Chapter 1: Partnership Formation On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both of their businesses. According to their agreement, they will split profits and losses 75:25 and their initial capital will also reflect that ratio. The following are Ernie and Bert’s Statement of Financial Position:
ASSETS Cash
Ernie Proprietor Statement of Financial Position December 31, 2014 LIABILITIES AND EQUITY
50,000 65,000 Accounts Receivable 100,000 55,000 Inventories 75,000 80,000 Equipment 250,000 Ernie, 90,000 Accumulated depreciation- Equipment (185,000) TOTAL ASSETS 290,000 290,000
Accounts payable Accrued expenses Notes payable capital TOTAL LIABILITIES&EQUITY
Bert Proprietor Statement of Financial Position December 31, 2014 LIABILITIES AND EQUITY 30,000 Accounts Payable
ASSETS Cash 75,000 Accounts receivable 110,000 Accrued expenses 90,000 Inventories 85,000 Notes Payable 100,000 Equipment 300,000 Bert, Capital 160,000 Accumulated Depreciation- Equipment (100,000) TOTAL ASSETS 425,000 TOTAL LIABILITIES&EQUITY 425,000 The values reflected in the Statement of Financial Position are already at fair values except fo the following accounts: Ernie’s Accounts Receivable is now 20,000 less than what is stated in his Statement of Financial Position. Both inventories of Ernie and Bert are now 90,000 and 70,000 respectively. Equipment for Bert has an assessed value of 275,000, appraised value of 250,000 and book value of 200,000. Additional accrued expenses are to be established in the amount of 10,000 for Bert only while additional accounts payable in the amount of 5,000 for Ernie. It is also agreed that all liabilities will be assumed
by the partnership, except for the notes payable of Bert which will be personally paid by him. 1. How much is the adjusted capital balance of Bert upon formation? A. 91,250 B. 185,000 C. 285,000 D. 310,000 Answer: ( C ) 2. How much is the capital credit to Ernie upon formation? A. 80,000 B. 273,750 C. 292,000 D. 255,500 Answer: ( B ) 3. How much should Ernie invest as additional cash to be in conformity with their initial capital agreement? A. 193,750 B. 212,000 C. 175,500 D. 205,000 Answer: ( A ) Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have 55% interest in the partnership and 35% in the profits and losses, while Clyde will have 45% interest in the partnership and 65% in the profits and losses. Bonnie contributed the following: Building Equipment Land
Cost 235,000 168,000 500,000
Fair value 255,000 156,000 525,000
The building and the equipment has a mortgage of 50,000 and 35,000 respectively. Clyde is to contribute 150,000 cash and equipment. The partners agreed that only the building mortgage will be assumed by the partnership. 1. How much is the fair market value of the equipment which Clyde contributed? A. 615,818 B. 989,143 C. 546,273 D. 574,909 Answer: ( D ) 2. How much is the total asset of the partnership upon formation? A. 1,892,143 B. 1,701,818
C. 1,660,909 D. 1,632,273 Answer: ( C )
Theories (letter of answer is underlined) 1 The partnership agreement is an express contract among the partners (the owners of the business). Such an agreement generally does not include a. A limitation on a partner’s liability to creditors. b. The rights and duties of the partners. c. The allocation of income between the partners. d. The rights and duties of the partners in the event of partnership dissolution. 2. A partnership records a partner’s investment of assets in the business at a. The market value of the assets invested. b. A special value set by the partners. c. The partner’s book value of the assets invested. d. Any of the above, depending upon the partnership agreement. ?3. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of recognition. b. Contributing partner’s original cost. c. Assessed valuation for property tax purposes. d. Contributing partner’s tax basis. ?4. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of contribution. b. Contributing partner’s original cost. c. Assessed valuation for property tax purposes. d. Contributing partner’s tax basis. 5. Four individuals who were previously sole proprietors form a partnership. Each partner contributes inventory and equipment for use by the partnership. What basis should the partnership use to record the contributed assets? a. Inventory at the lower of FIFO cost or market. b. Inventory at the lower of weighted-average cost or market. c. Equipment at each proprietor’s carrying amount. d. Equipment at fair value.
1. A contract where two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. a. Voluntary Association b. Corporation c. Partnership d. Sole Proprietorship Answer: (c) 2. A partnership formed for the exercise of a profession which is duly registered is an example of: a. Universal partnership of profits b. Universal partnership of all present property c. Particular partnership d. Partnership by estoppel Answer: (c) 3. One of the following is not a characteristic of contract of partnership. a. Real, in that the partners must deliver their contributions in order for the partnership contract to be perfected b. Principal, because it can stand by itself c. Preparatory, because it is a means by which other contracts will be entered into d. Onerous, because the parties contribute money, property, or industry to the common fund Answer: (a) 4. One of the following is not a requisite of a contract of partnership. Which is it? a. There must be a valid contract b. There must be a mutual contribution of money, property, or industry to a common fund c. It is established for the common benefit of the partners which is to obtain profits and divide the same among themselves d. The articles are kept secret among members Answer: (d) 5. The minimum capital in money or property except when immovable property or real rights thereto are contributed, that will require the contract of partnership to be in a public instrument and be registered with the Securities and Exchange Commission (SEC). a. P5, 000.00 b. P10, 000.00 c. P3, 000.00 d. P30, 000.00 Answer: (c) 6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership’s formation: Contributed by Roberts Smith Cash P 20,000 P 30,000 Inventory 15,000 Building 40,000 Furniture & Equipment 15,000
The building is subject to a mortgage of P 10,000, which the partnership has assumed. The partnership agreement also specifies that profits and losses are to be distributed evenly. What amounts should be recorded as capital for Roberts and Smith at the formation of the partnership? Roberts Smith a. 35,000 85,000 b. 35,000 75,000 c. 55,000 55,000 d. 60,000 60,000 Suggested Answer: (b) 35,000 & 75,000 Roberts: 20,000 + 15,000 = P35, 000 Smith: 30,000 + 15,000 + 40,000 – 10,000 = P75,000. The partner’s capital credit is based upon the net assets contributed by the particular partner, thus the liabilities assumed reduced the fair market value of the building invested. 7. The Grey and Redd Partnership was formed on January 2, 2010. Under the partnership agreement, each partner has an equal initial capital balance. Partnership net income or loss is allocated 60% to Grey and 40% to Redd. To form the partnership, Grey originally contributed assets costing P30,000 with a fair value of P60,000 on January 2, 2010, and Redd contributed P20,000 cash. Drawings by the partners during 2010 totaled P3, 000 by Grey an P9,000 by Redd. The partnership net income in 2010 was P25,000 Under the goodwill method, what is Redd’s initial capital balance in the partnership? a. 20,000 b. 25,000 c. 40,000 d. 60,000 Suggested Answer: (d) 60,000 Contributed Capital Agreed Capital Increase (Decrease) Grey 60,000 60,000 Redd 20,000 60,000 40,000 Total 80,000 120,000 40,000 The partnership agreement provides for equal initial capital. Thus under the goodwill method , the capital credit for Redd should be the same as the contribution of Grey, thereby increasing the total agreed capital to P120,000, which is P40,000 more than the total contributed capital (goodwill). 8. Using the information in No. 2, under the bonus method, what is the amount of bonus? a. 20,000 bonus to Grey b. 20,000 bonus to Redd c. 40,000 bonus to Grey d. 40,000 bonus to Redd Suggested Answer: (b) 20,000 bonus to Redd Grey
Contributed Capital 60,000
Agreed Capital 40,000
Increase (Decrease) (20,000)
Redd Total
20,000 80,000
40,000 80,000
20,000
The partnership agreement provides for equal initial capital. Thus under the bonus method, the capital credit for Redd should be the same as the contribution for Grey, resulting to P20,000 bonus from Grey to Redd. 9. On May 1, 2010, the business assets of John and Paul appear below: Cash Accounts Receivable Inventories Land Building Furniture & Fixture Other Assets Total
P
Accounts Payable Notes Payable John, Capital Paul, Capital\ Total
P
John 11,000 234,536 120,035 603,000
50,345 2,000 P 1, 020, 916 178,940 200,000 641, 976
P 1, 020, 916
P
Paul 22,354 567,890 260,102
428,267 34,789 3,600 P 1, 317, 002 P 243,650 345,000 728,352 P1, 317, 002
John and Paul agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P20, 000 in John’s books and P35, 000 in Paul’s are uncollectible. b. Inventories of P5, 500 n P6, 700 are worthless in John’s and Pail’s respective books. c. Other assets of P2, 000 and P3, 600 in John’s and Paul’s respective books are to be written off. The capital accounts of John and Paul, respectively, after the adjustments will be: a. 614, 476 683, 052 c. 640, 876 712, 345 b. 615, 942 717, 894 d. 613,576 683, 350 Suggested Answer: (a) 614, 476 683, 052 John: 641, 976 – 20, 000 – 5, 500 – 2, 000 = P 614, 476 Smith: 728, 352 – 35, 000 – 6, 700 – 3, 600 = P 683, 052 10. Based on No. 4, how much assets does the partnership have? a. 2, 317, 918 b. 2, 237, 918 c. 2, 265, 118 d. 2, 365, 218 Suggested Answer: (c) 2, 265, 118 John: 1, 020, 916 – 20, 000 – 5, 500 – 2, 000 = P 993, 416 Smith: 1, 317, 002 – 35, 000 – 6, 700 – 3, 600 = P 1, 271, 702 Total: 2, 337, 918 – 55, 000 – 12, 200 – 5, 600 = P 2, 265, 118
Problems 1. LF, EZ, and GT are partners with capital balances of P67,200, P108,000 and P38,000 respectively, sharing profits and losses in the ratio of 2:5:1. SG is admitted as a new partner bringing with him expertise and is to invest cash for a 15% interest in the partnership considering the transfer of capital from him of P18,000 upon his admission. Upon admission of SG, which of the following statements is false? A. The capital account of GT will be credited in the amount of P2,250 B. The total agreed capital of the old partners is P18,000 greater than their contributed capital C. The capital balance of EZ amount to P119,250 D.Cash will be debited in the amount of P40,800. 2. On June 1, 2013, AZ invited MG to join him in his business. MG agreed provided that AZ will adjust the accumulated depreciation of his equipment account to a certain amount, and will recognize additional accrued expenses of P40,000. After that, MG is to invest additional pieces of equipment make her interest equal to 45%. If the capital balances of AZ before and after adjustment were 556,00 and 484,000 respectively, what is the effect in the carrying value of the equipment as a result of the admission of MG? A. 364,000 B. (32,000) C. 396,000 D. (324,000) 3. TM and SJ, having capital balances of P980,000 and P525,000 respectively, decided to admit GD into the partnership. If TM and SJ share profit in proportion of 3;1 respectively, and SJ's capital balance after GD's investment is P589,750, how much was invested by GD? A. P848,750 B. P1,174,250 C. P588,000 D. P847,000 4. RD formed a partnership on February 10, 2009. R contributed cash of P150,000, while D contributed inventory with a fair value of P120,000. Due to R's expertise in selling, D agreed that R should have 60% of the total capital of the partnership. R and D agreed to recognize goodwill. what is the total capital of the RD partnership after the goodwill is recognized? A.P450,000 B.P330,000 C.P300,000 D.P270,000 5. In AD partnership, Allen's capital is P140,000 and Daniel's capital is P40,000 and they share a net income ratio of 3:1 respectively. They decided to admit David in the partnership. What amount will David invest to give him 1/5 interest in the partnership if no bonus/goodwill is recorded? A.P60,000
B.P36,000 C.P50,000 D.P45,000
Theories 1. ZEE acquired the assets (net of liabilities) of partner BEE in exchange for cash. The acquisition price exceeds the fair value of the net assets acquired. How should ZEE determines the amount to be reported for the plant and equipment, and for long-term debt of the acquired debt of partner BEE? A. Plant and equipment: Fair value ; Long-term debt: BEE's carrying amount B. Plant and equipment: Fair value ; Long-term debt: Fair value C. Plant and equipment: BEE's carrying amount; Long-term debt: Fair Value D. Plant and equipment: BEE's carrying amount; Long-term debt: BEE's carrying amount 2. Goodwill represents the excess cost of an acquisition over the: A. Sum of the fair values assigned to an intangible assets less liabilities assumed B. Sum of the fair values assigned to tangible and intangible assets acquired less liabilities assumed C. Sum of the fair values assigned to intangibles acquired less liabilities assumed D. Book value of an acquired company 3. When a partnership is formed, noncash assets contributed by partners should be recorded: I.At their respective book values for income tax purposes II.At their respective fair values for financial accounting purposes A. I only B. II only C. Both I and II D. Neither I nor II 4. A limited liability company (LLC): I.Is governed by the laws of the states in which it is formed II.provides liability protection to its investors III.does not offer pass-through taxation benefits of partnership A. Both I and III B. III C. Both I and II D. I, II, III 5. Transferable interest of a partner includes all of the following except: A.the partner's share in profits and losses B.the right to receive distributions C.the right to receive any liquidating distribution D.the authority to transact any of the partnership’s business operation
Answers Problem 1. D 2. A 3. D 4. C 5. D Theories 1. B 2. B 3. B 4. C 5. D
1. A partnership is a(n): I. accounting entity. II. taxable entity. a. I only b. II only c. Neither I nor II d. Both I and II 2. Which of the following is NOT a feature of a general partnership? a. mutual agency b. limited life c. limited liability d. none of these 3. A partner's tax basis in a partnership is comprised of which of the following items? I. The partner's tax basis of assets contributed to the partnership. II. The amount of the partner's liabilities assumed by the other partners. III. The partner's share of other partners' liabilities assumed by the partnership. a. I plus II minus III b. I plus II plus III c. I minus II plus III d. I minus II minus III 4. Which of the following accounts could be found in the general ledger of a partnership?
a. Option A b. Option B c. Option C d. Option D 5. Which of the following accounts could be found in the PQ partnership's general ledger? I. Due from P II. P, Drawing III. Loan Payable to Q a. I, II b. I, III c. II, III d. I, II, and III 6. Anton and Bauzon formed a partnership and agreed to divide initial capital equally, even though Anton contributed P100,000 and Bauzon contributed P84,000 in identifiable assets. Under the bonus method, to adjust capital accounts, Bauzon's intangible assets should be debited for: a. 0 b. 16,000 c. 8,000 d. 46,000 7. Roy, Sam and Tim decided to engage in a real estate venture as a partnership. Roy invested P140,000 cash and Sam provided an office and furnishings valued at P220,000. (There is a 60,000 note payable remaining on the furnishings to be assumed by the partnership). Although Tim has no tangible assets to invest, both Roy and Sam believe that Tim's expert salesmanship provides an adequate investment. The partners agree to receive an equal capital interest in the partnership. Using the bonus method, what is the capital balance of Tim? a. 0 b. 50,000 c. 100,000 d. 140,000 8. Lara and Mitra formed a partnership on July 1, 2011 and invested the following assets: P130,00 cash by Lara, and P200,000 cash and P50000 computer equipment by
Mitra. The computer equipment has a note payable amounting to P10,000, which was assumed by the partnership. The partnership agreement provides that Lara and Mitra will have an equal capital credit. Using the goodwill method, the amount of goodwill to be recorded upon formation of partnership is: a. 100,000 b. 110,000 c. 120,000 d. 140,000 9. Ana and Elsa form a new partnership. Ana invests P300,000 in cash for her 60% interest in the capital and profits of the business. Elsa contributes land that has an original cost of P40,000 and a fair market value of P70,000, and a building that has a tax basis of P50,000 and a fair market value of P90,000. The building is subject to a P40,000 mortgage that the partnership will assume. What amount of cash should Elsa contribute? a. 40,000 b. 80,000 c. 110,000 d. 150,000 10. Jones and Smith formed a partnership with each partner contributing the following items:
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. What is each partner's tax basis in the Jones and Smith partnership?
a. Option A b. Option B c. Option C d. Option D
ANSWERS & SOLUTIONS (Chapter 1) 1. a 2. c 3. c 4. d 5. d 6. a Zero, because under the bonus method, a transfer of capital is only required. 7. c Roy Cash
Sam
Tim
P140,000
–
–
–
P220,000
–
Office Equipment Note payable
________
_( 60,000)
______
Net asset invested
P140,000
P160,000
P
–
Agreed capitals, equally (P300,000/3) = P100,000
8. b Lara
Mitra
Cash Computer equipment Note payable Net asset invested
P130,000 P200,000 –
50,000
________ _( 10,000) P130,000 P240,000
Goodwill (P240,000 - P130,000) =P110,000
9. b Total Capital (P300,000/60%) P500,000 Elsa's interest ______40% Elsa's capital Less: Non-cash asset contributed at market value Land P 70,000 Building 90,000
P200,000
Mortgage Payable Cash contribution P 80,000
( 40,000)
10. a Jones: (80000+300000) - 120000 + (180000/2) = 350000 Smith: (40000+200000) - 60000 + (180000/2) = 270000
_120,000
1.1 THEORIES. 1. A partnership is a(n): I. accounting entity. II. taxable entity. A. I only B. II only C. Neither I nor II D. Both I and II 2. Anton and Garcia formed a partnership, each contributing assets to the business. Anton contributed inventory with a current market value in excess of its carrying amount. Garcia contributed real estate with a carrying amount in excess of its current market value. At what amount should the partnership record each of the following assets? Inventory Real Estate a. Carrying Amount Market Value b. Market Value Carrying Amount c. Carrying Amount Carrying Amount d. Market Value Market Value 3. On June 30, 2015, a partnership was formed by Mendoza and Lopez. Mendoza contributed cash. Lopez, previously sole proprietor, contributed noncash assets including a realty subject to mortgage which was assumed by the partnership. Lopez’s capital account at June 30, 2015 should be recorded at: a. The fair value of the property on June 30, 2015 less the mortgage payable b. Lopez’s carrying amount of the property on June 30, 2015 c. Lopez’s carrying amount of the property on June 30, 2015 less the mortgage payable d. The fair value of the property on June 30, 2015 4. Two individuals who were previously sole proprietors formed a partnership. Property other than cash which is part of the initial investment in the partnership would be recorded for financial accounting purposes at the : a. Proprietors’ book values or the fair value of the property at the date of the investment whichever is higher. b. Proprietors’ book values or the fair value of the property at the date of the investment whichever is lower. c. Proprietors’ book values of the property at the date of the investment d. Fair value of the property at the date of investment 5. A unique feature of partnerships (compared with publicly owned corporations) is that: a. Limited liability with respect to damages arising from professional services b. Greater allowable tax deductions for retirement plans c. Ease of formation d. Book value
1.2 PROBLEMS. 1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Cat contributed a parcel of land that cost her P10,000. Meow contributed P40,000 cash. The land has a fair value of P15,000. Cat insisted that the value of land should be P18,000. The partners agreed to value the land at P18,000. What amount should be recorded in Cat’s capital account on formation of the new partnership? a. P18,000
b. P17,400
c. P15,000
d. P10,000
2. On July 1, Manny and Floyd formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. Manny contributed a parcel of land that cost him P25,000. Floyd contributed P50,000 cash. The land was sold for P50,000 on July 1, four hours after formation of the partnership. How much should be recorded in Manny’s capital account on the partnership formation? a. P10,000
b. P20,000
c. P25,000
d. P50,000
Use the following question for 3 & 4 On March 1, 2014, cat and Fish formed a partnership with each contributing the following assets: Cash Machinery Building Furnitures and Fixtures
Cat P30,000 P25,000 P10,000
Fish P70,000 P75,000 P225,000 -
3. On March 1, 2015, the capital account of Fish would show a balance of: a. P280,000 370,000
b. P305,000
c. 314,000
d.
4. Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio, and using Fish capital as the base, how much cash is to be invested by Cat? a. P19,000
b. P30,000
c. P40,000
d. P55,000
5. On October 1, 2015, Albano and Armando formed a partnership and agreed to share profits and losses in the ratio 3:7 respectively. Albano contributed a parcel of land that cost him P2,000,000. Armando contributed P3,000,000 in cash. The land has a quoted price of P3,600,000 on October 1, 2015. What amount should be recorded in Albano’s capital account upon formation of the partnership? a. P3,600,000 b. P3,000,000 d. P2,000,000
c.
P3,480,000
1. Jones and Smith formed a partnership with each partner contributing the following items: Jones Cash Building cost to Jones - fair value Inventory - cost to Smith fair value Mortgage Payable
Smith
P 80,000 300,000 400,000
P 40,000
200,000 280,000 120,000
Accounts Payable
60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. What is the balance in each partner’s capital account for financial accounting purposes? A. Jones: P 360,000, B. Jones: P 350,000, C. Jones: P 260,000, D. Jones: P 500,000,
Smith: P 260,000 Smith: P 270,000 Smith: P 180,000 Smith: P 300,000
2. The business assets of LL and MM appear below: Cash Accounts Receivable Inventories Land Building Furniture and Fixture Other Assets Total
LL P 11,000 234,536 120,035 603,000 50,345 2,000 P 1,020,916
MM P 22,354 567,890 260,102 428,267 34,789 3,600 P 1,317,002
Accounts Payable Notes Payable LL, capital MM, capital Total
P 178,940 200,000 641,976 P 1,020,916
P 243,650 345,000 728,352 P 1,317,002
LL and MM agreed to form a partnership by contributing their respective assets and equities subject to the following adjustments: a. Accounts Receivable of P20,000 in LL’s books and P35,000 in MM’s are uncollectible. b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books.
c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be written off. The capital account of the partners after the adjustments will be: a. LL: P615,942, MM: P717,894 b. LL: P614,476, MM: 683,052 c. LL: P640,876, MM: P712,345 d. LL: P640,876, MM: 683,050 3. The same information in number 2, how much total assets does the partnership have after formation? a. P2,265,118 b. P2,337,918 c. P2,237,918 d. P2,365,218 4. On March 1, 2015, PP and QQ decide to combine their businesses and form a partnership. Their balance sheets on March1, before adjustments, showed the following: PP Cash Accounts Receivable Inventories Furniture and Fixtures (net) Office Equipment (net) Prepaid Expenses Total Accounts Payable Capital Total
QQ
P 9,000 18,500 30,000 30,000 11,500 6,375 P 105,375
P 3,750 13,500 19,500 9,000 2,750 3,000 P51,500
P45,750 59,625 P105,375
P18,000 33,500 P51,500
They agreed to have the following items recorded in their books: 1. Provide 2% allowance for doubtful accounts. 2. PP’s furniture and fixtures should be P31,000, while QQ’s office equipment is underdepreciated by P250. 3. Rent expense incurred previously by PP was not yet recorded amounting to P1,000, while salary expense incurred by QQ was not also recorded amounting to P800. 4. The fair market value of inventory amount to: For PP ...............................P29,500 For QQ ...............................P21,000 Compute the net (debit) credit adjustment for PP and QQ: PP QQ a. P 2,870 P 2,820 b. (2,870) (2,820) c. 870 180 d. (870) 180
5. The same information in number 4, compute the total liabilities after formation: a. P 65,550 b. 61,950 c. 63,750 d. 63,950
1. Which of the following is not a characteristic of most partnership? a. Limited liability b. Limited life c. Mutual agency d. Ease of formation Suggested answer (a) limited liability The liability of the partners in a partnership is unlimited.
2. Which of the following is not a characteristic of the proprietary theory that influences accounting for partnerships? a. Partner’s salaries are viewed as a distribution of income rather than a component of net income. b. A partnership is not viewed as separate entity, distinct, taxable entity. c. A partnership is characterized by limited liability. d. Changes in the ownership structure of a partnership result in the dissolution of the partnership. Suggested answer (c) A partnership is characterized by limited liability
3. An advantage of the partnership as a form of business organization would be a. Partners do not pay income taxes on their share in partnership income b. A partnership is bound by the act of the partners c. A partnership is created by mere agreements of the partners d. A partnership may be terminated by the death or withdrawal of a partner Suggested answer (c) A partnership is created by mere agreements of the partners
4. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of contribution b. Contributing partner’s original cost c. Assessed valuation for property tax purposes d. Contributing partner’s tax basis Suggested answer (a) Fair value at the date of contribution
5. Partnership capital and drawings accounts are similar to the corporate a. Paid in capital, retained earnings, and dividends accounts b. Retained earnings account c. Paid in capital and retained earnings accounts d. Preferred and common stock accounts Suggested answer (a) Partnership capital accounts are similar to corporate paid in capital and retained earnings; while partnership drawing accounts are similar to corporate dividends accounts
For questions 6-10: On May 1, 2015, the business assets of Jessyreen and Leilani appear below:
Cash Accounts receivable
Jessyreen
Leilani
P 11, 000
P 22, 354
234, 536
Inventories
120, 035
Land
603, 000
Building Furniture and fixtures
567, 890 260, 102
428, 267 50, 345
34,789
Other assets
_ _2, 000__
__ 3,600_
Total
P 1,020,916
P 1,317,002
Accounts payable
P 178,940
Notes payable
P 243,650
200,000
John, capital
345,000
641,976
Paul, capital
________
Total
P 1,020,916
728, 352 P1,317,002
Jessyreen and Leilani agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P20,000 in Jessyreen’s books and P35,000 in Leilani’s are uncollectible b. Investors of P5,500 and P6,700 are worthless in Jessyreen’s and Leilani’s respective books c. Other assets of P2,00 and P3,600 in Jessyreen’s and Leilani’s respective books are to be written off 6. The capital accounts of the partner’s after adjustments will be: a. Jessyreen’s Leilani’s
614,476 683, 052
b. Jessyreen’s Leilani’s
615, 942 717, 894
b. Jessyreen’s Leilani’s
640, 876 712, 345
b. Jessyreen’s Leilani’s
613, 576 683, 350
Suggested answer (a) Jessyreen Unadjusted capital balances
Leilani
p641,976
P728,352
Uncollectible accounts
(20,000)
(35,000)
Worthless inventories
(5,500)
Adjustments:
Other assets written off
(2,000)
Adjusted capital balances P614,476
(6,700) (3,600) P683,052
7. How much assets does the partnership have? a. 2,337,918 b. 2,237,918 c. 2,265,118 d. 2,365,218 Suggested answer (c) Jessyreen Unadjusted asset bals.
Leilani
Total
1020916
1317002
Uncollectible accounts
(20000)
(35000)
Worthless inventories
(5500)
2337918
Adjustments:
Other assets written off Adjusted assets bals.
(2000) 993416
(55000)
(6700) (3600)
(12200) (5600)
1271702
2265118
8. Shamira offered to join for a 20% interest in the firm. How much cash should he contribute? a. 330,870 b. 337,487 c. 344,237 d. 324,382 Suggested answer (d) New capital of the partnership [(614476+683052)/80%] Multiply by Cash to be contributed by Shamira
P1621910
20% P324382
9. After Shamira’s admission, the profit and loss sharing ratio was agreed to be 40:40:20, based on capital credits. How much should the cash settlement be between Jessyreen and Leilani. a. 33,602 b. 32,930
c. 32,272 d. 34,288
Suggested answer (d) Jessyreen Capital balances at P614476
Leilani 683052
40:40:20 ratio New capital ratio: @ 40% each (1621910)
648764
648764
P34288
(P34288)
Cash settlement bet. Jessyreen and Leilani
10. During the first year of their operations, the partnership earned P325,000. Profits were distributed in the agreed manner. Drawings were made in these amounts: Jessyreen, p50,000; Leilani, 65,000; Shamira, P28,00. How much are the capital balances after the first year? a. Jessyreen, capital
750,627
Leilani, capital
735,177
Shamira, capital
372,223
b. Jessyreen, capital
728,764
Leilani, capital
713,764
Shamira, capital
361,382
c. Jessyreen, capital
757,915
Leilani, capital
742,315
Shamira, capital
375, 837
d. Jessyreen, capital
743,121
Leilani, capital
727,825
Shamira, capital
368,501
Suggested answer (b)
Capital balances at
Jessyreen
Leilani
Shamira
P648764
P648764
P324382
(50000)
(65000)
(28000)
40:40:20 ratio Drawings
Share in profit (40:40:20) 130000 Capital balances
P728764
130000 P713764
65000
P361382
Use following information for question 1 to 5 On July 1, 2015, A and B decided to form a partnership. The firm is to take over the business assets and assume liabilities, and the capitals are to be based on net assets transferred after the ff. adjustments:
A and B’s inventory is to be valued at 31,000 and 22,000 respectively. Accounts receivable of 2,000 in A’s book and 1,000 in B’s books are uncollectible. Accrued salaries of 4,000 for A and 5,000 for B are still to be recognized in the books. Unused office supplies of A and B amounted to 5,000 and 1,500. Prepaid rent of 7,000 and 4,500 are to be recognized in the books A and B, respectively. A is to invest or withdraw cash necessary to have a 40% interest in the firm. Balance sheet for A and B before adjustments Cash Accounts receivable Inventory Office supplies Equipment Accum. Depreciation- Equipment Total Assets Accounts Payable Capitals Total Liabilities and Capital
A ₱ 31,000 26,000 32,000 20,000 (9,000) ₱ 100,000
B ₱ 50,000 20,000 24,000 5,000 24,000 (3,000) 120,000
₱ 28,000 72,000 ₱ 100,000
20,000 100,000 ₱ 120,000
1. The additional investment (withdrawal) made by A: a. ₱(15,000) c. ₱3,000 b. ₱(6,667) d. ₱8,333 2. The total assets of the partnership after formation:
a. ₱235,333 b. ₱230,000
c. ₱220,333 d. ₱212,000
3. The total liabilities of the partnership after formation: a. ₱57,000 c. ₱54,000 b. ₱48,000 d. ₱51,000 4. The total capital of the partnership after formation: a. ₱180,000 c. ₱163,333 b. ₱178,000 d. ₱155,000 5. The total capital balances of A and B in the combined balanced sheet: a. A, ₱81,250; B, ₱72,000 c. A, ₱100,000; B, ₱75,000 b. A, ₱81,250; B, ₱75,000 d. A, ₱62,000; B, ₱93,000 6. On June 1, 2015, T, U and V formed a partnership by combining their separate business proprietorships. T contributed cash of ₱100,000. U contributed property with a ₱80,000 carrying amount, a ₱95,000 original cost, and ₱120,000 fair value. The partnership accepted the responsibility for the ₱55,500 mortgage attached to the property. V contributed equipment with a ₱65,000 carrying amount, a ₱90,000 original cost, and ₱78,000 fair value. The partnership agreement specifies that P & L are to be shared equally but is silent regarding capital contributions. Which partner has the largest capital balance at the beginning of the partnership? a. T c. V b. U d. All capital account balances are equal 7. For financial accounting purposes, assets of an individual partner contributed to a partnership are recorded by the partnership at: a. Historical cost c. Fair market value b. Book value d. Lower of cost or market 8. A unique feature of partnership: a. They do not have to follow GAAP c. Books have to be maintained on the tax basis b. They are not governed by laws d. They do not file income tax return 9. Which of the following is not an advantage of a partnership over a corporation? a. Ease of formation c. The elimination of taxes at the entity level b. Unlimited liability d. All of the above 10. A partner’s withdrawal of assets from a limited liability partnership that is considered a permanent reduction in that partner’s equity is debited to the partner’s: a. Drawing account c. Capital account b. Retained earnings account d. Loan receivable account
1. A partner who is entitled to a share of the profits from a partnership is known as: a) A salaried partner. b) A managing partner. c) An equity partner. d) A limited liability partner.
Answer: An equity partner. A partner on a fixed salary is known as a salaried partner.
2. The maximum number of persons who are legally allowed to operate in a partnership is: a) 2 b) 20 c) There is no legal limit d) 100
Answer: There is no legal limit
3. Sparkle Ltd is a private limited company limited by shares. It has one director. How many shareholders does the law require it to maintain? a) One provided it is a different person from the director.
b) Five. c) Two. d) One which can be the same person as the director.
Answer: One which can be the same person as the director. The law allows private limited companies to exist with one shareholder who is the same person as the director.
4. Which one of the following statements about limited liability partnerships (LLPs) is incorrect? a) An LLP has a legal personality separate from that of its members. b) The liability of each partner in an LLP is limited. c) Members of an LLP are taxed as partners. d) A limited company can convert to an LLP.
Answer: A limited company can convert to an LLP. A general partnership can convert to an LLP but a limited company cannot.
5. An organisation running a business has the following attributes: the assets belong to the organisation, it can create a floating charge over its assets, change in membership does not alter its existence, and members cannot transfer their interests to others. What type of organisation is it? a) A private limited company
b) A limited liability partnership c) A general partnerships d) A private limited company
Answer: A limited liability partnership. In the question the attributes of the organisation are the same for LLPs as companies except members of a company (private and public) can transfer their interests to others.
6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership’s formation: Contributed by Roberts Smith Cash $20,000 $30,000 Inventory -15,000 Building -40,000 Furniture & equipment 15,000 -The building is subject to a mortgage of $10,000, which the partnership has assumed. The partnership agreement also specifies that profits and losses are to be distributed evenly. What amounts should be recorded as capital for Roberts and Smith at the formation of the partnership? Roberts Smith a. $35,000 $85,000 b. $35,000 $75,000 c. $55,000 $55,000 d. $60,000 $60,000 Answer: (b) The requirement is to determine the amounts to be recorded as capital for Roberts and Smith at the formation of the partnership. Unless otherwise agreed upon by the partners, individual capital accounts should be credited for the fair market value (on the date of contribution) of the net assets contributed by that partner. It is necessary to assume that the amounts listed are fair market values. The amount of net assets that Roberts contributed is $35,000 ($20,000 + $15,000). The fair market value of the net assets Smith contributed is $75,000 ($30,000 + $15,000 + $40,000 – $10,000). The partners’ profit and loss sharing ratio does not affect the initial recording of the capital accounts.
7. On April 30, year 1, Algee, Belger, and Ceda formed a partnership by combining their separate business proprietorships. Algee contributed cash of $50,000. Belger contributed property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership accepted responsibility for the $35,000 mortgage attached to the property. Ceda contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, year 1 capital account balance? a. Algee. b. Belger. c. Ceda. d. All capital account balances are equal. Answer: (c) The requirement is to determine which partner has the largest capital account balance. Use the solutions approach to solve the problem. Algee Belger Ceda Partner contribution 50,000 80,000 55,000 Less: Liabilities assumed by the partnership 0 (35,000) 0 Ending capital balance $50,000 $45,000 $55,000 Each partner values his contribution to the partnership at its fair market value. The fair market value becomes the partner’s balance in his capital account and is basis to the partnership under generally accepted accounting principles. Any liabilities assumed by the partnership, reduces the partners’ capital balance by the amount assumed. 8. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Carr’s unidentifiable asset should be debited for a. $46,000 b. $16,000 c. $ 8,000 d. $0 Answer: (d) Under the bonus method, unidentifiable assets (i.e., goodwill) are not recognized. The total resulting capital is the FV of the tangible investments of the partners. Thus, there would be no unidentifiable assets recognized by the creation of this new partnership.
9. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data summarizes 2004 activity: Partnership net income, 2004 $68,000 Ellis capital, 1/1/2004 90,000 Ellis additional investment in 2004 10,000 Ellis drawings in 2004 12,000 Nossiter capital, 1/1/2004 80,000 Nossiter drawings in 2004 20,000 What amount of net income is allocated to Nossiter’s capital account for 2004? a. $26,600 b. $27,600 c. $34,000 d. $47,600 Answer: (d) (68,000×.7) 10. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data summarizes 2004 activity: Partnership net income, 2004 $68,000 Ellis capital, 1/1/2004 90,000 Ellis additional investment in 2004 10,000 Ellis drawings in 2004 12,000 Nossiter capital, 1/1/2004 80,000 Nossiter drawings in 2004 20,000 What is the value of Ellis’s capital account at 12/31/2004? a. $20,400 b. $108,400 c. $111,400 d. $120,400 Answer: (b) (90,000+10,000-12,000+(68,000×.3)) Chapter 1 Partnership Formation 1.On July 1,1997, Monuz and Pardo form a partnership, agreeing to share profits and losses in the ratio of 4:6,respectively. Monuz contributed a parcel of land that cost him P25,000. Pardo contributed P50,000 cash. The land was sold for P50,000 on July 1,1997 four hours after formation of the partnership. How much should be recorded in Munoz capital account on formation of the partnership?
a) b) c) d)
P10,000 P20,000 P25,000 P50,000
2.Moonbits partnership had a net income of P8,000.00 for the month ended September 30,1997. Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by paying Liz P 32,000.00 for half of her capital and half of her 50 percent profit sharing interest on October 1,1997. At this time Liz capital balance was P24,000.00 and Dick capital balance was P56,000.00. Liz should receive a debit to her capital account of: a) b) c) d)
P P P P
12,000.00 20,000.00 16,000.00 26,667.00
3.On March 1,1997, Santos and Pablo formed a partnership with each contributing the following assets:
Cash Machinery and Equipment Building Furniture & Fixtures
Sa ntos P 30,000 25,000 -010,000
Pabl o P 70,000 75,000 225,000 -0-
The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership. The partnership agreement provides that Santos and Pablo share profits and losses 30% and 70%, respectively. On March 1,1997 the balance in Pablo’s capital account should be: a) b) c) d)
P P P P
290,000.00 305,000.00 314,000.00 370,000.00
4. The business assets of John and Paul appear below:
Cash
John P 11,000
Paul P 22,354
Accounts Receivable Inventories Land Building Furniture & Fixtures Other Assets Total
234,536 120,035 603,000 50,435 2,000 P 1,020,916
Accounts Payable Notes Payable John, Capital Paul, Capital Total
178,940 200,000 641,976 P 1,020,916
567,890 260,102 428,267 34,789 3,600 P 1,317,002 243,650 345,000 728,352 P 1,317,002
John and Paul agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P 20,000 in John’s books and P 35,000 in Paul’s are uncollectible. b. Inventories of P 5,500 and P 6,700 are worthless in John’s and Paul’s respective books. c. Other assets of P 2,000 and P 3,600 in John’s and Paul’s respective books are to be written off. The capital account of the partners after the adjustment will be: a) John’s Paul’s b) John’s Paul’s c) John’s Paul’s d) John’s Paul’s
P P P P P P P P
614,476 683,052 615,942 717,894 649,876 712,345 613,576 683,350
5. The following is the condensed balance sheet of the partnership Jo, Li and Bi who share profits and losses in the ratio of 4:3:3.
Cash Other Assets Jo, receivable
Total
P 180,000 1,660,000 40,000
P1,880,000
Accounts Payable Bi, Loan Jo, Capital Li, Capital Bi, Capital
P 420,000 60,000 620,000 400,000 380,000
Total
P1,880,0 00
Assume that the assets and liabilities are fairly valued on the balance sheet and the partnership decides to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be recorded. How much Mac contributes to cash or other assets? a) b) c) d)
P P P P
350,000 280,000 355,000 284,000
Solution and Explanation
1. D. The requirement is Munoz’ capital account balance upon formulation of the partnership. As in the case with all entities, investment in the capital of a partnership should be measured at the fair market value of the assets contributed. In this case, the FMV of the land would be measured at the fair market value by its sales price on the date of sale (P50,000) which is also the date of the partnership formation. Recording the land of Munoz’ cost would result in the partners sharing the gain from the sale in accordance with their profit and loss ratio. This is not equitable since the gain accrued while the land was held by Monuz. 2. A. Under the admission by purchase only the transfer of the capital purchase by the selling partner (Liz) to the buying partner (Sunshine) is recorded. Therefore 50% of the capital of Liz (P24,000) or P 12,000 is to be debited to her capital account. 3. A. P 290,000.00 Assets contributed by Pablo Less: Mortgage assumed by partnership Capital balance of Pablo
P 370,000 (80,000) P 290,000
Note that the profit and loss sharing ratio is irrelevant to the solution of this problem. 4. A.
John’s
P 614,476
Paul’s
P 683,052
Capital balance before adjustments Adjustments: Uncollectible accounts Inventories Written Off Other Assets written off Capital balances after adjustments
John P641,976
Paul P 728,352
(20,000) (5,500) (2,000) P 614,476
(35,000) 6,700 (3,600) P 683,052
5. A. P 350,000 Total agreed capital of the new partnership ( 1,400,000 ÷ 80% ) P 1,750,000 Total contributed capital of the old partners ( 1,400,000) Mac’s contribution
P
350,000
1. Partnership capital and drawing accounts are similar to the corporate A. Paid-in capital, retained earnings, and dividend accounts B. Retained earnings account. C. Paid-in capital and retained earnings accounts. D. Preferred and common stock accounts 2. For individuals who were previously sole proprietors form a partnership. Each partner contributes inventory and equipment for use by the partnership. What basis should the partnership use to record the contributed assets? A. Inventory at the lower of FIFO cost or market. B. Inventory at the lower of weighted-average cost or market. C. Equipment at each proprietor’s carrying amount. D. Equipment at fair value. 3. Meca and Came formed a partnership on January 1,2015 with each contributing the following assets: Meca Came Cash P30,000 P70,000 Machinery 25,000 75,000 Inventory 10,000 Building 225,000 The building is subject to a mortgage loan of P90,000 which is to be assumed by the partnership. On January 1,2015, the capital account of Came would show a balance of: A. P280,000 B. P305,000 C. P314,000 D. P370,000 4. Alma and Becca have just formed a partnership. Alma contributed cash of P176,400 and office equipment that cost P75,600. The equipment had been used in his sole proprietorship and had been 70% depreciated, the current value of the equipment is P50,400. Alma also contributed a note payable of P16,800 to be assumed by the partnership. Alma is to have a 30% interest in the partnership. Becca contributed P256,000 land at fair market value. Becca should make additional investment of a. P234,000 b. P490,000 c. P256,000 d. P210,000 5. The business assets of LL and MM appears below: LL
MM
Cash
P11,000
P22,354
Accounts Receivable
234,536
567,890
Inventories
120,035
260,102
Land
603,000
----------
Building
----------
428,267
50,345
34,789
2,000
3,600
Furniture and Fixtures Other Assets
Accounts Payable
P1,020,916
P1,317,002
P178,940
P 243,650
Notes Payable
200,000
345,000
LL,Capital
641,976
-------------
MM, Capital
----------
728,352
P1,020,916 P1,317,002 LL and MM agreed to form a partnership contributing their respective assets and equities subject to the following adjustments: a. Accounts receivable of P20,000 in LL’s books and P35,000 in MM’s are uncollectible. b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books. c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be written off. The capital account of the partners after the adjustments will be: a. LL, P615,942; MM, P717,894 c. LL, P640,876; MM, P683,050 b. LL, P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052 6. Langley invests his delivery van in a computer repair partnership with McCurdy. What amount should the van be credited to Langley’s partnership capital? A. The tax basis. B. The fair value at the date of contribution. C. Langley’s original cost. D. The assessed valuation for property tax purposes. 7. On April 30, 1993, Algee, Belger, and Ceda formed a partnership by combining their separate business proprietorships. Algee contributed cash of $50,000, Belger contributed property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership accepted responsibility for the $35,000 mortgage attached to the property. Ceda contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, 1993, capital account balance? A. Algee. c. Ceda. B. Belger. d. All capital account balance are equal. 8. Jamby and Minam just formed a partnership. Jamby contributed cash of P2,205,000 and office equipment that cost P945,000. The equipment had been used in her sole proprietorship and had been 70% depreciated, the appraised value of the equipment is P630,000. Jamby also contributed a note payable of P210,000 to be assumed by the partnership. Jamby is to have 60% interest in the partnership. Miriam contributed only P1,575,000 merchandise inventory at fair market value. Assume the use of bonus method, the partners’ capital must be in conformity with their profit and loss ratio upon formation. In the formation of a partnership, which of the following is true? A. B. C. D.
The agreed capital of Jamby upon formation is P2,625,000 The total agreed capital of the partnership is P4,375,000 The capital of Miriam will increase by P105,000 as a result of the transfer of capital There is either an investment or withdrawal of asset under the bonus method
9. Alley and Barvey established a partnership on December 1, 20x4. They agreed that Alley will contribute cash of P20,000; Land of P15,000 and Building of P50,000. Alley’s accounts payable of P10,000 is to be assumed by the partnership. Barvey will contribute cash of P30,000 and furniture and fixtures of P25,000. Assume that each partner initially should have an equal interest in partnership capital with no contribution of intangible asset (bonus method). How much are the capital balances of each partner? a. P85,000 for Alley and P55,000 for Barvey b. P65,000 for Alley and P65,000 for Barvey. c. P75,000 for Alley and P55,000 for Barvey d. P75,000 for Alley and P75,000 for Barvey. 10. The partnership agreement is an express contract among the partners (the owners of the business). Such an agreement generally does not include a. A limitation on a partner’s liability to creditors. b. The rights and duties of the partners. c. The allocation of income between the partners. d. The rights and duties of the partners in the event of partnership dissolution. 1. The partnership form of business is: a. An economic entity. b. A separate legal entity, just as a corporation is a legal entity. c. A taxable entity. d. A fiscal entity. 2. A distinct and major advantage of the professional corporation form of organization in comparison with the partnership form of organization is: a. Limited liability with respect to damages arising from professional services. b. Greater allowable tax deductions for retirement plans. c. Ease of formation d. Book value e. Historical cost 3. Which of the following is not a characteristic of a partnership? a. The partnership itself pays no income taxes. b. It is easy to form a partnership. c. Any partner can be held personally liable for all debts of the business. d. A partnership requires written Articles of Partnership. e. Each partner has the power to obligate the partnership for liabilities. 4. The advantages of the partnership form of business organization, compared to corporations, include
a. b. c. d. e.
Single taxation Ease of raising capital Mutual Agency Limited Liability Difficulty of formation
5. Which of the following is NOT a characteristic of the proprietary theory that influences accounting for partnerships? a. Partners’ salaries are viewed as a distribution of income rather than a component of net income. b. A partnership is not viewed as a separate, distinct, taxable entity. c. A partnership is characterized by limited liability. d. Changes in the ownership structure of a partnership result in the dissolution of the partnership.
PROBLEMS 6. Albert, Claude, and Jamie form a partnership by contributing P25,000, P70,000, and P80,000, respectively. In addition, the partners agree that Albert should receive P20,000 of goodwill because of his special skills relevant to this business. What amount of capital will exist for Claude when the partnership is formed? a. P60,000 b. P65,000 c. P70,000 d. Some other amount 7. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital and profits and Ken is to have a 40% interest in capital and profits. Bill contributes the following: Land Building Equipment
Cost P10,000 P100,000 P20,000
Fair value P20,000 P60,000 P15,000
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken contributes P50,000 cash to the partnership. Bill and Ken agree that Ken’s capital account should equal Ken’s P50,000 cash contribution and that goodwill (revaluation of asset) should be recorded. Goodwill (revaluation of asset) should be recorded in the amount of: a. P10,000
b. P15,000 c. P16,667 d. P20,000 8. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an historical cost, accumulated depreciation, and market value of P290,000, P100,000, and P400,000, respectively. The building is initially recorded on the partnership’s books at Juan’s book value (P190,000). Two years later the building is sold for a P270,000 gain. What portion of the profit or loss should be allocated to Juan? a. P20,000 b. P90,000 c. P210,000 d. P230,000 9. Jones and Smith formed a partnership with each partner contributing the following items: Cash Building-Cost to Jones -Fair Value Inventory- Cost Smith -Fair Value Mortgage Payable Account Payable
Jones P80,000 300,000
Smith P40,000
400,000 200,000 280,000 120,000 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. What is the balance in each partner’s capital account for financial accounting purposes? a. Jones- P350,000 and Smith- P270,000 b. Jones- P260,000 and Smith- P180,000 c. Jones- P360,000 and Smith- P260,000 d. Jones- P500,000 and Smith- P300,000 10. On July 1, ML and PP formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. ML contributed a parcel of land that cost her P25,000. PP contributed P50,000 cash. The land was sold for P50,000 on July 1, four hours after formation of the
partnership. How much should be recorded in ML’s capital account on the partnership formation? a. P10,000 b. P20,000 c. P25,000 Chapter 1
1. B. 2. A. 3. D. 4. A. 5. C. 6. C. 7. A. 8. B. 9. C. 10. D. d. P50,000
1.1 A partnership is formed by two individuals who were previously sole proprietors. Property other than cash which is part of the initial investment in the partnership would be recorded for financial accounting purposes at the: a. Proprietors’ book values or the fair value of the property at the date of the investment, whichever is higher b. Proprietors’ book values or the fair value of the property at the date of the investment, whichever is lower. c. Proprietors’ book values of the property at the date of the investment. d. Fair value of the property at the date of the investment. 1.2. When property other than cash is invested in a partnership, at what amount should the non-cash property be credited to the contributing partner’s capital account? a. Contributing partner’s tax basis. b. Contributing partner’s original cost. c. Assessed valuation for property tax purposes. d. Fair value at the date of contribution.
1.3. An advantage of the partnership as a form of business organization would be a. b. c. d.
Partners do not pay income taxes on their share in partnership income. A partnership is bound by the act of the partners A partnership is created by mere agreements of the partners A partnership may be terminated by the death or withdrawal of a partner.
1.4. When property other than cash i invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. b. c. d.
Fair value at the date of contribution Contributing partner’s original cost Assessed valuation for property tax purposes Contributing partner’s tax basis
1.5. Partnership capital and drawings are similar to the corporate a. b. c. d.
Paid in capital, retained earnings and dividends accounts Retained earnings account Paid in capital and retained earnings accounts Preferred and common stock accounts
PROBLEMS 1.6. Abena and Buendia establish a partnership to operate a used-furniture business under the name of A and B Furniture. Abena contributes furniture that cost P60,000 and has a fair value of P90,000. Buendia contributes P30,000 cash and delivery equipment that cost P40,000 and has a fair value of P30,000. The partners agree to share profits and losses 60% to Abena and 40% to Buendia. The peso amount of gain (loss) that will result if the initial noncash contributions of the partners are recorded at cost rather than fair market value will be a. b. c. d.
P30,000 and (P10,000) to Abena and Buendia, respectively P12,000 and P8,000 to Abena and Buendia, respectively (P18,000) and P18,000 to Abena and Buendia, respectively P 18,000 and (P18,000) to Abena and Buendia, respectively
1.7. On April 30, 2003, Bautista, Jimenez and Laxamana formed a partnership by combining their separate business proprietorships. Bautista contributed cash of P100,000. Jimenez contributed property with a carrying amount of P72,000, original cost of P80,000, and fair value of P160,000. The partnership accepted responsibility for the P70,000 mortgage attached to the property. Laxamana contributed equipment with a carrying amount of P60,000, original cost of P150,000, and fair value of 110,000. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest capital account balance as of April 30, 2003?
a. Bautista b. Jimenez
c. Laxamana d. All capital account balances are equal
1.8. G. Macalino and W. Nolasco form a partnership and agree to divide initial capital equally, even though Macalino contributed P100,000 and Nolasco gave P84,000 in identifiable assets. Under the bonus approach to adjust capital accounts, Nolasco’s unidentifiable assets should be debited for a . P8,000
c. P-0-
b . P16,000
d . P46,000
1.9. L. Molina and R. Nepomuceno enter into a partnership agreement in which Molina is to have a 60% interest in capital and profits and Nepomuceno is to have a 40% interest in capital and profits. Molina contributes the following: Cost
Fair Value
Land
P 20,000
P 40,000
Building
200,000
120,000
Equipment
40,000
30,000
There is a P60,000 mortgage on the building that the partnership agrees to assume. Nepomuceno contributes P100,000 cash to the partnership. Molina and Nepomuceno agree that Nepomuceno’s capital account should equal Nepomuceno’s P100,000 cash contribution and that goodwill should be recorded. Goodwill should be recorded in the amount of a. P20,000
c. P33,333
b. P30,000
d. P40,000
1.10. On March 1, 2003, Z Roxas and B. Poe decided to combine their business and form a partnership. The balance sheet of Roxas and Poe on March 1, before adjustment is presented below. Roxas
Poe
Cash
P 9,000
P 3,750
Accounts Receivable
18,500
13,500
Inventories
30,000
19,500
Furniture and fixtures (net)
30,000
9,000
Office Equipment (net)
11,500
2,750
6,375
3,000
P105,375
P51,500
P 45,750
P 18,000
Prepaid Expenses
Accounts Payable Z. Roxas, Capital
59,625
B. Poe, Capital
33,500 P105,375
P 51,500
They agreed to provide 3% for doubtful accounts on their accounts receivable and found Poe’s furniture to be under depreciated by P900. If each partner’s share in equity is to be equal to the net assets invested, the capital accounts of Roxas and Poe would be: a. P58,170 and P33,095 respectively b. P58,320 and P32,945 respectively c. P59,070 and P32,195 respectively d. P104,820 and P50,195 respectively 1. Which of the following is not a characteristic of a partnership? a. The partnership itself pays no income taxes b. It is easy to form a partnership c. Any partner can be held personally liable for all debts of the business d. A partnership requires written Article of Partnership 2. The partnership form of business is: a. An economic entity b. A taxable entity c. A fiscal entity d. A separate legal entity, just as a corporation is a legal entity 3. Which of the following is not an advantage of partnership over a corporation? a. Ease of formation b. Unlimited liability
c. The elimination of taxes at the entity level d. All of the above 4. A partner’s withdrawal of assets from a limited liability partnership that is considered a permanent reduction of in that partner’s equity is debited to the partner’s: a. Drawing account b. Retained earnings account c. Capital account d. Loan receivable account 5. For financial accounting purposes, assets of an individual partner contributed to partnership are recorded by the partnership at: a. Historical cost b. Book value c. Fair market value d. Lower of cost or market 6. On December 1, 2009, DD and EE formed a partnership with each contributing the following asset at fair market values:
The land and building are subject to a mortgage loan of P54,000 that the partnership will assume. The partnership agreement provides that DD and EE share profits and losses, 40% and 60%, respectively and partners agreed to bring their capital balances in proportion to the profit and loss ratio and using the capital balance of EE as the basis. The additional cash investment made by DD should be: a. 18,000 b. 85,500 c. 134,100 d. 166, 250 DD, Capital= 9+13.5+13.5=36 EE, Capital= 18+90+27-54=81 81/.60=135 135*.40=56-36=18 A 7. JJ and KK are joining their separate business to form a partnership. Cash and noncash asset are to be contributed for a total capital of 300,000. The noncash assets to be contributed and liabilities to be assumed are:
The partner’s capital are to be equal after all contributions of assets and assumptions of liabilities. The total assets of the partnership. a. 318,750 b. 300,000 c. 281,250 d. 225,000 Equity=Assets-Liabilities 300,000=X-(11,250+7,500) Assets=X=318,750 A 8. Refer to number 8, the amount of cash that each partner must contribute. a. JJ=75,000; KK=18750 b. JJ=75,000; KK=11,250 c. JJ=161,250; KK= 157,500 d. JJ= 127,500; KK= 11,250 For JJ; 150,000=Cash to be contrubuted+22,500+33,750+30,000+(-11250) Cash to be contributed=75,000 For KK; 150,000=Cash to be contributed+67,500+71,250+(-7500) Cash to be contributed=18,750 A
9. Jones and Smith formed a partnership with each partner contributing the
following items: Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. Refer to the above information. What is the balance in each partner’s capital account for financial accounting purposes?
C
10.MM, NN, and OO are partners with capital balances on December 31, 2012 of P300,000, P300,000 and P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that OO is taken certain equipment with second-hand value of P50,000 and a note for the balance of OO’s interest. The equipment are carried on the books at P65,000. Brand new equipment may cost P80,000. Compute for: (1) OO’s acquisition of the second-hand equipment will result to reduction in capital; (2) the value of the note that will OO get from the partnership’s liquidation, a. (1) 15,000 each for MM and NN (2) 150,000 b. (1) 5,000 each for MM, NN, and OO (2) 145,000 c. (1) 5,000 each for MM, NN, and OO (2) 195,000 d. (1) 7,500 each for MM and NN (2) 145,000
1. Cat and Dog formed a partnership, each contributing assets to the business. Cat contributed inventory with a current market value in excess of its carrying amount. Dog contributed real estate with a carrying amount in excess of its current market value. At what amount should the partnership record each of the following assets?
a.
Inventory Market value
Real estate Market value
b. c. d.
Market value Carrying amount Carrying amount
Carrying amount Market value Carrying amount
2. Recording of Cash Investment a. Face Value 3.
c. memorandum entry d. none of these
Recording of Property Investment a. Face Value
4.
b. Agreed value
b. Agreed value
c. memorandum entry d. none of these
Recording of the investment(industry) a. Face Value
b. Agreed value
c. memorandum entry d. none of these
5. Which of the following statements are true when comparing corporations and partnerships? a. Partnership entities provide for taxes at the same rates used by corporations b. In theory, partnerships are more able to attract capital c. Like corporations, partnerships have an infinite life d. Unlike shareholders, general partners may have liability beyond their capital balances
Problems 1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Cat contributed a parcel of land that cost her P10,000. Meow contributed P40,000 cash. The land has a fair value of P15,000. Cat insisted that the value of the land should be P18,000. The partners agreed to value the land at P18,000. What amount should be recorded in Cat’s capital account on formation of the new partnership? a. P18,000 b. P17,400 c. P15,000 d. P10,000
2. On July 1, Manny and Floyd formed a partnership, agreeing to the profit and loss in the ratio of 4:6, respectively. Manny contributed a parcel of land that cost him P25,000. Floyd contributed P50,000 cash. The land was sold for P50,000 on July 1, for hours after formation of the partnership. How much should be recorded in Manny’s capital account on the partnership formation? a. P10,000 b. P20,000 c. P25,000 d. P50,000 3. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital and profits and Ken is to have a 40% interest in capital and profits. Bill contributes the ff: Cost Fair Value Land Building Equipment
P10,000 P100,000 P20,000
P20,000 P60,000 P15,000
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken contributes P50,000 cash to the partnership. Bill and Ken agree that Ken’s capital account should equal Ken’s P50,000 cash contribution and that goodwill should be recorded. Goodwill should be recorded in the amount of: a. P10,000 b. P15,000 c. P16,667 d.
P20,000
Solution: Cash contribution of Ken P50,000 Divided by Ken capital interest ÷ 40% Total agreed capital P125,000 Less: Bill’s Contribution 65,000 Ken’s agreed capital P 60,000 Less: Ken’s contribution 50,000 Goodwill P 10,000 For 4 and 5 Cat admits Dog as partner in business. Accounts in the ledger for Cat on November 30, 2015, just before the admission of Dog, show the following balances: Cash P6,800 Accounts Receivable P14,200 Merchandise Inventory P20,000 Accounts Payable P8,000 Cat, capital P33,000 It is agreed that or the purposes of establishing Cat’s interest the following adjustments shall be made: a. An allowance for doubtful accounts of 3% of accounts receivable is to be
established b. The merchandise inventory is to be valued at P23,000 c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized. 4. Dog is to invest sufficient cash to obtain a 1/3 interest in the partnership. Cat’s adjusted capital before the admission of Dog a. P28,174 b. P35,347 c. P35,374 d. P36,374 5. The amount of cash investment by Dog a. P11,971 b. P35,347 c. P17,687 d. P18,790 Solution: Cat, capital P33,000 Less: Allowance for doubtful accounts 426 P53,061 Accrued rent 1/3 expense 800 P17,687 Total P 31,774 Add: Inventory 3,000 Prepaid rent 600 Cat’s adjusted capital P 35,374
Cat’s capital contribution P35,347 Divided by Cat’s capital interest ÷ Total agreed capital Multiply by Dog’s capital interest Dog’s cash contribution
2/3
x
