AC 42 Lec Midterm test bank

Lec 40 items
True or False 2 per topic
MCQ Theory 3 per topic
Identification 2 items per topic
MCQ Problem 3 points per topic

True or False
Nature and Formation:
1. When the contributed capital is P3,000 or more and the agreement is only orally settled, the contract
is void.

False

2. When an immovable property is contributed and an oral agreement is made, the partnership contract
is void

True

Operation
3. An industrial partner is exempted from sharing in the loss of the partnership even if he is also a capital
partner.

False

4. The amount of loan extended by partners to the partnership can be recorded either as partners’ loan
payable or trade payable, anyway both signifies partnership obligation.

False

Dissolution
5. It is possible that when a new partner is admitted by investment to the partnership, despite having a
positive asset revaluation, old partners’ capital could decrease when there is bonus to the new partner.

True

6. When there is a negative asset revaluation, the remaining partner’s balances will decrease if the
effect of the bonus given by the exiting partner is greater than that of the asset revaluation.

False
Liquidation

7. An insolvent partner is a deficient partner who can pay his capital deficiency by contributing
additional funds to the partnership.

False

8. Liquidation may or may not require dissolution.

False

MCQ – Theory

Formation:
9. A and B are both sole proprietors. They fell in love so they decided to form a partnership between
them. Before closing, they had the same capital balances. However, A’s capital balance upon closing his
personal books increased by 50%, while that of B’s decrease by 50%. Which of the following is true?
a. If A’s current capital balance is P100,000, the decrease in B’s capital must be 25,000
b. If A’s current capital balance is P100,000, the decrease in B’s capital must be greater than 25,000
c. If A’s current capital balance is P100,000, the decrease in B’s capital must be lesser than 25,000
d. Cannot be determined

10. A and B are both new to the business. They decided to form a partnership together since they fell in
love. A and B agreed that they will value their contributed assets based on how they feel, and whatever
happens, their agreement will be followed. It turned out that A’s assets are undervalued while that of
B’s are overvalued. Which of the following is true? Choose the best answer
a. If A’s assets are valued at 100,000 of which 30% is undervalued by 60%, and B’s assets are valued at
100,000 of which 50% is overvalued by 40%, then the true value of B’s investment must be 80,000
b. If A’s assets are valued at 100,000 of which 30% is undervalued by 60%, and B’s assets are valued at
100,000 of which 50% is overvalued by 40%, then the true value of B’s investment must be 70,000
c. If A’s assets are valued at 100,000 of which 30% is undervalued by 60%, and B’s assets are valued at
100,000 of which 50% is overvalued by 40%, the difference in the true value of their investments must
be greater than 38,000
d. If A’s assets are valued at 100,000 of which 30% is undervalued by 60%, and B’s assets are valued at
100,000 of which 50% is overvalued by 40%, the difference in the true value of their investments must
be less than 38,000

11. A and B decided to form a partnership. After all relevant adjustments, their individual capital
balances are equal. On the day of formation, B took a mortgage on his contributed building because
they needed more cash equal to 80% of its market value. The cash received on the loan is equal to its
balance. B contributed all of the cash he got from his loan. Which of the following is true?
a. If the capital balance of A is 100,000 and the total market value of the Building consists 40% of B’s
Capital before the mortgage loan, the proceeds must be 32,000
b. If the capital balance of A is 100,000 and the total market value of the Building consists 40% of B’s
Capital before the mortgage loan, B’ capital balance must be greater than A’s by 32,000 after
considering the mortgage
c. If the capital balance of A is 100,000 and the total market value of the Building consists 40% of B’s
Capital before the mortgage loan, B’ capital balance must be lesser than A’s by 40,000 after considering
the mortgage
d. If the capital balance of A is 100,000 and the total market value of the Building consists 40% of B’s
Capital before the mortgage loan, B’ capital balance must be equal to A’s capital balance after
considering the mortgage.

Operations:

12. The partnership agreement of Troy and Uriah allows the former to receive a 20% bonus on profits
before bonus and any residual profits/losses shall be divided 2:3, respectively Which partner has an
advantage when the partnership earns a profit or when it incurs a loss?
A. Uriah and Troy
B. Uriah and Uriah
C. Troy and Troy
D. Troy and Uriah

13. Bob and Fred form a partnership without an agreed profit and loss sharing ratio. During the first year
of operation, the partnership incurs a P20,000 loss. The partners should share the losses
A. based on their average capital balances
B. based on their initial capital balances
C. equally
D. in a 2 to 1 ratio

14. Which of the following statements is true concerning the treatment of salaries in partnership
accounting?
A. The salary of a partner is treated in the same manner as salaries of corporate employees.
B. Partner salaries are directly closed to the capital account.
C. Partner salaries may be used to allocate profits and losses; they are not considered expenses of
the partnership.
D. Partner salaries are equal to the annual partner draw.

Dissolution:
15. A and B are partners with 1:1 profit ratio. They decided to admit C by investment into their
partnership for a 1/3 interest. After C’s admission, both of the old and new partner’s capital balances
are greater than their initial (before asset revaluation) capital balances/contributions. Which of the
following is true? (Choose the most correct answer)
a. There was a revaluation increase and bonus to new partner of which the revaluation is greater than
50% of the bonus.
b. There was a revaluation increase and bonus to new partner of which the revaluation is lesser than
50% of the bonus.
c. There was a revaluation increase and bonus to new partner of which the revaluation is equal to the
bonus.
d. None of the above.

16 A and B are partners with 1:1 profit ratio. They decided to admit C by investment into their
partnership for a 1/3 interest. After C’s admission, old partners’ capital balances became lesser than
their initial (before asset revaluation) capital balances, while that of the new partner increased. Which
of the following is true? (Choose the most correct answer)
a. There was a revaluation increase and bonus to new partner of which the revaluation is greater than
50% of the bonus.
b. There was a revaluation increase and bonus to new partner of which the revaluation is lesser than
50% of the bonus.
c. There was a revaluation increase and bonus to new partner of which the revaluation is equal to the
bonus.
d. None of the above.

17. A, B, and C are partners. C decided to leave the partnership. Upon his exit, C was paid by the
partnership cash equal to his capital balance prior to any adjustments or any other considerations. Due
to this, the old partners’ capital balances increased. Which of the following could be the reason?
a. C has a loan to the partnership
b. C has a loan from the partnership
c. There was some liquidation expenses
d. Cannot be determined by the given information

18. The first priority to be paid when there is cash available in the liquidation process, be it in lump sum
or installment type –
A. Outside Creditors
B. Partner’s Loan
C. Partner’s Capital
D. None of These

19. Under liquidation by installment, the partner who receives cash when there is cash available is the
one
A. Who can sell the biggest portion of the assets?
B. Who has a negligible amount of liability
 C. Who has the smallest loss absorption ratio
D. None of These

20. During the liquidation process, a gain is recorded, when:

The Cash received is less than the book value of the asset realized.
When the partner agreed that he will pay for the partnership’s noncash asset for a discount

Identification:

Nature and Formation:

21. In this type of partnership, the property comprises all that the partners may acquire by their industry
or work during the existence of the partnership.

Universal Partnership of profits

22. This is a partnership created and operating with all general partners

General partnership

Operations
23. This profit-sharing scheme is established to give due recognition to a partner’s management skills
and expertise or even time allotted to the business, distribution of this does not depend on whether or
not the partnership has earned profit during the year.

Partner’s Salaries; Salaries

24. This profit-sharing scheme is established to give recognition to the difference in partners’ capital
contributions, the share is by multiplying the capital balance of the partner to an agreed percentage by
the partners.

Interest

Dissolution
25. This partner (or partners) receives (or receive a bonus when TAC and TCC are equal but the credited
capital of the new partner is greater than his contributed capital

New Partner or Admitted Partner

26. When TAC > TCC there is

Positive Asset Revaluation or Goodwill

Liquidation
27. The amount that you come up with when you divide the net balance of a partner’s interest in the
partnership and his respective profit-sharing ratio.

Loss Absorption Ability

28. Under this approach in partnership liquidation a schedule of cash payments is prepared every time
there is cash available for distribution.

Theoretical Loss approach

MCQ – Problems

Formation:
A and B are both new to the business. They decided to form a partnership together since they fell in
love. A and B agreed that they will value their contributed assets based on how they feel, and whatever
happens, their agreement will be followed. It turned out that A’s assets are undervalued while that of
B’s are overvalued. A’ assets are valued at 150,000 of which 80% are undervalued by 35%, and B’s assets
are valued at 100,000 of which 70% are overvalued by 40%

29. How much is the true value of A’s assets?

a. 214,615
b. 202,500
c. 192,000
d. 178,000

Answer: (150,000 x 20%) + (150,000 x 80% / 65%) = 214,615

30. How much is the true value of B’s assets?

a. 205,000
b. 146,667
c. 80,000
d. 72,000

Answer: (100,000 x 30%) + (100,000 x 70% /140%) = 80,000

31. How much is the true value of the assets contributed to the partnership?
a. 264,500
b. 272,000
c. 294,615
d. 361,282

Answer: 214,615 + 80,000 = 294,615

Operations:

32. How much is the share of Paul McCartney in the profits?

A. 58,500.00
B. 65,000.00
C. 31,500.00
D. 10,000.00
Answer: (100,000 x 90%) 65/100 = 58,500

33. How much is the share of John Lennon in the profits?

A. 31,500.00
B. 35,000.00
C. 10,000.00
D. 65,000.00
Answer: (100,000 x 90%) 65/100 = 31,500

34. How much is the share of George Harrison in the profits?

A. 58,500.00
B. 31,500.00
C. 35,000.00
D. 10,000.00
Answer: 100,000 x 10% = 10,000
Dissolution:
A and B are partners with 1:1 profit ratio, and has capital balances of P100,000 and P75,000. They
decided to admit C where he invested 90,000 into their partnership for a 1/3 interest. After C’s
admission, the total of old partners’ capital balances became lesser than their initial (before asset
revaluation) capital balances by 25,000, while that of the new partner increased by 50%.

TAC is then
Old partners’ new capital balance = 100,000 + 75,000 – 25,000 = 150,000
New partner capital balance = 90,000 x 1.50 = 135,000
TAC = 285,000

35. Considering the changes, how much is A’s new capital balance?
a. 95,000
b. 87,500
c. 76,667
d. 67,500

Answer: 100,000 – 25,000 x ½ = 87,500

36. Considering the changes, how much is B’s new capital balance?
a. 95,000
b. 62,500
c. 51,667
d. 50,000

Answer: 75,000 – 25,000 x ½ = 62,500

37. Considering the changes, how much is the total capital balance of A, B, and C?
a. 285,000
b. 252,500
c. 245,000
d. 240,000

Answer: 87,500 + 62,500 + 90,000 x 150% = 285,000

Liquidation:
Liam Gallagher and Noel Gallagher have decided to liquidate their partnership. Shown below is the
Statement of Financial Position prior to liquidation process. The partners divide profits and losses
equally.
Cash P60,000 Accounts Payable P80,000
Accounts Receivable 60,000 L. Gallagher, Loan 25,000
Inventories 80,000 L. Gallagher, Capital 105,000
Other Non-Cash
Assets 130,000 N. Gallagher, Capital 120,000

Total Liabilities and

Total Assets P330,000 Partnership Equity P330,000
90% of the Accounts Receivable was collected and the remaining balance was written-off against
accounts of the partners. Any available cash was distributed to the partners.

38. How much is the available cash for distribution to the partners?

A. P34,000
B. P114,000
C. P60,000
D. P117,000
Answer: (60,000 + 60,000 x 90% - 80,000) = 34,000

39. How much is the Loss Absorption Ability of Liam Gallagher?

A. P260,000
B. P240,000
C. P210,000
D. P50,000
Answer: (105,000 + 25,000) / 50% = 260,000

40. How much cash did Noel Gallagher receive during the first installment liquidation?

A. P117,000
B. P22,000
C. P120,000
D. P12,000
Answer:
L. Gallagher = (105,000 + 25,000 – 216,000 x .50) = 22,000

N. Gallagher = (120,000 – 216,000 x .50) = 12,000