Advanced Accounting- Chapter 10 Exam Questions and Correct Answers Latest Update 2024-2025
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Termination and Liquidation - Answers The liquidation of a partnership generally involves three
important steps: 1. Non-cash partnership assets are sold for cash, and gains and loss on the sales are
allocated to the capital accounts of individual partners on the basis of the profit and loss ratios. 2.
Partnership liabilities and expenses incurred during the liquidation are paid out of the partnership's
available cash. 3. Any partnership cash remaining after paying liabilities and liquidation expenses is
distributed to the individual partners on the basis of their representative capital balances. The
accountant summarizes and keeps track of the process in a statement of partnership liquidation. The
liquidation of a partnership becomes complicated if: one or more partners have a negative (deficit)
capital balance and the liquidation takes place over an extended period of time. The accountant can
facilitate distribution of cash in installments by calculating the safe payments. The accountant might
prepare a cash predistribution plan.
Termination and Liquidation 1 - Answers Morgan and Houseman want to liquidate their partnership. The
process calls for 1) Assets are converted into cash to pay business obligations and liquidation expenses
2)Remaining assets are distributed to partners based on their final capital balances 3)Partnership books
are closed. (Partnership assets are converted into cash that is then used to pay business obligations as
well as liquidation expenses. Any remaining assets are distributed to the individual partners based on
their final capital balances. Once assets have been distributed, the partnership's books are permanently
closed. If each partner has a capital balance large enough to absorb all liquidation losses, the accountant
should experience little difficulty in recording this series of transactions.
Termination and Liquidation Example - Answers Morgan and Houseman allocate all profits and losses on
a 6:4 basis. The partnership has $75,000 of noncash assets to be liquidated as seen on the 2015 Balance
Sheet. To illustrate the typical process, assume that Morgan and Houseman have been operating an art
gallery as a partnership for a number of years. Morgan and Houseman allocate all profits and losses on a
6:4 basis, respectively. On May 1, 2015, the partners decide to terminate business activities, liquidate all
noncash assets, and dissolve their partnership. Although they give no specific explanation for this action,
any number of reasons could exist. The partners, for example, could have come to a disagreement so
that they no longer believe they can work together. Another possibility is that business profits have
become inadequate to warrant the continuing investment of their time and capital. The partnership has
$75,000 of noncash assets to be liquidated. The revenue, expense, and drawing accounts have been
closed as a preliminary step in terminating the business. A separate reporting of the gains and losses
that occur during the final winding-down process will subsequently be made. (pg. 469)
Termination and Liquidation Journal Example Journal Entries - Answers On 6/1, the inventory is sold for
$15,000. Note the loss on the sale of inventory of $7,000 is assigned $4,200 ($7,000 x 60%) to Morgan
and $2,800 ($7,000 x 40%) to Houseman.
D: Cash 15,000
, D: Morgan, Capital (60% of loss) 4,200
D: Houseman, Capital (40% of loss) 2,800
C: Inventory 22,000
To record sale of partnership inventory at a $7,000 loss.
Assume that $9,000 of the Accounts Receivable are collected. The remaining accounts receivables are
written off, and the loss is allocated between Morgan and Houseman. $3,000 x 60%=$1,800
$3,000 X 40%=$1,200
D: Cash 9,000
D: Morgan, Capital 1,800
D: Houseman, Capital 1,200
C: Accounts Receivable 12,000
To record collection of accounts receivable with write-off of remaining $3,000 in accounts as bad debts.
The fixed assets are sold for $29,000. The loss on fixed assets of $12,000 is allocated to Morgan and
Houseman.
$12,000 x 60%=$7,200
$12,000 x 40%=$4,800
D: Cash 29,000
D: Morgan, Capital 7,200
D: Houseman, Capital 4,800
C: Land, Building, and Equipment (net) 41,000
To record sale of fixed assets and allocation of $12,000 loss.
Once all the assets are sold, accounts payable are paid off. Morgan and Houseman incur an additional
$3,000 in liquidation expenses.
D: Liabilities 32,000
