FORMATION OF PARTNERSHIP

1. A and B are combining their separate business to form a partnership. Cash and non-cash assets are to be
contributed for a total capital of P600,000. The contributed liabilities are to be assumed by the partnership. They
further agreed that their capital balances after formation must be equal.

The following are the assets and liabilities to be contributed by each entity:

A B
Book Value Fair Value Book Value Fair Value
Accounts receivable 40,000 40,000 - -
Inventories 60,000 80,000 40,000 50,000
Equipment 120,000 90,000 80,000 100,000
Accounts payable 30,000 30,000 20,000 20,000

1. What is the amount of the additional cash to be contributed by A in accordance with their agreement?
a. 300,000
b. 120,000
c. 420,000
d. 170,000

2. What is the amount of the capital credit to B after formation?

a. 130,000
b. 100,000
c. 300,000
d. 150,000

2. Charlie and Delta formed a partnership. Charlie invested cash worth P85,000 and a machine. On the other hand,
Delta contributed cash worth P55,000 and an equipment which has a mortgage of P35,000 which Delta will pay
personally. The total capital after formation was P360,000. They also further agreed to reflect 55:45 ratio as to
their capital balances respectively. No other investment or withdrawal occurred other than mentioned to reflect
their capital ratio agreement.

1. How much is the fair value of the machine?

a. 113,000
b. 105,000
c. 107,000
d. 115,000

2. How much is the fair value of the equipment?

a. 115,000
b. 107,000
c. 150,000
d. 142,000

4. G and H decided to form a partnership during 2020. The following are their statement of financial position on the
date of formation:
G H
Cash 131,250 328,125
Accounts receivable 2,975,000 1,793,750
Inventories 1,750,000 1,771,875
Equipment 1,312,500 2,537,500
Total 6,168,750 6,431,250

Accounts payable 918,750 2,318,750

G, Capital 5,250,000
H, Capital 4,112,500
Total 6,168,750 6,431,250

The following are based on their agreement:

 Equipment of G is under-depreciated by P175,000 and the equipment of H is over-depreciated by P262,500
 Allowance for doubtful accounts is to be setup amounting to P595,000 for G and P393,750 for H
 Inventories in the amount of P43,750 and P30,625 are worthless in the books of G and H respectively
 The partnership agreement also provides a profit and loss ratio and capital interest ratio of 70% and 30% for G
and H respectively
 G will invest or withdraw sufficient amount of cash to be in accordance to their capital interest ratio

What is the amount of cash to be invested or withdrawn by G in accordance with their agreement?
a. 4,781,875 invest
b. 3,556,875 invest
c. 4,781,875 withdraw
d. 3,556,875 withdraw
5. The financial position of Anton Company on October 31, 2020 before admitting Gerald as his partner to AG
Partnership is presented below:

Assets
Cash 540,000
Accounts Receivable 216,000
Less: Allowance for doubtful accounts 13,500 202,500
Notes Receivable 270,000
Inventories 121,500
Equipment 324,000
Less: Accumulated Depreciation 27,000 297,000
Total Assets 1,431,000

Liabilities and Capital

Accounts Payable 54,000
Notes Payable 270,000
Anton, capital 1,107,000
Total Liabilities and capital 1,431,000

It is agreed that for purposes of establishing Anton’s interest the following adjustments shall be made:
a. Interest at 10% on note receivable dated February 1, 2020 is to be accrued.
b. Inventory is to be valued at P94,500
c. The accounts receivable are estimated to be 95% realizable.
d. The equipment is under-depreciated by P25,000
e. Prepaid expenses of P10,000 and accrued expenses of P15,000 are to be recognized.

Gerald is to invest cash to obtain 40% interest in the partnership.

Required: Prepare the following entries to record the formation under the following assumption

1. The partnership will open a new set of books

2. The books of Anton are to be used by the partnership.

EXERCISES

1. A person may contribute any of the following to the mutual fund in order for him/her to become a partner,
except:
a. Money c. Property
b. Industry d. Prayers

2. A partner who contributes money to the partnership is classified as a/an:

a. Investor c. Industrial partner
b. Capitalist partner d. Managing partner

3. Nory and Rina decided to form a partnership. Nory was to contribute P100,000 cash plus a used equipment. The
used equipment had an original cost of P200,000 when it was purchased 1 year ago. The seller at that time
mentioned that the equipment sold had a useful life of 10 years. If the same equipment was to be bought today
brand new, it will now cost P250,000. The equipment invested by Nory can be sold at the second hand market
for P190,000.
How much is the capital credit of Nory at partnership formation?
a. 280,000 c. 300,000
b. 290,000 d. 350,000

Loo and Wee decided to combine their separate business and form a partnership. The statements of financial
position of the businesses immediately before partnership formation were as follows:
Loo Wee
Cash 40,000 50,000
Accounts receivable 100,000 75,000
Inventories 120,000 150,00
PPE, net 600,000 1,000,000
Accounts payable (300,000) (650,000)
Capital (560,000) (625,000)

Additional information:
 The partnership is to acquire all the assets and assume all the liabilities of the two businesses
 Accounts receivable of Loo and Wee were estimated to be 90% and 80% collectible, respectively.
 P20,000 worth of inventories of Loo were determined to be obsolete and must be written-off
 PPE of Wee has a fair value of P800,000
4. How much is the capital credit of Loo immediately after partnership formation?
a. 560,000 c. 830,000
b. 530,000 d. 450,000

5. How much is the capital credit of Wee immediately after partnership formation?
a. 410,000 c. 1,060,000
b. 365,000 d. 625,000

6. How much is the total assets of the partnership immediately after formation?
a. 2,135,000 c. 1,890,000
b. 2,090,000 d. 1,185,000