Problems 5: Classroom Activity

Instructions:
1. Find a study partner.
2. Imagine that you and your study partner are entrepreneurs and have agreed to form a
business partnership.
3. Read the facts below and answer the succeeding requirements.

Partner 1 Partner 2
Cash 250,000 1,800,000
Accounts receivable 430,000 1,000,000
Land 1,250,000 -
Building 2,000,000 -
Accounts payable 330,000 400,000
Notes payable - 500,000
Capital 3,600,000 1,900,000

Additional Information:
 The cash contribution of Partner 1 as listed above is the peso equivalent of 6,250 foreign
currency unit (FCU). The current exchange rate is P45:FCU1.
 Partner’s 2 account receivable should be written down by P200,000.
 The land has an appraised value of P1,500,000.
 The building has an appraised value of P1,400,000.
 Attached to the building is an unpaid mortgage of P800,000. Partner 1 agrees to settle this
mortgage immediately using his/her personal funds.
 There is a pending lawsuit over Partner 1’s contributed properties- a claim by a third
party. A discussion with Partner’s 1 legal counsel reveals that it is probable that the
plaintiff will accept an out of court settlement of not less than P300,000. The partnership
shall assume the obligation of paying the plaintiff.
 There are unpaid real property taxes on the properties contributed by Partner 1 amounting
to P40,000. The partners agreed that the partnership shall assume those obligations.
 The notes payable is stated at face amount. An inspection of the related promissory note
reveals that the note is a 5-year non-interest bearing note issued 2 years ago and requires
a lump sum payment at maturity date. The current rate is 10%.

Requirements:
a. Compute for adjusted balances of your capital accounts.
b. Provide the entry to record your contributions in the partnership books. (You may or may
not use a valuation account for the notes payable.)
Variation #1:
You and your partner agree that one of you is significantly cuter than the other. You determined
that that cuteness will bring good feng shui to the business. Accordingly, you decided to have
your capital accounts credited equal amounts. No cash settlements or additional investments will
be made.

Requirements:
a. How much is the bonus? (do not omit centavos)
b. Which partners receives the bonus?
c. Explain briefly how the bonus will be accounted for in the partnership books.
d. Provide the entry to record your contributions in the partnership books.

Variation #2:
You and your partner agreed that one of you is significantly hotter than the other. However, you
determined that the hotness will not bring any good to the business. Accordingly, you decided to
equalize your interest and make cash settlement for the difference among yourselves. No
additional investment or withdrawal of investment shall be made.

Requirements:
a. Which partner shall receive cash payment from the other partner? (do not omit centavos)
b. Explain briefly how the cash receipt/cash payment will be accounted for in the
partnership books.
c. Provide the entry to record your contributions in the partnership books.

Variation #3:
You and your partner agreed that both of you are equally beautiful and that your respective
interests in the partnership must be equal. You agreed that a partner’s capital shall be increased
accordingly by contributing additional cash to bring both your capital balances proportionate to
your equity interests.

Requirement: Which partner shall make the additional cash contribution and by how much?

Variation #4:
You and your partner agreed that both of you are equally gorgeous and that your respective
interests in the partnership must be equal. You agreed that the initial capital of the business
should be equal to the fair value of your net asset contributions. You further agreed that a partner
should provide additional investment (or withdraw part of his investment) in order to bring both
of your capital credits equal to your respective interests in the equity of the partnership.

Requirement: Which partner(s) should provide additional investment (or withdraw part of his/her
investment) in order to bring both your credits equal to your respective interests in the equity of
the partnership? (do not omit centavos?

PROBLEM 6: FOR CLASSROOM DISCUSSION

Valuation of contributions of partners

1. Mr. Sun and Ms. Moon formed a partnership. Their contributions are as follows:

Mr. Sun Ms. Moon

Cash 400,000 -
Accounts receivable 250,000 -
Land - 750,000
Equipment - 180,000

Additional Information:
 Only 80% of the accounts receivable is deemed collectible.
 The land is stated at original cost. The fair value is P1,000,000. The partnership assumes
a P250,000 unpaid mortgage on the land.
 Ms. Moon acquired the equipment on a long-term financing basis. Ms. Moon promised to
pay the unpaid principal balance of P80,000 using her personal funds. The equipment is
under-depreciated by P30,000.

Requirement: Provide the journal entry to record the partner’s contributions.

2. Use the information in problem ‘1’. The partners agreed to share in profits and losses
equally. A partner should make an additional contribution in order for the partners’
capital balances to reflect the partners’ equal interests in the partnership.
Requirement: Which partner should make an additional contribution and by how much?

Bonus on initial investment

3. Use the information in problem ‘1’. However, assume that the partners agreed to have
equal interests in the partnership’s equity and profit and losses. The partners’ initial
capital credits should reflect this agreement using the bonus method.

Requirement: Provide the journal entry to record the partner’s contributions.

Variation to bonus method- cash settlement between partners

4. Use the information in problem ‘1’. However, assume that the partners agreed to have
their capital accounts initially credited at equal amounts. Cash settlement shall be made
between the partners.

Requirements:
a. Provide the compound journal entry to record the partner’s contributions.
b. Provide the simple journal entries to record the partner’s contributions.

Variations to bonus method – additional investment/withdrawal

5. Use the information in problem ‘1’. However, assume that the partners agreed to have
their capital accounts initially credited at equal amounts. A partner shall provide
additional investment (or withdraw part of his investment) in order to equalize the
balances’ capital accounts.

Requirement: Which partner shall make an additional investment and which partner shall
withdraw part of his/her investment?

(Source: Accounting for Special Transactions, Millan 2020)