UNIVERSITY OF SAN JOSE-RECOLETOS CPA REVIEW CENTER PRACTICAL ACCOUNTING 2 FLORES, CPA
MR. EDMAN P.
P2 001: PARNERSHIP ACCOUNTING PARTNERSHIP FORMATION Exercise Problems Problem 1 On July 1, 2012, Carla and Carlo form a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. Carla contributed a parcel of land that cost her P250,000, while Carlo contributed P500,000 cash. The land was sold for P500,000 on July 1, 2012 four hours after formation of the partnership. How much should be recorded in Carla’s capital account on formation of the partnership? Ans: P500,000 Problem 2 On March 1, 2010, Junay and June formed a partnership with each contributing the following assets: Cash Machinery and equipment Building Furniture and fixtures
Junay P30,000 25,000 – 10,000
June P70,000 75,000 225,000 –
The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership. The partnership agreement provides that Junay and June share profits and losses 30% and 70%, respectively. On March 1, 2010 the balance in June’s capital account should be _________. Ans: P290,000
Problem 3 JJ admits RR as a partner in business. Accounts in the ledger for JJ on November 30, 2012, just before the admission of RR, show the following balances: Cash - P6,800; Accounts receivable - P14,200; Merchandise inventory – P20,000; Accounts payable - P8,000; JJ, capital - P33,000. It is agreed that for purposes of establishing JJ’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; and (c) Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized. RR is to invest sufficient cash to obtain in a 1/3 interest in the partnership. Required: 1. What is JJ’s adjusted capital before the admission of RR? (1) P35,374 2. What is the amount of cash investment by RR? (2) P17,687 Multiple Choice Questions 1. Tonya, Tonye, and Tonyo are forming a new partnership. Tonya is to invest cash of P100,000 and stapling equipment originally costing P120,000 but has a second-hand value in the market at P50,000. Tonye is to invest cash of P160,000, while Tonyo, whose family is engaged in selling stapling equipment to be used by the partnership with a regular price of P120,000 but which cost their family’s business P100,000. In addition, Tonyo invest cash amounting to P50,000. Partners agree to share profits equally. The capital balances upon formation are: a. Tonya, P220,000; Tonye, P160,000; and Tonyo, P150,000 b. Tonya, P150,000; Tonye, P160,000; and Tonyo, P170,000 c. Tonya, P160,000; Tonye, P160,000; and Tonyo, P160,000 d. Tonya, P176,666; Tonye, P176,666; and Tonyo, P176,668
2. On June 1, 2010, Debbie and Elaine formed a partnership. Debbie is to invest assets at fair value which are yet to be agreed upon. She is to transfer her liabilities and is to contribute sufficient cash to bring her capital to P210,000 which is 70% of the total capital of the partnership. Details regarding the book values of Debbie’s business assets and liabilities and their corresponding valuations are: Book Values Accounts receivable Allowance for doubtful accounts Merchandise inventory Store equipment Accum. Dep. – store equipment Office equipment Accum. Dep. – office equipment Accounts payable
P58,000 4,200 98,400 32,000 19,000 27,000 14,200 56,000
Agreed Valuations P58,000 5,000 107,000 32,000 16,400 27,000 8,600 56,000
Elaine agrees to invest cash of P42,000 and merchandise valued at current market price. The value of the merchandise to be invested by Elaine and the cash to invested Debbie are: a. P48,000 and P72,000, respectively c. P90,000 and P72,000, respectively b. P48,000 and P138,000, respectively d. P252,000 and P138,000, respectively
PARTNERSHIP OPERATION Exercise Problems Problem 1 The PQ partnership has the following plan for the distribution of partnership net income (loss): Salaries Bonus on net income Interest on average capital balance Remainder (if positive) Remainder (if negative)
P P80,000 6% 7% 60% 50%
Q P100,000 12% 7% 40% 50%
Required: Calculate the distribution of partnership net income (loss) for each independent situation below (for each situation, assume the average capital balance of P is P140,000 and of Q is P240,000). 1. Partnership net income is P360,000. 2. Partnership net income is P240,000. 3. Partnership net loss is P40,000.
Problem 2 Net income for Levin-Tom partnership for 2011 was P125,000. Levin and Tom have agreed to distribute partnership net income according to the following plan:
Interest on average capital balances Bonus on net income before the bonus but after interest on average capital balances Salaries Residual (if positive) Residual (if negative)
Levin 7%
Tom 7%
12% P40,000 60% 50%
P50,000 40% 50%
Additional Information for 2011 follows: 1. Levin began the year with a capital balance of P75,000. 2. Tom began the year with a capital balance of P100,000. 3. On March 1, Levin invested an additional P25,000 into the partnership. 4. On October 1, Tom invested an additional P20,000 into the partnership. 5. Throughout 2011, each partner withdrew P200 per week in anticipation of partnership net income. The partners agreed that these withdrawals are not to be included in the computation of average capital balances for purposes of income distributions. Required: 1. Determine the share of each partner in the net income of the partnership. 2. Determine the capital of each partner on December 31, 2011.
Problem 3 The following account balances appear in the in the ledger of the partnership of XY Store at the end of 2012 before the profit for the year has been transferred to the partners’ accounts: X, Drawings Y, Drawings X, Loan X, Capital Y, Capital Profit and Loss Summary
P7,200 12,500 P17,500 50,000 50,000 30,250
The following information is to be considered in closing the Profit and Loss Summary and Drawings accounts: 1. The cost of installing equipment at the beginning of 2012, P2,700, was charged to expense. The installation relates to equipment with a 10-year life. 2. The loan to the firm was made by partner X on March 1, 2012. No entry has been made for interest on the loan, which is 6% and is to be paid to partner X at the time the loan is repaid. 3. The partnership agreement permits X and Y to withdraw weekly sums of P150 and P225, respectively, these amounts are to be regarded as salaries. Actual withdrawals by partners differed from allowed amounts and are to be summarized in the drawings accounts. 4. Y, the managing partner, is entitled to a special bonus of 25% of the net profit after deduction of all special allowances to partners (including the bonus), and any remaining profit is to be distributed equally. Required: 1. The adjusted net profit to be distributed to partners should be _______. Ans: P31,805 2. What is the share of each partner in the profit of the partnership? 3. What is the capital balance of each partner at January 1, 2011? X - P55,522
Problem 4 On January 1, 2012, A,B,C and D formed Alpha Trading Co. a partnership, with capital contributions as follows: A, P50,000; B, P25,000; C,P25,000 and D,P20,000. The partnership contract provided that each partner shall receive a 5% interest on contributed capital, and that A and B shall receive salaries of P5,000 and P3,000 respectively. The contract also provided that C shall receive a minimum of P2,500 per annum, and D a minimum of P6,000 per annum, which is inclusive of amounts representing interest and share of remaining profits. The balance of the profits shall be distributed to A,B,C and D in a 3:3:2:2 ratio. Required: 1. What amount must be earned by the partnership, before any charge for interest and salaries, so that A receive an aggregate of P12,500 including interest, salary and share of profits? Ans: P32,333 2. What the total earnings of partner B? Ans: P9,250 3. What the total earnings of partner C? Ans: P4,583.33
Multiple Choice Questions 1. Alex and Carlo are partners agreeing to allow monthly salaries (P6,000 and P5,000, respectively), 6% interest on the capital investment at the beginning of the year (P300,000 and P230,000, respectively) and on the remaining balance, to be equally shared. The first year registered a net income of P100,000. Partners should be entitled to: a. Alex, P58,100 and Carlo, P41,900 c. Alex, P50,000 and Carlo, P50,000 b. Alex, P54,500 and Carlo, P45,500 d. Alex, P56,600 and Carlo, P43,400
2. In its first year of operations, Jeanette and Company, a partnership, made a net income of P20,000, before providing for salaries of P5,000 and P3,000 per annum for Jeanette and James, respectively: Jeanette James Josephine Total
Capital P30,000 20,000 10,000 P60,000 ======
Assuming that no profit-and-loss ratios are provided in the partnership agreement and that there has been no change in the capital contributions during the year, how much profit share would Jeanette be entitled to received? a. P10,000 b. P5,000 c. P11,000 d. P15,000
PARTNERSHIP DISSOLUTION Exercise Problems Problem 1 Presented below is the condensed statement of financial position of the Partnership of X, Y and Z on June 1, 2012 with their respective profit and loss ratios: Current assets Noncurrent assets
P300,000 344,000
Total assets
P644,000
Current liabilities Noncurrent liabilities X, Capital (1/2) Y, Capital (1/3) Z, Capital (1/6) Total liabilities and capital
P100,000 100,000 139,200 208,800 96,000 P644,000
On June 2, 2012, W was admitted to the partnership when he purchased, for P132,000 a proportionate interest from X and Y in the net assets and profits of the partnership. As a result of this transaction, W acquired one-fifth interest in the net assets and profits of the firm. Required: 1. What is the combined gain realized by X and Y? Ans: P43,200 2. The capital balance of partner Y after W’s admission should be ________. Ans: P155,520 3. The amount of cash paid to partner Y should be __________. Ans: P70,560 4. The P & L ratio of partner Y after W’s admission should be ________. Ans: 25.33%
Problem 2 A summary balance sheet for the partnership of Ivory, Jacoby and Kato on December 31, 2006 is shown below. Partners Ivory, Jacoby and Kato allocate profit and loss in their respective ratios of 9:6:10. Assets Cash P 50,000 Inventory 75,000 Marketable securities 120,000 Land 80,000 Building-net 400,000 Total assets P 725,000 Equities Ivory, capital Jacoby, capital Kato, capital Total equities
P P
425,000 225,000 75,000 725,000
The partners agree to admit Lange for a one-tenth interest. The fair market value for partnership land is P180,000, and the fair market value of the inventory is P150,000. Required: 1. Record the entry to revalue the partnership assets prior to the admission of Lange. 2. Calculate how much Lange will have to invest to acquire a 10% interest. 3. If Lange paid P200,000 to the partnership in exchange for a 10% interest, what would be the bonus that is allocated to each partner's capital account? Requirement 1 The assets of the partnership must be adjusted to fair market value. Land will increase by P100,000, and Inventory by P75,000. The profit and loss ratio elements add up to 25. Partner Ivory will then be allocated 9/25 of the P175,000, etc. Land Inventory Ivory, capital Jacoby, capital Kato, capital
100,000 75,000 63,000 42,000 70,000
Requirement 2 The partnership's total assets after revaluation are P900,000. If Lange acquires a 10% interest, it implies that the P900,000 represents 90% of the partnership’s value after Lange's investment. Therefore, P900,000/90% = P1,000,000, and P1,000,000 x 10% = P100,000. The entry to record Lange’s investment would be: Cash Lange, capital
100,000 100,000
Requirement 3 Cash Lange, capital Ivory, capital Jacoby, capital Kato, capital
Problem 3
200,000 100,000 36,000 24,000 40,000
C and D are partners who share profits and losses in the ration of 7:3, respectively. On October 30, 2012, there respective capital accounts were as follow: C, Capital P35,000 D, Capital 30,000 On that date they agreed to admit S as a partner with one-third interest in the capital and profits and losses, upon his investment of P25,000. Required: 1. Immediately after S’s admission, the capital balance of partner C should be ________. Ans: P31,500 2. The profit and loss ratio of partner C after S’s admission should be ________. Ans: 46.67%
Problem 4 A summary balance sheet for the Vail, Wacker and Yang partnership on December 31, 2006 is shown below. Partners Vail, Wacker, and Yang allocate profit and loss in their respective ratios of 4:5:7. The partnership agreed to pay partner Yang P227,500 for his partnership interest upon his retirement from the partnership on January 1, 2011. Any payments exceeding Yang’s capital balance are treated as a bonus from partners Vail and Wacker. Cash Inventory Marketable securities Land Building-net Total assets
Vail, capital Wacker, capital Yang, capital Total equities
Assets
P
P Equities
P P
75,000 87,500 60,000 90,000 150,000 462,500
212,500 112,500 137,500 462,500
Required: Prepare the journal entry to reflect Yang’s retirement from the partnership. 1/1/04 Yang, capital Vail, capital (P90,000 x 4/9) Wacker, capital (P90,000 x 5/9) Cash
137,500 40,000 50,000
227,500
Multiple Choice Questions 1. The capital accounts for the partnership of L and M at October 31, 2010 are as follow: L, Capital P80,000 M, Capital 40,000 The partners share profits and losses in the ratio of 6:4, respectively. The partnership is in desperate need of cash, and the partners agree to admit P as a partner with one-third interest in the capital and profits and losses upon his investment of P40,000. The capital balance of Partner L after P’s admission should be: a. P32,000 b. P40,000 c. P68,000
d. P80,000
2. Aga and Angel are partners with capital balances of P60,000 and P20,000, respectively. Profits and losses are divided in the ratio of 60:40. Aga and Angel decided to admit Jane as a new partner. Jane invested land valued at P15,000 for a 20% capital interest in the new partnership. The cost of the land was P12,000. The partnership elected to use the bonus method to record the admission of Jane into the partnership. Jane’s capital account should be credited for a. P12,000 b. P15,000 c. P16,000 d. P19,000
PARTNERSHIP LIQUIDATION Problem 1 On March 1, 2011, the ABC partnership decides to complete a lump-sum liquidation as soon as possible. The partnership balance sheet prepared on March 1 appears below: ABC Partnership Statement of Financial Position March 1, 2011 Cash Accounts Receivable Inventory Investments Plant and Equipment – Net Total Assets
P50,000 60,000 100,000 40,000 650,000 P900,000
Accounts Payable Due to Partner A A, Capital (30%) B, Capital (40%) C, Capital (30%) Total Liabilities and Capital
P200,000 30,000 350,000 80,000 240,000 P900,000
The partners share profits and losses in the ratio of 3:4:3. Partner B is personally insolvent, but partners A and C have sufficient personal assets to satisfy any capital deficits. On March 15, 2011, the non-cash assets are sold for P550,000. Lump sum payments are made to the partners on March 16, immediately after the creditors have been paid. Required: Determine the amount of cash received by A, B and C, respectively. Problem 2 The partnership of Rachel, Adams, and Nixon has the following trial balance on September 30, 2011:
Cash Accounts receivable – net Inventory Plant and equipment – net Accounts payable Rachel, Capital Adams, Capital Nixon, Capital
Debit P20,000 30,000 35,000 215,000
P300,000
Credit
P40,000 120,000 90,000 50,000 P300,000
The partners share profits and losses as follows: Rachel, 50 percent; Adams, 30 percent; and Nixon, 20 percent. The partners have decided to liquidate their partnership by installments. Cash is distributed to the partners at the end of each month. A summary of the liquidation transactions follows: October 1. P25,000 is collected on accounts receivable; balance is uncollectible. 2. P20,000 received for the entire inventory. 3. P1,500 liquidation expense paid. 4. P40,000 paid to creditors. 5. P10,000 cash retained in the business at the end of the month. November 6. P2,000 in liquidation expenses paid. 7. As part payment of his capital, Nixon accepted an item of special equipment that he developed, which had a book value of P8,000. The partners agreed that a value of P12,000 should be placed on this item for liquidation purposes. 8. P4,000 cash retained in the business at the end of the month. December 9. P150,000 received on sale of remaining plant and equipment. 10. P1,000 liquidation expenses paid. No cash retained in the business. Required: 1. Determine the amount of cash received by each partner in October. 2. Determine the amount of cash received by each partner in November. 3. Determine the amount of cash received by each partner in December.
Problem 3 The condensed balance sheet of Alex, Jay and John, as of March 31, 2012, follows: Cash - P28,000; Other assets P265,000; Liabilities - P48,000; Alex, capital - P95,000; Jay, capital - P80,000; John, capital - P70,000. The income and loss ratio is 50:25:25, respectively. The partners voted to dissolve their partnership and liquidate by selling the other assets in installments. The amount of P70,000 was realized on the first cash sale of other assets with a book value of P150,000. After settlement with creditors, all cash available was distributed to the partners. How much was received by each partner in the cash distribution?
Problem 4 X, Y and Z are partners in a merchandising business, sharing profits and losses equally. On December 31, 2011, the partnership capital and the partners’ drawings were:
Capital Drawing
X P100,00 0 60,000
Y P80,00 0 40,000
Z P300,00 0 20,000
Total P480,00 0 120,000
The partnership was unable to collect on its Trade A/R, and it was forced to liquidate. The operating profit for 2012 was P72,000, and was all exhausted including the partnership assets. Unsettled creditors’ claims at December 31, 2012 amounted to P84,000. Y and Z have substantial private resources, but X has no available free assets. Required: The final cash payment to each partner should be: X __________ Y __________ Z __________ P78,000
Multiple Choice Questions Questions 1 through 4 are based on the following information. Partners Dennis and Lilly have decided to liquidate their business. The following information is available: Cash P100,000 Accounts payable P100,000 Inventory 200,000 Dennis, Capital 120,000 Lilly, Capital 80,000 P300,000 P300,000
Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation, half the inventory is sold for P60,000, and P60,000 of the accounts payable is paid. During the second month, the rest of the inventory is sold for P45,000, and the remaining accounts payable are paid. Cash is distributed at the end of each month, and the liquidation is completed at the end of the second month. 1. Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Dennis at the end of the first month? A. P64,000 B. P60,000 C. P24,000 D. P36,000 2. Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Lilly at the end of the first month? A. P24,000 B. P40,000 C. P16,000 D. P64,000 3. Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Dennis at the end of the second month? A. P18,000 B. P27,000 C. P36,000 D. P60,000 4. Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Lilly at the end of the second month? A. P27,000 B. P36,000 C. P18,000 D. P0 5. The capital balances, prior to the liquidation of the XYZ partnership, were as follows: X, Capital P130,000 Y, Capital 130,000 Z, Capital 100,000 X, Y, and Z share profits and losses in the ratio of 5:3:2. As a result of a loan, the partnership owes Y P80,000. Using the information above, which partner has the highest Loss Absorption Power (LAP) prior to liquidation? A. X B. Y C. Z D. Both X and Y
6. Carla, Carlo and Karen are partners with capital balance of P350,000, P250,000 and P350,000 and sharing profits 30%, 20% and 50% respectively. Partners agree to dissolve the business and upon liquidation, all the partnership assets are sold and sufficient cash is realized to pay all the claims except one for P50,000. Karen is personally insolvent, but the other two partners are able to meet any indebtedness to the firm. On the remaining claim against the partnership, Carla is to absorb. a. P40,000 b. P15,000 c. P30,000 d. P25,000
INCORPORATION OF A PARTNERSHIP Problem 1 When Disney and Charles decided to incorporate their partnership, the trial balance was as follows: Cash Accounts receivable – net Inventory Equipment – net Accounts payable Disney, Capital Charles, Capital Total
Debit P50,000 25,000 55,000 120,000
P250,000
Credit
P40,000 140,000 70,000 P250,00 0
The partnership's books will be closed, and new books will be used for D & C Corporation. The following additional information is available: 1. The estimated fair values of the assets follow: Accounts receivable Inventory Equipment
P22,000 48,000 95,000
2. All assets and liabilities are transferred to the corporation. 3. The ordinary share is P5 par. Alice and Betty receive a total of 24,000 shares. 4. Disney and Charles share profits and losses in the ratio 6:4. Required 1. Prepare the entries on the partnership's books to record a. the revaluation of assets, b. the transfer of the assets to the D & C Corporation and the receipt of the ordinary shares, and c. the closing of the books. 2. Prepare the entries on D & C Corporation's books to record the assets and the issuance of the ordinary shares.
Problem 2 The condensed balance sheet of the partnership of Korea and Japan as of December 31, 2011 showed the following: Total assets - P200,000; Total liabilities - P40,000; Korea, Capital - P80,000; Japan - P80,000. On this date, the partnership was dissolved and its net assets were transferred to a newly-formed corporation. The fair value of the assets was P24,000 more than the carrying value on the firm’s books. Each of the partners was issued 10,000 shares of the corporation’s P1 par ordinary share. Immediately after effecting the transfer of the net assets, and the issuance of share, the corporation’s share premium account would be credited for _________. Ans: P164,000
