DEPARTMENT OF ACCOUNTANCY 1st Semester A.Y.

2020-2021
Accounting for Special Transactions – Partnership Formation

Situation 1: Justine and Michelle, who are engaged in the same type of business, agree to combine
their businesses and form a partnership. On January 1, 2019, the following were taken from their
respective books:

Justine Michelle
Debit Credit Debit Credit
Cash 24,400 25,800
Accounts Receivable 62,600 75,000
Merchandise Inventory 128,000 192,000
Delivery Equipment 190,000 150,000
Furniture & Fixtures 175,000 100,000
Prepaid Insurance 4,800 5,000
Accounts Payable 83,000 64,000
Notes Payable 126,400 148,000
Allowance for DA 12,000 12,800
Accum. Depreciation – Delivery Equipment 38,000 45,000
Accum. Depreciation – Furniture & Fixtures 70,000 40,000
Capital 255,400 238,000
Total 584,800 584,800 547,800 547,800

It is agreed that the partnership shall acquire the assets and assume the liabilities of the businesses
at the following values:

Justine Michelle
Accounts receivable (net) 55,000 65,000
Furniture and Fixtures (FMV) 90,000 70,000
Merchandise Inventory 132,000 200,000

Required:

1. Amounted credited to Justine, Capital and Michelle, Capital if the partners are to be credited
for net assets invested?

2. How much additional cash should be invested by Justine and Michelle if they agree to have
starting capital of P800,000 each.

3. If the partners agreed to have in the total capital equally, how much is the bonus and to whom
is the bonus?

4. Entries on the books of the partnership.

5. Statement of Financial Position for the partnership.

Situation 2: On July 1, 2019, Candy and Nikki decided to pool their assets and form a partnership.
After the formation, the partners will participate in the profits and loss ratio of 55% and 45% for Candy
and Nikki, respectively. The balance sheets on June 30 before adjustments were as follows:

Candy Nikki
Cash 16,500 26,400
Accounts Receivable 108,000 120,000
Allowance for Doubtful Accounts (2,700) (3,000)
Notes Receivable 30,000 -
Inventories 9,600 9,000

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 Prepaid Insurance - 3,000
Machinery 60,000
Accumulated Depreciation (6,000)
Furniture and Fixtures 48,000
Accumulated Depreciation (3,600)
Total Assets 215,400 199,800

Accounts Payable 3,000 3,600

Notes Payable 30,000
Capital 212,400 166,200
Total Liabilities and Capital 215,400 199,800

The firm is to take over business assets and assume business liabilities. Capitals are to be used on
net assets transferred after the following adjustments:

 The accounts receivable of Candy and Nikki are fairly valued.

 Interest at 12% on notes receivable dated May 12, 2019 should be accrued. (Use 360 days)
 The inventory of Candy should be valued at P9,000, while P1,000 of the inventory of Nikki is
considered worthless.
 The prepaid insurance of Nikki still amounted to P800.
 The machinery should be depreciated by P1,200 more.
 The furniture and fixtures is under depreciated by P1,200.
 Interest at 12% on notes payable dated April 17, 2019 should be accrued. (Use 360 days)
 Accrued rent receivable of P1,800 is to be recognized in Nikki’s books.

Required:

1. At how much should the machinery be recorded on the books of the partnership?

2. At how much should the furniture be recorded on the books of the partnership?

3. Why should we accrued interest?

4. Journal entries to record the investment of Candy and Nikki.

5. Journal entries to record the investment of Candy and Nikki using the bonus method. (Assume
interest ratio of 60% for Candy and 40% for Nikki)

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