FUNDAMENTALS OF ACCOUNTING, PART II (Partnership and Corporation)

I. Theories

1. Which of the following is not a characteristic of the proprietary theory that influences
accounting for partnerships?
a. Partners’ salaries are viewed as distribution of income rather than a component of
net income.
b. A partnership is not viewed as separate entity, distinct, taxable entity.
c. A partnership is characterized by limited liability.
d. Changes in the ownership structure of a partnership result in the dissolution of
partnership.

2. Which of the following statements is correct with respect to a limited partnership?

a. A limited partner may not be an unsecured creditor of the limited partnership.
b. A general partner may not also be limited partner at the same time.
c. A general partner may be a secured creditor of the limited partnership.
d. A limited partnership can be formed with limited liability for all partners.

3. An advantage of the partnership as a form of business organization would be

a. Partners do not pay income taxes on their share in partnership income.
b. A partnership is bound by the act of the partners.
c. A partnership is created by mere agreements of the partners.
d. A partnership may be terminated by the death or withdrawal of a partner.

4. When property other than cash is invested in a partnership, at what amount should non-
cash property be credited to the contributing partner’s capital account?
a. Fair value at the date of contribution.
b. Contributing partner’s original cost.
c. Assessed valuation for property tax purposes.
d. Contributing partner’s tax basis.

5. The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on
profits before bonus. Remaining profits and losses are divided between Flat and Iron in
the ratio of 2:3, respectively. Which partner has a greater advantage when the
partnership has a profit or when it has a loss?
Profit Loss
a. Flat Iron
b. Flat Flat
c. Iron Flat
d. Iron Iron

6. If the partnership agreement does not specify how income is to be allocated, profits and
loss should be allocated
a. Equally
b. In proportion to the weighted average of capital invested during the period.
c. Equitably so that partners are compensated for the time and effort expended on
behalf of the partnership
d. In accordance with their capital contribution.

7. Which of the following is not a component of the formula used to distribute income?
a. Salary allocation to those partners working.
b. After all other allocation, the remainder divided according to the profit and loss sharing
ratio.
c. Interest on the average capital investments.
d. Interest on notes to partners.

1
8. Which of these is not considered a legitimate expense of a partnership?
a. Interest paid to partners based on the amount of invested capital.
b. Depreciation on assets contributed to the partnership by partners.
c. Salaries for management hired to run the business.
d. Supplies used in the partners’ offices.

9. The fact that salaries paid to partners are not a component of partnership income is
indicative of
a. A departure from generally accepted accounting principles.
b. Being characteristic of the entity theory.
c. Being characteristic of the proprietary theory.
d. Why partnerships are characterized by unlimited liability.

For items 10 – 17, refer to the following below:

A. 1st is TRUE, 2nd is FALSE
B. 1st is FALSE, 2nd is TRUE
C. BOTH statements are TRUE
D. BOTH statements are FALSE

10. 1st – In the partnerships books, there are as many capital and drawing accounts as there
are partners. T
2nd – Contra accounts, like Allowance for Uncollectible Accounts and Accumulated
Depreciation, on non-cash assets invested by partners are always carried on the books.
F

11. 1st – Before a partnership can operate legally, it has to first comply with registration
requirements of the SEC, DTI, BIR, SSS and Mayor’s Office. T
2nd – A partnership is always owned by two individuals. F

12. 1st – For financial reporting purposes, the personal assets and debts of a partner should
be combined with the assets and debts of the business. F
2nd – Partners are personally liable for the liabilities of the partnership if the partnership is
unable to pay T

13. 1st – In a partnership, an owner’s equity account exists for each partner. T
2nd – Net asset adjustments are made on a sole proprietor’s books, when these are to be
used as partnership books, for the purpose of arriving at agreed values. T

14. 1st – An adequate accounting system and an accurate measurement of income are not
needed by a partnership because the profit is divided among two or more partners. F
2nd – If the partners did not agree as to how profits are to be divided, then such should be
divided among the partners equally. F

15. 1st – Any salaries authorized for partners are regarded as a preliminary step in the
division of profits, not as an expense of the business. T
2nd – Bonus is allowed to partners only if there is a partnership profit, since bonus is
based on profit. T

16. 1st – Unless otherwise agreed, allowance for salaries and interest are allowed to partners
whether there is a profit or a loss; whether the profit is sufficient or insufficient. T
2nd – The drawing account of a partner may have a debit or a credit balance. T

2
17. 1st – Allowance for salaries and interest in a partnership agreement are methods of
allocating profits and losses to the partners. T
2nd – Partners may intend for salary and interest allowances to be deducted in
determining the base for computing bonus. In such a case, no bonus is allowed if there is
insufficient profit after distribution of salaries and interests. T

18. Which of the following statements about partnership accounts is true?

a. Two accounts are generally maintained by for each partner, a drawing account and
a capital account.
b. The drawing account is credited with the partners’ withdrawals of cash or other
assets during the period.
c. Answer (a) I correct but (b) is false
d. Answers (a), (b) and (c) are all correct

19. Partners’ interest in the 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 partners’ share of partnership liabilities
d. The unamortized cost of the assets to the partner.

20. Which of the following statements concerning partnership is true?

a. A partnership is a legal entity, separate and distinct from the individual partners.
b. Individual partners are jointly liable for the debts and obligations of a partnership
c. Income tax is levied on the individual partners’ shares of the net income of a
partnership and is reported in their personal tax returns.
d. All of the above is true.

21. On July 1, 2011, Tall and Small formed a partnership. Tall contributed cash. Small,
previously a sole proprietor, contributed property other than cash, including realty subject
to a mortgage, which the partnership assumed. Small’s capital account of July 1, 2011
should be recorded at
a. Small’s book value of the property at July 1, 2011
b. Small’s book value of the property less mortgage payable at July 1, 2011
c. The fair value of the property less the mortgage payable at July 1, 2011
d. The fair value of the property at July 1, 2011

22. A partnership is formed by two individuals who were previously sole proprietors. Property
other than cash that is part of the initial investment in the partnership is recorded for
financial accounting purposes at the
a. Proprietor’s book values or the fair value of the property at the date of the
investment, whichever is higher
b. Proprietor’s book values or the fair value of the property at the date of the
investment, whichever is lower
c. Proprietor’s book values of the property at the date of the investment
d. Fair value of the property at the date of investment

23. The partnership contract provides that “net income or losses are to be distributed in the
ratio of partners’ capital account balances”. The appropriate interpretation of this
provision is that the net income or losses should be distributed in
a. The ratio of beginning capital account balances

3
 b. The ratio of average capital account balances
c. The ratio of ending capital account balances
d. The ratio of original capital account balances

24. Which of the following is an expense of a partnership?

a. Interest on partners’ capital account balances
b. Interest on loans from partners to the partnership
c. Both a and b
d. Neither a or b

25. A partners’ withdrawal of assets from the partnership that is considered a permanent
reduction in that partners’ equity is debited to the partners’
a. Drawing accounts c. Capital account
b. Retained earnings account d. loan receivable account

26. The partners’ drawing account are used

a. To record the partners’ salaries
b. To reduce the partners’ capital account balances at the end of the
accounting period
c. In the same manner as the partners’ loan accounts
d. To record the partners’ share of net income or loss for an accounting period

27. If there is provision for division of profits but not losses in the partnership agreement, it is
concluded that
a. Losses should not be divided to the capital accounts, but matched against future
earnings
b. Losses should be divided using the same approach as to division of profits
c. Losses should be divided equally
d. Losses should be allocated according to the ratio of capital account balances

28. Partners Lay and Tay share profits in a 2:1 ratio, respectively. Each partner receives an
annual salary allowance of P60, 000. If the salaries are recorded in the accounts as
partnership expense rather than treated as a division of net income, the total amount
allocated to each partner for salaries and net income would be
a. Less for both Lay and Tay
b. Unchanged for both Lay and Tay
c. More for Lay and less for Tay
d. More of Tay and less for Lay

29. Under what circumstances can the closing of the income summary account result in a
debit to one partners’ 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 results of operations are allocated in a profit and loss ratio and the
partnership’s net income was very low
c. The results of operations are divided in the average capital ratio and one partner
had a low capital balance
d. The partnership agreement provides for interest on capital and salary
allowances and net income is less than the sum of the interest and salary
allowances.

30. The allocation of an error should be based on the profit and loss ratio in effect when
a. The error was made
b. The error was corrected

4
 c. The error was discovered
d. The allocation should always be made equally

II. Problems
Bloom and Broom share profits and losses in a ratio of 2:3, respectively. Bloom and Broom
receive salary allowances of P10, 000 and P20, 000 respectively, and both partners receive
10% interest based upon the balance in their capital accounts on January 1. Partners’ drawings
are not used in determining the average capital balances. Total net income for 2010 is P60, 000.
If net income after deducting the interest and salary allocations is greater than P20, 000, Broom
receives a bonus of 5% of the original amount of net income.
Bloom Broom
January 1 capital balances P 200,000 P 300,000
Yearly drawings (P 1,500 a month) 18,000 18,000

31. What are the total amounts for the allocation of interest, salary and bonus?
a. P60, 000 c. P83, 000
b. P80, 000 d. P84, 000

Che and Huahua formed a partnership. After 1 year of operation, the partnership had the
following partial trial balance:
Debit Credit
Che, Capital P34,000
Huahua, Capital 52,000
Che, Withrawals P20,000
Huahua, Withdrawals 18,000
Service Revenue 250,000
Salaries Expense (to employees) 110,000
Rent Expense 36,000
Supplies Expense 28,000
Other Operating Expenses 15,000

Partners’ share profits as follows:

1. A salary of P12,000 is paid Huahua
2. Remaining profits (or losses) are shared equally.

32. The ending capital balance of Che amounted to:

a. P24, 500 c. P38, 500
b. P34, 000 d. None of the above

A partnership agreement calls for profits to be allocated based on salaries of P15, 000 and P30,
000 for Partners A and B, respectively. Partner A is to receive a bonus equal to 10% of
partnership income after the bonus. Interest at the rate of 10% is to be allocated to Partner C
based on their weighted average capital after drawings. Partner C began the current year with a
capital balance of P54, 000 and had the following subsequent activity:
March 1: Withdraw P20, 000 September 1: Contributed P5,000
July 1: Withdraw P10, 000 October 1: Contributed P12,000
33. Assuming the partnership has income of P66, 000; determine the amount to be allocated
to partner A:
a. P20, 767 c. P25, 167
b. P24, 767 d. None of the above

34. Salit and Galit are lawyers who have been operating their own separate practices as sole
proprietors. They decided to combine the two firms as a partnership on January 3, 2010.
The following assets were contributed by each:

5
 Salit Galit
Cash P 350, 000 P 350, 000
Trade Receivables 787, 500 665, 000
Equipment 122, 500 133, 000
Fixtures 161, 000
The partners agreed to split profits on the basis of gross cash collections from billing generated
from clients. During 2010, Salit’s clients paid the firm a total of P5, 250, 000 and Galit’s clients
paid P5, 687, 500. Expenses for the year were P 3, 780, 000 of which P 1, 680, 000 were
attributable to Salit and the balance to Galit. During 2010 Galit withdrew P 2, 625, 000 cash for
personal needs and contributed an additional computer valued at P77, 000. What is the capital
balance of Galit at December 31, 2010?
a. P3, 112, 900 b. P2, 937, 900 c. P2, 016, 000 d. P2, 482, 900

35. Juday and Ryan have just formed a partnership. Juday contributed cash of P2, 205, 000
and office equipment that cost P945, 000. The equipment had been used in her sole
proprietorship and had been 70% depreciated; the appraised value of the equipment is
P630, 000. Juday also contributed a note payable of P210, 000 to be assumed by the
partnership. Juday is to have 60% interest in the partnership. Ryan contributed only P1,
575, 000 merchandise inventory at fair market value. Assume the use of bonus method,
the partners’ capital must be in conformity with their profit and loss ratio upon formation.
In the formation of the partnership, which of the following is true?
a. the agreed capital of Juday upon formation is P2, 625, 000
b. the total agreed capital of the partnership is P4, 375, 000
c. the capital of Ryan will increase by P105, 000 as a result of the transfer of
capital
d. there is either an investment or withdrawal of asset under the bonus method

36. A partnership begins its first year of operations with the following capital balances:
Winston, Capital P 110, 000
Durham, Capital 80, 000
Salem, Capital 110, 000
According to the articles of partnership, al profits will be assigned as follows:
• Winston will be awarded an annual salary of P20, 000 with P10, 000 assigned to Salem
• The partners will be attributed interest equal to 10% of the capital balance as of the first
day of the year
• The remainder will be assigned on 5:2:3 basis, respectively
• Each partner is allowed to withdraw up to P10, 000 per year
Assume that the net loss for the first year of operations is P20, 000 and that the net income for
the subsequent year is P40, 000. Assume also that each partner withdraws the maximum
amount from the business each period. What is the balance in Winston’s capital account at the
end of the second year?
a. P102, 600 c. P108, 600
b. P104, 400 d. P109, 200

Sisley and Benny formed a partnership on January 2, 2010 by contributing capital of P262, 500
and P37, 500, respectively. They agreed to share profits and losses 70% and 30% respectively.
Benny manages the partnership and is given a salary of P5, 000 a month and bonus of 20% of
net income before salary, interest and bonus. Interest of 5% of the beginning capital is to be
given to each partner and any remainder is to be divided according to their profit and loss ratio.
For the year ended December 31, 2010, the partnership generated a net income of P48, 000
after salaries, interests and bonus.
37. Compute the amount that Sisley partner should receive in the distribution of profit.
a. P46, 725 c. 77, 475
b. P33, 600 d. 46, 725
38. Compute the amount that Benny partner should receive in the distribution of profit.
a. P107, 025 c. 76, 275
b. P105, 150 d. 77, 475

6
A, B and C formed a partnership on January 1, 2010 with initial capital contribution of P450,
000, P562, 500 and P675, 000 respectively. The partnership agreement provides that income be
shared among the partners as follows: Salaries are to be provided for A, B and C amounting to
P67, 500, P54, 000 and P40, 500 respectively. Interest of 12% on the average capital during
2010 is to be given to A, B and C. Bonus of 5% or the net income before salaries and interests
is to be given to A. Any remainder is to be divided among the partners using the ratio of 1:2:2
respectively.

The partnership treats the partners’ salaries as part of their operating expenses. The net income
reported for the year ending December 31, 2010 amounted to P234, 000. A contributed
additional capital of P67, 500 on July 1 and made a withdrawal of P22,500 on October 1; B
contributed additional capital of P45,000 on August 1 and made a withdrawal of P22,500 on
October 1; and C made a withdrawal of P67,500 on November 1.

39. Compute for the income allocated to A

a. 139, 815 c. 98, 055
b. 140, 940 d. 146, 295
40. Compute for the income allocated to B
a. 129, 555 c. 69, 435
b. 128, 430 d. 126, 315
41. Compute for the income allocated to C
a. 126, 630 c. 66, 510
b. 140, 940 d. 123, 390

42. On April 1, 2010, Padma and Patil formed a partnership with each contributing the
following assets:
Padma Patil
Cash P120,000 P 80,000
Machinery 100,000 300,000
Building 900,000
Furniture and Fixtures 40,000

The building is subject to a mortgage loan of P320,000, which is to be assumed by the

partnership. On April 1, 2010, the balance in Patil’s capital account should be
a. P960,000 c. P1,056,000
b. P1,020,000 d. P1,280,000

43. The partnership contract for the L and J Partnership provided that L is to receive an
annual salary of P120, 000, J is to receive an annual salary of P80, 000, and the
remaining profit or loss is to be divided equally between the two partners. Net income of
the L and J Partnership for the year ended December 31, 2011 was P180, 000. The
closing entry for net income on December 31, 2011 is a debit to Income Summary for
P180, 000 and credits to L, Capital and J, Capital, respectively of
a. P108, 000 and P72, 000
b. P 90, 000 and P90, 000
c. P120, 000 and P80, 000
d. P110, 000 and P70, 000

44. Barista, a partner in the Coffee Partnership, has a 20% participation in the partnership
profit and loss. Barista’s capital account had a net decrease of P240,000 during the
calendar year 2010. During 2010, Bautista withdrew P520,000 (charged against his

7
 capital account) and contributed property valued at P100,000 to the partnership. What
was the profit of the partnership
a. 600,000
b. 900,000
c. 1,400,000
d. 2,200,000

45. The partnership agreement of Gastos and Bilin provides that interest at 12% per year is
to be credited to each partner on the basis of average capita balances. A summary of
Bilin’s capital account for the year ended December 31, 2010 is as follows:
Balance, January 1 840,000
Additional investment, July 1 240,000
Withdrawal, August 1 90,000
Balance, December 31 990,000

What amount of interest should be credited to Bilin’s capital account for 2010?
a. 91,500
b. 92,500
c. 99,000
d. 110,700

46. Jacao, Jusco and Janco share profits and losses in the ratio of 2:3:5, respectively.Their
partnership realized a profit of P1,800,000 during the year. Jacao, with a beginning
capital balance of P1,000,000 withdrew P200,000 during the year. Jacao’s ending capital
balance is
a. 560,000
b. 1,000,000
c. 1,160,000
d. 1,360,000

47. The C2 Partnership was formed on January 3, 2010. Under the partnership agreement,
each partner has an equal initial capital balance accounted for under the bonus method.
Partnership profit or loss is allocated 60% to Gracia and 40% to Dianne. To form the
partnership, Gracia originally contributed assets costing P300,000 with a fair value of
P600,000 on January 3, 2010, while Dianne contributed P200,000 in cash. Withdrawals
by the partners during the fiscal 2010 totaled P30,000 by Gracia and 90,000 by Dianne.
The partnership profit for fiscal year 2009 was P450,000. Dianne’s initial capital balance
in the partnership is
a. 200,000
b. 250,000
c. 400,000
d. 600,000

48. Using the information in No. 47, what is the share of Gracia in the partnership’s profit?
a. 150,000
b. 180,000
c. 225,000
d. 270,000

49. The 555 Company is a partnership of three musicians who play at birthdays and parties.
The partnership’s profits and losses are allocated in proportion to the partner’s capital
contributions. If the partners Claire, Chila and Chacha have capital contributions of
P300,000, P300,000 and P500,000 respectively, what is each partner’s share in the profit
of P1,100,000.
8
 Claire Chila Chacha
a. 300,000 200,000 600,000
b. 300,000 300,000 500,000
c. 300,000 500,000 1,100,000
d. 366,667 366,667 366,667

50. On March 31, 2010, Alea, Amie and Anika formed a partnership by combining their
separate business proprietorships. Alea contributed cash of P200,000. Amie contributed
property with a carrying amount of P144,000, original cost of P160,000, and fair value of
320,000. The partnership accepted responsibility for the 140,000 mortgage attached to
the property. Anika contributed equipment with a carrying amount of 120,000 original cost
of P300,000 and fair value of P220,000. The partnership agreement specifies that profits
and losses are to be shared equally.
Which partner has the largest capital account balances as of March 31, 2010?
a. Alea
b. Amie
c. Anika
d. All capital accounts are equal

51. Using the information in No. 7, total partnership capital on March 31, 2010 is
a. 464,000
b. 500,000
c. 600,000
d. 740,000

52. Using the information in No. 7, and assuming capitals are in the profit and loss ratio, then
there is
A. P20,000 bonus to Amie
B. P20,000 bonus to Anika
C. No bonus to Alea
Which is correct?
a. A only
b. B only
c. A and B only
d. A,B and C

53. The partnership of Alona and Samurai was formed on April 1, 2010. At that date, the
following assets were contributed:

Alona Samurai
Cash 300,000 140,000
Merchandise Inventory 220,000
Building 400,000
Furniture and Equipment 60,000
The building is subject to a mortgage loan of P160,000 which is to be assumed by the
partnership. The partnership agreement provides that Alona and Samurai share on income and
loss of 25% and 75% respectively. Samurai’s capital account at April 1, 2010 should be
a. 600,000
b. 640,000
c. 690,000
d. 760,000

54. Using the information in No. 53, and assuming that the partnership agreement provides
that the partners initially should have an equal interest in partnership capital, Alona’s
capital account on April 1, 2010 should be
a. 360,000
b. 480,000

9
 c. 960,000
d. 1,120,000

55. Using the information in No.53, the total partnership capital on April 1, 2010 is
a. 360,000
b. 480,000
c. 960,000
d. 1,120,000

56. Using the information in No.53, the bonus given by Samurai to Alona is
a. Zero
b. 100,000
c. 120,000
d. 240,000

57. Using the information in No.53 and assuming that capital shall be proportionate to the
partners’ profit and loss ratio, the required capital of Alona is
a. 240,000
b. 480,000
c. 600,000
d. 720,000

58. The JJ Tours Partnership earned P500,000 this year. The partners have equal capital
balances, and share profits and losses 1:3. The partners will show share in partnership
profit of
a. 250,000 each
b. 250,000 and 750,000, respectively
c. 125,000 and 375,000, respectively
d. 500,000 each

59. Samba and Sabina share profits and losses in the ratio of 1:2. Samba receives a
monthly salary of 150,000. If Samba’s capital balance is P2,500,000 at the beginning of
the year and P2,000,000 at the end of the year, and annual partnership profit after
salaries is P1,200,000, then Samba withdrew
a. 500,000
b. 1,300,000
c. 2,700,000
d. 3,200,000

60. Agatha joined a partnership by contributing the following: cash, P20,000 accounts
receivable, P4,000; land P240,000 cost, P400,000 fair value; and accounts payable,
P16,000. What will be the initial amount recorded in Agaton’s capital account?
a. 248,000
b. 424,000
c. 20,000
d. 408,000

61. On September 30, 2010, Aba and Ann formed a partnership and agreed to share profits
and losses in the ratio of 3:7, respectively. Aba contributed a parcel of land that cost him
P200,000. Ann contributed P300,000 cash. The land has a quoted price of P360,000 on
September 30, 2010. What amount should be recorded in Aba’s capital account upon
formation of the partnership?

10
 a. 200,000
b. 300,000
c. 348,000
d. 360,000

62. Partners Sharon and Shiela share income in a 2:1 ratio, respectively. Each partner
receives an annual salary allowance of P72,000. If the salaries are recorded in the
accounts of the partnership as an expense rather than treated as an allocation of profit,
the total amount allocated to each partner for salaries and profit would be
a. Less for both Sharon and Shiela
b. Unchanged for both Sharon and Shiela
c. More for Sharon and Shiela
d. More for Shiela and less for Sharon

63. Partners Bagobo and Bicomo share profit and loss equally after each has been credited
with annual salary allowances of P90,000 and P72,000, respectively. Under this
arrangement, Bagobo will benefit by P18,000 more than Bicomo in which of the following
circumstances?
a. Only if the partnership has profit of P162,000 or more for the year
b. Only if the partnership does not incur a loss for the year
c. In all profit or loss situation
d. Only if the partnership has profit of at least P18,000 for the year

64. Letran and Barbie are partners who share profits equally and losses in a 2:1 ratio. Letran
and Barbie have beginning capital balances of P400,000 and P500,000, respectively, and
made no withdrawals during a period of two years. After a profitable operations on the
first year with a profit of P400,000 and an unprofitable operations on the second year with
a loss of P240,000, the capital balances of Letran and Barbie will be
Letran Barbie
a. 480,000 580,000
b. 390,000 570,000
c. 440,000 620,000
d. 670,000 770,000

65. Benzon and Bonjing are partners in B and B Enterprises. Partnership profits and losses
are allocated as follows: salaries of P160,000 and P200,000 to Benzon and Bonjing,
respectively; 10% interest on their beginning capital balances, any remaining profit is
divided equally. At the beginning of the year, their capital balances are P360,000 and
P600,000. Partnership profit of P600,000 is allocated as follows:
Benzon Bonjing
a. 192,000 408,000
b. 268,000 332,000
c. 300,000 300,000
d. 280,000 320,000

11