Biboso, Rani Mae L.

Racines, Jr., Alex R.

WILEY Multiple Choice
1. Partnerships
A. are required to prepare annual reports.
B. are required to file income tax returns but do not pay Federal taxes.
C. are required to file income tax returns and pay Federal income taxes.
D. are not required to file income tax returns or pay Federal income taxes.
2. If the partnership agreement provides a formula for the computation of a bonus to the partners,
the bonus would be computed
A. next to last, because the final allocation is the distribution of the profit residual.
B. before income tax allocations are made.
C. after the salary and interest allocations are made.
D. in any manner agreed to by the partners.
3. In a limited partnership, a general partner
A. is excluded from management.
B. is not entitled to a bonus at the end of the year.
C. has limited liability for partnership debit.
D. has unlimited liability for partnership debit.
4. Langley invests his delivery van in a computer repair partnership with McCurdy. What amount
should the van be credited to Langleys partnership capital?
A. The tax basis.
B. The fair value at the date of contribution.
C. Langleys original cost.
D. The assessed valuation for property tax purposes.
5. When the goodwill method is used and the book value acquired is less than the value of the
assets invested, total implied capital is computed by
A.
B.
C.
D.

multiplying the new partners capital interest by the capital balances of existing partners.
dividing the total capital balances of existing partners by their collective capital interest.
dividing the new partners investment by his (her) capital interest.
dividing the new partners investment by the existing partners collective capital interest.

6. In the absence of an agreement among the partners

A. interest is allowed on capital investments.
B. interest is charged on partners drawings.

C. interest is allowed on advances to the firm made by partners beyond agreed

investments.
D. compensation is allowed partners for extra time devoted to the partnership.
7. A partnership in which one or more of the partners are general partners and one or more are
not is called a(n)
A. joint venture.
B. general partnership.
C. limited partnership.
D. unlimited partnership.
6. When the goodwill method is used to record the admission of a new partner, total partnership
capital increases by an amount
A. equal to the new partners investment.
B. greater than the new partners investment.
C. less than the new partners investment.
D. that may be more or less than the new partners investment.
7. The bonus and goodwill methods of recording the admission of a new partner will produce the
same result if the:
1. new partners profit-sharing ratio equals his capital interest
2. old partners profit-sharing ratio in the new partnership is the same relatively as it was in the
old partnership.
A. 1
B. 2
C. both 1 and 2 are met.
D. None
8. The profit and loss sharing ratio should be
A. in the same ratio as the percentage interest owned by each partner.
B. based on relative effort contributed to the firm by the partners.
C. a weighted average of capital and effort contributions.
D. based on any formula that the partners choose.
9. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first
year of operation, the partnership incurs a $20,000 loss. The partners should share the losses
A. based on their average capital balances.
B. in a 2 to 1 ratio.
C. equally.
D. based on their ending capital balances.
10. When the goodwill method is used to record the admission of a new partner, total partnership
capital increases by an amount
A. equal to the new partners investment.

B. greater than the new partners investment.

C. less than the new partners investment.
D. that may be more or less than the new partners investment.
11. Bryant, Milton, and Pine formed a partnership and agreed to share profits in a 3:1:2 ratio
after recognition of 5% interest on average capital balances and monthly salary allowances of
$3,750 to Milton and $3,000 to Pine. Average capital balances were as follows:
Bryant 300,000
Milton 240,000
Pine 180,000
What is the net income (loss) allocated to Milton assuming the partnership incurred a $27,000
net loss?
A. 22,000
B. (30,000)
C. 33,000
D. (48,000)

Salary
Interest
Residual

Bryant
--$15,000
(72,000)

Milton
$45,000
12,000
(24,000)

Pine
$ 36,000
9,000
(48,000)

Total
$ 81,000
36,000
(144,000)

Total

$(57,000)

$33,000

$ (3,000)

$(27,000)

12. Rice and Thome formed a partnership on January 2, 2011. Thome invested $120,000 in cash.
Rice invested land valued at $30,000, which he had purchased for $20,000 in 2005. In addition,
Rice possessed superior managerial skills and agreed to manage the firm. The partners agreed to
the following profit and loss allocation formula:
a. Interest 8% on original capital investments.
b. Salary $5,000 a month to Rice.
c. Bonus Rice is to be allocated a bonus of 20% of net income after subtracting the bonus,
interest, and salary.
d. Remaining profit is to be divided equally.
At the end of 2011 the partnership reported net income before interest, salaries, and bonus of
$168,000.
What is the amount of bonus to be allocated to Rice?
A. 13,000
B. 16,000
C. 25,000
D. 27,000

B = Bonus to Rice
B = 0.20(Net Income - interest - salary - bonus)
B = 0.20($168,000 - [0.08($150,000)] - $60,000 B)
B = 0.20($96,000 - B)
B = $19,200 - 0.20B
1.20B = $19,200
B = $16,000
The partnership agreement of Stone, Miles, and Kiney provides for annual distribution of profit
and loss in the following sequence:
Miles, the managing partner, receives a bonus of 10% of net income.
Each partner receives 5% interest on average capital investment.
Residual profit or loss is to be divided 4:2:4.
Average capital investments for 2011 were:
Stone $270,000
Miles $180,000
Kiney $120,000
13. What is the net income (loss) allocated to Kiney assuming the partnership incurred a $15,000
net income?
A. 5,000
B. 500
C. 0
D. 1,000

Residual

Stone
$ --13,500
13,500
(6,000)

Miles
$1,500
9,000
10,500
(3,000)

Kiney
$ --6,000
6,000
(6,000)

Total
$ 1,500
28,500
30,000
(15,000)

Total

$7,500

$7,500

-0-

$15,000

Bonus
Interest

14. What is the net income (loss) allocated to Miles assuming the partnership incurred a $75,000
net income?
A.
B.
C.
D.

29,100
24,300
21,600
75,000

Bonus
Interest

Stone
$ --13,500

Miles
$7,500
9,000

Kiney
$ --6,000

Total
$ 7,500
28,500

Residual

13,500
15,600

16,500
7,800

6,000
15,600

36,000
39,000

Total

$29,100

$24,300

$21,600

$75,000

15. What is the net income (loss) allocated to Miles assuming the partnership incurred a $30,000
net loss?
A.
B.
C.
D.

9,000 loss
2,700 loss
17,400 income
12,000 income

Residual

Stone
$ --13,500
13,500
(23,400)

Miles
$ --9,000
10,500
(11,700)

Kiney
$ --6,000
6,000
(23,400)

Total
$ --28,500
28,500
(58,500)

Total

($9,000)

($2,700)

($17,400)

($30,000)

Bonus
Interest

Bloom and Carnes share profits and losses in a ratio of 2:3, respectively. Bloom and Carnes
receive salary allowances of $10,000and $20,000, also respectively, and both partners receive
10%interest based upon the balance in their capital accounts on January1. Partners drawings are
not used in determining the average capital balances. Total net income for 2006 is $60,000. If net
income after deducting the interest and salary allocations is greater than $20,000, Carnes
receives a bonus of 5% of the original amount of net income.
January 1 capital balances
Yearly drawings ($1,500 a month)

Bloom
$ 200,000
18,000

Carnes
$ 300,000
18,000

16. What are the total amounts for the allocation of interest, salary, and bonus, and, how much
over-allocation is present?
A. $60,000 and $0.
B. $80,000 and $20,000.
C. $83,000 and $0.
D. $83,000 and $23,000.
Interest: ($500,000 x 10%) = $50,000
Salary: ($10,000 + $20,000) = $30,000
Bonus: Condition not met = $0
Total allocations = $80,000 and over-allocations = $80,000 - $60,000 = $20,000

17. If the partnership experiences a net loss of $20,000 for the year, what will be the final amount
of profit or (loss) closed to each partners capital account?
A.
B.
C.
D.

($30,000) to Bloom and $10,000 to Carnes.

($10,000) to Bloom and ($10,000) to Carnes.
($8,000) to Bloom and ($12,000) to Carnes.
$10,000 to Bloom and ($30,000) to Carnes.

Bloom:
Interest allocation: $20,000
Salary allocation: $10,000
Carnes:
Interest allocation: $30,000
Salary allocation: $20,000
There is a total of $80,000 for positive allocations. To bring them down to a $20,000 loss, a
residual adjustment of ($100,000) is needed which is allocated ($40,000) to Bloom and
($60,000) to Carnes. After these amounts are assigned to the partners, each partners capital
account will be reduced by a net $10,000.
18. The XYZ partnership provides a 10% bonus to Partner Y that is based upon partnership
income, after deduction of the bonus. If the partnership's income is $121,000, how much is
Partner Y's bonus allocation?
A. $11,000.
B. $11,450.
C. $11,650.
D. $12,100.
On February 1, 2005, Flores, Gilroy, and Hansen began a partnership in which Flores and
Hansen contributed cash of $25,000; Gilroy contribute property with a fair value of $50,000 and
a tax basis $40,000. Gilroy receives a 5% bonus of partnership income. Flores and Hansen
receive salaries of $10,000 each. The partnership agreement of Flores, Gilroy, and Hansen
provides all partners to receive a 5% interest on capital and that profits and losses be divided of
the remaining income be distributed to Flores, Gilroy, and Hansen by a 1:3:1 ratio.
19. What is the net income (loss) allocated to Gilroy assuming the partnership incurred a $25,000
net income?
A.
B.
C.
D.

20,000
3,000
6,000
50,000

20. What is the net income (loss) allocated to Hansen assuming the partnership incurred a
$25,000 net income?
A. 11,000
B. 12,000

C. 13,000
D. 14,000
Net income
Bonus to Gilroy
Salaries
Interest
Residual loss
Loss allocation
Allocation

Income
$ 25,000
( 1,250 )
( 20,000)
( 5,000 )
( 1,250 )
1,250
$0

Flores

Gilroy

Hansen

$ 1,250
$ 10,000
1,250

2,500

$ 10,000
1,250

$( 250 )
$ 11,000

( 750 )
$ 3,000 $

( 250 )
11,000

21. Which of the following results in dissolution of a partnership?

A. contribution of additional assets to the partnership by an existing partner
B. receipt of a draw by an existing partner
C. winding up of the partnership and the distribution of remaining assets to the partners
D. withdrawal of a partner from a partnership
22. When the goodwill method is used to record the admission of a new partner, total partnership
capital increases by an amount
A. equal to the new partners investment.
B. greater than the new partners investment.
C. less than the new partners investment.
D. that may be more or less than the new partners investment.
23.The admission of a new partner under the bonus method will result in a bonus to
A. the old partners only.
B. the new partner only.
C. either the new partner or the old partners, but not both.
D. none of the above.
24. Under the bonus method, when a new partner is admitted to the partnership, the total capital
of the new partnership is equal to:
A. the book value of the previous partnership + the fair market value of the consideration
paid to the existing partnership by the incoming partner
B. the book value of the previous partnership + any necessary asset write ups from book
value to market value + the fair market value of the consideration paid to the existing
partnership by the incoming partner
C. the book value of the previous partnership - any asset write downs from book to
market value + the fair market value of the consideration paid to the existing
partnership by the incoming partner
D. the fair market value of the new partnership as implied by the value of the incoming
partner's consideration in exchange for an ownership percentage in the new partnership
25. If an existing partner withdraws from a partnership,
A. his or her interest may be sold to the partnership or an individual partner.

B. the consideration received for that partner's interest may suggest the existence of
undervalued existing assets and/or goodwill.
C. either the bonus or the goodwill method may be used to record the transaction if the
partnership acquires the withdrawing partner's interest.
D. all of the above.
26. Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie
contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value
of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the
admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed
the partnership net assets were fairly stated.What will be Callies initial capital balance?
A. $36,000
B. $50,000
C. $35,000
D. $30,000
New Partnership Capital = 130,000 + 50,000 = 180,000
Callie Capital = 20% x 180,000
27. Bell and Carson are partners who share profits and losses 3:7. The capital accounts on
January 1, 2011, are $120,000 and $160,000, respectively. Elston is to be admitted as a partner
with a one-fourth interest in the capital and profits and losses by investing $80,000. Goodwill is
not to be recorded. The capital balances after admission should be:
A. Bell, $117,000; Carson, $153,000; Elston, $90,000
B. Bell, $120,000; Carson, $160,000; Elston, $90,000
C. Bell, $123,000; Carson, $160,000; Elston, $80,000
D. Bell, $120,000; Carson, $167,000; Elston, $80,000
Davis has decided to retire from the partnership of Davis, Eiser, and Foreman. The partnership
will pay Davis $200,000. Goodwill is to be recorded in the transaction as implied by the excess
payment to Davis. A summary balance sheet for the Davis, Eiser, and Foreman partnership
appears below. Davis, Eiser, and Foreman share profits and losses in a ratio of 1:1:3,
respectively.
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets

Equities
$ 75,000
82,000
38,000
150,000
255,000
$ 600,000

28. What goodwill will be recorded?

A. $40,000.
B. $120,000.
C. $160,000.

Davis, capital
Eiser, capital
Foreman, capital
Total equities

160,000
140,000
300,000
$ 600,000

D. $200,000.
29. What partnership capital will Eiser have after Davis retires?
A. $100,000.
B. $140,000.
C. $180,000.
D. $220,000.
30. What partnership capital will Foreman have after Davis retires?
A. $240,000.
B. $300,000.
C. $360,000.
D. $420,000.
31. Which of the following statements is correct?
1. Personal creditors have first claim on partnership assets.
2. Partnership creditors have first claim on partnership assets.
3. Partnership creditors have first claim on personal assets.
a. 1
b. 2
c. 3
d. Both 2 and 3

32. The first step in preparing an advance cash distribution plan is to

a. determine the order in which partners are to participate in cash distributions.
b. compute the amount of cash each partner is to receive as it becomes available for distribution.
c. allocate any gains (losses) to the partners in their profit-sharing ratio.
d. determine the net capital interest of each partner.

33. In an advance plan for installment distributions of cash to partners of a liquidating

partnership, each partner's loss absorption potential is computed by
a. dividing each partner's capital account balance by the percentage of that partner's capital
account balance to total partners' capital.
b. multiplying each partner's capital account balance by the percentage of that partner's capital
account balance to total partners' capital.
c. dividing the total of each partner's capital account less receivables from the partner plus
payables to the partner by the partner's profit and loss percentage.

d. some other method.

34. Which of the following procedures is acceptable when accounting for a deficit balance in a
partners capital account during partnership liquidation?
a. A partner with a negative capital balance must contribute personal assets to the partnership that
are sufficient to bring the capital account to zero.
b. If a partner with a negative capital balance is personally insolvent, the negative capital balance
may be absorbed by those partners having a positive capital balance according to the residual
profit and loss sharing ratios that apply to all the partners.
c. If a partner with a negative capital balance is personally insolvent, the negative capital
balance may be absorbed by those partners having a positive capital balance according to
the residual profit and loss sharing ratios that apply to those partners having positive
balances.
d. All the above procedures are acceptable.

35. X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are
allocated 35% to X, 35% to Y, and 30% to Z. The partners have decided to dissolve and liquidate
the partnership. After paying all creditors, the amount available for distribution is $60,000. X, Y,
and Z are all personally solvent. Under the circumstances, Z will
a. receive $18,000.
b. receive $30,000.
c. personally have to contribute an additional $6,000.
d. personally have to contribute an additional $36,000.
36. In partnership liquidation, how are partner salary allocations treated?
a. Salary allocations take precedence over creditor payments.
b. Salary allocations take precedence over amounts due to partners with respect to their capital
interests, but not profits.
c. Salary allocations take precedence over amounts due to partners with respect to their capital
profits, but not capital interests.
d. Salary allocations are disregarded.

37. A simple partnership liquidation requires

a. periodic payments to creditors and partners determined by a safe payments schedule.
b. partnership assets to be converted into cash with full payment made to all outside
creditors before remaining cash is distributed to partners in a lump sum payment.
c. only creditors to be paid in an orderly manner.
d. periodic payments to partners as cash becomes available.

38. Under the rule of offset, what is the proper disposition of a partnership loan that was made
from a partner who has a debit balance?

a. The loan is first paid to the debtor partner before cash payments are made to partners.
b. The loan is written off as a partnership loss if the partner does not have the cash to cover
the debit balance.
c. The loan is charged off to the capital accounts of all the partners in their profit and loss sharing
ratios.
d. The loan is charged off to the capital account of the debtor partner.
39. In partnership liquidations, what are safe payments?
a. The amounts of distributions that can be made to the partners, after all creditors have been paid
in full.
b. The amounts of distributions that can be made to the partners with assurance that such
amounts will not have to be returned to the partnership.
c. The amounts of distributions that can be made to the partners, after all non-cash assets have
been adjusted to fair market value.
d. All the above are examples of the safe payments concept.

40. If all partners are included in the first installment of an

installment liquidation, then in future installments
a. cash will be distributed according to the residual profit and loss sharing ratio.
b. cash should not be distributed until all non-cash assets are converted into cash.
c. a safe payments schedule must be prepared before each cash distribution to avoid excessive
payments to partners.
d. a cash distribution plan must be prepared so that partners will know when they will be
included in cash distributions.
41. The year-end balance sheet and residual profit and loss sharing percentages for the Lang,
Maas, and Neal partnership on December 31, 2005, are as follows:
Cash

$ 30,000

Accounts payable $ 200,000

Loan to Lang

40,000

Loan from Maas

50,000

Other assets

480,000

Lang, capital (25%) 70,000

Total assets

$ 550,000

Maas, capital (25%) 80,000

Neal, capital (50%) 150,000
Total liab./equity $ 550,000

The partners agree to liquidate the business and distribute cash when it becomes available. A
cash distribution plan for the Lang, Maas, and Neal partnership will show that cash available,
after outside creditors are paid, will initially go to
A. Lang in the amount of $20,000.

B. Maas in the amount of $45,000.

C. Maas in the amount of $55,000.
D. Neal in the amount of $90,000.
Vulnerability ranks:
Lang equity ($70,000 - $40,000)/.25 = $120,000 = 1
Maas equity ($80,000 + $50, 000/.25 = $520,000 = 3
Neal equity ($150,000/.5) = $300,000 = 2
Assumed loss absorption:
Lang
Equities

Maas

Neal

Total

$ 30,000

$ 130,000

$ 150,000

$ 310,000

( 30,000 )

( 30,000 )

( 60,000 )

( 120,000 )

$ 90,000

$ 190,000

( 135,000 )

Loss to eliminate
Lang
Subtotals

$ 100,000

Loss to eliminate
Neal

( 45,000 )

( 90,000 )

Subtotals

$ 55,000

$0

$ 55,000

On June 30, 2006, the Warle, Xin, and Yates partnership had the following fiscal year-end
balance sheet:
Cash
Accounts receivable

$ 4,000
6,000

Accounts payable
Loan from Xin

$ 7,000
5,000

Inventory

14,000

Warle, capital(20%)

14,000

Plant assets-net

12,000

Xin, capital(30%)

10,000

Loan to Warle

6,000

Total assets

$ 42,000

Yates, capital(50%)
Total liab./equity

6,000
$ 42,000

The percentages shown are the residual profit and loss sharing ratios. The partners dissolved the
partnership on July 1, 2006. And began the liquidation process. During July the following events
occurred:

* Receivables of $3,000 were collected.

* The inventory was sold for $4,000.
* All available cash was distributed on July 31, except for $2,000 that was set aside for
contingent expenses.

42. The book value of the partnership equity (i.e., total equity of the partners) on June 30, 2006 is
A.
B.
C.
D.

$60,000.
$29,000.
$30,000.
$42,000.

($14,000 Warle capital + $10,000 Xin capital + $6,000 Yates capital + $5,000 Loan from Xin $6,000 Loan to Warle)

43. The cash available for distribution to the partners on July 31, 2006 is
A.
B.
C.
D.

$ 2,000.
$ 4,000.
$ 7,000.
$11,000.

($4,000 beginning balance + $3,000 cash collected + $4,000 for inventory sold - $7,000 of
accounts payable - $2,000 for expenses)

44. How much cash would Xin receive from the cash that is available for distribution on July 31?
A.
B.
C.
D.

$ 0.
$ 600.
$1,000.
$2,000.
Warle

Xin

Yates

Total

Equities, June 30

$ 8,000

$ 15,000

$ 6,000

$ 29,000

Inventory loss

( 2,000 )

( 3,000 )

( 5,000 )

( 10,000 )

( 400 )

( 600 )

Contingency fund
( 2,000 )

( 1,000 )

Subtotals

5,600

11,400

17,000

Possible losses on
remaining assets

( 3,000 )

( 4,500 )

( 7,500 )

Subtotals

$ 2,600

$ 6,900

Deficit

( 3,000 )

( 4,500 )

7,500

Subtotals

( 400 )

2,400

2,000

Deficit

400

( 400 )

Cash distribution

$0

$0

$ 2,000

$( 7,500 )

( 15,000 )
$ 2,000

Eliminate Yatess

Eliminate Warles

$ 2,000

Hara, Ives, and Jack 12. Hara, Ives, and Jack are in the process of liquidating their partnership.
Since it may take several months to convert the other assets into cash, the partners agree to
distribute all available cash immediately, except for $10,000 that is set aside for contingent
expenses. The balance sheet and residual profit and loss sharing percentages are as follows:
Cash

$ 400,000

Accounts payable

$ 200,000

Other assets

200,000

Hara, capital (40%)

135,000

Total assets

$ 600,000

Ives, capital (30%)

216,000

Jack, capital (30%)

49,000

Total liability/equity
45. How much cash should Ives receive in the first distribution?
A.
B.
C.
D.

$146,000.
$147,000.
$153,000.
$156,000

46. How much cash should Hara receive in the first distribution?
A. 49,000
B. 47,000

$ 600,000

C. 43,000
D. 59,000

Losses
Equities
Possible loss on remaining assets
Contingencies

Hara

Ives

$ 135,000

Jack

$ 216,000

$ 49,000

$ 200,000

( 80,000 )

( 60,000 )

( 60,000 )

10,000

( 4,000 )

( 3,000 )

( 3,000 )

$ 153,000

$( 14,000 )

Subtotals

$ 51,000

Eliminate Jacks
debit balance

( 8,000 )

( 6,000 )

14,000

Safe payments

$ 43,000

$ 147,000

$0

Jade, Kahl, and Lane are in the process of liquidating their partnership. Lane has agreed to accept
the inventory, which has a fair value of $60,000, as part of her settlement. A balance sheet and
the residual profit and loss sharing percentages are as follows:
Cash

$ 198,000

Inventory

Accounts payable

$ 149,000

80,000

Jade, capital (40%)

79,000

Plant assets

230,000

Kahl, capital (40%)

140,000

Total assets

$ 508,000

Lane, capital (20%)

140,000

Total liab./equity

$ 508,000

47. If the partners distribute the available cash, Lane will receive
A.
B.
C.
D.

$23,000.
$29,000
$30,000.
$34,000.

48. If the partners distribute the available cash, Kahl will receive
A.
B.
C.
D.

26,000
23,000
33,000
41,000

Jade

Kahl

Lane

Equities

$ 79,000

$ 140,000

Distribute inventory to Lane and:

$ 140,000
( 60,000 )

recognize $20,000 loss

( 8,000 )

( 8,000 )

( 4,000 )

Possible losses on plant

( 92,000 )

( 92,000 )

( 46,000 )

Subtotal $

( 21,000 )

$ 40,000

$ 30,000

21,000

( 14,000 )

( 7,000 )

$0

$ 26,000

$ 23,000

Eliminate Jades debit

balance to Kahl & Lane
Balance

The NOR Partnership is being liquidated. A balance sheet prepared prior to liquidation is
presented below:
Assets Liabilities & Equities
Cash
$240,000
Liabilities
$ 160,000
Other Assets
300,000
Reese, Loan
60,000
Total Assets
$540,000
Nen, Capital
180,000
Ott, Capital
60,000
Reese, Capital
80,000
Total Equities
$540,000
Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio. All partners are personally
insolvent.
49. How much loss Nen incurred?
A.
B.
C.
D.

20,000
40,000
60,000
45,000

50. How much loss Reese incurred?

A.
B.
C.
D.

20,000
40,000
60,000
45,000

Net interest
Potential loss$300,000
Potential loss$60,000
Cash distribution

Nen
$(180,000)
120,000
(60,000)
40,000
$(20,000)

Ott
$(60,000)
120,000
60,000
(60,000)
$ -0-

Reese
$(140,000)
60,000
(80,000)
20,000
$(60,000)

51. When a bankruptcy court enters an order for relief it has:

A. accepted the petition.
B. dismissed the petition.
C. appointed a trustee.
D. started legal action against the debtor by its creditors.
52. The duties of the trustee include:
A. appointing creditors committees in liquidation cases.
B. approving all payments for debts incurred before the bankruptcy filing.
C. examining claims and disallowing any that are improper.
D. calling a meeting of the debtors creditors.
53. Which of the following items is not a specified priority for unsecured creditors in a
bankruptcy petition?
A. Administration fees incurred in administering the bankrupts estate.
B. Unsecured claims for wages earned within 90 days and are less than $4,650 per
employee.
C. Unsecured claims of governmental units for unpaid taxes.
D. Unsecured claims on credit card charges that do not exceed $3,000.
54. A primary difference between voluntary and involuntary bankruptcy petitions is that
A. creditors file the petition in an involuntary filing.
B. trustees are not used in an voluntary filing.
C. voluntary petitions are not subject to review by the bankruptcy court.
D. the debtor corporation files the petition in an involuntary filing.
55. A single creditor
A. can never file a petition for bankruptcy.
B. with a $10,000 or more secured claim may file a petition for bankruptcy.
C. with a $10,000 or more unsecured claim may file a petition for bankruptcy, if there
are fewer than 12 unsecured creditors.
D. with a $10,000 or more unsecured claim may file a petition for bankruptcy if there are
more than 12 unsecured creditors.
Archery Corporation is liquidating under the Bankruptcy Act. The accounts of Archery at the
time of filing are summarized as follows:
Cash
Accounts receivable-net
Inventory
Equipment-net

Book Value
$ 10,000
60,000
110,000
70,000

Estimated Realizable Value

$ 10,000
50,000
70,000
70,000

Land
Building-net
Goodwill

20,000
200,000
42,000
$ 512,000

Accounts payable
Wages and salaries
Contributions due to pension plan
Taxes payable
Accrued interest payable (includes
$10,000 from the mortgage payable and
$2,000 from the note payable)
Note payable
Mortgage payable
Capital stock
Deficit

$ 120,000
30,000
20,000
80,000
12,000

40,000
150,000

100,000
100,000
70,000
(20,000)
$ 512,000

The land and building are pledged as security for the mortgage payable as well as any accrued
interest on the mortgage. The note payable is secured with the equipment, but the interest on the
note is unsecured. Wages and salaries were accrued within the last 90 days and pension plan
contributions were accrued within the last 6 months; neither exceeds $4,000 per employee.
Liquidation expenses are expected to be $50,000.
56. What is the expected return on the dollar for unsecured nonpriority claims?
A. $ .50
B. $ .20
C. $ .75
D. $ .15
57. Banyo Corporation was a supplier to Archery Corporation and at the time of Archerys
bankruptcy filing, Banyos account receivable from Archery was $40,000. On the basis of the
estimates, how much can Banyo expect to receive?
A.
B.
C.
D.

35,000
10,000
8,000
14,000
Amount of Claim

Estimated available cash

Secured claims:
Mortgage payable & interest
Partially secured claims:
Note payable ($30,000

$ 110,000

Expected
Estimated
Payment Remaining Cash
$ 390,000
$ 110,000

$ 280,000

reclassified as unsecured)
Unsecured priority claims:
Estimated liquidation expenses
Wages and salaries
Pension fund liability
Taxes payable
Unsecured nonpriority claims:
Accounts payable
Unsecured portion of note
payable
Accrued interest on note
Payable

100,000

70,000

210,000

50,000
30,000
20,000

50,000
30,000
20,000

160,000
130,000
110,000
30,000

80,000

80,000

$ 120,000
30,000
2,000

Expected return on the dollar for unsecured nonpriority claims:

$30,000/$150,000 = $.20 on the dollar
Banyos estimated return: $40,000 claim x $.20 = $8,000

Hinsch Company is in bankruptcy and is being liquidated under the provisions of Chapter 7 of
the bankruptcy code. The trustee has converted all assets into $120,000 cash and has prepared the
following list of approved claims:
Customer deposits ($1,000 from each of two customers
that ordered products that were never delivered)
Property taxes payable
Accounts payable, unsecured
Trustees fees and other costs of liquidation
Mortgage payable, secured by property that was sold
for $80,000
Note payable to bank, secured by all accounts
receivable of which $30,000 were collected and $10,000
were written off as uncollectible

$ 2,000
4,000
30,000
16,000
60,000
30,000

58. How much will the bank receive on the note payable?
A.
B.
C.
D.

32,000
36,000
38,000
28,000

Cash
Mortgage payable, paid in full
Note payable to bank, secured portion

$ 120,000
( 60,000 )
60,000
( 30,000 )
30,000

Priority claims ($16,000 of administrative costs +

$2,000 of customer deposits + $4,000 property tax)
Available for unsecured nonpriority claims
Unsecured, nonpriority claims:
Unsecured portion of note payable to bank
Accounts payable
Total unsecured, nonpriority claims

( 22,000 )
$ 8,000
$ 10,000
30,000
$ 40,000

$8,000 cash/$40,000 claims = $.20 on the dollar

Amount paid to bank:
$30,000 for secured portion + ($10,000 x .20) for
unsecured portion =

$ 32,000

Ingham Corporation is being liquidated under the Bankruptcy Act. The trustee has determined
that the unsecured claims will receive $.30 on the dollar. Platinum Corporation holds a
$35,000mortgage note receivable from Ingham that is secured by equipment with a $17,500
book value and a $7,000 fair value.
59. How much of the mortgage receivable will be recovered by Platinum?
A.
B.
C.
D.

18,725
15,400
12,500
10, 220

Mortgage note receivable

Less: Portion secured by equipment
Unsecured portion

$ 35,000
( 7,000 )
$ 28,000

Estimated recovery on secured portion

Estimated recovery on unsecured portion
($28,000 x $.30) =
Recovery on mortgage note receivable

$ 7,000
8,400
$ 15,400

60. Dooley Corporation was forced into bankruptcy and is in the process of liquidating assets and
paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Cerner
holds a note receivable from Dooley for $90,000 collateralized by an asset with a book value of
$60,000 and a liquidation value of $30,000. The amount to be realized by Cerner on this note is:
a. $30,000.
b. $48,000.
c. $60,000.
d. $90,000.