ACCOUNTING FOR SPECIAL TRANSACTIONS 2020 Edition Gloria A. Rante Ma. Delia M. Liz Elsa R. Ruado Jonald P. BinaluyoCHAPTER 1 ACCOUNTING FOR PARTNERSHIP FORMATION & OPERATION LEARNING OUTCOMES: At the end of the chapter, the student will be able to: Understand the initial investment valuation and recognition; Identify the different methods of recording initial investment; Jouralize the required entries in the books of the partnership. Prepare the statement of financial position immediately after formation; and Recognize and measure partnership income and expenses Identify the different methods of allocating partnership profit or loss Be able to compute average capital of a partner Journalize profit or loss distribution to partners Identify errors and misstatements in the financial statements Prepare Statement of Changes in Partner's Equity& Operation Chapter 1 — Accounting for Partnership. Formation FORMATION OF PARTNERSHIP A partnership is formed in any of the following structure: * Two or more persons form a partnership for the first time +A person already in business may invite an individual to form a partnership ; * Twoormore sole proprietors may forma partnership ‘The Articles of Co-Partnership This is a voluntary contract between/among two or more persons to place their capital, labor, and skills into business, with the understanding that there will be a sharing of the profits and losses between/among partners. One of the documentary requirements when registering a partnership with Securities and Exchange Commissions (SEC) is the Articles of Co-Partnership, that is why this is one of the essential documents in forming a partnership. At the time the partnership is formed, the partners should develop the Articles of Co-Partnership, which normally includes the following: 1. Name of the Partnership 2. Name and address of the partners 3. Rights and responsibilities of each partner 4. The purpose for which the partnership is formed 5. The initial investment and additional investments to be made by each of the partner 6. The withdrawals that maybe made by partners and the limitations, if any 7. The profit and loss ratio 8. Procedures on dissolving the partnership Recording the Contributions of the Partners Partners are credited based on the value of assets contributed and if such assets are subject to liabilities which are to be assumed by the partnership, then the partners are to be credited for net assets contributed. (net asset is assets minus the liabilities) a. Cash contributions are valued at its face value (its fair value). Foreign currency denominated cash contributions are valued based on exchange rates on the date of contribution. However, cash deposited in a bankruptChapter 1 — Accounting for Partnership Formation & Operation or closed bank is valued at its estimated recoverable amount (net realizable value). Non-ash contributions are valued at its fair market value. Normally, the partners agreed to value non-cash assets at fair market value. Accounts receivables transferred to the partnership are to be recorded at ‘gross amount accompanied by corresponding allowance for bad debts. Fixed assets transferred to the partnership are to be recorded at fair market value. Accumulated depreciation is not carried forward in the books of the partnership, Accounting for Initial Investment Partners may contribute cash, property, or industry to the partnership. Assets contributed are debited to appropriate asset account and credited to capital account of the partner. When contributions are in form of services, a memorandum entry is prepared, 1 Net Investment Method - the partners are credited for the amount of the net assets invested (FV of assets minus FV of liabilities). This will happen if the contributions ratio is equal to capital ratio. Bonus Method - partners’ capital is credited based on their agreed ratio which may be different from their contribution ratio, The difference between the amount contributed and amount credited to capital is the bonus. This is also called as the transfer of capital method. ILLUSTRATIVE PROBLEM 1-1, TWO OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP. GD and CL decided to form a partnership on October 1 of the current year. Their Statement of Financial Position on this date were: GD cL Cash P 65,625, P 164,063 Accounts Receivables 1,487,500 896,875 Merchandise Inventory 875,000 885,937 Equipment 656,250 1,268,750 TOTAL P 3,084,375 3,215,625 Accounts Payable 459,375, P1,159,375 GD, Capital 2,625,000 CL, Capital 2,056,250 TOTAL P 3,084,3754 Chapter 1 — Accounting for Partership Formation & Operation ‘They agreed to the following adjustments: - Equipment of GD is under-depreciat depreciated by P131,250. : ~ Allowance for doubtful accounts is to be set up amounting to P297,500 for GD and P196,875 for CL. ; « Inventories of P21,875 and P15,320 are worthless in the books of GD and CL, respectively. ted by P87,500 and that CL is over. ‘The partnership agreement provides for a profit and loss ratio of 6:4 for GD and CL, respectively. Required: Solve for the following independent assumption: 1. Adjusted capital of GD and CL using the transfer of capital method. 2. Journalize the entries to adjust the capital and to record the investment in the new books of the partnership. : 3. Adjusted capital of GD and CL using the bonus method, assuming their capital ratio is the same as the profit and loss ratio. Suggested Solution: (1) Net Investment Method cD cL Unadjusted capital 2,625,000 2,056,250 Under-depreciated equipment (87,500) - Over-depreciated equipment - 131,250 Allowance for bad debts” (297,500), (196,875) Write-down of inventories (21,875) (15,320) Adjusted capital 2,218,125 975,305 (2) Entries in the books of the partnership: To record the investment of GD Cash 65,625 Accounts Receivable 187,500 Merchandise Inventory 853,125 Equipment (net) 568,750 Allowance for bad debts 297,500 Account Payable 459,375 cD Coptial 2,218,125& Operation Entry to record the investment of CL Cash 164,063, Accounts Receivable 896,875 Merchandise Inventory 870,617 Equipment (net) 1,400,000 Allowance for bad debts 196,875 Account Payable 1,159,375 CL, Capital 1,975,305 (3) Bonus Method cD cL Unadjusted capital 2,625,000 2,056,250 Under-depreciated equipment (87,500) = Over-depreciated equipment - 131,250 Allowance for bad debts (297,500) (196,875) Write-down of inventories (21,875) (15,320) Adjusted capital 2,218,125 1,975,305 Note: The same journal entries under the net investment method will be used in recording the initial investments of the partners under the bonus method. Total Contributed Capital Adjusted GD, Capital 2,218,125 Adjusted CL, Capital 1, 4,193,430 GD, Capital CL,Capital Contributed capital 2,218,125 1,975,305 Capital credit per agreement 4,193,430 x 60% 4,193,430 x 40% Bonus Entry to record the bonus to GD CL, Capital 297,933 GD, Capital 297,983-counting for Partnership Formation & Operation Chapter 1 ly done outside the Note: Settlement between the two partners is usually de u partnership. GD will pay P297,333 to CL since the increase in capital of GD (bonus to GD) resulted to a decrease in capital of CL (bonus from CL). ILLUSTRATIVE PROBLEM 1-2. A SOLE PROPRIETOR AND Two INDIVIDUALS FORM A PARTNERSHIP ‘On December 1 of the current year, Gabriel, the sole proprietor of the Victory Company, expands the company and establish a partnership with Miguel and Ezekiel. The partners plan to share profits and losses as follows: Gabriel, 40%; Miguel, 35% and Ezekiel, 25%. Gabriel asked Miguel to join the partnership because his image and reputation are expected to be valuable during formation, Miguel is also contributing P105,000 cash and a building that was acquired for 1,010,000, with carrying amount of P870,000 and fair value of P490,000. The building is subject to mortgage of P198,000 that the partnership did not assume. Ezekiel is contributing 212,000 cash and marketable securities costing P336,000 to Ezekiel but are currently worth P475,000. Gabriel's investment in the partnership is the Victory Company. The Statement of Financial Position for Victory Company follows: ‘Assets Cash Accounts Receivable Merchandise Inventory | Equipment,net 618,000 + TOTAL 3,858,000 TOTAL : 1,858,000 ‘The partners agreed that 35% of inventory is considered worthless, the equipment is worth 75% of its carrying amount, and 15% of accounts receivable is uncollectible. Gabriel 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. Answer the following: 1. Assuming the partners will either invest or withdraw cash, using Ezekiel as the base, Gabriel and Miguel will both invest cash with total amount of: 2 Assuming the partners will either invest or withdraw cash, using Miguel as the base, Gabriel and Ezekiel will both withdraw cash with total amount of: 3. If the transfer of capital method is used, the capital account of Gabriel and Ezequiel will change by: (debited or credited)Chapter 1 ~ Accounting for Partnership Formation & Operation Suggested Solution: Gabriel Miguel Ezekiel Total Unadjusted capital 829,000 write-down of inventory (137,900) write-down of PPE (154,500) provision for uncollectible (68,400) payables not assumed by firm 437,000 Cash contribution 105,000 Fair value of building 490,000 Cash contribution 212,000 Marketable securities 475,000 Net assets contribution 905,200 595,000 687,000 2,187,200 1. Using Ezekiel as the base, the total capital of the firm is: 687,000 / 25% = P2,748,000 Gabriel Miguel Ezekiel Contributed capital 905,200 595,000 687,000 Agreed capital: 2,748,000 x 40% 1,099,200 2,748,000 x 35% 961,800 2,748,000 x 25% : 687,000 Additional Investment 194,000 __ 366,800 0 2. Using Miguel as the base, the total capital of the firm is: 595,000 / 35% = P1,700,000 Gabriel Miguel Ezekiel Contributed capital 905,200 595,000 687,000 Agreed capital: 1,700,000 x 40% 680,000 1,700,000 x 35% 595,000 1,700,000 x 25% 425,000 Withdrawal (225,200) 0 (262,000)8 Chapter 1 ~ Accounting for Partnership Formation & Operation 3. Using the transfer of capital method (bonus method) : Gabriel Miguel Ezekiel Contributed capital 905,200 595,000 687,000 Agreed capital: 2,187,200 x 40% 874,880 2,187,200 x 35% 765,520 2,187,200 x 25% 546,800 Increase (decrease) in capital 30,320) _170,520__(1 Summary of Answers: 1. Assuming the partners will either invest or withdraw cash, using Ezekiel as the base, Gabriel and Miguet will both invest cash with total amount of: 560,800 2 Assuming the partners will either invest or withdraw cash, using Miguel as the base, Gabriel and Ezekiel will both withdraw cash with total amount of: ‘P487,200 3. If the transfer of capital method is used, the capital account of Gabriel will change by: (debited or credited) P30,320 DEBIT 4. If the transfer of capital method is used, the capital account of Ezekiel will change by: (debited or credited) P140,200 DEBIT PARTNERSHIP OPERATIONS, Since the partnership is organized by two or more persons, there should be a Clear agreement on how the partnership profit or loss will be divided among the partners. The following factors must be considered in establishing a just and equitable profit and loss sharing agreement: 1. Single Ratio - the partners may agree a single ratio on the distribution of the earnings or losses of the partnership. This is referred to as the “profit and loss ratio”. The profit and loss distribution may be expressed in terms of: . Percentage (50%; 30%; 20%) . Fraction (5/10; 3/10; 2/10) Decimal (0.50; 0.30; 0.20) . Ratio (5:3: poop9 Chapter 1 - Accounting for Partmership Formation & Operation i. If the partners agree on the manner of profit distribution but not loss distribution, then loss will be distributed using the profit ratio. ii, If the partners agree on the manner of loss distribution but not profit distribution, then profit will be distributed using the capital ratio. ili, If there is no provision for the distribution of profit and losses, then it will be divided on the basis of capital ratio. (use the beginning capital ratio in the absence of original capital ratio) 2. Provision for Salaries - part of profit distribution given to the partner(s) that devote time in the management of partnership. 3. Provision for Interest - part of profit distribution which allowed partners interest on capital (beginning or average) to give recognition to the differences in the capital given to the partnership. Partner with highest capital gets the highest interest share. 4. Provision for Bonus - part of profit distribution given to the partners who contribute skills or expertise to the partnership. Bonus may be computed using any of the following as basis: a. Bonus is based on profit before deducting bonus and income tax. B= 10% NI b. Bonus is based on profit after deducting bonus but before deducting income tax. B=10% (NI-B) c. Bonus is based on profit before deducting bonus but after deducting income tax. B= 10% (NI-7) where: T = 30% (NI); if bonus is not treated as expense. where: T = 30% (NI - B); if bonus is treated as expense. d. Bonus is based on profit after deducting bonus and income tax. B=10% (NI- B-)10 Chapter 1 — Accounting for Partnership Formation & Operation i i ted as expense. where: T = 30% (NI); if bonus is not trea where: T= 30% (NI ~ B); if bonus is treated as expense. ILLUSTRATIVE PROBLEM 1.3. SINGLE METHOD OF ALLOCATION At the beginning of the current year, partners Planet and Shakers ee Pas Partnership with Planet contributing 500,000 and aaees bu ie 300,000. Partnership realized a profit of P200,000 for the first year of operations. Distribute the profit to Planet and Shakers under each of the following independent assumptions: a. Profit is divided equally. b. Profit is divided in the ratio of 3:1. c. Noagreement on profit distribution. Assumption a: Profit is divided equally Planet 200,000 x 50% 100,000 200,000 x 50% Share in profit Journal Entry Income Summary 200,000 Planet, Capital 100,000 Shakers, Capital 100,000 Assumption b: Profit is divided in the ratio of 3:1 Planet 200,000 x 3/4 150,000 200,000 x 1/4 Share in profit 150,000 Journal Entry Income Summary 200,000 Planet, Capital 150,000 Shakers, Capital 50,000 Assumption c: No agreement on profit distribution Planet Shakers 200,000 x 5/8 125,000 200,000 x 3/8 75,000 Share in profit 125,000Chapter I - Accounting for Partnership Formation & Operation Journal Entry Income Summary 200,000 Planet, Capital 125,000 Shakers, Capital 75,000 Note: In the absence of agreement, profit and loss will be divided on the basis of contributed capital (500,000 and 300,000). ILLUSTRATIVE PROBLEM 1-4. MULTIPLE BASES OF ALLOCATION On January 1, 2018, partners Planet and Shakers formed P&S Partnership with Planet contributing P500,000 and Shakers contributing P300,000. Partnership realized a profit of P200,000 for the year 2018. Below is the summary of additional investments and withdrawals of the partners during the year. Additional Partner Planet Investment Withdrawal February 1 60,000 March 31 30,000 July 1 50,000 November 1 15,000 Additional Partner Shakers Investment Withdrawal May 31 50,000 August1 35,000 December 1 30,000 Profit is distributed to the partners according to the following provisions: ‘a. Annual salary to Planet, managing partner in the amount of P50,000. b. Interest of 10% each based on average capital balances. c. Bonus to Planet of 5% of net income before bonus and income tax. d. Balance, 4:6. Required 1. Compute the average capital. 2. Distribute the profit to the partners. 3. Prepare a Statement of Changes in Capital.Chapter 1 ~ Accounting for Parmership Formation & Operation Suggested Solution 1. Average Capital Partner Planet Beginning Capital February 1 March 31 July 1 November 1 Average Capital Partner Shakers Beginning Capital May 1 August 1 December 1 Average Capital 2. Profit Distribution Salary Interest 555,000 x 10% 321,250 x 10% Bonus 200,000 x 5% Balance (4:6) Total Note: Bonus shall be given if, and onl When the result of the operation is a l the partner(s). 500,000x 12/12 $00,000 60,000 x 11/12 55,000 30,000 x 9/12 (22,500) 50,000 x 6/12 25,000 15,000 x2/12 _(2,500)_ 555,000 a 300,000 x 12/12 300,000 50,000 x 8/12 33,333 35,000 x 5/12 (14,583) 30,000x1/12 ___—2,500_ Planet Shakers Total 50,000 50,000 55,500 32,125 87,625 10,000 10,000 20,950 31,425, 52,375 136,450 63,550 200,000 12 y if, there is a profit (net income). loss, no bonus will be distributed to3 Chapter 1 ~ Accounting for Partnership Formation & Operation 3. Statement of Changes in Capital P&S Partnership Statement of Changes in Capital for the year ended December 31, Planet Shakers Beginning capital 500,000 300,000 Additional investment 110,000 80,000 Share in profit 136450 63,550 Withdrawal (45,000)__(85,000) Ending capital 701,450 408,550 ILLUSTRATIVE PROBLEM 1-5, CALCULATION OF BONUS Dennis & Joy established Victory Partnership investing P500,000 each on November 9, 2019, Part of their profit distribution is a bonus of 15% to Dennis, the managing partner. Calculate the amount of bonus under each of the following independent assumption assuming the net income for the year ended December 31, 2019 is P300,000: (assume 30% tax rate) a. Bonusis based on profit before deducting bonus and income tax. b. Bonus is based on profit after deducting bonus but before deducting income tax. c. Bonus is based on profit before deducting bonus but after deducting income tax. d. Bonus is based on profit after deducting bonus and income tax. a. Bonus is based on profit before deducting bonus and income tax B= 15% (300,000) ». Bonus is based on profit after deducting bonus but before deducting income tax B= 15% (300,000 - B) B= 45,000 / 1.15 B=39130ion Chapter 1 — Accounting for Partnership Formation & Operat ‘ter deductit € Bonus is based om profit before deducting bons but after ing income tax B= 15% (300,000= T) B = 15% ((300,000) - (30% x 300,000)) * where: T = 30% (300,000); if bonus is not treated as expense B = 15% (300,000 - 1) B = 15% ((300,000) ~ (80% x 300,000 - B)) B=30144 * where: T = 30% (300,000 - B); if bonus is treated as expense 4. Bonus is based on profit after deducting bonus and income tax B = 15% (300,000 - B-7) 15% ((300,000) - B - (30% x 300,000)) * where: T = 30% (300,000); if bonus is not treated as expense B = 15% (300,000 - B- T) B = 15% ((300,000) ~ B - (30% x 300,000 - B)) B= 26360 “ where: T = 30% (300,000 - B); if bonus is treated as expense Accounting for Errors / Misstatement in the Profit or Loss Misstatement caused by error might affect income statement accounts or statement of financial position accounts. These errors might.have a material effect on the financial statement if not corrected. Errors include mathematical mistakes, mistakes in the application of accounting principles, oversights, or intentional misstatements of accounting records. Errors is classified either counter balancing or Non-counter balancing error, Counterbalancing errors This error if undetected or corrected will offset or correct them after two reporting period. A correcting journal entry is necessary for any counterbalancing error that is detected before it has counterbalanced. If the error is discovered after it has counterbalanced, no correcting journal entry isChapter 1 lccounting for Partnership Formation & Operation necessary, but the financial statements should be restated so that they are not misleading. Non-counterbalancing érrors Are errors that will not be automatically offset in the next accounting period. A correcting journal entry is necessary for a non-counterbalancing error and any applicable financial statements must be restated. The following table summarizes the effects of common. counterbalancing errors: Effect on: Income- | Income- ‘Type of adjustment/ error current year | next year Ending inventory overstated Over under | Ending inventory understated Under over Failure to accrue expenses at year end Over under Overstatement of accrued expense at year end Under Over Failure to accrue earned revenue at year end Under Over Overstatement of accrued revenue at year end Over under Failure to expense prepayments at year end Over Under Understatement of year end prepaid expense Under Over Understatement of year end liability for Over Under revenue received in advance ‘Overstatement of year end liability for Under a revenue received in advance Errors, whether counter balancing or non-counter balancing, affects the capital accounts of the partners. Therefore, correction is necessary to reflect the correct amount of income/loss that will be closed to the capital accounts. ILLUSTRATIVE PROBLEM 1-6. CORRECTION OF ERRORS Ariel, JC and Eugene are partners share profits on a 5:3:2 ratio. For the year 2019, the net income of the partnership was reported at P250,000. However, it was discovered that the following items were omitted in the partnership’s books:tion Chapter 1 for Partnership Formation & Opera 2019 Unrecorded at year- 2018 end: | Prepaid expense P 16 ie Accrued expense Unearned income 14,000 avi Accrued income Required: Compute the corrected net income for 2019 Suggested Solution Reported Net Income - 2019 meen Unrecorded prepaid expense - 2018 (16,0 ; ‘Unrecorded accrued expense - 2019 (12,000) Unrecorded unearned income - 2018 Seats Unrecorded accrued income - 2019 10,001 Adjusted Net Income - 2019 246,0007 Chapter 1 — Accounting for Partmership Formation & Operation PROBLEM 1-1 For several years, Deejay and Joshua have been operating their own retail pharmacies as sole proprietorships. They decided that several advantages could be gained if they combine their businesses into one operation. They leased a new facility and began operations as a partnership on January 2, of the current year. Deejay was able to find a buyer for his prior business and sold it as a going concern. Joshua did not have an opportunity to sell his business so he transferred as many asserts as possible to the new partnership. The following assets were contributed by Deejay and Joshua to start their new business: Degjay Cash 375,000 Accounts Receivable Inventory (merchandise) Furnishings Accumulated Depreciation on Furnishings General Office Equipment Accumulated Depreciation on Equipment Computer System Accumulated Depreciation on System Computer Software (undepreciated balance) Total 375,000 Accounts payable (assumed by the partnership) Required: BV 82,000 48,000 225,000 24,000 (12,000) 38,500 (20,000) 23,200 (17,200) 5,000 396,500 25,000 1. How much will be the opening capital of Deejay and Joshua? 2. Journalize the initial investment in the book of the partnership. 3. Assuming that the partners agree to have an equal capital in the partnership, using the transfer of capital method, how much is the initial capital of Joshua? PROBLEM 1 - 2 Joshua MV 82,000 40,000 220,000 8,000 20,000 375,000 25,000 The partnership of Gryffindor and Slytherin was formed on February 28 of the current year. At that date, the following assets were contributed:Chapter 1 ~ Accounting for Partnership Formation & Operducn Gryffindor Slytherin 35,000 a 15,000 Merchandise 45,000 Building 100,000 Furniture and fixtures 25,000 30,000 that is to be assumed by the ‘The buildi i e ling is subject to a mortgage loan of ‘des that Gryffindor and Slytherin partnership. The partnership agreement provi share profits or losses 40:60, respectively. Required: , 1. Using the net assets contribution approach, how much is the capital credit to Slytherin? ; : 2. Assuming the partners agreed to have an equal capital credit, how much is the capital of Gryffindor? = - 3. Assuming the partners agreed that the profit and loss ratio is the same as capital ratio, how much is the capital of Slytherin? PROBLEM 1-3 C P and A are new CPA’s and are to form an accounting partnership. C is to contribute cash of P75,000 and his computer originally bought at P80,000 but has a second-hand value of P50,000. P is to contribute cash of P100,000, and tables and chairs worth P20,000 but acquired by P for only P18,000. A, whose family is selling computers, is to contribute cash of P40,000 and a brand-new computer plus printer with regular price at P80,000 but which cost their family’s computer dealership P70,000, Partners agree to share profits 3:2:3. How much is the total capital of the partnership upon formation? PROBLEM 1-4 A, B, and C are forming a new partnership each contributing cash of P200,000 and their respective office equipment and supplies valued at P100,000, P200,000, and P300,000, respectively. A’s noncash contribution is his own developed audit software valued at cost which he could sell for trice the amount. Partners agree to admit his software at market value and they will share profits equally. How much is the capital credit to each partner upon formation:Chapter 1 — Accounting for Partnership Formation & Operation PROBLEM 1-5 Joe Con developed an interesting idea for marketing sailboats in Death Valley. He invited Rob White to join him in a partnership. Following is the information you have collected relative to their original contributions. Rob contributed P30,000 cash, a tract of land, and delivery equipment. Joe contributed P60,000 cash. After giving special consideration to the tax bases of the assets contributed, the relative usefulness of the assets to the partnership versus the problems of finding buyers for the assets and contributing cash, and other such factors, the partners agreed that Joe's contribution was equal to 40 percent of the partnership's tangible assets, measured in terms of the fair value of the assets to the partnership. However, since the marketing idea originated with Joe, it was agreed that he should receive credit for 50 percent of the recorded capital. Recent sales of land similar to that contributed by Rob suggest a market value of P40,000. Likewise, recent sales of delivery equipment similar to that contributed by Rob suggest P40,000 as the market value of the equipment. These sales, of course, were not entirely representative of the particular assets contributed by Rob and therefore may be a better indicator of their relative values than their absolute values. In reflecting on their venture, the partners agree that it is a rather risky affair in respect to anticipated profits. Hopefully, however, they will be able to build good customer relations over the long run and establish a permanent business with an attractive long-term rate of return. Under the most appropriate method, given the circumstances, the entry to record the formation of partnership must be: PROBLEM 1-6 On June 1 of the current year, S and T pooled their assets to form a partnership, with the firm to take over their business assets and assume the liabilities. Partners’ capitals are to be based on the assets transferred after the following adjustments: a. T's inventory is to be increased by P3,000. b. An allowance for bad debts of P1,000 and P1,500 are be set up on the books of S and T, respectively. c. Accounts payable of P4,000 is to be recognized in S’s books. d. An amount of cash must be contributed by any one of the partners in order to establish equal amount of interest. The following balances appear on S and T's individual books on June 1, before adjustments:20 Chapter 1 — Accounting for Parmership Formation & Operation, Assets s P75,000 T 113,000 How much capital must be credited to S? PROBLEM 1-7 Carlo admits David as a partner in his business. Accounts in the Lave aca on June 30 of the current year, just before the admission of David, following balances: Cath P6800 Accounts Receivable 342,000 Merchandise Inventory 200,000 Accounts Payable 80,000 Carlo, Capital 330,000 It is agreed that for purposes of establishing Carlo’s interest the following adjustments shall be made. a. An allowance for doubtful accounts of 3% of accounts receivable is to be established b. The merchandise inventory is to be valued at P230,000 c. Prepaid expenses of P12,260 and accrued expenses of P8,000 are to be recognized. David is to invest sufficient cash to obtain a 1/3 interest in the partnership. Compute for the following: 1. How much is the cash investment of David? 2.. How much is the total capital of the partnership upon formation? 3. How much is the total assets of the partnership upon formation? 4. Journalized the adjustments in the capital account of Carlo. PROBLEM 1-8 On January 1, 2018, Malachi and Haggai a greed to form a i following are their assets and liabilities, Partnership. The21 Chapter 1 = Accounting for Partnership Formation & Operation Accounts Malachi Haggai Cash P136,000 —_P76,000 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 Malachi decided to pay-off his notes payable from his personal assets. It was also agreed that Haggai’s inventories were overstated by P24,000 and Malachi machinery was over-depreciated P20,000, Haggai is to invest/withdraw cash in order to receive a capital credit that is 20% more than Malachi’s total net investment in the partnership. Immediately after the formation, compute for the following: 1. Total cash of the partnership, 2. Total assets of the partnership. 3. Total capital of the partnership. PROBLEM 1-9 On June 1, of the current year, Nikki and Ernest combined their separate business to form a partnership. The non-cash assets to be contributed and liabilities to be assumed are as follows: | Fair Vatue___Valu “Accounts Receivable “P26,250° 20,000 Inventory 26,000 PPE a _ 86250 ‘Accounts Payable {11,250 Nikki and Ernest are to invest equal amounts of cash such that the contribution of Nikki would be 10% more than the investment of Ernest. Immediately after the formation, compute for the following: 1. Total cash of the partnership. 2, Total assets of the partnership. 3. Total capital of the partnership.22 Chapter 1 — Accounting for Partnership Formation & Operation PROBLEM 1 - 10 On December 1, of the current year, James invited Lakers to join himin business. Lakers agreed provided that James will adjust the accumulated depreciation of his equipment account to certain amount, and will recognize additional accrued expenses of P10,000. After that, Lakers is to invest additional pieces of equipment to make his interest equal to 45%. The capital balance of James before and after adjustment were P139,000 and P121,000, respectively. What is the effect in the carrying value of equipment as a result of admission of Lakers? PROBLEM 1 - 11 On February 1, 2019, Flores, Gilroy, and Hansen began a partnership in which Flores and Hansen contributed cash of P25,000; Gilroy contribute property with a fair value of P50,000 and a tax basis P40,000. Gilroy receives a 5% bonus of partnership income. Flores and Hansen receive salaries of P10,000 each. The partnership agreement of Flores, Gilroy, and Hansen provides all partners to receive a 5% interest on capital and that profits and losses be divided of the remaining income be distributed to Flores, Gilroy, and Hansen by a 1:3:1 ratio. Required: 1. Prepare a schedule to distribute P50,000 partnership net income to the partners. 2. Prepare a schedule to distribute P20,000 partnership net loss to the partners. PROBLEM 1-12 Evans, Fitch, and Gault operate a partnership with a complex profit and loss sharing agreement. The average capital balance for each partner on December 31, 2019 is P300,000 for Evans, P250,000 for Fitch, and P325,000 for Gault. An 8% interest allocation is provided to each partner. Evans and Fitch receive salary allocations of P10,000 and P15,000, respectively. If partnership net income is above P25,000, after the salary allocations are considered (but before the interest allocations are considered), Gault will receive a bonus of 10% of the original amount of net income. All residual income is allocated in the ratios of 2:3:5 to Evans, Fitch, and Gault, respectively. Required: 1. Prepare a schedule to allocate income to the partners net income is P250,000. partners assuming that partnership 2. Prepare a journal entry to distribute the partnership's income to the pa (assume that an Income Summary account is used by the partnership) : 3. Prepare a schedule to allocate income or loss to the & partnership incurs a net loss of P36,000, Partners assuming that the23 Chapter I~ Accounting for Partnership Formatlon & Operation 4. Prepare a journal entry to distribute the partnership's loss to the partners (assume that an Income Summary account is used by the partnership). PROBLEM 1-13 ‘The partnership of X, Y and Z provides for the division of net income as follows: a. Y, who manages the partnership is to receive a salary of P16,500 monthly b. Each partner is to be allowed interest at 15% on ending capital c. Balance ~ 25:30:45 to X, Y and Z respectively During 2019, X invested an additional P96,00 in the partnership. Y made an additional investment of P60,000 and withdrew P90,000. Z withdrew P72,000. No other investments or withdrawals were made during 2019. On January 1, 2019, the capital balances were X - P280,00; Y - P300,000 and Z - P170,000. Total capital at year-end was P975,000. Required: 1. Allocate the net income (loss) to the partners. 2. Prepare the Statement of Changes in Capital. PROBLEM 1-14 Greg, Harris, and Ivan have a retail partnership business selling personal computers. The partners are allowed an interest allocation of 8% on their average capital. Capital account balances on the first day of each month are used in determining weighted average capital, regardless of additional partner investment or withdrawal transactions during any given month. Drawings are disregarded in computing average capital, but temporary withdrawals of capital that are debited to the capital account are used in the average calculation. Partner capital activity for the year was: Capital accounts Greg Harris Ivan Jan 1 - balance P ~ 200000 P 300,000 P 250,000 Feb 2- investment 50,000 Mar 6 - investment 10,000 20,000 Apr 20 - withdrawal (10,000 Jul3 - withdrawal and investment (7,000 ) 10,000 Sep 29 - investment 5,000 4,000 5,000 Nov 5 - investment 5,000 Required: Calculate weighted average capital for each partner, and determine the amount of interest that each partner will be allocated.Chapter 1 Accounting for Partnership Formation & Operation PROBLEM 1-15 Cleary, Wasser, and Nolan formed a partnership on Ntrse au with investments of P100,000, P150,000, and P200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning of 6) area a year, (2) annual compensation of P10,000 to Wasser, and ( aoe s remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was P150,000 in 2017 and 180,000 in 2018. Each partner withdrew P1,000 for personal use every month during 2017 and 2018. Required: 1, Allocate the net income (loss) to the partners. 2. Prepare the Statement of Changes in Capital. PROBLEM 1 - 16 Lancelot is trying to decide whether to accept a salary of P40,000 or a salary of 25,000 plus a bonus of 10% of net income after salary and bonus as a means of allocating profit among the partners, Salaries traceable to the other partners are estimated to be P100,000. Required: What amount of income would be necessary so that Lancelot would consider the choices to be equal? PROBLEM 1-17 A,B, C and D established a publishing company on January 2, 2018 that they operate as a partnership. The partnership agreement includes the following: a. A receives a salary of P20,000 and a bonus of 3% of income after all bonuses b. B receives a salary of P10,000 and a bonus of 2% of income after all bonuses c. All partners are to receive 10% interest on their average capital balances The average capital balances are as follows: A - P50,000; B - P45,000; C - P20,000 and D - P42,000. Any remaining profits and loss are to be divided equally among the partners. Required: 1. Allocate the net income (loss) to the partners 2. Prepare the Statement of Changes in Capital,28 Chapter 1 ~ Accounting for Partnership Formation & Operation PROBLEM 1-18 Edward, Glenn and Ramel, formed a partnership on July 1, 2018 with the following investments: Edward : = [Glenn Swe] Hane | Ramil | 450,000 ; The partnership agreement stated that profits and losses are to be shared equally by the partners after consideration for the following: a. Annual salaries to partners: P 60,000 for Edward; P 48,000 for Glenn and P 36,000 for Ramel. b. 10% interest on average capital. c. 10% net profit after salaries and interest as bonus to Edward as the managing partner. Additional information: a, On October 1, 2018, Edward made additional investment of P60,000. b. Ramel invested P30,000 on December 1, 2018. Required: 1. Ifeach partner received P30,000 (ignore income tax) on the residual profit after salaries, interest and bonus, the net income reported by the partnership during the 1+ 6-months of operation is; 2. Considering your answer in number 1, prepare the Statement of Changes in Capital. 3, Assuring the result of operation is a loss of P50,000, how much is the share of each partner to the partnership loss? PROBLEM 1-19 Yael, a partner in Sponge Cola Partnership, has a 30% participation in partnership profits and losses. Yael’s capital account had a net decrease of 60,000 during the calendar year 2018, During 2018, Yael withdraw P130,000 (charged against his capital account) and contributed property with agreed valued of P25,000 to the partnership. The accumulated depreciation of property is 5,000. Required: The net income of partnership for 2018 is:26 Chapter } — Accounting for Partnership Formation. & Operation PROBLEM 1-20 ‘The following balance sheet for the Partnership of A, By amd Cwere taken from the books on July 1, 2019: The partners agreed to distribute the profits as follows: a. Annual salaries to A and B of P 3,000 each; b. Allow interest of 6% on beginning capital; c. Allow a bonus of 10% to B, the bonus to be salaries and interest; and d. Remaining, 40% to A, 40% to B. and 20% to C. treated as an expense after Required: 1. If the net income of the partnership was P122,000 during the six-month period ending December 31, 2019, the total share of B in the net income is: 2. IFC receives as his share of net income P42,880 for the six-month period ending December 31, 2019, the total net income realized by the partnership for the same period before salaries, interest and bonus was:27 iccounting for Partne Formation & Operation ———— mr tara & Operation MULTIPLE CHOICE (THEORY) 1. Partner's interest in a partnership is generally equal to: a. The fair value of net assets at date of contribution. b. The sum of the fair value of the assets the partner contributes to the firm, increased by any liabilities of other partners assumed and decreased by any personal liabilities that are assumed by other partners. c. The sum of the bases of the individual assets the partner contributes to the firm, decreased by the partner's share of partnership liabilities, d. The unamortized cost of the assets to the partner. 2, When property other than cash is invested in a partnership, at what amount should the noncash property _be credited to the contributing Partner's capital account? (select the best answer) Fair value at the date of contribution. . Contributing partner's original cost. Assessed valuation for property tax purposes. |. Contributing partner's tax basis. Zonal valuation epapop 3. On July 1, of the current year, a partnership was formed by John and Seth. John contributed cash. Seth, previously a sole proprietor, contributed property other than cash including realty subject to a mortgage, which was assumed by the partnership. Seth’s capital account at that date should be recorded at: a. Seth’s book value of the property. b. Seth's book value of the property less the mortgage payable c. The fair value of the property less the mortgage payable d. The fair value of the property 4. A and B formed a partnership and agreed to divide initial capital equally despite the fact that A has contributed more capital than B. In recording for the initial capital under bonus approach, how much is the approximate debit to the capital of A for the unidentifiable assets? Contribution of B less the arithmetic average contribution . Contribution of A less the arithmetic average contribution . Contribution of B less the contribution of A . Contribution of A less the contribution of B poop28 Chapter 1 — Accounting for Parmership Formation & Operation. 5. A partner's drawing account is, in substance, . A capital accounts ».__ A contra-capital accounts A salary éxpense account ‘ A loan account (a loan from the partnership) S pos 6 The disadvantages of the partnership form of business organization, compared to corporations, include .__ the legal requirements for formation. unlimited liability for the partners. : the aera ial the partnership to pay income taxes. the extent of governmental regulation. the complexity of operations. > pans 7. The advantages of the partnership (general) form of business organization, compared to corporations, include single taxation. . ease of raising capital. mutual agency. Limited liability. difficulty of formation. Ppoep 8. Which of the following is not a characteristic of a partnership? ‘The partnership itself pays no income taxes. . Tt is easy to form a partnership. Any partner can be held personally liable for all debts of the business. A partnership requires written Articles of Partnership. Each partner has the power to obligate the partnership for liabilities, oop oe 9. The amount withdrawn by a partner in excess of the agreed amount that can be withdrawn is Debited to drawing account . Debited to loan account Debited to capital account . Treated as an expense Bose 10. When the investment of the new partner exceeds the new partners’ initial capital balance, the bonus is credited to a. The new partner. b, The old partner based on their old profit and loss ratio, c. The old partner based on their capital ratio.29 Chapter 1 ~ Accounting for Partmership Formation & Operation 1. 12. 13. 14. B. 16. d. ‘The old and new partner based on relative profit and loss ratio. The partner whose connection with the firm is public and open ROP . Ostensible Partner Secret Partner Dormant Partner |. Silent Partner The partner who is not known to the public and does not manage the business a b. c d. Ostensible Partner . Secret Partner Dormant Partner |. Silent Partner The who manages the firm's activities a c d. Capitalist Partner Liquidating Partner Managing Partner Partner by estoppel ‘The characteristic of the partnership that bind the firm by the action of any of its partners a b. c d. Unlimited liability . Mutual agency Sharing of profits . Limited liability The agreement which stipulates that a billionaire partner is exempted from profit sharing is a b. c. d. Void . Voidable Unenforceable |. Valid Which of the following transactions shall not affect the capital balance of partner? a, b. c d. ‘Share of a partner in the partnership’ net loss. Receipt of bonus by a partner from another partner based on the agreement. Advances made by the partnership to a partner. Additional investment by the partner to the partnership.30 Chapter 1 — Accounting for Partnership Formation & Operation. 17. In the absence of agreement as to distribution of profit, how shall the partnersh Sei diaesi ? ip profit be distributed to the partners i a. The industrial partner shall receive a share equivalent to the least share of ‘a capitalist partner while bi capitalist partners shall share based on capital contribution ratio. ; b. ‘The industrial panne shall receive a just and equitable share and the remainder shall be distributed to the capitalist partners on the basis of capital contribution ratio. c. The profit shall be distributed on ratio which may have been agreed upon by the partners, d. The profit shall be distributed equally to all partners including the industrial partner. the basis of loss contribution 18. Under what circumstances can the closing of Income Sumunary account results in a debit to one partner's capital account and credits to the other partners’ capital accounts? | a. The results of operations are divided in a profit and loss ratio and the partnership sustained a loss for the period. b. The partnership agreement provided for interest on capital and salary allowances and net income is less than the sum of the interest and salary allowances. c. The results of operations are allocated in a profit and loss ratio and the partnership's net income was very low. d. The results of operations are divided in the average capital ratio and one partner had a low capital balance. 19. Which of the following will decrease the capital balance of a partners? a. Share in partnership profit. b. Receipt of share in revaluation surplus from a partnership plant and equipment. c. Drawing made by a partner. d. Advances made by a partner to the partnership. 20. The GM partnership agreement provides for G to receive a 20% bonus on profits before the bonus. Remaining profits and losses are divided between G and M in the ratio of 2 to 3, respectively. Which partner has a greater advantage when the partnership has a profit or when it has a loss? Profit Loss Profit ‘Loss a G M © 4M G b. G G d. M M1 Chapter 1 — Accountis ° for Partnership Formation & Operation 21. If there is an agreement for the division of profits but none for losses, it is concluded that: a. Losses should be divided according to partner’s original capital ratio, b. Losses should be divided equally. ©. Losses should be divided according to partner's average capital ratio. 4d. Losses should be divided in the same way as profits. 22. An amount withdrawn by the partner in excess of the agreed amount that can be withdrawn is a. Debited toa loan account b. Debited to capital account ¢. Considered an expense 4. Debited to drawing account 23. If the partnership agreement provides a formula for the computation of a bonus to the partners, the bonus would be computed a. next to last, because the final allocation is the distribution of the profit residual, b. before income tax allocations are made. . after the salary and interest allocations are made. d. in any manner agreed to by the partners. 24. Drawings are advances to a partnership. are loans to a partnership. are function of interest on partnership average capital. have the same nature as withdrawals, Boop 25. Withdrawals from the partnership accounts are typically not used a. to record compensation for work performed in the business. b. to reduce the partners’ capital account balances at the end of an accounting period. c. to record interest earned on a partner's capital balance. d. to reduce the basic investment that has been made in the business.to record a reward for ownership in the partnership. 26. Cob, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean asserts the right to: i. Cob’s share in TLC’s partnership profit ii, Participate in the management of the partnership32 Chapter 1 ~ Accounting for Partmership Formation & Operation, iii, Sell Cob’s interest to the outsider a. iandifi pionly — citonly — d-dandl 27. If only the share of each partner in the losses has been agreed upon, the share of each partner in profits shall be allocated a. inthe same proportion. ae b. in accordance with their capital cont sean ¢. as determined in accordance with the Partnership Code of the Philippines. d. equally. likely to be used as a means of 28. Which of the following would be least active in the management of allocating profits among partners who are the partnership? Salaries , . Bonus as a percentage of sales in excess of a projected amount Bonus as a percentage of net income before bonus Interest on average capital balances poe 29. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation, interest on capital, with any remainder to be allocated at agreed ratio. If partnership has a loss to allocate, generally which of the following procedures would be applied? a. Any loss would be allocated equally to partners b. The loss would be allocated using the profit and loss ratio only c. The bonus criteria would not be used d. Any salary allocation criteria would not be used 30. Which of the following statements is/are TRUE? a. Bonus is based on the concept of income; therefore, no bonus will be given if the result of the operation is a loss. b. If the partners do not agree on the manner of profit distribution, it is understood to allocate on the basis of capital ratio. c. Salary, as part of profit allocation, is normally given to the partner who manages the business operation, d, Temporary withdrawal is a withdrawal of the anticipated share in profit; therefore, charged to drawing account and not directly to capital account, e. Allof the above.33 Chapter 1 - Accounting for Partnership Formation & Operation MULTIPLE CHOICE (PROBLEMS) ‘ On March 1, of the current year, PP and QQ decide to combine their businesses and form a partnership. Their balance sheets on March 1, before adjustments, showed the following: PP QQ Cash Pp 9,000.00 P 3,750.00 Accounts Receivable 18,500.00 13,500.00 Inventories 30,000.00 19,500.00 Furniture and Fixtures (net) 30,000.00 9,000.00 Office Equipment (net) 11,500.00 2,750.00 Prepaid Expenses 6,375.00 _3,000.00_ Total P 105,375.00 P. 51,500.00 Accounts Payable P 45,750.00 P 18,000.00 Capital 59,625.00 33,500.00 Total —P__ 10537500 P _51,500.00 They agreed to have the following items recorded in their books: a. Provide 2% allowance for doubtful accounts. b. PP’s furniture and fixtures should be P31,000, while QQ’s office equipment is under-depreciated by P250. c. Rent expense incurred previously by PP was not yet recorded amounting to P1,000, while salary expense incurred by QQ was not also recorded amounting to P800. d. The fair market value of inventory amounted to: for PP P29,500 and for QQ P21,000 1. Compute for the net (debit) credit adjustment for PP and QQ: a. PP: P2,870; QQ: P2,820 b. PP: (P870); QQ: P180 c. PP: (P2870); (P2,820) d. PP: 870;QQ:(P180) 2. How much is the total liabilities after the formation? a. P61,950 c, P63,750 b. 63,950 d. P65,550 3. How much is the total assets after the formation? a. 157,985 cc. P160,765 b. 156,875 d. P152,985 On January 1, of the current year, Tonie, Abbie and JM entered into articles of co- partnership for the operation of TAJ computer shop. Toni contributed34 tion Chapter 1 — Accounting for Partnershi Formation & Opera : 700,000 subject to mortgage investment property with assessed value of PLIVOT t : payable of 500,000 to be assumed by the partriership. Abbie contributed - ‘ ith accumulated depreciation of computer equipment with cost of P600,000 wil spent is P300,000: On the P200,000. The fair market value of the computer equip! same date, the partnership was able to sell the investment property for P2,000,000. 4. How much cash shall be contributed by JM if the articles of co-partnership provide that Toni will have 60% interest in the partnership? a. P500,000 c 1,000 b. — P 700,000 d. 600,000 On January 1, of the current year, Angel, Bea and Collen formed ABC & ©o, a general professional partnership for the exercise of their common Profession. Angel contributed a building with cost of PSM and accumulated depreciation of P4M. Based on the city assessor's records, the building has an assessed value of P2M. The building has an annotated mortgage payable amount to P500,000 to be assumed by the partnership. On the other hand, Bea contributed 10,000 shares of stock with par value of P200/share and prevailing quoted price of P300/share. On January 2, the building contributed by Angel was sold for P5.5M. 5. If Colleen wants to have 20% capital interest in the newly formed partnership, huow much cash shall be contributed by her? a. 875,000 c. P2,000,000 b. -P1,125,000 d. 2,125,000 At the beginning of the current year, Regina, Jessica and Nataly formed a partnership with profit or loss sharing agreement of 2:3:5. Regina contributed a land with assessed value from city assessor in the amount of P1,000,000. The land is subject to a real estate mortgage which is annotated to the tittle of the land is the amount of P800,000 and will be assumed by the partnership. The appraised value of the land is P2,400,000 and accumulated depreciation of P1,500,000. The fair value of the buildings is P800,000. Nataly contributed investment in trading securities with historical cost of P6,000,000. The trading securities have quoted price in active market of P3,000,000. The partners decided to bring their capital balances in accordance with their profit or loss sharing agreement. The total agreed capitalization of the new parinership is P10,000,000.35 Chapter 1 — Accounting for Partnership Formation & Operation, 6. Which ofthe following statements correct? * Jessica should contribute additional’ ‘capital in the amount of 2,000,000 b. The agreed capital of Nataly is P500,000 ¢. Regina should contribute additional capital in the amount of 1,800,000 d. Nataly is entitled to withdraw in the amount of P1,000,000 Alma and Becca have just formed a partnership. Alma contributed cash of P176,400 and office equipment that cost P75,600. The equipment had been used in his sole proprietorship and had been 70% depreciated, the current value of the equipment is P50,400. Alma also contributed a note payable of P16,800 to be assumed by the partnership. Alma is to have a 30% interest in the partnership. Becca contributed P256,000 land at fair market value. 7. Becca should make additional investment of: a 234,000 cc. P256,000 b. — P490,000 d. P210,000 Miley admits Claire as a partner in business. Just before the partnership's formation, Miley's books showed the following: Cash PR 2,600 Accounts receivable 12,000 Inventories 18,000 Accounts payable 6,200 Miley, Capital 26,400 It was agreed that, for establishing Miley's investment in the firm, the following adjustments shall be reflected: * Allowance for bad debts of 2% should be set up. * Merchandise inventory should be valued at P20,000. * Prepaid expense of P350 and accrued expense of P400 should be recognized. 8. How much cash should Claire invest to secure a one-third interest in the partnership? a. P14,055 c. P17,600 b. P9437 d. P14,205 A business owned by Charles was short and Charles decided to form a partnership with Raven and Erik, Raven was able to contribute cash thrice the36 Chapter 1 — Accounting for Partnership Formation & O} eration. interest of Charles in the partnership while Erik was able to contribute cash twice the interest of Raven in the partnership. ‘The assets contributed by Charles were as follows: Cash P18,000; Accounts Receivable (net) P366,000; Inventory 840,000; and Store Equipment of P300,000 with accumulated depreciation of P30,000 but with a fair value of P200,000. Charles, Raven and Erik agreed that the Receivables was impaired by an additional amount of P8,000, They also agreed that the fair value of the inventory is P920,000. 9. The total assets of the partnership: a. 15,460,000 ec. P7,680,000 b. — P15,960,000 d. 7,092,000 John and Jude form a partnership with John contributing cash of P50,000 and equipment with fair value of P70,000. Jude contributed machinery with fair value of P180,000 and enough cash to have a capital participation of 70%. The profit and loss ratio are 25% to John and 75% to Jude. 10, How much is the total cash of partnership upon formation a. P230,000 cc. P200,000 b. — P150,000 d. P250,000 Gab and Migs entered into a partnership as of March 1, 2018 by investing P1,000,000 and P600,000, respectively. They agreed that Gab, as the managing partner, was to receive a salary of P960,000 per year and a bonus computed at 10% of the net income after adjustment for the salary; the balance of the income was to be distributed in the ratio of their original capital balances. On December 31, 2018, account balances were as follows: Cash P560,000 Accounts payable P-480,000 ‘Accounts receivable 536,000 Gab, capital 1,000,000 Furniture & Fixtures 360,000 Migs, capital 600,000 Returns and allow. 40,000 Gab, drawing (160,000) Purchases 1,568,000 Migs, drawing (240,000) Operating expenses 480,000 Sales 1,864,000 Inventories on December 31, 2018 were as follows: supplies, P20,000, merchandise, P584,000. Prepaid insurance was P7,600 while accrued expenses were P12,400. Depreciation rate was 20% per year.37 Chapter 1 = Accounting for Partnership Formation & Operation 11. The distribution of net profit was: . a. Gab, P572,000; Migs, (P136,800) 5 b. Gab, P497,000; Migs, (P181,800) ¢. Gab, P549,500; Migs, (P246,300) d. Gab, P553,000; Migs, (P148,200) Love and Faith have been operating an accounting firm as partners for a number of years and at the beginning of 2019, their capital balances were P120,000 and 150,000, Tespectively. During 2019, Love invested an additional P20,000 on April 1 and withdrew P12,000 on August 30. Faith withdrew P24,000 on May 1 and invested P10,000 on November 1. In addition, Love and Faith withdrew their salary allowances of P36,000 and P42,000, respectively. At year-end 2019 total capital of the Love and Faith partnership was 360,000. Love and Faith share income after salary allowances in a ratio of 55:45. 12. The share of Love on the 2019 net income is: a. P88,800 c. P46,800 b. P57,600 d. P104,400 ‘On May 2, 2019, Patrick, Chris and Mark formed the Three Thirteen Partnership with the following initial contribution: Patrick - P150,000, Chris - P300,000 and Mark ~ P300,000, After closing the partnership profit for 2019 and considering the additional investments and withdrawals made, capital balances as of December 31, 2019 are as follows: Patrick - P300,000, Chris - P400,000 and Mark = P500,000. Profit and Loss ratio agreed between the partners is 4:4:2 to Patrick, Chris and Mark, respectively. At the end of 2019, it is determined that the Income Summary has a credit balance of P200,000. 13. How much is the share of Patrick in 2019's operation result? a. (P30,000) ©. P80,000 b. P50,000 d. P40,000 Dino and Gavin, partners, allow monthly salaries (P6,000 & P5,000, respectively) and 6% interest on beginning capital (P300,000 & P230,000, respectively), and then divide any remaining profit equally. 14. Ona net profit of P100,000, the respective shares would be: P50,000 and P50,000 . P54,500 and P45,500 56,600 and P43,400 ._P58,100 and P41,900 aoe3B Dawn and Dew, who share partnership PP". 2019 as follows: weighted-average capital ratio, had capital Dawn, Capital 04701 5,000 | 01/01 48,000 07/31 10,000 09/30 5,000 12/01 4,000 15. Ifthe partnership reports a net income Of 60,000 in 2019, Daton's share would be a. P20,000 ‘ P37 500 b. 22,500 d. P40, ane 1, 2019. On that, Insta and Gram have Insta-Gram began operations on Ji ‘ capital credits of P175,000 and P240,000, respectively. following profit-sharing plar: a. 10% interest on partners’ capil b. P60,000 and 75,000 annual respectively c. Remaining profit will be divided to Insta and Gram on a 60:40 ratio, respectively sted P150,000 worth of merchandise and withdrew During the year, Insta invest 40,00) cash, while Gram invested P120,000 cash. The partnership earned a ‘The partnership has the ital balances at the end of the year salaries of Insta and Gram, profit of P266,375 during the year. 16. How much is Insta capital balance at the end of 2019 a. 484,825 cc. PA22,375 b. PA26,625 d. P413,625 CHAN and DARA are partners who agreed to share profits and losses in the following manner: Chan Dara Annual salaries PB 261,000 B 259,000 Interest on average capital 5% 10% Bonus (based on net income after salaries 10% & interest) Remainder 50% 0%39 Chapter 1 ~ Accounting for Partnership Formation & Operation During the year ended December 31, 2019, the partnership's result of operation was P575,000 profit before any deduction. CHAN and DARA‘s average capital balances for the year are P600,000 and P300,000, respectively. 17, How much is the total share of DARA in the net income for the year ended December 31, 2019? 2 a. P287,500 c. P288,500 b. —P286,500 d. P295,665 Bing, Bong and Bang are partners with average capital balances during 2019 of P120,000, P60,000 and P40,000, respectively. Partners will receive 10% interest on their average capital balances. After deducting salaries of P30,000 to Bing and 720,000 to Bang, the residual profit or loss is divided equally. In 2019, the partnership sustained a P33,000 loss before interest and salaries to partners. 18. By what amount should Bing's capital account change? a. P42,000 increase b. P35,000 decrease c. P11,000 decrease d. P7,000 increase A and B formed a partnership. The partnership agreement stipulates the following: a. Annual salary allowance of P200,000 for A. b. Bonus to A of 10% of the profit after partner's salaries and bonus. c. The partners share profits and losses on a 60:40 ratio. During the period, the partnership incurred loss of P80,000. 19. How much is the share of B in the partnership loss? a. P109,091 cc. P29,091 b. P112,000 d. PO 20. By what amount did A’s capital account change? Increase (decrease) a. (229,091) ©. (P32,000) b. P29,091 dd. 32,000 Sean and Andie formed a general professional partnership (practicing law) in the Philippines on January 1, 2019. Their capital contributions were credited to their respective capital accounts as follows: Sean, Capital ~ P600,000; Andie, Capital - P1,000,000. During the year, the partnership earned profit of P4,000,000. The income tax rate was 30%.40 & Operation Chapter 1 — Accounting for Partnership Formancn. : ip profit? 21. How much is the shave of Andie in the partners 0 a. 1,750,000 §. 2,000,000 b. P2,500,000 ‘ ' ip. During the year, Wash has a 25% participation in the profits of es contributions of Wast’s capital account has a net increase of PAD OO, 1S P160,000 and capital withdrawals of P240,000 during i ? 22. How much profit did the partnership earned ee La a. P120,000 e.Fs b. P560.000 d. P720,000 ji isi iness. During 2019, they Kenji and Hazel are partners in a merchandising business. th withdrew their salary allowances of P34,000 and P59,000 Se aes profit or loss are shared in the ratio of 32 by Kenji and Hazel. tae earn summary account before any profit allocation has a credit balance of! 1,000. ‘The partners’ capital accounts show the following: Kenji Hazel Beginning balance P85,000 P67,000 Additional investment 40,000 43,000 Withdrawal other than. salary (35,000) (20,000) Ending balance 90,000 90,000 23. What would be the capital balance of Kenji on December 31, 2019 after dividing the net income? a. P176,000 c. P183,800 b. P142,200 d. P124,800 David, Curry, and Tomas have been partners throughout 2019. Their average balances and their balances at the end of the year before closing the nominal accounts are as follows: Partner Average Balances Balances, 12/31/2019 David P97,500 P70,000 Curry 7,300 11,800 Tomas 4,250 1,700 (debit balance) The income for 2019 is P103,500 before charging partners’ salary allowances and before payment of interest on average balances at the agreed rate of 4% per annum. Annual salary allocations are P12,500 to David, P8,750 to Curry, and