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    Chapter 1 - Partnerships - Basic Considerations and Formation PDF

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    Chapter 1 Partnerships: Basic Considerations And Formation Partnerships are a popular form of business because they are easy to form and because they allow several individuals to combine their talents and skills in a Particular business venture. In addition, partnerships provide a means of obtaining more capital than a single individual can obtain and allow the sharing of risks for rapidly growing businesses. Partnerships are particularly common in the service professions, especially law, medicine, and accounting. These professions have generally not adopted the corporate form of business because of their long-standing tradition of close professional association with clients and the total commitment of the professional's association with clients and the total commitment of the professional's business and personal assets to the propriety of the advice and . service given to clients. Definition of a Partnership The Partnership Law is the general governing authority for partnerships. Accountants ~ advising partnerships must be familiar with this law because it describes many of the rights of each partner and of creditors during creation, operation, and liquidation of the partnership. Article 1767 of thé Partnership Law embodies the definition of partnership. It states that “‘by the contract of partnership, two or more persons bind themselves to contribute money, property or industry to acommon fund with the intention of dividing the profits among themselves.” This definition encompasses three distinct factors: 1. Association of Two or More Persons, The “persons” are usually individuals. Any natural person who possesses the right to enter into a contract can become a partner. I y 2 Chapter 2. To Carry Onas Co-Owners. Apartnership isan aggregation of partners individyay rights. This means that all partners are co-owners of partnership property and are co-owners of the profits or losses of the partnership. i 3. Business for Profit. Apartnership may be formed to perform any legal business, trade or profession, or other service. However, the partnership must attempt to makea profit; therefore, non-profit organizations may not be partnerships. Characteristics of a Partnership Before taking up the accounting problems encountered in partnerships, itis helpful to know the important characteristics of the partnership form of organization. Separate Legal Personality, Article 1768 of the Partnership Law states that the partnership has a juridical personality separate and distinct from that of each of the partners. A partnership may, therefore, acquire property in its own name and may enter into contracts, Ease of Formation. The formation of a partnership does not require as many formalities asa corporation. The partnership may be created by oral or written agreement between two or more persons, or merely by inferences from the implication of their conduct. Co-ownership of Partnership Property and Profits. All assets invested in the partnership become the property of the partnership. The right of each partner to possess partnership property for partnership purposes is equal to the right of each of the other partners. Each partner has a proprietary interest in the partnership. This interest refers to‘each partner’s share in the earnings and in the capital. Limited Life. Any change in the agreement of the partners terminates the partnership contract. A partnership may also expire any time when there is achange inthe relationship, of the partners due to the death, withdrawal, bankruptcy or incapacity of a partner. No one can be forced against his will to continue asa partner regardless of the agreed terms of operations. Other factors which may bring a partnership to an end are the expiration of the period specified in the partnership contract and the admission of a new partnet. Mutual Agency. Each partner has an equal right to act for the Partnership and to enter into contracts binding upon it, as long as he acts within the normal scope of business operations. Each partner isa principal as well as an agent of the partnership. Partnerships: Basic Considerations and Forniation 3 Unlimited Liability: Each partner may be held personally liable forall the debts of the Partnership. All of his business and personal properties may be used for the settlement of partnership liabilities. There is, however, a special type of partnership, called limited Partnership, wherein certain partners are allowed to limit their personal liabilities to the extent of their capital contributions only. Entity Versus Proprietorship Theories ‘The proprietorship theory views the assets ofa business as belonging to the proprietor, the liabilities as debts of the proprietor, and the income of the business as an increase in the proprietor’s net worth (capital). In practice, however, proprietorship assets and liabilities are treated separately from the personal assets and liabilities of the proprietor. Thus, in practice, proprietorship are treated as separate entities, even though, in theory, they are not. On the other hand, small partnerships are usually viewed as a combination of two or more proprietorships, and the “proprietorship” theory would be the pertinent one for firms of this size. The death of one partner would usually cause a dissolution especially if there are only two partners. Despite the many similarities between partnerships and proprietorships (i.c., unlimited liability, dissolution upon death), partnerships are generally viewed as entities separate and apart from the individual partners. Assets are viewed as belonging to the partnership and not to the individual partners. Income earned by the partnership is usually viewed as income to the “entity” with each partner entitled to a distributive share of the income. Partnership Agreement The formulation ofa partnership agreement must be done at the inception of organization of the partnership. This agreement is the framework within which the partners are to operate or conduct partnership business — from formation to operations then to the eventual dissolution and liquidation of the partnership. Observations of these details will help minimize, if not eliminate, the confusion and disputes that may arise ‘between or among the partners. The partnership agreement may be oral, implied or written. However, it is best that the business of the partnership be organized on the basis of a written contract. It is not possible to cover in the partnership contract every issue which may later arise. Among the more significant points that must be covered by the partnership agreement are: 2 ; The date on which the partnership © The drawings or salaries to be allowed to eac Chapter | nature of the partnershi 2 id Names of the partners, and the name an rakeseffect and the duration oi ontract! contract; rocedure for valuing noncasy, 4 5 thepl tal to be invested by each partner, b es oenatons, the treatment of any contribution (whether as capital oras loan) in excess of agreed amounts, and the penalties for failure to contribute ang maintain the agreed amountof capital); . The authority, the rights and duties ofeach partner, | The accounting period to be used, the nature of accounting records, preparation of financial statements, and auditing of partnership books. . The method of sharing profits and losses including the frequency of income itand distribution to. ers. Renna, measurement and distri partn h partner and the disposition of partner’s salary and drawing accounts including the penalties, ifany, for excessive withdrawals; and . Provision of the arbitration of disputes and the liquidation of the partnership at the termination of the agreed time including those concerning the contingency of a partner’s death. Especially important are the rules on the valuation of assets including goodwill and the method of settlement with the estate ofa deceased partner. Similar provisions should be made with respect to a partner’s retirement. Partnership agreements are usually with the aid of or in consultation with lawyers and certified public accountants. Some of the areas where the partners may seek the advice ofan accountant are as follows: lL 2. ‘The determination of the current fair values to be assigned to the noncash assets initially invested to the parmership. The ascertainment of the individual partner's initial interest in the partnership copital. |. The formulation of the plan for sharing in the profits or losses. . The determination of the methods to compute the interest of a withdrawing partner asa result of his retirement or death. A fact ‘dered it of ital iste necesityofrevlung ie assesandtesrerdae intangible asset values such as goodwill. js iniare ‘The determination of the closing procedures to not income and withdrawals are to be closed t ofthe accounting period, thereby, increasing be followed, that is, whether or © the capital account at the end ‘or decreasing the total capital. ps. Basic Considerations and Formation J Partuer’s Ledger Accounts 1 na partnership, although itis possible to operate with only one equity account for each partner, it is desirable that the following partner's accounts be maintained: 1. Capital accounts 2. Drawing or personal accounts 3. Account for loans to or from partners Capital and drawing accounts. The original investment of each partner is recorded by debiting the fair value of the assets invested, crediting the liabilities assumed by the firm, and crediting the partner’s capital account for the net assets contributed. Subsequent to the original investments, transactions between the partnership and the partners will result to changes in the respective partner’s ownership interest. These changes are summarized in the respective partner’s capital and drawing accounts. A partner’s equity is increased by the additional investment of cash or other property and bya share in the partnership profit. A partner’s equity is decreased by the withdrawal of cash or other assets and by a share in the partnership loss. Normally, increases or decreases in capital that are interpreted as permanent capital changes are recorded directly in the capital account. Withdrawals, which are considered equivalent to salaries, made by the partner in anticipation of profits, nd other increases or decreases of relatively minor amounts are recorded in the drawing account. At the end of the accounting period, the debit and credit balances in the drawing account are then closed to the respective partner’s capital account. Also, during this period, the profit or loss as shown by the Income Summary account is distributed in accordance with the profit and loss sharing agreement. The share of each partner in the profit or loss is recorded in their respective capital account. Individual partner’s capital and drawing balances are combined to reporting each partner’s interest in the statement of financial position. ‘The transactions that are usually debited and credited to partner’s capital and drawing accounts may be summarized as follows: ‘The capital account is credited for: a, Original investment b. Additional investment. : : c. Partner’s share in the profits (sometimes this is closed to the drawing account), 6 eee eee The capital account is debited for: a. Permanent withdrawal of capital. ihe period ; e period. b. Debit balance ofthe drawing account atthe end O° PT drawing account), ¢. Partner’sshare in the losses (sometime: this is clo: ‘ Thedrawing accountis credited for: rant. a. Partnership obligations assumed or paid by the pat” ; b._ Personal funds or claims of partner collected and ee ey ed adaraiond & Periodic partner's salaries depending on the accounting, Ist ‘Procedures agreed upon. The drawing account is debited for: 2 - a, Withdrawal of assets by the partners in anticipation. ofnet income. | by. Partner's personal indebtedness paid or assumed by the partnership. c. Funds or claims of partnership collected and retained by the partner. Loans to and from partners. A withdrawal bya partner ofasubstantial amount with the assumption of its repayment to the firm may be debited to a Receivable from partner account rather than to the partner’s drawing account. On the other. hand, an advance to the partnership by a partner with the assumption of its ultimate repayment by the partnership is viewed as a loan rather than as an increase in the capital account. This type of transaction is credited to the Loans Payable to partners account or Notes Payable if the loan is evidenced by a note duly signed in the name of the partnership. ACCOUNTING FOR THE FORMATION OF A PARTNERSHIP The formation of a partnership presents relatively few difficult i Accounting entries to record the formation will depend upon ie ead formed. A partnership may be formed in several ways, namely: a , 1, Formation ofa partnership for the first time. 2. Conversion ofa sole proprietorship to a r i] Partnershi a. Asole proprietor allows another indivi r Gieusuanes individual, who has no business of his ow" b. Two ormore sole proprietors form partn a i 3 partnershi 3. Admission ofa new partner (This is discussed ape 3). Partnersh asic Considerations and Formation 7 Partnership Formation for the First Time - Initial Investments Cash Investments Initial cash investments in a partnership are recorded in the capital accounts maintained for each partner. For example, Abad and Besa each invests P100,000 cash ina new Partnership. The entry to record the investments would be: Cash 200,000 Abad, capital 100,000 Besa, capital 100,000 To record the investments of Abad and Besa. Noncash Investments When property other than cash is invested ina partnership, the noncash property is recorded at the current fair value of the property at the time of the investment. Theoretically, independent appraisals should be made to determine the fair value. Despite the theoretical soundness of the independent appraisal procedure, the fair value on noncash asset is determined by agreement of the partners. The amounts involved should be specified in the written partnership agreement: Illustration. Assume that Pedro and Jose forma partnership for the first time. Their investments are as follows: Pedro Jose (Fair Value) (Fair Value) Cash P70,000 = Merchandise inventory (cost, P10,000) P20,000 Computer equipment (cost, P50,000) 30,000 an : ; 70,000 50,000 Chapter | 8 The journal entries to record the investments are as Follows: Cash 70,000 70 ton Pedro, capital : To record initial investment of Pedro Merchandise inventory nN Computer equipment 3 50,000 Jose, capital ‘ ” To record initial investments of Jose at their fair values at their current fair value ensures that any Recording partners’ noncash investments Teil be equitably distributed in gains or losses on the subsequent sale of the property accordance with the partnership agreement. Bonus or Goodwill on Initial Investments Valuation problem arises when partners agree on capital interests that are not equal to their net assets invested. For example, in the above illustration, the partners agree that each partner is to receive equal interest, even though Pedro invested P70,000 and Jose contributed, P50,000 in identifiable net assets. To meet this condition, the capital accounts of Pedro and Jose should be adjusted using two methods — the bonus method or the goodwill method. Under the bonus method no assets is recorded in the partnership books. To equalize capital balances to P60,000, capital transfer of P10,000 from Pedro to Jose is made. The only entry necessary is as follows: Pedro capital 10,000 Jose capital 10,000 To accomplish equal capital interests of 60,000 by recording a P10,000 bonus to Jose from Pedro. The bonus method assumes that Jose’s business connections does not constitute a recordable partnership asset with a measurable cost. Hence, this approach recognizes only the assets that are physically contributed to the business (such as cash, inventory, equipment). Although these contributions determine total partnership capital the recognition of specific capital balances is viewed as an independent process based solely on the partners’ agreement. Because the initial capital balances result from negotiation, they do not need to correspond directly with the individual investments. Inthe entry above, Jose received a capital bonus of P : iti of business connections he brought into the patente En Peto preenguie Partnerships: Basic Considerations and Formation 9 When the goodwill method is used, thee by recording goodwill of P20,000 with of Jose. The entry is: . Merchandise inventory of Henry is to be increased by P1,000. ©. The furniture and fixtures of Gerry and Henry are to be depreciated by P600 and P900 respectively. Books of Henry are used as the Partnership Books. Ifthe books of Henry are to beused as the partnership books, the accounting procedures to record the formation of the partnership are: Books of Gerry \. Adjust the accounts of Gerry as agreed. Adjustments are made to his capital account. 2. Close the books. Books of Henry (Now the partnership books) 1, Adjust the accounts of Henry as agreed. Adjustments are made to his. capital account. 2. Record the investment of Gerry, his adjusted assets and liabilities, ‘The journal entries to record the formation of the partnership, using the above. accounting procedures are: Books of Gerry 2016 June 30 (1) Gerry capital 1,600 Allowance for bad debts 1,000 Accu. depreciation — furniture and fixtures 600 To record adjustments of assets Chapter 1 ein (2) Accounts payable 3 es Allowance for bad debts 500 Accu, depreciation — furniture and fixtures 4,400 Gerry capital 7 5,000 Cash 10,000 Accounts receivable 8,000 Merchandise inventory 6 000 Furniture and fixtures i To close the books. Books of Henry (Now the books of the partnership) 2016 | June 30 (1) Merchandise inventory 1,000 Henry capital 700 ‘Allowance for bad debts 800 ‘Accu, depreciation — furniture and fixtures 900 To adjust assets of Henry. | (2) Cash 5,000 | Accounts receivable 10,000 | ‘Merchandise inventory 8,000 | Furniture and fixtures 5,400 Accounts payable 3,000 ‘Allowance for bad debts 1,000 Gerry capital 24,400 To record investments of Gerry. i | | New Partnership Books will be used. If new books are to be opened for the partnership, the following accounting. procedures may be used to record the formation of the partnership. Books of Gerry and Henry 1. Adjust the accounts of Gerry and Henry according t ir agree! ‘Adjustments are to be made to their capital accounts. — mae 2, Close the books. Partnerships: Basic Considerations and Formation New Book of the Partnership 1. Record the investments of Gerry, his adjusted assets and liabilities. 2. Record the investments of Henry, his adjusted assets and liabilities. Using the accounting procedures, the journal entries to record the formation of the partnership under this assumption are: Books of Gerry 2016 June 30 (1) Gerry capital 1,600 Allowance for bad debts 1,000 Accu. depreciation — furniture and. fixtures To record adjustments of assets. (2) Accounts payable 3,000 Allowance for bad debts 1,000 Accu. depreciation ~ furniture and fixtures 600 Gerry capital 24,400 600 Cash 5,000 Accounts receivable 10,000 Merchandise inventory 8,000 Furnitures and fixtures 6,000 To close the books. Books of Henry 2016 June 30 (1) Merchandise inventory 1,000 Henry capital 700 Allowance for bad debts Accumulated depreciation — furn. and fixt. To record adjustments of assets 800 900 18 (2) Accounts payable 5 Allowance for bad debts WO Accumulated depreciation — furn. and fixt Henry capital Cash Accounts receivable Merchandise inventory Furniture and fixtures To close the books. 24,300 New Books of the Partnership 2016 June 30 : (1) Cash 5,000 Accounts receivable 16,000 Merchandise inventory 8,000 Furniture and fixtures 5.400 Accounts payable 3.000 Allowance for bad debts 1,000 Gerry capital 24,406 To record the investments of Gerry. (2) Cash 4,000 Accounts receivable 8,000 Merchandise inventory 11,009 Furniture and fixtures 3.100 Accounts payable 6000 Allowance for bad debts 300 Henry capital 24.300 To record the investments of Henry ‘Take note that the Furniture and Fixtures accounts are recorded net of the accumulated depreciation. 19 ia Statement of financial position of the partnership after the formation is as follows: Hlustration 1-4 GH Parmership Statement of Financial Position June 30, 2016 Merchandise inventory Furniture and fixtures Total assets Liabilities and Equity Accounts payable Gerry capital Henry capital Total liabilities and equity Key Observation from the Illustrations, Note that the partnership is an accounting entity separate from each of the partners, and that the assets invested are recorded at their current fair values at the time of the formation. No accumulated depreciation is carried forward to the partnership. All liabilities are recognized and recorded. The capital of the partnership is the sum of the individual partners’ capital accounts and isalso the value of the partnership's net assets. The fundamental accounting equation (assets less liabilities equals capital) is used often in partnership accounting, Each partner’s capital interest recorded does not necessarily have to equal his capital contribution. The partners may decide to divide the total capital equally regardless of the actual contributions. The key point is that the partners may allocate the capital contributions in any manner they desire. The accountant must be sure that all partners agree to the allocation and must then record it accordingly. 1. 2. i that is considered a permanen, Apartner’s withdrawal of assets froma ri 5: reduction in the partner's equity is debited to partner Drawing account Retained earnings account Capital account Loan receivable account pe oe The partner’s drawing accounts are’ used: a. Torecord the partner's salaries a . Toreduce the partner’s capital account balances at the end of the period. b, c. Inthe same manner as the partners’ loan accounts. ; : d. Torecord the partners’ share ofnet income: or loss for an accounting period. Apartner’s drawing accounts: an expense account acapital account acontra-capital account aliability account ‘Saige |. A partnership is an association of two or more persons who carry on as ¢0- ‘owners ofa business for profit. The n Sa ne Petons wo form the partnership may be Tl. Corporations IIL. Fraternal nonprofit organizati Tony. Tand I. 1,1, and I. Tand IL. Beep Partnerships: Basic Considerations and Formation 5. A partnership isa (an): aoe 1. Accounting entity. Il. Taxable entity, Tonly. Honly. Neither or IL. |. Both Tand IT . Partner X contributed equipment to the XYZ partnership. The equipment cost, P60,000 with accumulated depreciation of P 10,000 but had a fair value of P70,000 at the date the partnership received it. At what amount should the equipment be reported? a. b. c. d. . P70,000 P60,000 - P10,000 |. P50,000 Which of the following accounts can be found in the MN partnerships’ general ledger? a b. & d. I. Receivable from M Tl. Mdrawing TI. Mloan Tonly. TandI. I, I, and I. and I. Which of the following statements about partnership accounts is true? a. Two accounts are generally maintained for each partner, a drawing account and a capital account. The drawing account is credited with the partner’s withdrawals of cash or other assets during the period. ._ Answer (a) is correct but (b) is false. Answers (a), (b), and (c) are all correct. 10. 12. Chapier iis generally equal to Partner’s interest in a partnership is gene™@) a. The fair value of net as b. The sum of the fair valu increased by any liabilities of other P personal liabilities that are assumed by c. The sum of the bases of the individual assets th firm, decreased by the partner’s share of partners’ d. The unamortized cost of the assets to the partner. ate of contribution. : etsat date e stethe partner contributes to the firm, ees ariners assumed and decreased by any other partners. | ‘he partner contributes to the hip liabilities. A ship is true? Which of the following statements, conceming partnership is true’ ip is i and distinct from the individual partners, a. Apartnership isa legal entity, separate and distinct from the Individual partnersare jointly liable forthe debts and obligations of partnership, cc. Income tax is levied on the individual partners’ shares of the net income ofa partnership and is reported in their personal tax returns. d. Allofthe above is true. + On July 1,2016, Long and Short formed a partnership, Long contributed cash. Short, previouly a sole proprietor, contributed property other than cash, including realty subject to amortgage, which the partnership assumed. Short’s ‘capital account of July 1,2016, should be recorded at: Short’s book value of the property a July 1,2016, - Short’s book value ofthe property less mortgage payable at July 1, 2016. The fair value of the property less the: mortgage payable at July 1, 2016. |. The fair value of the property at July 1,2016, A partnership is formed by two individuals who i i Property other than cash that is Part of Liner uslysole Te the initial , voi recorded for financial accounting p poser ene inthe partnerships a. Proprietor’s book values or the fai investment hicheverith te ie fair value of the Property at the date of the b. Proprietor’s book values or the fait investment, whichever is lower. Srvalue ofthe Property at the date of the Proprietor’s book values of the ; 4. Fair value ofthe property atthe ae wat the ata of investment. nt. ae op 2 the inves Partnerships. Basic Considerations and Formation Zs 13. On April 30, 2016, Apple, Berry and Cherry formed a partnership by combining their separate business proprietorships. Apple contributed P50,000 cash, Berry contributed property with a P36,000 book value, a P40,000 original cost, and P80,000 fair value. The partnership assumed the P35,000 mortgage attached to the property. Cherry contributed equipment with a P30,000 carrying amount, a 75,000 original cost, and P55,000 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, 2016, capital account balance? poge g 3 . All capital account balances are equal. 1-1: 1-2: ship and agreed to share , ia formed a partners P ted On May 1 2016, Jon od ey sexpet. 18e CO a that cost him P50,000. Mariacontributed 200. rafter the formation of th Sold for P5000 on May 1, 2016 immediate es eant en partnership. What amount should be recorded in 7 formation of the partnership? a. 55,000 6. PS1,500 c. P60,000 d. P50,000 i i . They agree that Red Red, White, and Blue form a partnership on May 1, 2016. nat Re i i pment with a total fair value of P40,000; White will aaercbat ec tn value of 80,000: and Blue will contribu contribute deli ipment with a fair v cash. [Blue venta onettind interest in the capital and profits, he should contribute the following of cash: a. P 40,000 6. P 60,000 c. P120,000 d. P180,000 Mateo and Julio formed a partnership on April 1 and contributed the following assets: Mateo Julio Mateo lio Cash 300,000 eronon 4et___________ 00000 at April | should be: a. P350,000 5. 300,000 c. P400,000 d. 450,000 . Partnerships: Basic Considerations and Formation 25 14: 1-6: Elsa and Perla form anew partnership. invests P300,000 in cash for her 60 Percent interest in the capital and profits of the business. Perla contributes land that has an original cost of P40,000 anda fair market value of P70,000, and a building that has a tax basis of PS0,000 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 Perla contribute? a. P 40,000 6. P 80,000 c. P110,000 4, P150,000 Anton and Bauzon formed 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 the capital accounts, Bauzon’s intangible assets should be debited for: a. P46,000 6. P16,000 c. P 8,000 d. Zero Reyes and Santos drafted a partnership agreement that lists the following assets contributed at the partnership formation: / Contributed by Reyes Santos Cash 200,000 300,000 Inventory - 150,000 Building ~ 400,000 Equipment 150,000 - The building is subject to a mortgage of P100;000, which the partnership has assumed. The partnership agreement also specifies the profits and losses are to be distributed evenly. What amounts should be recorded as capital for Reyes and Santos at the formation of the partnership? Reyes Santos a. P350,000 — P850,000 6, 350,000 P750,000 c. P550,000 — P550,000 d. P600,000 600,000 Chapter j ae, 1-7; 1-8: 1-9: a bining the; On April 30, 2016, AA, BB and CC formed ot "750,000 a separate business proprietorships. AA contributes foatee contributed property with a P36,000 book value, @ a 000 ae oe be P80,000 fair value. The partnership accepted responsi” 1 Wr MAO mortgage attached to the property. CC contributed equipme en .000 book value, a P75,000 original cost and P55,000 fair value e Partnership agreement specifies that profits and losses are to be share ; equal 7 Dut is silent regarding capital contributions. Which partners has the largest April 30, 2016, capital balance? a AA 6. BB « CC d. All capital account balances are equal PP, RR, and SS are new CPA’s and are to form a partnership. PP is to contribute cash of P50,000 and his computer originally costing P60,000 but has a second hand value of P25,000. RR is to contribute cash of P80,000. SS, whose family is selling computers, is to contribute cash of P25,000 and a brand new computer witha regular selling price of P60,000 but which cost is P50,000. Partners agree to share profits equally. The capital balances upon formation are: PP RR SS a. P 75,000 80,000 85,000 b. P110,000 P80,000 P75,000 c. P 80,000 P80,000 80,000 d. P 83,333 88,333 P88,334 Maria and Nora entered into a partnership on March 1, 2016 by investing the following assets: ee ee Maria . Nora Maria ora Cash P 30,000 P = Merchandise Inventory 7 . 50,000 Computer Equipment Furniture and Fixtures 200,000 160,000 ann Partnerships: Basic Considerations and Formation 27 1-9: Continued 1-10: LH: The agreement between Maria and Nora. provides that profits and losses are to be divided into 40% to Maria and 60% to Nora, and that the partnership is to assume a liability on the computer equipment of P60,000. The partners further agree that Norais to receive a capital credit equal to her profit and loss ratio. How much cash is to be invested by Nora? a. P135,000 5. P145,000 c. P155,000 ad. PI30,000 Roy, Sam and Tim decided to engage in a real estate venture asa partnership. Roy invested P140,000 cash and Sam provided an office and furnishings valued at P220,000. (There is a P60,000 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. P 50,000 6. Zero c. P140,000 d. P100,000 Lara and Mitra formed a partnership on July 1, 2016 and invested the following assets: Lara Mitra Cash 130,000" P200,000 - 50,000 Computer Equipment The computer equipment has a note payable amounting to P1 10,000, which was cared 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 the partnership is: a. PI10,000 6. P120,000 c. P100,000 d. P130,000 2: 2 Chapter 1 sas formed on March 31, 2016. At thay The partnership of Perez and Reyes was formed on WMG) dlate, Perez invested P50,000 cash and office OOO ml Rieke Reyes invested 170,000 eash, merchandise valued ae (hich the ures ed at P100,000, subject to a notes payable of P50, ive profituendlicee” assumes). The partnership provides that Pe to paws oul inten 25:75, respectively. The agroement further provides' oodwi spectively Theagecmen fate provides oodulland bonus method, what is the total capital ofthe partners after the formation? have, an equal interest in the partnership capi Bonus Method Goodwill Method 4. P310,000 P460,000 5. -P360,000 P510,000 CG P300,000 P410,000 d. P350,000 P400,000 2 Ruiz and Pefia are combining their separate businesses to form a partnership, Cash and noncash assets are to be contributed for a total capital of P300,000, The noncash assets to be contributed and the liabilities to be assumed are: Ruiz Pena Book Fair Book Fair value value value value Accounts Receivable 20,000 —_P20,000 = = Inventories 30,000 40,000 P20,000 25,000 Equipment 60,000 45,000 40,000 50,000 Accounts Payable 15,000 15,000 10,000 10,000 ‘The partner's capital accounts should be equal after all the: ‘contribution of assets and the assumption of liabilities. How much cash sto be contributed by Ruiz? a. P150,000 b. P 60,000 c. P210,000 d, P 85,000 | Partnerships: Basie Considerations and Formation 29 1-14: 1-15: On March 1, 2016, Cruz.and Ferrer formed a partnership with each contributing the following assets: eee Cruz Ferrer Cash 30,000 70,000 Machinery and equipment 25,000 75,000 Building = 25,000 Furniture and fixtures 10,000 - The building is subject to a mortgage loan of P90,000, which is to be assumed by the partnership. The partnership agreement provides that Cruz and Ferrer share profits and losses 30 percent and 70 percent, respectively. Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio, and using Ferrer’s capital as the base, how much cash isto be invested by Cruz? a. P19,000 6. P30,000 c. P40,000 d. PS55,000 The statement of financial position as of July 31,2016 for the business owned by C. Borja shows the following assets and liabilities: Cash 2,500 Accounts Receivable 10,000 Merchandise Inventory 15,000 Fixtures 18,000 Accounts Payable 6,000 Itis estimated that 5% of the receivables may prove uncollectible. Merchandise inventory includes obsolete items costing P5,000 of which P2,000 might still be realized. Depreciation has never been recorded: the fixtures are two years old, have an estimated useful life of 10 years, and would cost P20,000 if currently |. D. Arce is to be admitted as a partner upon his investment of P20,{ cash and P10,000 worth of merchandise. What is the total assets of] the partnership? a. P70,500 b. P48,000 c. P67,500 d. P74,000 30 1-16: 1-17: Chapter 1 dez for an interest in his business, ats Mende? 56,400 The following On September 30, 2016, Lope: ne partnership: On this date, Lopez's capital account shows were agreed upon before the forms ail 000 1. Prepaid expenses of P17.500 and accrued expenses of P5,000 are to be Lopez: amounting to P100,000 recognized. swakieoll 6 of the outstanding accounts rece! yable 0: istoberecognizedasuncollectibles. ip andi 3. Mendezis to be credited with a one-third interest 1m the arin ership and is to invest cash aside from the P50,000 worth of merchandise. sted by Mendez and the total capital of the The amount of cash to be inves partnership are: @. P32,950 and P248,850 respectively. 5. PS5,300 and P221,200 respectively. c. P82,950 and P248,850 respectively. d. P32,950 and PI71,200 respectively. Moran and Nakar entered into a partnership on February 1, 2016 by investing the following assets: Moran Nakar Cash P15,000 - Merchandise Inventory co 45,000 Land Fe - 15,000 Building - 65,000 Furniture and fixture 100,000 ye The agreement between Moran and Nakar provides that qo be divided ino 40% (o Moran)and 60% (to Nakas) ah te nce is to assume the P30,000 mortgage loan on the buik ding \¢ partnership IfNakaris to receive a capital credit , : ean neice) Pn lt equal ohis profit and loss ratio, how much a. P127,500 b. PI72,500 c. P 97,500 d. P 77,500 Partnerships: Basic Considerations and Formation Hu 1-18: As of July 1, 2016, Flores and Garcia decided to form a partnership. Their ‘statements of financial position on this da Cash Accounts receivable Merchandise Inventory Machinery and equipment Total Accounts Payable Flores, capital Garcia, capital Total The partners agreed that the machinery and equipment of Flores is underdepreciated by P 1,500 and that of Garcia by P4500. Allowance for doubtful accounts is to be set up amounting to P12,000 for Flores and P4,500 for Garcia. ‘The partnership agreement provides for a’ profit and loss ratio and capital interest of 60% to Flores and 40% to Garcia. How much cash must Flores invest to bring the partner's capital balances proportionate to their profit and loss ratio? a. P14,250 b. P 5,250 ©. P17,250 d. P10,250 1-19: Ortizand Ponce are partners sharing profits inthis propottion-60:40. A statement of financial position prepared for the partners on April 1.2016: Cash P 48,000 Accounts Payable P 89,000 Accounts receivable 92,000 Ortiz, capital 133,000 Inventories 165,000 Ponce, capital 108,000 Equipment 70,000 Less Accumulated Depreciation 45,000 _ 25,000 Total Assets P330,000 Total Liabilities & Capital _P330,000 32 1-19: Continued

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