Xela Mae T.

Bigornia

BSA 3A

CHAPTER 4: CHANGE IN CAPITAL STRUCTURE: WITHDRAWAL, RETIREMENT, DEATH OR INACAPACITY

OF A PARTNER.

THEORIES:

1. All of the following conditions causes a change in capital structure of a partnership, except:

a. Withdrawal of a partner

b. Retirement of a partner

c. Death of pet of a partner

d. Incapacity of a partner

2. The capital credit which is not equal to capital contribution may be

a. Bonus method

b. Asset revaluation method

c. Neither A nor B

d. Either A or B

3. Statement 1: Dissolution does not always result to liquidation.

Statement 2: Liquidation is always preceded by dissolution.

a. Only statement 1 is correct.

b. Only statement 2 is correct.

c. Both statements are correct.

d. Both statements are wrong.

4. A case in retirement or death of a partner wherein the excess of amount paid over the capital interest
of the retiring or deceased partner is recorded as a decrease in the capital balances of the remaining
partners.

a. Bonus Method

b. Asset revaluation method

c. FIFO method
d. LIFO method

5. It is determined by dividing the difference between the retiring or deceased partner's capital interest
and the amount of settlement by his profit and loss sharing ratio.

a. Bonus Method

b. Asset revaluation method

c. FIFO method

d. LIFO method

PROBLEMS:

1. On June 30, 2004, the balance sheet for the partnership of CC, MM, and PP, together with their
respective profit and loss ratios, were as follows:

Assets, at cost.......................................................................P180,000

CC, loan....................................................................................... 9,000

CC, capital (20%).................................................................. 42,000

MM, capital (20%).................................................................. 39,000

PP, capital (60%).................................................................. 90,000

Total........................................................................P180,000

CC has decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to
their fair value of P216,000 at June 30, 2004. It was agreed that the partnership would pay CC P61,000
cash for CC' s partnership interest, including CC's loan which is to be repaid in full. No goodwill is to be
recorded. After CC's retirement, what is the balance of MM's capital account?

a. P36,450

b. 39,000

c. 45,450

d. 46,200

2. PP, RR, and SS were partners with capital balances as of January 1, 2004, of P20,000, P30,000, and
P40,000 respectively, sharing profit and losses on a 5:3:2 ratio.
On July 1, 2004, PP withdraw from the partnership. Partners agreed that at the time of withdrawal,
certain inventories had to be revalued at P14,000 from its cost of P10,000. For the six month period
ending June 30, 2004, the parynership generated a net income of P28,000. Further, partners agreed to
pay PP, P39,000 for his interest and that the remaining partners' capital accounts, would be adjusted for
whatever goodwill the settlement would generate. The payment of PP included a goodwill of:

a. P3,000

b. 5,000

c. 10,000

d. 8,500

3. The condensed balance sheet of the partnership of EE, FF and GG with corresponding profit and loss
sharing percentage as of June 30, 2004 was as follows:

Nets assets................................................................P480,000

EE, capital (50%)...................................................P240,000

FF, capital (30%).................................................. 144,000

GG, capital (20%).................................................. 96,000

Total................................................................P480,000

As of said date, EE retired from the partnership. By mutual agreement, he was paid P270,000 for his
interest in the partnership. Partial goodwill was to be recorded. After EE's retirement, the total net
assets of the partnership was:

a. P300,000

b. 210,000

c. 240,000

d. 270,000

4. Using the same information in number 3, except that total goodwill was to be recorded. What will be
the total net assets of the partnership after EE's retirement?

a. P300,000

b. 210,000

c. 240,000
d. 270,000

5. A. Smith, a partner in an accounting firm, decided to withdraw from the partnership, Smith's share of
the partnership profits and losses was 20%. Upon withdrawing from the partnership he was paid
P88,000 in final settlement for his interest. The total of the partner's capital accounts before recognition
of partnership goodwill prior to Smith's withdrawal was P252,000. After his withdrawal, the remaining
partners' capital accounts, excluding their share of goodwill, totalled P192,000. The total goodwill of the
firm was:

a. P144,000

b. 168,000

c. 192,000

d. 300,000

ANSWERS:

THEORIES:

1. C

2. D

3. C

4. A

5. B

PROBLEMS:

1. C

SOLUTION:

Amount paid...................................................................................................P61,200

Less: Book value of interest of CC (20%).................................. 58,200

Bonus to retiring partner....................................................................P 3,000

*Total interest of CC:

 Loans...................................................................................................................P9,000

Capital......................................................................................P42,000

Add: Share in adjustment of asset

(P216,000-180,000)×20%................................... 7,200 49,200

Total interests..........................................................................................P58,200

Therefore, the capital balance of MM would be:

MM: [P39,000+(216,000-180,000)×20%-(P3,000×2/8*)]........P45,450

*New profit and loss ratio: (MM: 2/8); (PP: 6/8)

2. A

SOLUTION:

Amount paid.............................................................................................P39,000

Less: Book value of interest of PP* (50%).......................... 36,000

Partial goodwill to PP......................................................................P 3,000

* Total interest of PP:

Capital..............................................................................................P20,000

Add: Share in adjustment of asset

(P14,000-10,000)×50%.................................................. 2,000

Share in Net income (P28,000×50%)............................ 14,000

Total................................................................................P36,000

3. C

SOLUTION:

Amount paid......................................................................................P270,000

Less: Book value of interest of EE (50%)...................... 240,000

Partial goodwill...............................................................................P30,000

Therefore the net assets of the partnership after EE's retirement would be:
 Net assets, before retirement.......................................................P480,000

Partial goodwill...................................................................................... 30,000

Cash paid....................................................................................................(270,000)

Total...................................................................................... P240,000

4. D

SOLUTION:

Amount paid......................................................................................P270,000

Less: Book value of interest of EE (50%)...................... 240,000

Excess/ Partial goodwill..............................................................P 30,000

Divided by................................................................................................ 50%

Total goodwill......................................................................................P 60,000

Therefore, the net assets of the partnership after EE's retirement would be:

Net assets, before retirement.......................................................P480,000

Partial goodwill...................................................................................... 60,000

Cash paid....................................................................................................(270,000)

Total...................................................................................... P270,000

5. A

SOLUTION:

Amount
paid................................................................................................................................P88,800

Less: Book value of interest of Smith (20%)

Total partner's capital before withdrawal......................252,000

Less: Total partner's capital after withdrawal...........192,000 60,000

Excess/ Partial goodwill.....................................................................................................P 28,800

 Divided by........................................................................................................................................
20%

Total
goodwill...............................................................................................................................P144,000

Sources:

Theories: Quizlet

Problems: Practical Accounting 2 (Dayag)