College of St.

John – Roxas
Member: Association of LASSSAI Accredited Superschools (ALAS)
Academic Year 2020-2021; Second Semester
Midterm Examination in ACCT201: Accounting for Special Transactions
Professor: Miles N.M. Santos, CPA

INSTRUCTION: Write your answers on a separate .docx file. Page layout should be letter-sized; with 1” margins on
top, bottom, left and right sections of the document, using Arial 12 font and single-spaced. If you’re answering with a
piece of paper in handwritten, take pictures of your answers orderly and convert them into a single .pdf file. Answers
without solutions shall not merit points.

I. Theory (30%) 2 points for each item.

1. If the bonus method is used in accounting for partnership formation, is the respective capital contribution of
partners equal to their capital credit? Why or why not?
2. If the partnership contract provides that each partner may have to additionally invest or withdraw his original
contribution to the partnership formation, what method is being used? Further, describe the amount of the
capital credited to partner using this type of method.
3. The partnership contract provides that the value of the land contributed by A amounts to Php. 1,000,000.00.
However, the local appraisers suggests that the land has actually a value of Php. 800,000 when sold to
outside parties. Assuming that no other contributions were made by partner A, how much is its capital
balance in the partnership in its first day of operation? Justify your answer.
4. In using either goodwill or net investment method in accounting for partnership formation, who is considered
as base to determine the total agreed capital? Give the three attributes of this partner in terms of his
contribution.
5. If the partnership agreement provides that A’s capital credit is Php. 600,000.00, however, his capital
contribution only amounts to Php. 500,000.00 and there is no mention of the method to be used in
accounting for his capital balance, what amount should be credited to partner A? Further explain the
treatment of the difference between the capital credit and capital contribution of partner A.
6. The partners failed to stipulate their agreement as to their allocation of the partnership’s profit or loss. The
partners are A, B, and C and their capital contribution is 600,000.00; 350,000.00 and 250,000.00,
respectively. How will each of the partners divide the profit or loss of the partnership among themselves?
7. As an accountant, in what instances do you use the partner’s average capital balance as base in computing
for their respective interest as share in the profit or loss of the partnership?
8. Salaries of the partners can be taken out from the partnership’s net profit. If the salaries of the partners are
expensed, can this still be taken out from the partnership’s net profit? Why or why not?
9. Is it always true that in the partnership’s profit, salaries, interest and bonus are to be distributed to partner?
Why or why not?
10. Partner A periodically withdrew 30,000 from the partnership in anticipation of the partnership’s profit. If the
partnership reports loss for the current year and the partners agreed that partner A is not anymore obliged to
return the money he has withdrawn throughout the year, what is its effect to partner A’s capital balance at
the end of the year?

II. Application (70%) 5 points for each question in the case.

Case 1

On January 1, 2021, Elisha and Stephanie formed ES Partnership which is engaged to manufacturing of toys.
Elisha contributed 800,000 cash; building with a fair value of 650,000; and equipment with a cost of 450,000.
The said building has an assessed value of 430,000 and the equipment is already 75% depreciated. Stephanie
contributed her entire business to the partnership. Stephanie’s balance sheet of her business are as follow:

Cash 50,000 Accounts payable 72,800

Accounts receivable 127,500 Capital, Stephanie 517,700
Inventory 65,000 590,500
Prepaid expenses 33,000
1
 Equipment 300,000
Furniture and fixtures 15,000
590,500

In the partnership’s contract, the partners agreed to assume the mortgage of the building which amounts to
55,000. Furthermore, they agreed the following:

i. Accounts receivable should be set up with an allowance of doubtful accounts of 3% of its total amount.
ii. 1/3 of the prepaid expenses are related to the personal rental fees of Stephanie and that the partners
agreed to exclude them.
iii. Half of the inventories are not related to toy manufacturing, therefore, it is not accepted as capital
contribution to the partnership.
iv. Elisha’s and Stephanie’s interest to the partnership should be 3:1, respectively. Any excess or deficit to
the agreed total capital ratio should be settled between them outside the partnership.

1. How much is the capital balance of Elisha and Stephanie respectively to the partnership upon its first day of
operation?
2. Assuming that goodwill method is used, what is the total amount of the partnership capital?
3. Assuming that the total agreed capital is 2,000,000; how much should Elisha and Stephanie respectively
invest or withdraw?

Case 2

Carpio and Leonen formed a partnership on January 1, 2021 and contributed 500,000 and 300,000,
respectively. The articles of co-partnership provides that the operating income be shared between them as
follows: as salary, 35,000 monthly for Carpio and 20,000 monthly for Leonen; interest of 8% on the average
capital balance of the partners; and bonus to Carpio for 10% after salaries, interest and bonus.

The operating income for the year ending December 31, 2021 amounted to 1,200,000. Carpio made an
additional capital contribution of 50,000 on May 31, 2021 and withdrew 30,000 and 10,000 on July 1, 2021 and
August 31, 2021, respectively. Leonen likewise made additional capital contribution of 120,000 on August 31,
2021 but withdraw 60,000 on December 1, 2021.

1. How much is the share of each partner from the total partnership income?
2. What is the partner’s respective capital balance as of December 31, 2021?
3. If partner Carpio reported a capital balance of 1,150,000 as of December 31, 2020 while considering the
above-mentioned information in this case, how much is the partnership’s operating income or loss?

Case 3

X, Y and Z formed XYZ Partnership on January 1, 2021. X contributed cash that amounts 400,000 and an
equipment which costs 620,000. The said equipment has been depreciated already by 50%. The prevailing
market price of the equipment is 250,000. Y contributed building which has a carrying value of 500,000. It costs
Y 1,250,000 to construct the building. The mortgage on the building amounts 180,000. It has been decided that
this will be assumed by the partnership. Lastly, Z contributed inventory with a cost and a selling price of 45,000
and 55,000, respectively. The estimated cost to sell the inventory amounts to 15,000. The partners agreed to
have a capital ratio of 45%, 30%, and 25%, respectively.

1. Determine each partner’s capital credit and the total agreed capital under the bonus method.
2. Determine each partner’s capital credit and the total agreed capital under the goodwill method.
3. Assume that the partners agreed to have a total capital of 1,000,000, determine each partner’s capital credit
and the total agreed capital under the net investment method.

Bonus: Provide the journal entry for Case 3 assuming bonus method is used. 10 points to total score.