Partnership Formation
a. Total partnership capital is equal to the fair value of the
Part 1: True or False
1) The assets contributed to (and related liabilities assumed by)
the partnership are measured in the partnership books at fair
value.
2) A bonus exists when the capital account of a partner is credited
for an amount greater than or less than the fair value of his
contributions.
3) A bonus given to a partner is treated as an adjustment to the
capital accounts of the other partners.
4) Partner A contributed cash of P100 and land with carrying
amount of P500 and fair value of P700 to a partnership. The
credit to Partner A’s capital account in the partnership books is
P600.
5) Partner B contributed land with carrying amount of P100 and
fair value of P200 to a partnership. In the partnership books, land
is debited for P200 but Partner B’s capital account is credited for
P100.
6) Partner C contributed inventory costing P500 and with a net
realizable value of P400 to a partnership. The related accounts
payable of P100 will be assumed by the partnership. The net
credit to Partner C’s capital account in the partnership books is
P300.
Part 2: Multiple Choice
1) 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 accounts?
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
2) You and I formed a partnership. The fair value of my
contribution is P100,000 while the fair value of your contribution is
P50,000. However, since you will be contributing an expertise to
the partnership, we have agreed to value that expertise.
Accordingly, we have agreed that our respective capital accounts
will be credited for equal amounts. Which of the following
statements is correct?
a. Our agreement results to a bonus of P25,000 which
relates to the valuation of your expertise. Accordingly,
we will record goodwill of P25,000.
b. Our agreement results to a bonus of P25,000. In
accordance with our agreement, I shall pay you
P25,000. Our asset contributions will be debited at their
fair values of P100,000 and P50,000, respectively.
c. Our agreement results to a bonus of P25,000 which is
treated as a capital adjustment – an increase to your
capital account and a decrease to my capital account.
My asset contribution will be debited at P75,000 while
your asset contribution will be debited at P75,000.
d. Our agreement results to a bonus of P25,000 which is
treated as a capital adjustment – an increase to your
capital account and a decrease to my capital account.
Our asset contributions will be debited at their fair values
of P100,000 and P50,000, respectively.
3) Under the bonus method, any increase or decrease in the
capital credit of a partner is
a. Deducted from or added to the capital credits of the
other partners
b. Recognized as goodwill
c. Recognized as expense
d. Deferred and amortized to profit or loss
4) 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
5) Under the bonus method,
net contributions to the partnership.
b. Total partnership capital is less than the fair value of the
net contributions to the partnership.
c. Total partnership capital is greater than the fair value of
the net contributions to the partnership.
d. Total partnership capital is less than the fair value of the
net contributions to the partnership, if the bonus is given
to the incoming partner.
6) Under the bonus method, the asset contribution of the partner
receiving the bonus is
a. Debited at an amount greater than the fair value of the
asset contributed
b. Debited at an amount lesser than the fair value of the
asset contributed
c. Debited at an amount equal to the fair value of the asset
contributed
d. Either a or b
7) Transactions between and among the partners are
a. Recorded in the partnership books
b. Not recorded in the partnership books
c. Either a or b
d. Neither a nor b
Questions 8 to 10 are based on the following information:
A and B agreed to form a partnership. A contributed cash of
P100,000 while B contributed cash of P200,000. The partnership
agreement stipulates that A and B will have equal interest on the
initial capital of the partnership and in subsequent partnership
profits and losses.
8) Which of the following statements is correct?
a. A’s contribution will be debited for P150,000.
b. The partnership’s capital after recording the contribution
of A but before recording the contribution of B is
P150,000.
c. The partnership’s capital after recording the
contributions of both A and B is greater than P300,000.
d. None of the these.
9) Which of the following statements is correct?
a. The contractual agreement is unfair because A’s
contribution is way below the agreed interest of A in the
partnership. Therefore, the contractual agreement is
void.
b. The capital balances of the partners after the
partnership formation are P100,000 and P200,000,
respectively. Any adjustment on the partners’ capital
balances to reflect the effects of the contractual
stipulations shall not be made through the partnership
books.
c. A and B shall have capital balances of P150,000 each
after the partnership formation.
d. The partnership formation will result to a debit to an
unidentifiable asset called “good wheel.”
10) Which of the following statements is incorrect?
a. The total partnership assets after the partnership
formation is P300,000.
b. The effect of the contractual stipulation is a decrease in
B’s capital balance and a corresponding increase in A’s
capital balance.
c. The contractual stipulation does not affect the debit
recording of the partner’s respective asset contributions.
d. B’s asset contribution will be debited at a decreased
amount of P150,000.
Part 3: Problems
1) On January 1, 2020, Mr. A and Ms. B agreed to form a
partnership contributing their respective assets and equities
subject to adjustments. On that date, the following were provided:
Mr. A Ms. B
Cash 28,000 62,000
Accounts 200,000 600,000
 Receivable partnership. Compute for the adjusted capital balances of the
Inventories 120,000 200,000 partners on January 1, 2020.
Land 600,000
Building 500,000 7) A and B drafted a partnership agreement that lists the following
Furniture & Fixtures 50,000 35,000 assets contributed at the partnership’s formation:
Intangible Assets 2,000 3,000 A B
Accounts Payable 180,000 250,000 Cash 20,000 30,000
Other Liabilities 200,000 350,000 Inventory 15,000
Capital 620,000 800,000 Building 40,000
The following adjustments were agreed upon: Furniture & 15,000
 Accounts receivable of P20,000 and P40,000 are Equipment
uncollectible in A’s and B’s respective books. The building is subject to a mortgage of P10,000 which the
 Inventories of P6,000 and P7,000 are worthless in A’s and partnership has assumed. The partnership agreement also
B’s respective books. specified that profits and losses are to be distributed evenly. What
 Intangible assets are to be written off in both books. amounts should be recorded as capital for A and B at the
Requirement: Provide one compound journal entry in the formation of the partnership?
partnership’s books.
8) On April 30, 2020, A, B and C formed a partnership by
Questions 2 to 4 are based on the following information: combining their separate business proprietorships. A contributed
Mr. A and Ms. B formed a partnership and agreed to divide the cash of P50,000. B contributed property with a P36,000 carrying
initial capital equally even though Mr. A contributed P100,000 and amount, a P40,000 original cost, and P80,000 fair value. The
Ms. B contributed P84,000 in identifiable assets. partnership accepted responsibility for the P35,000 mortgage
2) The partners agree that the difference in the amount of attached to the property. C contributed equipment with a P30,000
contribution and the amount of credit to the partner’s capital shall carrying amount, a P75,000 original cost, and P55,000 fair value.
be treated as compensation for the expertise that the partner will The partnership agreement specifies that profits and losses are to
be bringing to the partnership. Provide the entry to be made in the be shared equally but is silent regarding capital contributions.
partnership books. Which partner has the largest April 30, 2020 capital account
3) The partners agree that the difference in the amount of balance and how much is it?
contribution and the amount of credit to the partner’s capital shall
be treated as cash settlement between the partners. Provide the Questions 9 and 10 are based on the following information:
entry to be made in the partnership books. A and B formed a partnership. The partnership agreement
4) The partners agree that the difference in the amount of stipulates the following:
contribution and the amount of credit to the partner’s capital shall  A shall contribute noncash assets with carrying amount of
be treated as compensation for the expertise that the partner will P60,000 and fair value of P100,000.
be bringing to the partnership. How much is the unidentifiable  B shall contribute cash of P200,000.
asset to be recognized in the books for Ms. B’s expertise?  A and B shall have interests of 80% and 20%, respectively,
on both the initial partnership capital and in subsequent
5) On January 1, 2020, Mr. A and Ms. B agreed to form a partnership profits and losses.
partnership. The partners’ contributions are listed below:  No outside cash settlements shall be made between and
Mr. A Ms. B among the partners.
Cash 50,000 120,000 9) How much is the total partnership capital after formation?
Accounts 360,000 1,080,000 10) How much is the adjusted capital account of B after the
Receivable formation?
Inventories 216,000 360,000
Land 1,080,000 11) A, B and C formed a partnership. Their contributions are as
Building 900,000 follows:
Equipment 90,000 90,000 A B C
Accounts Payable 336,000 450,000 Cash 50,000 40,000 140,000
Capital 1,460,000 2,100,000 Equipmen 150,000
The partners agreed to the following: t
 The recoverable amounts of the partners’ respective Additional information:
accounts receivable are P400,000 and P760,000 for Mr. A  Although C has contributed the most cash to the partnership,
and Ms. B, respectively. he did not have the full amount of P140,000 available and
 The inventory contributed by Ms. B includes obsolete items was forced to borrow P40,000. The partners agreed that half
with a recorded cost of P20,000. of the amount borrowed shall be assumed by the
partnership.
 The land contributed by Mr. A has an attached mortgage of
P180,000. The partnership shall assume the mortgage.  The equipment contributed by B has an unpaid mortgage of
P20,000, the repayment of which is not assumed by the
 The equipment contributed by Ms. B has a fair value of
partnership.
P130,000.
 The partners agreed to equalize their interest. Cash
 Mr. A has an unrecorded accounts payable of P100,000. The
settlements among the partners are to be made outside the
partnership assumes the obligation of settling that account.
partnership.
Requirement: Provide one compound journal entry in the
Which partner shall receive cash payment from the other
partnership’s books.
partner(s) and how much?
6) On January 1, 2020, Mr. A and Ms. B agreed to form a
12) A and B agreed to form a partnership. The partnership
partnership and share profits and losses in the ratio of 3:7,
stipulates the following:
respectively. Mr. A contributed a parcel of land that cost him
P10,000. Ms. B contributed P40,000 cash. The land was sold for  Initial capital of P300,000.
P18,000 on January 1, 2020, immediately after formation of the  A 25:75 interest in the equity of the partnership.
A contributed P100,000 cash while B contributed P200,000 cash.
Which partner should provide additional investment (or withdraw
part of his investment) in order to bring the partners’ capital
credits equal to their respective interests in the equity of the
partnership and how much?

-JMR