XADVACT1 Midterm Review - Partnership Liquidation
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Questions and Answers

In a lump-sum liquidation, what is the first step regarding partner loans?

  • Use any remaining cash for additional expenses
  • Pay loans to partners (correct)
  • Pay external creditors
  • Distribute funds equally among partners

    • During lump-sum liquidation, how is the remaining cash after paying off external creditors used?

  • Paid towards future operational costs
  • Used to pay off liquidation expenses
  • Distributed to partners' capital accounts (correct)
  • Reinvested back into the partnership

    • In a piecemeal liquidation, how are loans and capital treated initially?

  • Loans are ignored until the end
  • They are treated equally (correct)
  • Loans are prioritized over capital
  • Only capital is considered

    • What does the Cash Priority Program (CPP) determine in piecemeal liquidation?

    <p>Which partner should be paid first (A)</p> Signup and view all the answers

    In the context of the Safe Payment Schedule (SPS), what is the sequence of payments applied?

    <p>First apply payment to loans from partners, then to their capital accounts (C)</p> Signup and view all the answers

    What happens to any balance after loans are paid in a lump-sum liquidation?

    <p>It is distributed among the partners' capital accounts (D)</p> Signup and view all the answers

    In a piecemeal liquidation, what approach is used to compute cash priority for payments?

    <p>Cash Priority Program or Safe Payment Schedule (B)</p> Signup and view all the answers

    What is a key difference between lump-sum and piecemeal liquidation regarding cash distributions?

    <p>Piecemeal allows for multiple distributions over time (C)</p> Signup and view all the answers

    What is the main purpose of the Cash Priority Program?

    <p>To determine the order of payments to partners (A)</p> Signup and view all the answers

    What is included when calculating the estimated recovery percentage of the PSL?

    <p>Only unsecured portion (A)</p> Signup and view all the answers

    Which statement reflects the net gain or loss on realization?

    <p>Statement of Equity/Estate Deficit (D)</p> Signup and view all the answers

    When is the Cash Priority Program generally prepared?

    <p>Before realization of non-cash assets (A)</p> Signup and view all the answers

    What method should be used when income recognition needs to be progressively based on work completion?

    <p>Percentage of Completion Method (D)</p> Signup and view all the answers

    What does the Safe Payment Schedule establish?

    <p>The amount of cash that can be safely distributed (C)</p> Signup and view all the answers

    What is the purpose of determining the Loss Absorption Capacity (LAC)?

    <p>To prepare for partner insolvency (A)</p> Signup and view all the answers

    Which statement summarizes the cash transactions, including receipts and disbursements?

    <p>Statement of Receipts and Disbursements (A)</p> Signup and view all the answers

    What is the Worst Case Scenario (WCS) #1 in cash distribution related to?

    <p>Assuming all unsold non-cash assets are losses (C)</p> Signup and view all the answers

    In a condensed balance sheet, what equation represents the relationship between assets, liabilities, and equity?

    <p>A = L + E (B)</p> Signup and view all the answers

    What happens if there is a deficiency after Worst Case Scenario #1?

    <p>Remaining partners share the losses (D)</p> Signup and view all the answers

    When should the cost recovery method be applied in accounting for long-term contracts?

    <p>When costs incurred are known (A)</p> Signup and view all the answers

    Which statement provides a summary of cash at the beginning and end of the period?

    <p>Statement of Receipts and Disbursements (C)</p> Signup and view all the answers

    Which statement is true regarding Unsecured Liabilities (USL) without Priority?

    <p>The entire amount of the claim is counted initially (B)</p> Signup and view all the answers

    Which term indicates the amount recognized as estate equity or deficit at the beginning of the period?

    <p>Estate equity/(deficit), beg (A)</p> Signup and view all the answers

    What triggers the need for a Safe Payment Schedule?

    <p>The realization of non-cash assets (B)</p> Signup and view all the answers

    What method should be used if the problem states to use the Cost Recovery method?

    <p>Cost Recovery method (C)</p> Signup and view all the answers

    When is it appropriate to use the POC method if not specified?

    <p>When cost-to-cost method is preferred (C)</p> Signup and view all the answers

    If there is mention that the outcome cannot be estimated reliably, which method should be used?

    <p>Cost Recovery method (D)</p> Signup and view all the answers

    What should be recognized immediately regarding overall loss?

    <p>Recognize total loss immediately (C)</p> Signup and view all the answers

    How is Revenue to Date calculated?

    <p>Total Contract price multiplied by POC to date (A)</p> Signup and view all the answers

    What does Gross Profit to Date represent?

    <p>Revenue to Date minus Cost to Date (B)</p> Signup and view all the answers

    If there is a prior year's revenue mentioned, how should the current year’s revenue be calculated?

    <p>Current Year Revenue equals Revenue to Date minus prior year revenue (C)</p> Signup and view all the answers

    What is the formula for calculating Cost to Date?

    <p>Total Estimated Cost multiplied by POC to Date (A)</p> Signup and view all the answers

    Study Notes

    Partnership Liquidation

    • Lump-Sum Liquidation:

      • Pay loans to partners before distributing remaining cash to capital accounts.
      • Remaining cash is distributed based on partners' capital balances after settling external creditors and liquidation expenses.

    • Piecemeal Liquidation:

      • Utilize Cash Priority Program (CPP) or Safe Payment Schedule (SPS) to determine pay order without loan priority initially.
      • Payments are applied in order: first to partners' loans, then to their capital accounts.

    • Methods for Cash Distribution:

      • Cash Priority Program (CPP): Establishes a distribution hierarchy among partners.
      • Safe Payment Schedule (SPS): Calculates safe cash distributions during liquidation.
      • Both approaches help ensure equity in payment without overpayment risk.

    • Worst Case Scenarios (WCS):

      • WCS #1: Considers maximum losses from unsold non-cash assets.
      • WCS #2: Assumes remaining partners absorb deficiencies if partners are deemed insolvent.
      • Cash distributions are based on predetermined priority post-assessment of losses.

    Corporate Liquidation

    • Partially Secured Liabilities (PSL):

      • Total claim amount includes both secured and unsecured portions during calculations.

    • Unsecured Liabilities (USL):

      • Do not include unsecured part of PSL until estimating recovery percentages.

    • Statements to Review:

      • Statement of Affairs, Statement of Realization and Liquidation, Statement of Estate Deficit, Statement of Receipts/Disbursements, and Balance Sheet.
      • Relationships among these statements are crucial to understanding financial standing during liquidation.

    Long-Term Construction Contracts

    • Revenue Recognition:

      • Percentage of Completion (POC) Method: Recognizes income progressively based on the percentage of completion unless the outcome cannot be reliably estimated.
      • Cost Recovery Method: Recognizes revenue only up to costs incurred until reliable estimates can be made.

    • Total Loss Recognition:

      • Under POC method, total losses are recognized immediately if overall losses are expected.

    • Reconciling Revenue, Cost, and Gross Profit:

      • Revenue to Date: Calculated using contract price multiplied by POC to date.
      • Total Costs: Based on estimated costs multiplied by POC to date.
      • Gross Profit computation involves subtracting costs from revenue.

    • Calculating Current Year Revenues and Costs:

      • Revenue this year is the difference between current revenue to date and prior year revenue.
      • Costs reflect total estimated costs multiplied by POC, differentiating between current year and prior years.

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    Description

    Prepare for your XADVACT1 midterm exams with this last-minute review focused on partnership liquidation. This quiz emphasizes the treatment of partner loans in both lump-sum and piecemeal liquidation scenarios, alongside the order of payment details. Ensure you're ready to tackle these concepts with confidence!

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