PARTNERSHIP FORMATION AND OPERATION

I. On 1 November, 2013, Ken Langer and Ann Walters formed a partnership. Langer contributed some
business assets and the liabilities assumed by the partnership, which are listed below at both fair value and
carrying amount.
Fair Value
Carrying Amount
Cash at bank
52,800
52,800
Marketable securities
47,520
36,960
Accounts receivable
54,000
56,760
Inventory
135,960
132,000
Equipment
342,000
33,000
Account payable
105,600
105,600
Walters contributed a building worth P 396,000, land worth P 138,000 and a P 330,000 mortgage was taken
over by the partnership. They agreed to share profits and losses in the ratio of 6:4. During the first year of the
partnership, Langer invested P 66,000 in the business and withdrew P 45,600. Walters invested P 96,000 and
withdrew P 14,400. The partnership had a net profit of P 81,600. Retained profits accounts are not used.
Required:
1. Prepare the journal entries to record the initial investment of both partners.
2. Prepare a statement of financial position as at 1 November, 2013.
3. Prepare a statement of partners equity for the year ended 31, October 2014.
II. Selected accounts from the trial balance as at 30, June 2013 of the partnership of W. Earp, J. Earp and D.
Holiday are as follows:
Debit

Credit
13,050

Loan State Finance Ltd.

Profit & Loss Summary (after usual adjusting
and closing entries for net profit
determination)
41,925
Salary, J. Earp
7,500
W. Earp, Capital
49,500
W. Earp, Retained profits
1,050
J. Earp, Capital
24,750
J. Earp, Retained profits
525
D. Holiday, Capital
16,500
D. Holiday, Retained profits
675
Advance, D. Holiday (repayable in October 2014)
6,600
Further adjustments for the financial year ended 30 June, 2013 have yet to be made as follows:
a. Interest accrued to State Finance Ltd. P 1,100.
b. The partnership accountant has duly paid J. Earps agreed salary as part-time manager (P 7,500 per
annum) but was uncertain how to charge it.
c. Partners have agreed to:
6% per annum interest on fixed capitals.
7% interest on total drawings for the year which were: W. Earps P 12,000; J. Earps P 6,750
and D. Holiday P 8,250.
6% per annum interest on advance from Holiday.
Profit/losses to be shared , 1/3, 1/6 to W. Earp, J. Earp and D. Holiday, respectively.

Required:
1. Complete the Profit and Loss Summary account.
2. Prepare Profit Distribution account.
3. Complete each partners Retained Profits account after all adjustments.
III. Brown, Ball and Black are in partnership sharing profits and losses in the proportion of a half, one-third and
one-sixth, respectively. Their capitals at July 1, 2013, the date of commencement of business, were Brown P
84,000, Ball P 70,000 and Black P 35,000, all contributed in cash.
The partners did not keep a complete set of accounting records and at June 30, 2013 their assets and liabilities
were valued as follows before adjustments (a) to (d) below: Inventory P 115,500; Accounts Receivable P
49,560; Bills Receivable P 17,920; Plant and Equipment P 40,320; Premises P 64,400; Bills Payable P 8.400;
Account Payable P 34, 160; Bank Overdraft P 18,620.
Drawings made by the partners in anticipation of profits for the year ended June 30, 2012 amounted to Brown
P 7,000, Ball P 5,600 and Black P 4,200. Brown paid in an additional P 16,800 on January 1, 2013.
Required:
1. Prepare a statement of distribution of profit for the year to each partner after making the following
adjustments:
a. depreciation on plant and equipment, 10% and on business premises, 2% (use straight line
method)
b. allowance for doubtful debts equal to 4% of accounts receivable and bills receivable
c. interest on drawings: Brown P 168; Ball P 154; Black P 140
d. interest on capital at 6% per annum
2. Prepare a statement of financial position for the partnership as at June 30, 2014.
IV. Able, Babel and Cable are in a hardware business trading as ABC Co. The partnership agreement includes
the following provisions:
a. Interest on capital is to be allowed at 6% per annum.
b. Salaries are to be allowed: Able, nil; Babel, P 8,000; Cable, P 6,000.
c. Interest is to be allowed on advances by partners at 8% per annum.
A trial balance at June 30, 2013, after the activities of the preceding year had been recorded but before the
stock take, is shown below:
ABC Company
Trial Balance
as of June 30, 2013
Cost of goods sold
Cash at bank
Accounts receivable
Allowance for doubtful debts
Inventory
Furniture, plant and equipment
Accumulated depreciation furniture, plant and
equipment
Prepaid insurance
Prepaid rent
Account payable
Advance from Able (due for payment on April 15, 2012)

Debit
P 300,000
6,000
120,000

Credit

P 3,000
225,000
200,000
125,000
2,500
4,000
100,000
80,000

Able, Capital
Babel, Capital
Cabel, Capital
Able, Retained profits
Babel, Retained profits
Cabel, Retained profits
Sales revenue
Selling and general expenses
Discount received
Proceeds from sale of motor vehicle
Carrying amount of motor vehicle sold

80,000
40,000
40,000
2,000
13, 000
10,000
440,000
75,00
500
12,000
13,000
P 945,500

P 945,500
Additional information:
a. Merchandise o P 400 purchased on credit was received on June 30, 2013, but had not been recorded
in the accounts; nevertheless, it had been included in the physical stock take of P 223,000.
b. Insurance and rents to be expenses were assessed at P 1,200 and P 2,200, respectively.
c. Depreciation expense to be brought to account, P 8,700.
d. Wages owed but not paid amounted to P 3,600.
e. Partners Babels and Cabels salaries had not been brought to account.
f. Interest on Ables advance had not been brought to account.
g. Verification of accounts receivable revealed that the balance of the allowance for doubtful debts should
be increased to P 3,600. The increase is related to sales revenue recognized in the current period.
Required:
1. Prepare the statement of financial performance for the period ended June 30, 2013.
2. Prepare a Profit Distribution account for the same period.
3. Set out the statement of financial position as at June 30, 2013, properly classified.
V. On January 2, 2010, Dave and Don formed a general partnership. Below were the movements of their
capital balances during the year:
Investment, January 2
Additional investment, October 30
Withdrawals, December 1

Dave
450,000
25,500
(12,000)

Investment, January 2
Withdrawals, July 1

Don
550,000
(100,000)

Prepare a Schedule of Profit or Loss under the following independent assumptions:

1. Net income is P 125,000. The partnership is silent as to the sharing of net income or loss.
2. Net income is P 310,000. They agreed to provide for : 10% interest on average capital balances;
monthly salary of P500 and P800 to Dave and Don respectively; 20% bonus based on income after
interest, salaries and bonus to partners (shared equally); remaining profit is given at 1:4 to Dave and
Don, respectively.
3. Net loss is P 100,000. They agreed to provide for 15% interest on ending capital balances; salary to
Don of P 100,000; 10% bonus based on net income after salaries and interests (shared equally); any
balance is distributed in the ratio of beginning capital.
4. Net income is P 124,000. Monthly salary is P 1,000 each to the partners; 10% interest on beginning
capital balances; 15% bonus based on income after salaries and interests (shared equally); any
balance is divided equally.
5. Taxable income is P 54,000. Tax rate is 32%. Bonus to Dave is treated as part of operating expenses
and calculated at 20% on net income after bonus but before taxes. Remaining profit is distributed
equally.
6. Taxable income is P 84,000. Tax rate is 32%. Bonus is treated as part of operating expenses and
calculated at 30% on net income after deduction for bonus and taxes (shared equally). Remaining profit
is distributed equally.