1

Unit I – Partnership Formation and Operation

Lesson 1 – Nature, Definition and characteristics of Partnership

Name: __________________________ Score__________

Section _________________________ Date:____________

Assignment 1: Instruction: Answer as directed.

1. Explain the difference between the accounting entity concept and the unlimited liability characteristic of a
partnership.

2. One of the advantages of a partnership is tax exemption for professional partnership. Explain.

3. Explain the significance of the “Articles of Co-Partnership.

4. Can a nominal partner be at the same time a secret partner? Explain

5. Distinguish partnership from corporation.

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Unit I - Partnership
Lesson 1 – Nature, Definition and characteristics of Partnership

Name: ________________________ Score__________

Section _______________________ Date:____________

Assignment 2: Modified True or False:

Instruction: Write “T” on the space provided before the statement if its correct and if the statement is
false underline the word or group of words that makes the statement false.

___1. Basically a partnership is perfected by a mere consent of the parties.

___2. In the event of liquidation, all partners are legally and personally liable when it involves debts to third parties
that cannot be paid by the partnership.
___3. A partnership has the power of succession.
___4. Industrial partners are legally like a general partner for all partnership debts to the extent of their personal
assets.
___5. The SEC should first authorize a partnership to engage in business before it can operate.
___6. A stipulation of partnership contract excluding a partner from profit sharing is null and void.
___7. Every partner is assumed as agent of the partnership.
___8. The partner investing a particular kind of asset may receive back the same property if the partnership is
terminated.
___9. The maximum number of owners composing a partnership must be three natural persons.
___10. General partnership is not subject to tax.
___11. When the capitalization of the partnership is below P 3,000 an oral agreement is sufficient in forming a
partnership.
___12. Partnership is the best form of business organization for firms that are engaged in rendering profession
services.
___13. Partnership can be formed to engage in trading, manufacturing and rendering services.
___14. Partnership is founded on the basis of trust.
___15. A limited partner is one whose investment in the partnership is limited to a certain amount.
___16. Industrial partners share in the in the business profits but not in losses.
___17. An oral partnership contract is not binding among partners.
___18. The wrongful acts of any partner bind the firm and/or the partners.
___19. All partners in the limited partnership are not liable for partnership debts after exhaustion of its assets.
___20. A partnership is automatically dissolved if there is a change in the persons of partners.
___21. A partner may not be known as one of the partners but take active part in running the business.
___22. Upon the termination of the legal life of the partnership, it may continue its normal activities under a new
business name.
___23. Every partnership should have at least one general partner.
___24. An industrial partner is a limited partner.
___25. A partnership is not considered separate entity from the partners when it involves debts to third party
in the event of liquidation.
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Unit I – Partnership Formation and Operation

Lesson 2 – Partnership Formation

Name: ________________________ Score__________

Section _______________________ Date:____________

Assignment 1 – THEORY.

1. The net contributions of the partners to the partnership is measured at

a) cost c) discretionary amount determined by partner
b) fair value d) any of these

2. Transactions between and among the partners are:

a) recorded in the partnership books c) either a or b
b) not recorded in the partnership books d) neither a or b

3. Which of the following accounts has a normal credit balance?

a) Loans to partners c) Partner’s drawing
b) partner’s capital d) Due from partner

4. What is the entry for the acceptance of an industrial partner’s skills as his contribution?
a) General journal through a debit-credit entry
b) General ledger through a debit-credit entry
c) General ledger through a memorandum entry
d) none of the above

5. The partner’s capital account increases in the following cases except when a partner’s transaction in the
partnership involves:
a) initial investment c) additional investment
b) share in net income d) personal drawings

For items 6 -7:

Dee and Tee agreed to form a partnership. Dee contributed cash of P 50,000 while Tee contributed cash of
P150,000. They agreed to have an equal interest on the initial capital and in partnership profits and losses.

6. Which of the following statements is false?

a) Tee’s contribution will be debited for P150,000.
b) The partnership capital after recording the investments od Dee and Tee is P 200,000.
c) Dee’s contribution will be debited for P 50,000.
d) none of these

7. Which of the following statements is correct?

a. the contractual agreement is void because Dee’s contribution is less than the agreed interest of Dee.
b. Tee’s contribution will be debited for P 100,000.
c. Dee will make an additional investment of P 100,000 to make his capital balance equal to Tee’s capital.
d. Dee and Tee will have capital balances of P 100,000 each after the partnership formation.

8. A and B agreed to form a partnership. A contributed P 300,000 cash while B contributed his expertise.
partnership agreement stipulates that A and B shall have equal interest in both initial capital and profits and
losses.

Which of the following is correct?

a) Immediately after the formation of the partnership, the balance of A capital account in the partnership
books is P 300,000.
b) Immediately after the formation of the partnership, the balance of B capital account in the partnership
books is zero.
c) A’s contribution will be debited for P 300,000, but the net credit to A’s capital account will be P 150,000.
d) None of these
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9. Statement 1. A bonus exists when the capital account of a partner is credited for an amount greater than or
lesser than the fair value of his contribution.
Statement 2: A bonus given to a partner is treated as an adjustment to the capital account of the other
partners.

a) True: True b) False: False c) True: False d) False: True

10. Fay and May agreed to form a partnership. The agreement stipulates that Fay shall contribute a non-cash
assets with a fair value of P 150,000 and while May shall contribute cash of P 150,000. However, since Fay
will be bringing her special skills to the partnership, the partners agreed that Fay shall be entitled to a 60%
interest in partnership profits and losses.

Which of the following is incorrect?

a) Fay’s contribution shall be debited for P 150,000.
b) The total capital of the partnership immediately after the formation of the partnership is P 300,000.
c) Fay’s capital account balance immediately after the formation of the partnership is P 180,000.
d) None of these.
 5

Unit I – Partnership Formation and Operation

Lesson 2 – Partnership Formation

Name: ________________________ Score__________

Section _______________________ Date:____________

Assignment 2 – Brief exercises. Instruction: Answer as directed.

1. On August 1, 2020, Eddie and Fred agreed to form a partnership to sell and install office security
systems. The partners decide that Eddie will invest cash, P 500,000; equipment with a cost of P 300,000
but with a current fair value of P250,000.

Fred will contribute a service vehicle with a fair value of P 400,000. The book value of the service vehicle is
P 650,000. In addition, Fred is to invest sufficient cash to equal Eddie’s investment.

Journalize the investments of Eddie and Fred.

Date Particulars PR Debit Credit

2020
Aug. 1 Cash 500,000
Equipment 250,000
Eddie, capital 750,000
Investment

Cash 350,000
Transportation Equipment 400,000
Fred, capital 750,000
Investment

2. Pepe and Pilar formed a partnership on July 1, 2020. Pepe contributed equipment with a book value of
P300,000 and a fair market value of P 400,000 with P 100,000 mortgage to be assumed by the partnership.
Pilar invests cash of P 100,000 and equipment recorded as P 150,000 with accumulated depreciation of
P60,000 and with and agreed valuation of P 80,000.

Journalize the investments of Pepe and Pilar.

Date Particulars PR Debit Credit
2020
July 1 Land 400,000
Mortgage payable 50,000
Pepe, capital 350,000
Investment

Cash 100,000
Equipment 80,000
Pilar, capital 180,000
Investment

3. Using the same data in 2 above, except that the mortgage will not be assumed by the partnership. Record
the investment of Pepe.
Date Particulars PR Debit Credit
2020
July 1 Land 400,000
Pepe, capital 400,000
Investment
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4. Mark and Nick agreed to form a partnership on July 1, 2020, for the purpose of manufacturing and selling
custom stainless kitchenwares. Both are master crafters and have their own tools and equipment, which
they will invest in the business.

Mark and Nick determined that their tools and equipment have fair values of P 180,000 and P 240,000,
respectively. They further resolved to invest sufficient cash such that each partner will have beginning
capital balance of P500,000.

How much cash will be presented in the partnership’s statement of financial position? ____580,000____

Solution:
Mark Nick Total
Required Capital 500,000 500,000
Less fair value of non-cash investment 180,000 240,000
Cash investment 320,000 260,000 580,000

5. MM, NN, and LL formed a partnership on July 1, 2020 with the following assets, measured at their fair
market values, contributed by each partner:
MM NN LL
Cash P 20,000 P 22,000 P 40,000
Delivery trucks 250,000 228,000 ---
Computers 48,000 51,000 ---
Office furniture 9,500 22,500
Totals P 318,000 P 310,500 P 62,500

Although LL has contributed the most cash to the partnership, he did not have the full amount of P40, 000
available and was forced to borrow P20, 000. The delivery truck contributed by MM has a Mortgage of
P 100,000 and the partnership is to assume responsibility for the loan. The profit and loss sharing agreement is
40%, 40%, and 20%, respectively, for MM, NN, and LL.

Journalize the investments of MM, NN and LL.

Date Particulars PR Debit Credit
2020
July 1 Cash 20,000
Delivery Truck 250,000
Computers 48,000
Loans payable 100,000
MM, capital 218,000
Investment

Cash 22,000
Delivery Truck 228,000
Computers 51,000
Office furniture 9,500
NN, capital 310,500
Investment

Cash 40,000
Office furniture 22,500
LL, capital 62,500
Investment
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6. Using the same data in number 5: except that the agreement further provides that the partners’ capital must
be in conformity with their profit and loss ratio upon formation, the capital balances of MM, NN and LL in
the partnership statement of financial position:

MM ____236,400_____ NN ___236,400_________ LL ___118,200______

Solution:
Contributed Capital Agreed Capital Difference
MM (40%) 218,000 236,400 18,400
NN (40% 310,500 236,400 (74,100)
LL (20%) 62,500 118,200 55,700
Total 591,000 591,000 74,100

7. Refer to no. 6: the journal entry to record the transfer of capital (bonus) :

Date Particulars PR Debit Credit

2020
July 1 NN, capital 74,100
MM, capital 18,400
LL, capital 55,700
Bonus to MM and LL.

End
 8

Unit I – Partnership Formation and Operation

Lesson 2 – Partnership Formation

Name: ________________________ Score__________

Section _______________________ Date: __________
Assignment 3 – Use 2-columns journal
1. On October 1, 2020, JC Construction and GB builders decided to form a partnership to be known as JCGB
Construction Company. Their Statement of financial Position on this date were:
JC Construction GB Builders
Cash P 250,000 P 260,000
Accounts Receivable 400,000 390,000
Allowance for bad debts (15,000) (13,000)
Inventory 600,000 700,000
Equipment , net 800,000 1,000,000
Total 2,035,000 2,337,000

Accounts Payable 335,000 550,000

Amanda Capital 1,700,000
Diana, Capital _________ 1,787,000
Total 2,035,000 2,337,000

They agreed the following adjustments shall be made:

1. Equipment of JC Construction is under depreciated by P 10,000 and that GB Builders is over
depreciated by P 15,000.
2. Allowance for bad debts shall be equal to 10% of Accounts Receivable.
3. The value of Inventories of JC is to be increased by P 8,000 and for GB Builders, P 5,000 are
worthless.
4. The assets and liabilities at their adjusted values shall be assumed by the partnership.

REQUIRED:
1. Prepare the necessary journal entries in the books of JC Construction and GB Builders.
2. Prepare the journal entries in the books of JCGB Construction Company
3. Prepare the statement of financial position of the partnership

SOLUTION:
Req. 1 Books of JC ( sole proprietor)
Date Particulars PR Debit Credit
2020
Oct 1 Inventory 8,000
JC, capital 27,000
Equipment 10,000
Allowance for bad debts 25,000
To adjust the assets of JC.

Allowance for bad debts 40,000

Accounts Payable 335,000
JC, capital 1,673,000
Cash 250,000
Accounts Receivable 400,000
Inventory 608,000
Equipment 790,000
To close the boos

 The adjusted capital balance of Peter is:

JC, Capital
Debit Credit
 9

10/1/20 27,000 balance 1,700,000

adjusted bal. 1,673,000

Books of GB ( sole proprietor)

Date Particulars PR Debit Credit

2020
Oct 1 Equipment 15,000
GB, capital 16,000
Inventory 5,000
Allowance for bad debts 26,000
To adjust the assets of JC.

Allowance for bad debts 39,000

Accounts Payable 550,000
GB, capital 1,771000
Cash 260,000
Accounts Receivable 390,000
Inventory 695,000
Equipment 1,015,000
To close the boos

 The adjusted capital balance of Peter is:

GB, Capital
Debit Credit
10/1/20 16,000 balance 1,787,000

adjusted bal. 1,771,000

Req. 2 Books of JCGB Construction Company (partnership books)

Date Particulars PR Debit Credit

2020
Oct 1 Cash 250,000
Accounts Receivable 400,000
Inventory 608,000
Equipment 790,000
Allowance for bad debts 40,000
Accounts Payable 335,000
JC, capital 1,673,000
Investment

Cash 260,000
Accounts Receivable 390,000
Inventory 695,000
Equipment 1,015,000
Allowance for bad debts 39,000
Accounts Payable 550,000
JC, capital 1,771000
investment
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JCGB Construction Company

Statement of Financial Position
October 1, 2020

Assets
Cash P 510,000
Accounts receivable P 790,000
Less: Estimated uncollectible accounts 79,000 711,000
Inventory 1,303,000
Equipment 1,805,000
Total assets P 4,329,000
Liabilities and Partners’ Equity
Accounts Payable P 885,000
JC, Capital 1,673,000
Peter, Capital 1,771,000
Total liabilities and Partner’s equity P 4,329,000

2. Using the same data in problem 1: except that the partnership provides that JC and GB will share profits and
Losses equally . The agreement further provides that the partners’ capital must be in conformity with their profit
and loss ratio upon formation.

Q1. Assuming the use of transfer of capital method, how much is the agreed capital of JC to bring the
capital balances proportionate to their profit and loss ratio? ____1,722,000_________________
olution:
Contributed Capital Agreed Capital Difference
JC 1,673,000 1,722,000 49,000
GB 1,771,000 1,722,000 (49,000)
Total 3,444,000 3,444,000

Q2. The capital balances of JC and GB in the partnership statement of financial position:
JC ____1,722,000_____ GB __1,722,000_________

Q3. Prepare journal entries in the books of the partnership

Books of JCGB Construction Company (partnership books)

Date Particulars PR Debit Credit

2020
Oct 1 Cash 250,000
Accounts Receivable 400,000
Inventory 608,000
Equipment 790,000
Allowance for bad debts 40,000
Accounts Payable 335,000
JC, capital 1,673,000
Investment

Cash 260,000
Accounts Receivable 390,000
Inventory 695,000
Equipment 1,015,000
Allowance for bad debts 39,000
Accounts Payable 550,000
JC, capital 1,771000
investment
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GB, capital 49,000

JC, Capital 49,000
Transfer of capital or bonus to JC.
Prob. 3: AB and CD decided to form a partnership on August 1, 2020. Their balance sheets on this date are:
AB CD
Cash P 15,000 P 37,500
Accounts Receivable 340,000 205,000
Merchandise Inventory 200,000 202,500
Equipment 200,000 350,000
Accumulated depreciation ( 50,000) ( 60,000)
Total P 705,000 P 735,000
Accounts Payable P 105,000 P 265,000
Capital 600,000 470,000
Total P 705,000 P 735,000

They agreed to have the following adjustments :

1. Equipment of AB is underdepreciated by P 20,000 and that of CD is overdepreciated by P 10,000.
2. Allowance for doubtful accounts is to be set up amounting to P 68,000 for AB and P 45,000 for CD.
3. Inventories of P 5,000 and P 15,000 are worthless in AB’s and CD’s books, respectively.
4. The partnership agreement provides for a profit and loss ratio and capital interest of 70% to AB and 30% to
CD.

1. How much cash must AB invests to bring the capital balances proportionate to their profit and loss ratio?
_______473,000_______________

Additional Cash investment by AB to bring capital balances proportionate to profit and loss ratio:
Profit and loss ratio:
AB = 70% CD = 30%
CD, capital P 420,000
Divide by profit and loss ratio CD 30%
Total Agreed Capital P 1,400,000
Multiply by profit and loss ratio AB 70%
Required Capital of AB P 980,000
Less Equity in business 507,000
Additional cash investment by AB P 473,000

2. Prepare journal entries in the books of the sole proprietors and partnership books.
Journal entries
Books of AB

Date Particulars PR Debit Credit

2020
Aug. 1 AB, capital P 20,000
Accumulated. Dep., Equipment P 20,000
Underdepreciation

AB, Capital 68,000

Allowance for doubtful accts 68,000
Set up allowance for doubtful accounts

AB, Capital 5,000

Merchandise Inventory 5,000
Worthless inventories

Accounts Payable 105,000

Allow. for doubtful accounts 68,000
Accum. Dep. – Equipment 70,000
AB, Capital 507,000
Cash 15,000
 12

Accounts Receivable 340,000

Merchandise Inventory 195,000
Equipment 200,000
To close the books
Books of CD

Date Particulars PR Debit Credit

2020
Aug. 1 Accumulated dep.–Equipment 10,000
CD, capital 10,000
Overdepreciation

CD, Capital 45,000

Allowance for doubtful accts. 45,000
Set up allowance

CD, Capital 15,000

Merchandise Inventory 15,000
Worthless inventories

Accounts Payable 265,000

Allow. For doubtful accounts 45,000
Accum. Depreciation – quipt. 50,000
Cd, Capital 420,000
Cash 37,500
Accounts Receivable 205,000
Merchandise Inventory 187,500
Equipment 350,000
To close the books

Partnership Books

Date Particulars PR Debit Credit

2020
Aug. 1 Cash 15,000
Accounts Receivable 340,000
Merchandise Inventory 195,000
Equipment 130,000
Accounts Payable 105,000
Allowance for doubtful accts 68,000
AB, Capital 507,000
Initial investment

Cash 473,000
AB, Capital 473,000
Additional cash investment

Cash 37,500
Accounts Receivable 205,000
Merchandise Inventory 187,500
Equipment 300,000
Accounts Payable 265,000
Allowance for doubtful accts 45,000
CD, Capital 420,000
Initial investment
 13

Unit I – Partnership Formation and Operation

Lesson 2 – Partnership Formation
Name: ________________________ Score__________
Section _______________________ Date:____________

Assignment 4 – Answers must be supported with computations. Use yellow pad for supporting computations.

On January 1, 2020, Anne, and Betty decided to form a partnership. The firm is to take over the assets and
assume liabilities and capital are to be based on net assets transferred after the following adjustments:
a. Anne and Betty’s inventory is to be valued at P 31,000 and P 22,000, respectively.
b. Accounts receivable of P 2,000 in Anne’s books and P 1,000 in Betty’s books are uncollectible.
c. Accrued salaries of P 4,000 to Anne and P 5,000 to Betty are still to be recognized in the books.
d. Unused office supplies of Anne amounted to P 5,000 while that of Betty amounted to P 1,500.
e. Unrecorded patent of P 7,000 and prepaid rent of P 4,500 are to be recognized in the books of Anne and
Betty, respectively.
f. Anne is to invest or withdraw cash necessary to have a 40% interest in the firm.

Balance sheets for Anne and Betty on January 1, 2020, before adjustments are given below:
Anne Betty
Cash P 31,000 P 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies --- 5,000
Equipment 20,000 24,000
Accumulated depreciation – equipment (9,000) (3,000)
Total assets P 100,000 P 120,000

Accounts payable P 28,000 P 20,000

Capitals 72,000 100,000
Total assets P 100,000 P 120,000

1. The net adjustments – capital in the books of Anne and Betty:

a) Anne, P 7,000 net debit, and Betty, P 2,000 net credit
b) Anne, P 5,000 net debit, and Betty, P 7,000 net credit
c) Anne, P 7,000 net credit, and Betty, P 2,000 net debit
d) Anne, P 5,000 net credit, and Betty, P 7,000 net debit

solution: for 1 & 2:

Anne, capital Betty, capital
a) 1,000 d) 7,000 a) 2,000 d) 4,500
b) 2,000 e) 5,000 b) 1,000
c) 4,000 ____ c) 5,000
7,000 12,000 3,500 _____
Net Cr. 5,000 11,500 4,500
1/1 capital 72,000 Net Dr. 7,000 1/1 capital 100,000
77,000 93,000

2. The adjusted capital of Anne and Betty in their respective books:

a) Anne, P 65,000; Betty, P 102,000 c) Anne, P 77,000; Betty, P 98,000
b) Anne, P 63,000; Betty, P 107,000 d) Anne, P 77,000; Betty, P 93,000

3. The additional investment (withdrawal) made by Anne:

a) P ( 6,666.50) b) P (15,000) c) P 3,000 d) P 8,377.50
Solution:
Betty, Capital 93,000
Divide by p/l ratio of Betty 60%
Total Partnership capital 155,000
 14

X p/l ratio of Anne 40%

Required capital of Anne 62,000
Adjusted capital of Anne 77,000
Withdrawal to be made by Anne 15,000

4. The total assets of the partnership after formation:

a) P 212,000 b) P 220,333.50 c) P 230,000 d) P 235,333.50

5. The total Liabilities of the partnership after formation:

a) P 48,000 b) P 51,000 c) P 54,000 d) P 57,000

6. The total capital of the partnership after formation:

a) P 155,000 b) P 163,333.50 c) P 178,333.50 d) P 180,000

Solution 4 – 6:
Total liabilities ( 48,000 + 9,000) 57,000
Total partners’ capital 155,000
Total Assets 212,000

7. The capital balances of Anne and Betty in the partnership balance sheet:
a) Anne, P 81,250; Betty, P 72,000 c) Anne, P 100,000; Betty, P 75,000
b) Anne, P 81,250; Betty, P 75,000 d) Anne, P 62,000; Betty, P 93,000

8. On January 1, 2020 PS and RT agreed to form a partnership. The following are their assets and
liabilities:
Accounts PS RT
Cash P 136,000 P 76,000
Accounts Receivable 88,000 48,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Accounts Payable 216,000 144,000
Notes Payable 140,000 60,000

PS decided to pay-off his notes payable from his personal assets. It was also agreed that RT inventories
were overstated by P 24,000 and PS machinery was overdepreciatedi by P 20,000. RT is to invest/withdraw
cash in order to receive a capital credit that is 20% more than PS’ total net investment in the partnership.

How much cash will be presented in the partnership’s statement of financial position?
a) P 274,400 b) P 410,400 c) P 450,400 d) P 486,400

Solution:
Accounts PS RT
Assets and liabilities as adjusted:
Cash P 136,000 P 76,000
Accounts Receivable 88,000 48,000
Inventories 304,000 340,000
Machinery 500,000 440,000
Accounts Payable ( 216,000) ( 144,000)
Notes Payable ( 60,000)
Adjusted capital 812,000 700,000

Required capital of RT ( 812,000 x 120% 974,400

Less: equity in business 700,000
Additional cash investment by RT 274,400
Cash included in the business assets transferred 212,000
 15

Total Cash to be oresented in the statement of financial position 486,400

9. On December 1, 2019, DJ and BF agreed to invest equal amounts and share profits equally to form a
partnership. DJ invested P 3,120,000 cash and a piece of equipment. BF invested some assets which are
shown below: Book value
Accounts Receivable P 400,000
Inventory 1,120,000
Machinneries, net 2,240,000
Intangibles, net 920,000

The assets invested by BF are not properly valued . P 32,000 of the accounts receivable are proven
uncollectible. Inventories are to be written down to P 1,040,000. Included in the machineries is an obsolete
apparatus acquired for P 384,000 with an accumulated depreciation balance of P 336,000. Part of the
intangibles is a patent with a carrying value of P 56,000 which was sued upon by a competitor . BF
unsuccessfully defended the case and the final decision of the court was released on November 29, 2019.

What is the fair value of the equipment invested by DJ?

a) P 968,000 b) P 1,344,000 c) P 1,400,000 d) P 1,560,000

BF’s investment as adjusted:

Accounts receivable (400,000 – 32,000) 368,000
Inventory ( 1,120,000 – 80,000) 1,040,000
Machineries, net ( 2,240,000 – 48,000) 2,192,000
Intangibles ( 920,000 – 56,000) 864,000
BF’ adjusted capital 4,464,000
Cash investment by DJ 3,120,000
Fair value of equipment to be invested by DJ 1,344,000

10. On September 3, 2020, MM admits VV for an interest in his business. On this date MM’s capital account shows
a balance of P 452,000. The following were agreed upon before the formation of the partnership:
1. Prepaid expenses of P 25,750 and accrued expenses of P 17,500 are to be recognized.
2. 8% of the outstanding accounts receivable of MM amounting to P375,000 is to be recognized as
uncollectible.
3. VV invested P 260,000 worth of merchandise and is to be credited with a one-third interest in the
partnership.
4. MM is to invest or withdraw cash to earn his interest.

Which of the following is not true regarding the partnership formation?

a) The total agreed capital upon formation is P 780,000. T
b) The total contributed capital of the partnership is P 690,250.
c) MM invest additional cash of P89,750 to earn his interest in the partnership. T
d) A net debit adjustment of P 21,750 affected the capital balance of MM upon formation.T

Solution:
MM, capital before adjustments 452,000
Prepaid expense to be recognized 25,750
Accrued expense to be recognized (17,500)
Allowance for bad debts to be recognized ( 8% x 375,000) (30,000)
MM adjusted capital 430,250
Required capital of MM :
Total capital of the partnership: (VV capital 260,000/1/3) 780,000
X interest of MM in the partnership 2/3 . 520,000
Additional investment by MM 89,750
 16

11. A and B have just formed a partnership. A contributed cash of P 882,000 and office equipment that cost
P 378,000. the equipment had been used in his sole proprietorship and had been 70% depreciated, the
current market value of the equipment is P 252,000. A also contributed a note payable of P 84,000 to be
assumed by the partnership. A is to have 60% interest in the partnership. B contributed only P 630,000
merchandise inventory at fair market value. The partner’s .capital must be in conformity with their profit and
loss ratio upon formation. Which of the following is true?

a) The agreed capital of A upon formation is P 1,008,000.

b) The capital of B will decrease by P 42,000 as a result of the transfer of capital.F
c) The total agreed capital of the partnership is P 1,750,000.F
d) There is an investment or withdrawal of asset under the bonus method.F

Solution:
A ( 60%) B (40%) Total
Cash 882,000
Merchandise invnentory 630,000
Office equipment 252,000
Notes payable 84,000) ________
Contributed capital 1,050,000 630,000 1,680,000
Bonus to B by A ( 42,000) 42,000
Capital credit in conformity w/ p/l ratio 1,008,000 672,000 1,680,000

12. On June 1, 2020, AJ the sole proprietor of AJ Company, expands the company and establish a partnership
with DJ and PJ. The partners plan to share profits and losses as follows: AJ, 40%, DJ, 35% and PJ 25%.AJ
asked DJ to join the partnership because his image and reputation are expected to be valuable during the
formation. DJ is also contributing P 420,000 cash and a building that was acquired for P 4,040,000, with
carrying amount of P 3,480,000 and a fair market value of P 1,960,000. The building is subject to a P
792,000 mortgage that the partnership did not assume. PJ is contributing P 848,000 cash and marketable
securities costing P 1,344,000 to PJ but are currently worth P 1,900,000 AJ’s investment in the partnership is
the AJ Company. The Statement of Financial Position for the AJ Company follows:

Cash P 1,560,000 Accounts Payable P 1,748,000

Accounts Receivable 1,824,000 Notes Payable 2,368,000
Merchandise Inventory 1,576,000 AJ, Capital 3,316,000
Equipment, net 2,472,000 __________
P 7,432,000 P 7,432,000

The partners agree that 35% of the inventory is considered worthless, the equipment is worth ¾ of its carrying
amount, and 85% of the accounts receivable is collectible. AJ plans to pay off the accounts payable with his
personal assets. The other partners have agreed that partnership will assume the notes payable. The partners
agreed that their capital balances upon formation will be in conformity with their profit and loss ratio.

Which of the following statements is false?

a) Assuming the partners will either invest or withdraw cash, using AJ as the base, DJ will invest cash of
P 788,200and PJ will withdraw cash of P 485,000. T
b) Assuming the partners will either invest or withdraw cash , using DJ as the base, AJ and PJ will both
withdraw cash with a total amount of P 1,948,800. T
c) Assuming the partners will either invest or withdraw cash, using PJ as the base, AJ and DJ will both
invest cash with a total amount of P 2,243,200. T
d) If the transfer of capital method is used, the capital accounts of AJ and PJ will be debited in the amount
of P 560,800 and P 121,280, respectively.
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Solution:
AJ (40%) DJ (35%) PJ (25%)
Cash 1,560,000 420,000 848,000
Accounts receivable 1,550,000
Marketable securities 1,900,000
Merchandise inventory 1,024,000
Equipment 1854,000
Building 1,960,000
Total assets 5,988,800
Notes payable (2,368,000) _________ _________
Contributed capital 3,620,800 2,380,000 2,748,000

Choice a: using AJ capital as the base:

Contributed capital Capital credit Investment /(withdrawal)
AJ (40%) 3,620,800 3,620,800
DJ (35%) 2,380,000 3,168,200 788,200
PJ (25%) 2,748,000 2,263,000 (485,000)
8,748,800 9,052,000 302,000

Total Agreed capital = 3,620,800/40% = 9,052,000

Choice b: using DJ capital as the base:
Contributed capital Capital credit Investment /(withdrawal)
AJ (40%) 3,620,800 2,720,000 (900,800)
DJ (35%) 2,380,000 2,380,000
PJ (25%) 2,748,000 1,700,000 (1,048,000)
8,748,800 6,800,000 (1,948,800)

Total Agreed capital = 2,380,000/35% = 6,800,000

Choice c: using PJ capital as the base:

Contributed capital Capital credit Investment /(withdrawal)
AJ (40%) 3,620,800 4,396,800 776,000
DJ (35%) 2,380,000 3,847,200 1,467,200
PJ (25%) 2,748,000 2,748,000 ________
8,748,800 10,992,000 2,243,200

Total Agreed capital = 2,748,000/25% = 10,992,000

13. On June 1, 2020, AD invited MP to join him in his business. Mp agreed provided that AD will adjust the
accumulated depreciation of his Equipment account to a certain amount and will recognize additional
accrued expenses of P 40,000. After that, MP is to invest additional pieces of equipment to make her interest
equal to 45%. If the capital balances od AD before and after adjustments were P 556,000 and P 484,000,
respectively, what is the effect in the carrying value of the equipment as a result of the admission of MP?
a) P 364,000 b) P 32,000 c) P 396,000 d) (P 324,000)

Solution:
AD, capital before adjustment 556,000
Ad, capital after adjustment 484,000
Net adjustment from capital of AD 72,000
Accrued expense recognized (40,000)
Increase in accum. dep./Decrease in book value of Equipment (32,000)
AD adjusted capital 484,000
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Divide by p/l share of AD 55%

Total agreed capital of the partnership 840,000
X p/l share of MP 45%
Required capital of MP 396,000
Equipment contributed by MP 396,000
Net effect on the carrying value of Equipment – Increase 364,000

14. Net assets of DD, EE and CC before formation are P 135,000, P 165,000 and P 251,000, respectively. The
partners agreed that certain assets and liabilities had to be adjusted. DD’s note payable of P 15,000 bearing an
interest of 12% should be included in the partnership books and other assets undervalued by P 24,000. The
interest is personally paid by DD. EE’s prepaid expenses should be P 5,000 less than what is stated in the
financial statements. CC’s liabilities were understated by P 14,500.

How much is the capital of DD after the formation?

a) P 174,000 b) P 144,000 c) P 142,200 d) P 127,800

Solution:
DD EE CC
Net assets before the formation 135,000 165,000 251,000
Note payable to be recognized (15,000)
Increase in other assets (undervalued) 24,000
Dec. in prepaid expenses (5,000)
Liabilities understate _______ _______ (14,500)
Adjusted capital balances after formation 144,000 160,000 236,500

15. On June 1, 2020, MM and AA are combining their separate businesses to form a partnership. Cash and non-
cash assets are to be contributed. The noncash to be contributed and the liabilities to be assumed are :
MM AA
Book value Fair Value Book Value Fair value
Accounts Receivable P 25,000 P 26,250 P 20,000 P 19,000
Inventory 40,000 45,000 20,000 20,750
Property, Plant and Equipment 100,000 90,700 86,250 82,250
Accounts Payable 15,000 15,000 11,250 11,250

MM and AA are to invest equal amounts of cash such that the contribution of MM would be 10% more than the
investment of AA. What is the amount of cash presented on the partnership’s Statement of Financial Position on
June 1, 2020?
a) P 251,250 b) P 276,250 c) P 502,500 d) P 552,500
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