JOHN PAUL C.

ROSARIO – CENTRAL MINDANAO UNIVERSITY

Test bank for Partnership Nature and Formation

Statement 1: The formation of a partnership is always based on a contract or agreement of partners

Statement 2: All contracts or agreements entered into by partners are valid.

True, False

Statement 1: When a partner contributes a furniture with a fair value of P25,000, the partners’
agreement must be put in writing

Statement 2: When a partner contributes a real property with a fair value of P2,500, the partners’
agreement must be put in writing

True, True

Statement 1: Non-registration of articles of co-partnership nullifies the existence of a partnership

Statement 2: Non-registration of a partnership agreement of the partnership when an immovable

property is contributed voids the contract

False, True

Statement 1: Co-ownership of the property indicates the existence of a partnership.

Statement 2: There is partnership formed when two persons merely share in the gross returns from the
sale of property

False, False
 JOHN PAUL C. ROSARIO – CENTRAL MINDANAO UNIVERSITY

Statement 1: A Silent Partner is the complete opposite of a Secret Partner.

Statement 2: A Dormant Partner is the complete opposite of a Managing Partner.

True, False

Statement 1: There are instances when the contributions of a partner are recorded through their
drawing accounts

Statement 2: There are instances when the drawings of a partner are recorded through their capital
accounts

False, True

Statement 1: When a receivable is contributed, it is recorded at an amount net of the allowance for
doubtful accounts

Statement 2: When an item of PPE is contributed, it is recorded at an amount gross of the accumulated
depreciation

False, False

Statement 1: Failure to recognize the expired portion of the prepaid expenses contributed to the
partnership will overstate the capital accounting of the contributing partner

Statement 2: The receivable contributed by a partner is overstated by P2,000. In case the account is not
adjusted, the capital account of the contributing partner is understated by the same amount.

True, False
 JOHN PAUL C. ROSARIO – CENTRAL MINDANAO UNIVERSITY

Statement 1: A partner contributed a building with an agreed value of P800,000 and which has been
mortgaged for P250,000 which was assumed by the partnership. The partner contributing the building
will immediately be credited at P550,000.

Statement 2: Liabilities contributed to the partnership will reduce the interest of the contributing
partner

True, True

10

Statement 1: The decline in the value of merchandise inventory contributed at the time of the
partnership formation must be allocated to the partners based on the agreed profit-and-loss ratio

Statement 2: The cost of the inventory contributed to the formation of a partnership is P360,000 while
its prevailing fair market value is P350,000. The partners agreed that the inventory must be valued at
P352,000. In recording the investment of the partner, the inventory must be debited at P350,000.

False, False
 JOHN PAUL C. ROSARIO – CENTRAL MINDANAO UNIVERSITY

Problem:

1.

On January 1, 2021 Ben and Jim decided to form a partnership. The firm is to take over
business assets and assume liabilities, and capitals are to be based on net assets transferred
after the following adjustments:
a. Ben and Jim’s inventory is to be valued at P310,000 and P220,000, respectively.
b. Accounts receivable of P20,000 in Ben’s books and P10,000 in Jim’s books
are uncollectible.
c. Accrued salaries of P40,000 for Ben and P50,000 for Jim are still to be recognized in the
books.
d. Unused office supplies of Ben amounted to P50,000, while that of Jim amounted to
P15,000.
e. Unrecorded patent of P70,000 is to be recognized in each of the books Ben and Jim.
f. 1/2 of Ben’s prepared expenses has expired, while 1/3 of Jim’s are unused.
g. Ben is to obtain a mortgage loan on the equipment. The cash generated from the loan
will be invested for Ben to have a 50% interest in the firm, after ¼ of the loaned amount
is assumed by the firm.

Balance sheets for Ben and Jim on January 1 before adjustments are given below:

Ben Jim
Cash P 310,000 P 500,000
Accounts Receivable 260,000 200,000
Inventory 320,000 240,000
Office Supplies - 50,000
Prepaid Expenses 90,000 135,000
Equipment 250,000 240,000
Accumulated depreciation – equipment (70,000) (30,000)
Total Assets P1,160,000 P1,335,000

Accounts Payable P 280,000 P 200,000

Capitals 880,000 1,135,000
Total Liabilities and Capital P1,160,000 P1,335,000

Assuming a new set of books will be opened for the partnership, show the journal entries necessary to
be recorded in:

1. Ben’s Books (assume mortgage was obtained after closing of the books)
2. Jim’s Books
3. Partnership Books (one entry only)

4. How much is the net adjustments in the capital account of Ben (before mortgage)? (Indicate if
debit or credit)
5. How much is the net adjustments in the capital of Jim? (Indicate if debit or credit)
 JOHN PAUL C. ROSARIO – CENTRAL MINDANAO UNIVERSITY

6. After all the adjustments but before obtaining the mortgage, how much is the adjusted capital
of Ben in his books?
7. How much is the adjusted capital of Jim in his Books?
8. How much is the partnership assets after formation?
9. How much is the partnership liabilities after formation?
10. How much is the partnership total capital after formation?
11. How much is the difference between Ben and Jim’s capital accounts after formation?
12. Assuming that instead of Ben obtaining a mortgage, it is Jim who will withdraw a portion of his
investment from the partnership. How much is Jim’s withdrawal to obtain a 40% interest in the
firm?
13. Assuming that instead of Ben obtaining a mortgage, it is Jim who will withdraw a portion of his
investment from the partnership to obtain a 40% interest in the firm. How much is the
difference between Ben and Jim’s capital accounts after formation?
 JOHN PAUL C. ROSARIO – CENTRAL MINDANAO UNIVERSITY

Solution:

1.

Debit Credit
Ben, Capital P 10,000
Inventory P 10,000

Ben, Capital 20,000

Accounts Receivable 20,000

Ben, Capital 40,000

Accrued Salaries 40,000

Office Supplies 50,000

Ben, Capital 50,000

Patent 70,000
Ben, Capital 70,000

Ben, Capital 45,000

Prepaid Expenses 45,000

Accumulated depreciation - equipment 70,000

Equipment 70,000

Accounts Payable 280,000

Accrued Salaries 40,000
Ben, Capital 885,000
Cash 310,000
Accounts Receivable 240,000
Inventory 310,000
Office Supplies 50,000
Prepaid Expenses 45,000
Equipment 180,000
Patent 70,000
 JOHN PAUL C. ROSARIO – CENTRAL MINDANAO UNIVERSITY

2.

Debit Credit
Jim, Capital P 20,000
Inventory P 20,000

Jim, Capital 10,000

Accounts Receivable 10,000

Jim, Capital 50,000

Accrued Salaries 50,000

Jim, Capital 35,000

Office Supplies 35,000

Patent 70,000
Jim, Capital 70,000

Jim, Capital 90,000

Prepaid Expenses 90,000

Accumulated depreciation - equipment 30,000

Equipment 30,000

Accounts Payable 200,000

Accrued Salaries 50,000
Jim, Capital 1,000,000
Cash 500,000
Accounts Receivable 190,000
Inventory 220,000
Office Supplies 15,000
Prepaid Expenses 45,000
Equipment 210,000
Patent 70,000

3. Before we proceed with the journal entry, we first have to compute for the mortgage Ben needs
to obtain. We determine it as follows:
a. Solve first for the targeted gross capital. Since it is Ben’s investment that needs to be
adjusted, this means that Jim’s investment is the basis to determine the gross capital as
follows:
Total Capital = Jim, Capital / 50% = P1,000,000 / 50% = P2,000,000
Ben’s Targeted Capital = Total Capital x 50% = P2,000,000 x 50% = P1,000,000
Ben’s additional capital requirement = P1,000,000 – P885,000 = P115,000
 JOHN PAUL C. ROSARIO – CENTRAL MINDANAO UNIVERSITY

The P115,000 represents the net increase in Ben’s investment. And since ¼ of the mortgage
lone is to be assumed by the partnership, the net increase now represents ¾ of the amount
to be loaned. Thus, the amount to be loaned is P115,000 / ¾ = P153,333.33 and the amount
of mortgage to be assumed by the partnership is P153,333.33 x ¼ = P38,333.33. This will
now result to a net increase in Ben’s investment amounting to P153,333.33 – P38,333.33 =
P115,000. See illustrated journal entry below:

Cash P153,333.33
Mortgage Payable P 38,333.33
Ben, Capital 115,000

After this, we can now journalize Ben and Jim’s investments as follows:

Debit Credit
Cash P963,333.33
Accounts Receivable 430,000
Inventory 530,000
Office Supplies 65,000
Prepaid Expenses 90,000
Equipment 390,000
Patent 140,000
Accounts Payable P480,000
Accrued Salaries 90,000
Mortgage Payable 38,333.33
Ben, Capital 1,000,000
Jim, Capital 1,000,000

4. 5,000 credit
5. 135,000 debit
6. P885,000
7. P1,000,000
8. P2,608,333.33
9. P608,333.33
10. P2,000,000
11. Ben, Capital – Jim, Capital = P1,000,000 – P1,000,000 = -0-
12. In this case, Jim’s capital is the one that needs adjustment. Thus, Ben’s investment is the basis to
determine the gross capital as follows:
Total Capital = Ben, Capital / 60% = P885,000 / 60% = P1,475,000
Jim’s Targeted Capital = Total Capital x 40% = P1,475,000 x 40% = P590,000
Jim’s withdrawal of investment = P1,000,000 – P590,000 = P410,000
13. Ben, Capital – Jim, Capital = P885,000 – P590,000 = P295,000