Exercise 16-8

Select the best answer for each of the following items. Questions 1 and 2 are based on the following condensed balance sheet for the partnership of Caine, Davis, and Jones.

Cash		$90,000		Accounts Payable		$220,000
Other Assets		820,000		Jones, Loan		40,000
Caine, Receivable		40,000		Caine, Capital		300,000
				Davis, Capital		200,000
				Jones, Capital		190,000
Total		$950,000		Total		$950,000

The partners share income and loss in the ratio of 5:3:2, respectively.

1. Assume that the assets and liabilities are fairly valued in the balance sheet and the partnership decides to admit Kuman as a new partner with a one-fourth capital interest. No goodwill or bonus is to be recorded. How much should Kuman invest in cash or other assets?

$172,500.

$233,333.

$230,000.

$175,000.

2. Assume that instead of admitting a new partner, the partners decide to liquidate the partnership. If the other assets are sold for $600,000, how much of the available cash should be distributed to Caine?

$190,000.

$300,000.

$150,000.

$170,000.

3. A, B, C, and D are partners sharing profits and losses equally. The partnership is insolvent and is to be liquidated. The status of the partnership and each partner is as follows:

		Partnership Capital Balance		Personal Assets (Exclusive of Partnership Interest)		Personal Liabilities (Exclusive of Partnership Interest)
A		$15,000 Credit		$100,000		$40,000
B		10,000 Credit		30,000		60,000
C		20,000 Debit		80,000		5,000
D		30,000 Debit		1,000		28,000

Assuming the Uniform Partnership Act applies, the partnership creditors

Will not be paid in full regardless of how they proceed legally because the partnership assets are less than the claims of the partnership creditors.

Will have to share Bs interest in the partnership on a pro-rata basis with Bs personal creditors.

Must first seek recovery against C because he is personally solvent and he has a negative capital balance.

Have first claim to the partnership assets before any partners personal creditors have rights to the partnership assets.

4. If a partner with a debit capital balance during liquidation is insolvent, the following results:

None of the above.

The partner must borrow money to invest in the partnership.

The partnership will give the partner cash to the extent of the partners debit balance.

The partners debit balance will be allocated to the other partners.

5. If a partnership is undergoing a transformation to a corporation, which of the following is a result?

Assets and liabilities are adjusted to fair value and the partners receive stock in the new corporation.

Assets and liabilities are adjusted to fair value.

The partners receive stock in the new corporation.

The net assets are distributed to the partners in their profit and loss ratio.