618)
Balances 6,107 12,275 13,382

Note:
1. Regardless there is a forthcoming contribution to be made by Sandy, it is assumed that the P10,000 deficit
may
not be recovered for purposes of distribution of cash.
2. The P13,382 cannot be distributed in accordance with profit and loss ratio for reason that the capital
balances of Harding and Jones is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)

or, alternatively: Using Cash Payment Priority Program

H J S
Capital balances 20,000 22,000 (10,000
)
Additional contribution 0 10,000
0
Capital balances 22,000
20,000
Divided by: Profit and loss ratio 50/85 35/85
Loss absorption power 34,00 53,429
0
Loss to reduce JJ to HH:
(19,428 x 35/85 = 8,000) 19,428
Balances 34,00 34,000
0

Cash available P18,382

Less: Priority I to Jones (P19,428 x 35/85) 8,000 P 8,000
P10,382
Less: P& L (50:35) (10,382) P 6,107 4,275
P6,107 P 12,275
19. c
20. b
21. c
A B C
Total
Capital before realization 70,000 30,000 50,000 150,00
0
Loan 20,000 ______ ______ 20,00
0
Total interests 90,000 30,000 50,000 170,000
Loss on sale (240,000 – 195,000) (15,000 ( 15,000 (15,000) (45,000)
) )
75,000 15,000 35,000 125,000

22. b –liabilities should be paid first, then the balance of P30,000 should be given to Able
since he is the one entitled to the first priority.
INTERESTS
PAYMENTS______
A B C A B C
Total
Balances before realization
Loans………………….. P 20,000
 Capital………………... 70,000 P 30,000 P 50,000
Total interests………... P 90,000 P 30,000 P 50,000
Divided by: P&L ratio………… 1/3 1/3 1/3
Loss absorption ability……….. P270,000 P 90,000 P150,000
Priority I…………………………. 120,000 - _______ P 40,000
P40,000
P150,000 P90,000 P150,000
Priority II………………………… 60,000 0 60,000 20,000 0 P20,000
40,000
P 90,000 P 90,000 P 90,000 P 60,000 P 0 P20,000
P80,000

23. d
A B C
Total
Capital before realization 70,000 30,000 50,000 150,00
0
Loan 20,000 ______ ______ 20,00
0
Total interests 90,000 30,000 50,000 170,000
Loss on sale (240,000 – 195,000) (15,000 ( 15,000 (15,000) (45,000)
) )
75,000 15,000 35,000 125,000
Payment of loans to partner (20,000) ______ _____ (20,000)
55,000 15,000 35,000
105,000
Asset received ______ ______ (30,000)
(30,000)
Payment to partners after payment of loan 55,000 15,000 5,000
75,000
Note: The requirement is payment to partners after outside creditors and loans to partners had been paid,
therefore, the payment to partners is in so far as capital is concerned.

24. a
D E F
Capital balances 40,000 90,000 30,000
Less: Machine, at fair value ______ (35,000) ______
Capital balances 40,000 55,000 30,000
Divided by: Profit and loss ratio 1/3 1/3 1/3
Loss absorption power 120,000 165,000 90,000
Loss to reduce E to D:
(45,000 x 1/3 = 15,000) (45,000) ____0
Balances 120,000 120,000 90,000
25. c
K M B J
Capital balances 59,000 39,000 34,000 34,000
Divided by: Profit and loss 40 30% 10 20
ratio % % %
Loss absorption power 147,50 130,000 340,000 170,000
0
Loss to reduce CC to BB:
(170,000 x .10 = 17,000) 170,000 ____0
Balances 147,500 130,000 170,000 170,000

26. c
 C P H M
Capital balances 60,000 27,000 43,000 20,000
Divided by: Profit and loss 40 30% 20 10
ratio % % %
Loss absorption power 150,00 90,000 215,000 200,000
0
Loss to reduce CC to BB:
(15,000 x .20 = 3,000) 15,000 ____0
Balances 150,00 90,000 200,000 200,000
0

27. c - the P16,000 available cash can be distributed but should be done under the
assumption that all deficit balances will be total losses. After offsetting JJ loan, the two
deficits total P4,000. FF and RR, the two partners with positive capital balances, share
profits in a 30:20 relationship (the equivalent of a 60%:40% ratio). FF would absorb P2,400
of the potential loss with RR being allocated P1,600. The remaining capital balances
(P10,600 and P5,400) are safe capital balances and those amounts can be immediately
distributed.

or, alternatively:
W J F R
Capital balances (2,000) (5,000) 13,000 7,000
Loan ______ 3,000 _______ __
Total interests (2,000) (2,000) 13,000 7,000
Potential insolvency loss (3:2) 2,000 2,000 ( 2,400 (1,600)
)
10,600 5,400

28. b
A B C Total
Capital balances (5,000) 18,000 6,000 19,000
Potential loss from A deficit (5:3) 5,000 (3,125) (1,875 0
)
14,875 4,125 19,000
Loss to reduce H and J:
(5:3) (8,750) (5,250 (14,000)
)
6,125 (1,125) 5,000
Possible insolvency loss ( 1,125) 1,125
0
5,000

29. a – installment liquidation (refer for more problems in Chapter 5)

INTERESTS PAYMENTS ___
P Q R P Q R Total
Balances before realization
Totall interests………... P 70,000 P 50,000 P100,000
Divided by: P&L ratio………… 20% 40% 40%
Loss absorption abilities……….. P350,000 P125,000 P250,000
Priority I…………………………. (100,000) 0 P20,000 P20,000
P250,000 P125,000 P250,000
Priority II………………………… (125,000) (125,000) 25,000 P50,000
75,000
P125,000 P125,000 P125,000 P75,000 P 4,500 P50,000
P95,000
 Cash, beginning P 90,000
Add (deduct):
Liquidation expenses paid ( 8,000)
Payment of liabilities (170,000)
Proceeds from sale of assets(?) 108,000
Payment to partner before payment to Renquist (priority I only) P 20,000
30. d – Justice P15,533
J Z D Total
Capital balances 23,000 22,00 (14,000 31,000
0 )
Potential loss from Douglass (7,467 (6,533) 14,000 0
(40:35) )
15,533 15,467 0 31,000
Note:
1. Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000
deficit may not be recovered for purposes of distribution of cash.
2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital
balances of Justice and Zobart is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)

or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5)

J Z D
Capital balances 23,000 22,000 (14,000
)
Additional contribution 0 14,000
0
Capital balances 22,000
23,000
Divided by: Profit and loss ratio 40/75 35/75
Loss absorption power 43,12 47,143
5
Loss to reduce Z to D:
(4,018 x 35/55 = 1,875) 4,018
Balances 43,12 43,125
5

Cash available P31,000

Less: Priority I to Douglass (P4,018 x 35/75) 1,875 P 1,875
P29,125
Less: P& L (40:35) (29,125) P15,533 13,592
P15,533 P15,467
31. d
INTERESTS PAYMENTS
___
D K R D K R
Total
Balances before realizatio
Loans………………….. P 0 P 10,000 P(20,000)
Capital………………... 170,000 170,000 100,000
Total interests………... P170,000 P180,000 P 80,000
Divided by: P&L ratio………… 50% 30% 20%
Loss absorption abilities……….. P340,000 P600,000 P400,000
Priority I…………………………. - (200,000) 0 P60,000 P
60,000
P340,000 P400,000 P400,000
Priority II………………………… - (60,000) (60,000) 18,000
18,000 36,000
 P340,000 P340,000 P340,000 P– P 78,000
P18,000 P 96,000

Cash received by the partner Kemp P 60,000

Add (deduct):
Liabilities paid 250,000
Expenses paid 5,000
Contingency 10,000
Cash, beginning (120,000)
Proceeds from sale of other assets P205,000
32. b
INTERESTS PAYMENTS
___
T N D T N D
Total
Balances before realization
Loans………………….. P 0 P 0 P 0
Capital………………... 22,000 15,500 14,000
Total interests………... P 22,000 P15,500 P 14,000
Divided by: P&L ratio………… 2/4 1/4 1/4
Loss absorption abilities……….. P 44,000 P62,000 P 56,000
Priority I………………………….... - ( 6,000) 0 P 1,500 P 1,500
P 44,000 P 56,000 P 56,000
Priority II………………………… - (12,000) (12,000) __ 3,000 P 3,000 6,000
P 44,000 P44,000 P 44,000 P – P 4,500 P 3,000 P 7,500

Cash received by Tree P 6,250

Divided by: P & L ratio 2/4
Amount in excess of P7,500 P 12,500
Total cash payments – refer to program 7,500
Payment to partners P 20,000

33. d
Cash, beginning P 12,000
Add (deduct):
Proceeds from sale of certain assets 32,000
Liquidation expenses paid ( 1,000)
Payment of liabilities ( 5,400)
Payment to partners (refer to No. 30) ( 20,000)
Cash withheld P 17,600

34. d
Priority
Creditors Mattews Norell Total Reams
First P300,000………. P300,000 P 3 00,000
Next P80,000 (7:3)… P56,000 P24,000 80,000
Next P70,000 (3:4)… 30,000 P40,000 70,000
Remainder*……….. 22,000 34,000 44,000 100,000
P300,000 P108,000 P 58,000 P84,000 P550,000
(d)

*P550,000 – P300,000 – P80,000 – P70,000 = P100,000

INTERESTS PAYMENTS______
P Q R P Q R Total
Balances before realization
Loans………………….. P 6,000 P(10,000)
 Capital………………... 24,000 P36,000 60,000
Total interests………... P30,000 P36,000 P50,000
Divided by: P&L ratio………… 3/10 3/10 4/10
Loss absorption abilities…….. P100,000 P120,000 P125,000
Priority I…………………………. - - (5,000) P 2,000 P
2,000
P100,000 P120,000 P120,000
Priority II………………………… - (20,000) (20,000) P6,000 8,000
14,000 (d)
P100,000 P100,000 P100,000 P – P6,000 P10,000
P16,000

35. d

Priority
Creditors Mattews Norell Reams Total
First P300,000………. P300,000 P300,000
Next P80,000 (7:3)… P56,000 P24,000 80,000
Next P70,000 (3:4)… 30,000 P40,000 70,000
Remainder*……….. 22,000 34,000 44,000 100,000
P300,000 P108,000 P58,000 P84,000 P550,000
(d)

*P550,000 – P300,000 – P80,000 – P70,000 = P100,000

THEORIES
True or False
1 False 6. True 11. False 16. False
.
2 True 7. True 12. True 17. True
.
3 False 8. False 13. False
.
4 False 9. True 14. True
.
5 True 10 True 15, True
. .

Note for the following numbers:

1. An installment liquidation occurs over an extended period of time and partners
generally receive interim (installment) distributions.
3. The accountant must ensure that the partnership will have sufficient cash to pay
current and prospective creditors before distributions are made to partners.
4. It may not be prudent for the accountant to pay creditors as quickly as possible.
However, funds should be set aside so that creditors can be paid in a timely
manner.
8. The size of the capital account must be evaluated in conjunction with the residual
profit and loss ratio to determine which partner is least likely to have a deficit occur
during the partnership liquidation.
11. The cash distribution plan indicates how a distribution will be allocated among the
partners but it does not guarantee that a distribution will be made.
13. The loss absorption power indicates the amount of loss the partnership would have
to occur before that partner’s capital account balance is reduced to zero.
16. The schedule of safe payments can be used for any partnership liquidation but it
provides the same distribution as the cash distribution plan under most
circumstances.
Multiple Choice
18 b 23 a 28. b 33. b 38 c 43. d
. . .
19 b 24 d 29. e 34. d 39 d 44. b
. . .
20 a 25 d 30. a 35. b 40 b 45. c
. . .
21 a 26 a 31. a 36. a 41 a 46. d
. . .
22 d 27 d 32. c 37. b 42 b
. . .