DISSOLUTION

Theories:

1. Which of the following statements is true about the partnership dissolution?

a. It refers to the process of converting the non-cash assets of the partnership and
distributing the total cash to the creditors and the remainder to the partners.
b. It refers to the change in the relation of the partners caused by any partner ceasing to
be associated in the carrying on of the partnership.
c. It refers to the extinguishment of the juridical personality of the partnership.
d. It refers to the end of the life of the partnership.

Exp: The liquidation or dissolution method for partnerships is identical to the

liquidation process for corporations. Over a period of time, the partnership’s non-cash
assets are converted to cash, creditors are paid to the extent feasible, and residual funds,
if any, are dispersed to the partners.

2. Which of the following will not result in a partnership’s dissolution?

a. Insolvency of the partnership.

b. Admission of a new partner in an existing partnership.
c. Assignment of an existing partners interest to a third person.
d. Retirement of the partner.

Exp: Usually, partnerships will dissolve if any partner withdraws, becomes deceased, or
otherwise becomes unable to continue their duties as a partner. Other circumstances
that may lead to partnership dissolution may include: Admission of new partner, the
incapacity/bankruptcy or death of a partner, an agreement of all partners to dissolve
(incorporation of partnership) or an event that makes the partnership business illegal.

3. Which of the following statements is true when a new partner joins an existing
partnership by purchasing a share of an existing partner's capital interest?

a. It will result to revaluation or impairment of existing asset of the partnership.

b. The partnership will recognize gain or loss in the transfer of capital from one partner
to another partner.
c. The partnership is not dissolved by the admission of a new partner by purchase.
d. It will just result to credit to capital of newly admitted partner with corresponding
debit to capital of the selling partner.

Exp:  There are two types of Partnership Admission. A new partner may join an existing
partnership by 1) Purchasing interest from the partners or existing members, or 2)
Investing in the partnership. It’s also possible to Purchase interest and Invest to be
admitted as a partner.

4. Which of the following scenarios will result in a bonus to the new partner and asset
revaluation if a new partner is admitted to an existing partnership through investment?

a. The total contributed capital of all partners is equal to the total agreed capital of
new partnership while the agreed capital of new partner is higher than the amount
he has contributed.
b. The total contributed capital of all partners is more than the total agreed capital of new
partnership while the agreed capital of new partner is lower than the amount he has
contributed.
c. The total contributed capital of all partners is less than the total agreed capital of new
partnership while the agreed capital of new partner is higher than the amount he has
contributed.
d. The total contributed capital of all partners is more than the total agreed capital of new
partnership while the total agreed capital of old partners is equal to the amount they
contributed.

Exp: A new partner is admitted in an existing partnership through investment. If the

total contributed capital of all partners is higher than the total agreed capitalization of
new partnership while the agreed capitalization of new partner is lower than his
contributed capital, Impairment loss shall be shared only by old partners with bonus
coming from new partner.

5. Which is right if a partner who withdrew from the partnership receives less than the
capital balance prior to retirement, resulting in a fall in the capital balance of the
surviving partners?
a. The retiring partner receives bonus from remaining partners.
b. An impairment loss is recognized before the retirement.
c. Revaluation surplus is recognized before the retirement.
d. The retiring partner gives bonus to the remaining partner.

Exp: The partnership pays the leaving partner for the value of his or her capital account
+ a cash bonus.

6. Which of the following is not included in third-party liabilities in the event of a

partnership firm's dissolution?
a. Reserves
b. Credit Balance of P&L Account
c. Partners loan
d. All of the Above.

Exp: According to this section, the partners of the firm are liable to the third party for
any act done by any of them unless they give public notice of the dissolution of the firm.
An agreement can spell out the order in which liabilities are to be paid.
7. If a partner agrees to pay a firm's liability upon dissolution of the firm is debited, it is
noted as?
a. P&L Account
b. Realisation Account
c. Partner’s Capital Account
d. Cash Account
Exp: A realisation account is  used to record the transactions arising on dissolution. It is
prepared to close all assets and liabilities which exist at the date of dissolution. The
balance on Realisation account represents profit or loss on dissolution of business.

8. Completing unfinished partnership business, collecting and paying debts, collecting

partnership assets to be turned into cash, and taking inventory are all examples of what
act?

a. Formation
b. Dissolution
c. Winding up
d. Termination
Exp: The meaning of Dissolution of a partnership is a process by which the relationship
between the partners is terminated and comes to an end and all the assets, shares,
accounts and liabilities are disposed of and settled. Completing unfinished partnership
business, collecting and paying debts, collecting partnership assets to be turned into
cash are all acts of Dissolution in a partnership.

9. A partnership dissolution differs from a liquidation in that

a. payments are made to creditors before partners receive value.
b. periodic payments to partners are made when cash becomes available.
c. a partner withdraws from the business and the enterprise continues to function.
d. full payment is made to all outside creditors before remaining cash is distributed to
partners in a final lump sum payment.
Exp: A partnership's liquidators pay non-partner creditors first, followed by partners
who are also creditors of the firm. If any assets remain after meeting these
responsibilities, partners who contributed capital to the partnership are entitled to
receive their capital contributions.

10. The following are the Causes/Condition resulting to Dissolution except?

a. Admission of New partner
b. Retirement of a partner
c. Death, Incapacity, or bankruptcy of partner
d. Cooperation of partnership

Exp: The following are the causes and condition resulting to Dissolution: Admission of
new partner, retirement of a partner, death/incapacity/bankruptcy of a partner and
incorporation of partnership. (not Cooperation of partnership)

11. Which of the following does not result in a general partnership’s automatic
dissolution?
a. Death of a partner
b. Insolvency of a partner
c. When the partnership business becomes unlawful
d. Insanity of a partner
Exp: Insanity of a partner does not result in a general partnership’s automatic
dissolution.  The insanity of a partner does not ipso facto dissolve the firm and the next
friend or continuing partners has to file suit foe dissolution. If a partner goes insane,
the partnership firm can be dissolved on the petition of other partners. The firm is not
automatically dissolved on the insanity of a partner. The court will act only on the
petition of a partner who himself is not insane.

12. A decree by the court is necessary to dissolve a general partnership based on three of
the following grounds. Which one will not require such decree but will cause the
automatic dissolution of the partnership?
a. The business of the partnership can only be carried on at a loss
b. A partner is shown to be of unsound mind
c. A partner has been guilty of such conduct as tends to affect prejudicially the carrying
on of the business
d. A partner is civilly interdicted
Exp: The following will not require such decree but will cause the automatic dissolution
of the partnership, by decree of court under Art. 1831, NCC are as follows:
       a. a partner has been declared insane or of unsound mind
b. a partner becomes in any other way incapable of performing his part of the
partnership contract
      c. a partner has been guilty of such conduct as tends to affect prejudicially the
carrying on of the business
      d. a partner wilfully or persistently commits a breach of the partnership
agreement
      e. the business of the partnership can only be carried on at a loss
      f. other circumstances render a dissolution equitable

13. Judicial dissolution of a partnership except:

a. permanent incapacity
b. prejudicial conduct
c. breach of contract
d. loss
e. unjust and unequitable dissolution

Exp: The following are the juridical dissolution of a partnership except letter E. It
should be just and equitable. If the court considers that the circumstances that have
arisen render it just and equitable to dissolve the partnership then it shall be.

14. Statement 1: A new capital account for a new partnership is formed.

Statement 2: The selling partner’s capital account(s) are increased in proportion(s)

a. Both True
b. Both False
c. 1 is True, 2 is False
d. 1 is False, 2 is True

Exp: Statement 1 is true, because A partnership capital account is a distinct account

that shows the equity in a partnership that is owned by specific partners. Whenever a new
partner is admitted to the partnership, a new capital account must be opened for him or her.
This will allow the partnership to reflect the new members of the partnership.

Statement 2 is false, because the capital accounts are not always increased in
proportions.

15. Statement 1: A new partnership is formed when a partnership is dissolved but not
liquidated.
Statement 2: The assets and liabilities transferred to the new partnership are revalued to
their fair market worth.

a. Both True
b. Both False
c. 1 is True, 2 is False
d. 1 is False, 2 is True

Exp: Statement 1 is true since Dissolution of partnership means a process by which the

relationship between the partners is terminated and comes to an end and all the assets,
 shares, accounts and liabilities are disposed of and settled. And dissolution doesn't
always end up with liquidation.

16. One who takes charge of the winding up to partnership affairs upon dissolution?
a. Silent partner
b. General partner
c. Ostensible partner
d. Liquidating partner
Exp: A liquidating partner  may be stated as the partner who is officially selected to
settle down the accounts, gather the assets which is the process of winding up of
partnership affairs.

17. One of the following incidents may be a cause for involuntary dissolution of a
partnership. 
       Which is?

a. Termination of the term of the partnership

b. Insolvency of any partner
c. Express will of any partner
d. Expulsion of any partner

Exp: Without violating the agreement:

      a. Termination of the definite term or specific undertaking
      b. Express will of any partner in good faith, when there is no definite term and no
specified undertaking
       c. Express will of all partners (except those who have assigned their interests or
suffered them to be charged for their separate debts) either before or after the termination
of any specified term or particular undertaking
      d. Expulsion of any partner in good faith of a member

18. I.   Dissolution does not terminate the partnership.

        II. Insanity of a general partner in a limited partnership dissolves the partnership.

a. True; True
b. True; False
c. False; False
d. False; True

Exp: Dissolution is distinct from the termination of a partnership and the "winding up"
of partnership business. Although the term dissolution implies termination, dissolution is
actually the beginning of the process that ultimately terminates a partnership.

19. I.   A limited partner is simply a contributor to the partnership.

        II. A limited partner has a right to the return of his contribution upon the dissolution
of the partnership.
 a. True; True
b. True; False
c. False; False
d. False; True

Exp: I is true, the primary duty of a limited partner is to provide capital contributions

and shoulder company liability. Capital contributions may come in the form of cash,
material assets, or services.

II is true, Stated in the rights of a limited partner, a limited partner shall have the right
to receive a share of the profits or other compensation by way of income, and to return
of his contribution, as provided in sections 1111 and 1112.

20. Which of the following losses will not cause the dissolution of a partnership?

a. Loss before delivery of a specific thing which a partner had promised to contribute to
the partnership.
b. Loss of a specific thing after its delivery to and acquisition of its ownership by
the partnership from the partner who contributed the same.
c. Loss after delivery of a specific thing where the partner contributed only its use and
enjoyment where such partner reserved the ownership thereof.
d. Loss before delivery of a specific thing where the partner promised to contribute only
its use and enjoyment, reserving the ownership thereof.

Exp: Under Article 1830 of the Civil Code of the Philippines, Dissolution is caused,
When a specific thing which a partner had promised to contribute to the partnership,
perishes before the delivery; in any case by the loss of the thing, when the partner
who contributed it having reserved the ownership thereof, has only transferred to the
partnership the use or enjoyment of the same; but the partnership shall not be
dissolved by the loss of the thing when it occurs after the partnership has acquired
the ownership thereof;

21. The dissolution of a partnership occurs

a. only when the partnership sells its assets and permanently closes its books.
b. only when a partner leaves the partnership.
c. at the end of each year, when income is allocated to the partners.
d. only when a new partner is admitted to the partnership.
e. when there is any change in the individuals who make up the partnership.

Exp: Under the UPA, The dissolution of a partnership is the change in the relation of
the partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business.” The partnership is not
necessarily terminated on dissolution; rather, it continues until the winding up of
partnership affairs is completed, and the remaining partners may choose to continue
on as a new partnership if they want.

22. Statement 1: One of the characteristics of a partnership is that it has a limited life
in the sense that the partnership agreement can be easily dissolved T
‘
Statement 2: Dissolution is the same from liquidation F

a. Both True
b. Both False
c. 1 is True, 2 is False
d. 1 is False, 2 is True
 Exp: Statement 1 is Correct, Partnership agreement can easily be dissolved, a
partnership terminates or dissolved when a partner discontinues participating in
the business operation.  Partnerships will dissolve if any partner withdraws,
becomes deceased, or otherwise becomes unable to continue their duties as a
partner.

Statement 2 is Incorrect because Dissolution is not the same from liquidation.

Simple, dissolution is a voluntary legal closure of a business while a
liquidation involves the selling of a company's assets in order to pay creditors.

23. Statement 1: The admission of a new partner requires the consent of all existing
partners. T

Statement 2: Partnership dissolution does not necessarily terminate the business.

The business continues until the remaining partners decide to liquidate the
business. T

a. Both True
b. Both False
c. 1 is True, 2 is False
d. 1 is False, 2 is True

Exp: Statement 1 is Correct, According to the Partnership Act 1932, a new

partner can be admitted into the firm only with the consent of all the existing
partners unless otherwise agreed upon. With the admission of a new partner, the
partnership firm is reconstituted and a new agreement is entered into to carry on
the business of the firm.

Statement 2 is Correct, Dissolution is distinct from the termination of a

partnership and the winding up of partnership business. Although the term
dissolution implies termination, dissolution is actually the beginning of the
process that ultimately terminates a partnership.

24. Statement 1: A new partner is not admitted when he purchases part or all of
the interest of one or more of the existing partners.

Statement 2: The purchase of interest is not recorded in the partnership books.

a. Both True
b. Both False
c. 1 is True, 2 is False
d. 1 is False, 2 is True

Exp: Statement 1 is Incorrect because when new partner is admitted he acquires

his share in profits from the old partners. In other words, on the admission of a
new partner, the old partners sacrifice a share of their profit in favour of the new
partner.
Statement 2 is Correct because the new partner can purchase all or part of
the interest of a current partner, making payment directly to
the partner and not to the partnership.

25. Statement 1: In the purchase of interest, the partnership capital remains the
same while in the investment, the partnership capital is increased. T
 Statement 2: The purchase of interest and investment in the partnership, no gain
or loss is recognized. T

a. Both True
b. Both False
c. 1 is True, 2 is False
d. 1 is False, 2 is True
Exp: Statement 1&2 is Correct, when an incoming partner purchases a portion
or all of the interest of one or more of the original partners, the partnership
assets remain unchanged and no cash or other assets flow from the new partner
to the partnership. This transaction is recorded by opening a capital account for
the new partner and decreasing the capital accounts of the selling partners by
the same amount. The cash paid by the buyer is not recorded in the books of the
partnership for this is a personal transaction between the seller partners and the
buyer. The gain or loss arising from the transaction is not to be recorded in the
partnership books.