Partnership Exercises

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Partnership exercises
Accounting (Mindanao State University)
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Chapter 1: Partnership Formation
On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both of their
businesses. According to their agreement, they will split profits and losses 75:25 and their initial capital will
also reflect that ratio.
The following are Ernie and Bert’s Statement of Financial Position:
Ernie Proprietor
Statement of Financial Position
December 31, 2014
ASSETS LIABILITIES AND EQUITY
Cash 50,000 Accounts payable 65,000

Accounts Receivable 100,000 Accrued expenses 55,000
Inventories 75,000 Notes payable 80,000
Equipment 250,000 Ernie, capital 90,000
Accumulated depreciation- Equipment (185,000)
TOTAL ASSETS 290,000 TOTAL LIABILITIES&EQUITY 290,000
Bert Proprietor
Statement of Financial Position
December 31, 2014
ASSETS LIABILITIES AND EQUITY
Cash 30,000 Accounts Payable 75,000
Accounts receivable 110,000 Accrued expenses 90,000
Inventories 85,000 Notes Payable 100,000
Equipment 300,000 Bert, Capital 160,000
Accumulated Depreciation- Equipment (100,000)
TOTAL ASSETS 425,000 TOTAL LIABILITIES&EQUITY 425,000
The values reflected in the Statement of Financial Position are already at fair values except fo the following
accounts:
Ernie’s Accounts Receivable is now 20,000 less than what is stated in his Statement of Financial Position. Both
inventories of Ernie and Bert are now 90,000 and 70,000 respectively. Equipment for Bert has an assessed
value of 275,000, appraised value of 250,000 and book value of 200,000. Additional accrued expenses are to
be established in the amount of 10,000 for Bert only while additional accounts payable in the amount of 5,000
for Ernie. It is also agreed that all liabilities will be assumed by the partnership, except for the notes payable of
Bert which will be personally paid by him.
1. How much is the adjusted capital balance of Bert upon formation?

A. 91,250 C. 285,000
B. 185,000 D. 310,000
Answer: ( C )
2. How much is the capital credit to Ernie upon formation?

A. 80,000 C. 292,000
B. 273,750 D. 255,500
Answer: ( B )
3. How much should Ernie invest as additional cash to be in conformity with their initial capital
agreement?
A. 193,750 C. 175,500
B. 212,000 D. 205,000
Answer: ( A )
Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have 55% interest in the
partnership and 35% in the profits and losses, while Clyde will have 45% interest in the partnership and 65% in
the profits and losses. Bonnie contributed the following:
Cost Fair value

Building 235,000 255,000
Equipment 168,000 156,000
Land 500,000 525,000

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The building and the equipment has a mortgage of 50,000 and 35,000 respectively. Clyde is to contribute
150,000 cash and equipment. The partners agreed that only the building mortgage will be assumed by the
partnership.
1. How much is the fair market value of the equipment which Clyde contributed?
A. 615,818 C. 546,273
B. 989,143 D. 574,909
Answer: ( D )
2. How much is the total asset of the partnership upon formation?

A. 1,892,143 C. 1,660,909
B. 1,701,818 D. 1,632,273
Answer: ( C )
Theories (letter of answer is underlined) 1. A contract where two or more persons bind
themselves to contribute money, property, or
1 The partnership agreement is an express industry to a common fund with the intention of
contract among the partners (the owners of the dividing the profits among themselves.
business). Such an agreement generally does not a. Voluntary Association
include b. Corporation
a. A limitation on a partner’s liability to
c. Partnership
creditors.
d. Sole Proprietorship
b. The rights and duties of the partners.
c. The allocation of income between the Answer: (c)
partners. 2. A partnership formed for the exercise of a
d. The rights and duties of the partners in the profession which is duly registered is an example
event of partnership dissolution. of:
2. A partnership records a partner’s investment of a. Universal partnership of profits
assets in the business at b. Universal partnership of all present property
a. The market value of the assets invested. c. Particular partnership
b. A special value set by the partners. d. Partnership by estoppel
c. The partner’s book value of the assets Answer: (c)
invested. 3. One of the following is not a characteristic of
d. Any of the above, depending upon the contract of partnership.
partnership agreement.
a. Real, in that the partners must deliver their
?3. When property other than cash is invested in a
contributions in order for the partnership contract
partnership, at what amount should the noncash
property be credited to the contributing partner’s to be perfected
capital account? b. Principal, because it can stand by itself
a. Fair value at the date of recognition. c. Preparatory, because it is a means by which other
b. Contributing partner’s original cost. contracts will be entered into
c. Assessed valuation for property tax d. Onerous, because the parties contribute money,
purposes. property, or industry to the common fund
d. Contributing partner’s tax basis. Answer: (a
?4. When property other than cash is invested in a 4. One of the following is not a requisite of a contract
partnership, at what amount should the noncash of partnership. Which is it?
property be credited to the contributing partner’s a. There must be a valid contract
capital account? b. There must be a mutual contribution of money,
a. Fair value at the date of contribution.
property, or industry to a common fund
b. Contributing partner’s original cost.
c. It is established for the common benefit of the
c. Assessed valuation for property tax
purposes. partners which is to obtain profits and divide the
d. Contributing partner’s tax basis. same among themselves
5. Four individuals who were previously sole d. The articles are kept secret among members
proprietors form a partnership. Each partner Answer: (d)
contributes inventory and equipment for use by 5. The minimum capital in money or property except
the partnership. What basis should the when immovable property or real rights thereto are
partnership use to record the contributed assets? contributed, that will require the contract of
a. Inventory at the lower of FIFO cost or partnership to be in a public instrument and be
market. registered with the Securities and Exchange
b. Inventory at the lower of weighted- Commission (SEC).
average cost or market.
a. P5, 000.00
c. Equipment at each proprietor’s carrying
b. P10, 000.00
amount.
c. P3, 000.00
d. Equipment at fair value.
d. P30, 000.00
Answer: (c)
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6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the
partnership’s formation:
Contributed by
Roberts Smith
Cash P 20,000 P 30,000
Inventory 15,000
Building 40,000
Furniture & Equipment 15,000
The building is subject to a mortgage of P 10,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the partnership?
Roberts Smith
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000
Suggested Answer: (b) 35,000 & 75,000
Roberts: 20,000 + 15,000 = P35, 000 Smith: 30,000 + 15,000 + 40,000 – 10,000 =
P75,000. The partner’s capital credit is based upon the net assets contributed by the particular
partner, thus the liabilities assumed reduced the fair market value of the building invested.
7. The Grey and Redd Partnership was formed on January 2, 2010. Under the partnership agreement,
each partner has an equal initial capital balance. Partnership net income or loss is allocated 60% to
Grey and 40% to Redd. To form the partnership, Grey originally contributed assets costing P30,000
with a fair value of P60,000 on January 2, 2010, and Redd contributed P20,000 cash. Drawings by
the partners during 2010 totaled P3, 000 by Grey an P9,000 by Redd. The partnership net income in
2010 was P25,000
Under the goodwill method, what is Redd’s initial capital balance in the partnership?
a. 20,000
b. 25,000
c. 40,000
d. 60,000
Suggested Answer: (d) 60,000
Contributed Capital Agreed Capital Increase (Decrease)

Grey 60,000 60,000
Redd 20,000 60,000 40,000
Total 80,000 120,000 40,000
The partnership agreement provides for equal initial capital. Thus under the goodwill method ,
the capital credit for Redd should be the same as the contribution of Grey, thereby increasing
the total agreed capital to P120,000, which is P40,000 more than the total contributed capital
(goodwill).
8. Using the information in No. 2, under the bonus method, what is the amount of bonus?
a. 20,000 bonus to Grey
b. 20,000 bonus to Redd
c. 40,000 bonus to Grey
d. 40,000 bonus to Redd
Suggested Answer: (b) 20,000 bonus to Redd
Contributed Capital Agreed Capital Increase (Decrease)

Grey 60,000 40,000 (20,000)
Redd 20,000 40,000 20,000
Total 80,000 80,000
The partnership agreement provides for equal initial capital. Thus under the bonus method,
the capital credit for Redd should be the same as the contribution for Grey, resulting to P20,000
bonus from Grey to Redd.

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9. On May 1, 2010, the business assets of John and Paul appear below:
John Paul
Cash P 11,000 P 22,354
Accounts Receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000
Building 428,267
Furniture & Fixture 50,345 34,789
Other Assets 2,000 3,600
Total P 1, 020, 916 P 1, 317, 002
Accounts Payable P 178,940 P 243,650

Notes Payable 200,000 345,000
John, Capital 641, 976
Paul, Capital\ 728,352
Total P 1, 020, 916 P1, 317, 002
John and Paul agreed to form a partnership contributing their respective assets and equities subject
to the following adjustments:
a. Accounts receivable of P20, 000 in John’s books and P35, 000 in Paul’s are uncollectible.
b. Inventories of P5, 500 n P6, 700 are worthless in John’s and Pail’s respective books.
c. Other assets of P2, 000 and P3, 600 in John’s and Paul’s respective books are to be written off.
The capital accounts of John and Paul, respectively, after the adjustments will be:
a. 614, 476 683, 052 c. 640, 876 712, 345
b. 615, 942 717, 894 d. 613,576 683, 350
Suggested Answer: (a) 614, 476 683, 052
John: 641, 976 – 20, 000 – 5, 500 – 2, 000 = P 614, 476
Smith: 728, 352 – 35, 000 – 6, 700 – 3, 600 = P 683, 052
10. Based on No. 4, how much assets does the partnership have?
a. 2, 317, 918
b. 2, 237, 918
c. 2, 265, 118
d. 2, 365, 218
Suggested Answer: (c) 2, 265, 118

John: 1, 020, 916 – 20, 000 – 5, 500 – 2, 000 = P 993, 416
Smith:1, 317, 002 – 35, 000 – 6, 700 – 3, 600 = P 1, 271, 702
Total: 2, 337, 918 – 55, 000 – 12, 200 – 5, 600 = P 2, 265, 118
Problems equipment account to a certain amount, and

1. LF, EZ, and GT are partners with will recognize additional accrued expenses of
capital balances of P67,200, P108,000 and P40,000. After that, MG is to invest additional
P38,000 respectively, sharing profits and pieces of equipment make her interest equal to
losses in the ratio of 2:5:1. SG is admitted as a 45%. If the capital balances of AZ before and
new partner bringing with him expertise and is after adjustment were 556,00 and 484,000
to invest cash for a 15% interest in the respectively, what is the effect in the carrying
partnership considering the transfer of capital value of the equipment as a result of the
from him of P18,000 upon his admission. admission of MG?
Upon admission of SG, which of the following A. 364,000 B. (32,000)
statements is false? C. 396,000 D. (324,000)
A. The capital account of GT will be credited in 3. TM and SJ, having capital balances of
the amount of P2,250 P980,000 and P525,000 respectively, decided
B. The total agreed capital of the old partners to admit GD into the partnership. If TM and SJ
is P18,000 greater than their contributed share profit in proportion of 3;1 respectively,
capital and SJ's capital balance after GD's investment
C. The capital balance of EZ amount to is P589,750, how much was invested by GD?
P119,250 A. P848,750 B. P1,174,250
D.Cash will be debited in the amount of C. P588,000 D. P847,000
P40,800.
4. RD formed a partnership on February 10,
2. On June 1, 2013, AZ invited MG to join him 2009. R contributed cash of P150,000, while D
in his business. MG agreed provided that AZ contributed inventory with a fair value of
will adjust the accumulated depreciation of his P120,000. Due to R's expertise in selling, D
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agreed that R should have 60% of the total C.the right to receive any liquidating
capital of the partnership. R and D agreed to distribution
recognize goodwill. what is the total capital of D.the authority to transact any of the
the RD partnership after the goodwill is partnership’s business
recognized? operation
A.P450,000 B.P330,000 Answers
C.P300,000 D.P270,000 Problem
1. D
5. In AD partnership, Allen's capital is 2. A
P140,000 and Daniel's capital is P40,000 and 3. D
they share a net income ratio of 3:1 4. C
respectively. They decided to admit David in 5. D
the partnership. What amount will David invest
to give him 1/5 interest in the partnership if no 1. A partnership is a(n):
bonus/goodwill is recorded? I. accounting entity.
A.P60,000 B.P36,000 II. taxable entity.
D.P45,000 C.P50,000
a. I only c. Neither I nor II
Theories b. II only d. Both I and II
1. ZEE acquired the assets (net of liabilities) of
partner BEE in exchange for cash. The
acquisition price exceeds the fair value of the
net assets acquired. How should ZEE 2. Which of the following is NOT a feature of a
determines the amount to be reported for the general partnership?
plant and equipment, and for long-term debt of a. mutual agency
the acquired debt of partner BEE? b. limited life
A. Plant and equipment: Fair value ; Long-term c. limited liability
debt: BEE's carrying amount d. none of these
B. Plant and equipment: Fair value ; Long-term
debt: Fair value 3. A partner's tax basis in a partnership is
C. Plant and equipment: BEE's carrying comprised of which of the following items?
amount; Long-term debt: Fair Value I. The partner's tax basis of
D. Plant and equipment: BEE's carrying assets contributed to the partnership.
amount; Long-term debt: BEE's carrying II. The amount of the partner's
amount liabilities assumed by the other partners.
III. The partner's share of other
2. Goodwill represents the excess cost of an partners' liabilities assumed by the
acquisition over the: partnership.
A. Sum of the fair values assigned to an
intangible assets less liabilities assumed a. I plus II minus III c. I minus II
B. Sum of the fair values assigned to tangible plus III
and intangible assets acquired less liabilities b. I plus II plus III d. I minus II
assumed minus III
C. Sum of the fair values assigned to
intangibles acquired less liabilities assumed 4. Which of the following accounts could be
D. Book value of an acquired company found in the general ledger of a partnership?
3. When a partnership is formed, noncash

assets contributed by partners should be
recorded:
I.At their respective book values for income tax
purposes
II.At their respective fair values for financial
accounting purposes
A. I only B. II only
C. Both I and II D. a. Option A c. Option C
Neither I nor II b. Option B d. Option D
4. A limited liability company (LLC): 5. Which of the following accounts could be

I.Is governed by the laws of the states in which found in the PQ partnership's general ledger?
it is formed I. Due from P
II.provides liability protection to its investors II. P, Drawing
III.does not offer pass-through taxation III. Loan Payable to Q
benefits of partnership
A. Both I and III B. III a. I, II c. II, III
C. Both I and II D. I, II, III b. I, III d. I, II, and III
5. Transferable interest of a partner includes all 6. Anton and Bauzon formed a partnership
of the following except:
and agreed to divide initial capital equally,
A.the partner's share in profits and losses
B.the right to receive distributions even though Anton contributed P100,000
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and Bauzon contributed P84,000 in

identifiable assets. Under the bonus
method, to adjust capital accounts,
Bauzon's intangible assets should be
debited for:
a. 0 c. 8,000
b. 16,000 d. 46,000
7. Roy, Sam and Tim decided to engage in

a real estate venture as a partnership. Roy Assume that for tax purposes Jones
invested P140,000 cash and Sam provided and Smith agree to share equally in the
an office and furnishings valued at liabilities assumed by the Jones and Smith
P220,000. (There is a 60,000 note payable partnership.
remaining on the furnishings to be
assumed by the partnership). Although Tim What is each partner's tax basis in
has no tangible assets to invest, both Roy the Jones and Smith partnership?
and Sam believe that Tim's expert
salesmanship provides an adequate
investment. The partners agree to receive
an equal capital interest in the partnership.
Using the bonus method, what is the
capital balance of Tim?
a. Option A c. Option C
a. 0 c. 100,000
b. Option B d. Option D
b. 50,000 d. 140,000
8. Lara and Mitra formed a partnership on

ANSWERS & SOLUTIONS (Chapter 1)
July 1, 2011 and invested the following
assets: P130,00 cash by Lara, and
1. a
P200,000 cash and P50000 computer
2. c
equipment by Mitra. The computer
3. c
equipment has a note payable amounting
4. d
to P10,000, which was assumed by the
5. d
partnership. The partnership agreement
6.a
provides that Lara and Mitra will have an
equal capital credit. Using the goodwill
method, the amount of goodwill to be
recorded upon formation of partnership is:
a. 100,000 c. 120,000
b. 110,000 d. 140,000
9. Ana and Elsa form a new partnership.

Ana invests P300,000 in cash for her 60%
interest in the capital and profits of the
business. Elsa contributes land that has an
original cost of P40,000 and a fair market
value of P70,000, and a building that has a
tax basis of P50,000 and a fair market
value of P90,000. The building is subject to
a P40,000 mortgage that the partnership
will assume. What amount of cash should
Elsa contribute?
a. 40,000 c. 110,000
b. 80,000 d. 150,000
10. Jones and Smith formed a partnership
with each partner contributing the following
items:

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Zero, because under the bonus method, a transfer of capital is only required.
7. c
Roy Sam Tim
Cash P140,000 – –
Office Equipment – P220,000 –
Note payable ________ _( 60,000) ______
Net asset invested P140,000 P160,000 P –
Agreed capitals, equally (P300,000/3) = P100,000
8. b
Lara Mitra
Cash P130,000 P200,000
Computer equipment – 50,000
Note payable ________ _( 10,000)
Net asset invested P130,000 P240,000
Goodwill (P240,000 - P130,000) = P110,000
9. b
Total Capital (P300,000/60%) P500,000
Elsa's interest ______40%
Elsa's capital P200,000
Less: Non-cash asset contributed at market value
Land P 70,000
Building 90,000
Mortgage Payable ( 40,000) _120,000
Cash contribution P 80,000
10. a
Jones: (80000+300000) - 120000 + (180000/2) = 350000
Smith: (40000+200000) - 60000 + (180000/2) = 270000

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1.1 THEORIES. 4. Two individuals who were previously sole

1. A partnership is a(n): proprietors formed a partnership.
I. accounting entity. Property other than cash which is part of
II. taxable entity. the initial investment in the partnership
A. I only B. II only would be recorded for financial
C. Neither I nor II D. Both I and II accounting purposes at the :
a. Proprietors’ book values or the
2. Anton and Garcia formed a partnership, fair value of the property at the
each contributing assets to the business. date of the investment whichever
Anton contributed inventory with a is higher.
current market value in excess of its b. Proprietors’ book values or the
carrying amount. Garcia contributed real fair value of the property at the
estate with a carrying amount in excess of date of the investment whichever
its current market value. At what amount is lower.
should the partnership record each of the c. Proprietors’ book values of the
following assets? property at the date of the
Inventory Real investment
Estate d. Fair value of the property at the
a. Carrying Amount Market date of investment
Value
b. Market Value Carrying 5. A unique feature of partnerships
Amount (compared with publicly owned
c. Carrying Amount Carrying corporations) is that:
Amount a. Limited liability with respect to
d. Market Value Market damages arising from
Value professional services
b. Greater allowable tax deductions
3. On June 30, 2015, a partnership was for retirement plans
formed by Mendoza and Lopez. Mendoza c. Ease of formation
contributed cash. Lopez, previously sole d. Book value
proprietor, contributed noncash assets
including a realty subject to mortgage 1.2 PROBLEMS.
which was assumed by the partnership. 1. On May 1, 2015, Cat and Meow formed a
Lopez’s capital account at June 30, 2015 partnership and agreed to share profits
should be recorded at: and losses in the ratio of 3:7, respectively.
a. The fair value of the property on Cat contributed a parcel of land that cost
June 30, 2015 less the mortgage her P10,000. Meow contributed P40,000
payable cash. The land has a fair value of P15,000.
b. Lopez’s carrying amount of the Cat insisted that the value of land should
property on June 30, 2015 be P18,000. The partners agreed to value
c. Lopez’s carrying amount of the the land at P18,000. What amount should
property on June 30, 2015 less be recorded in Cat’s capital account on
the mortgage payable formation of the new partnership?
d. The fair value of the property on a. P18,000 b.
June 30, 2015 P17,400
b. c. P15,000 d.
P10,000

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2. On July 1, Manny and Floyd formed a a. P280,000 b.

partnership, agreeing to share profits and P305,000 c.
losses in the ratio of 4:6, respectively. 314,000 d.
Manny contributed a parcel of land that 370,000
cost him P25,000. Floyd contributed
P50,000 cash. The land was sold for 4. Assuming that the partners agreed to
P50,000 on July 1, four hours after bring their respective capital in
formation of the partnership. How much proportion to their respective profit and
should be recorded in Manny’s capital loss ratio, and using Fish capital as the
account on the partnership formation? base, how much cash is to be invested by
Cat?
a. P10,000 b.
P20,000 a. P19,000 b.
c. P25,000 d. P30,000 c.
P50,000 P40,000 d.
P55,000
Use the following question for 3 & 4
5. On October 1, 2015, Albano and Armando
On March 1, 2014, cat and Fish formed a formed a partnership and agreed to share
partnership with each contributing the profits and losses in the ratio 3:7
following assets: respectively. Albano contributed a parcel
of land that cost him P2,000,000.
Cat Armando contributed P3,000,000 in cash.
Fish The land has a quoted price of P3,600,000
Cash P30,000 on October 1, 2015. What amount should
P70,000 be recorded in Albano’s capital account
Machinery P25,000 upon formation of the partnership?
P75,000
Building - a. P3,600,000 b.
P225,000 P3,000,000 c.
Furnitures P3,480,000 d.
and Fixtures P10,000 P2,000,000
-
3. On March 1, 2015, the capital account of 1. Jones and Smith formed a partnership
Fish would show a balance of: with each partner contributing the
following items:
Jones Smith
Cash P 80,000 P 40,000
Building - cost to Jones 300,000
- fair value 400,000
Inventory - cost to Smith 200,000
- fair value 280,000
Mortgage Payable 120,000
Accounts Payable 60,000

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Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership. What is the balance in each partner’s capital account for
financial accounting purposes?
A.
B. Jones: P 360,000, Smith: P 260,000 D. Jones: P 260,000, Smith: P 180,000

C. Jones: P 350,000, Smith: P 270,000 E. Jones: P 500,000, Smith: P 300,000
2. The business assets of LL and MM appear below:
LL MM
Cash P 11,000 P 22,354
Land 603,000 -
Building - 428,267
Furniture and Fixture 50,345 34,789
Total P 1,020,916 P 1,317,002
Accounts Payable P 178,940 P 243,650

LL, capital 641,976 -
MM, capital - 728,352
Total P 1,020,916 P 1,317,002
LL and MM agreed to form a partnership by contributing their respective assets and equities
subject to the following adjustments:
a. Accounts Receivable of P20,000 in LL’s books and P35,000 in MM’s are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books.
c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be written off.
The capital account of the partners after the adjustments will be:
a. LL: P615,942, MM: P717,894 c. LL: P640,876, MM: P712,345

b. LL: P614,476, MM: 683,052 d. LL: P640,876, MM: 683,050
3. The same information in number 2, how much total assets does the partnership have after
formation?
a. P2,265,118 c. P2,237,918
b. P2,337,918 d. P2,365,218

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4. On March 1, 2015, PP and QQ decide to combine their businesses and form a partnership. Their
balance sheets on March1, before adjustments, showed the following:
PP QQ
Cash P 9,000 P 3,750
Furniture and Fixtures (net) 30,000 9,000
Office Equipment (net) 11,500 2,750
Prepaid Expenses 6,375 3,000
Total P 105,375 P51,500
Accounts Payable P45,750 P18,000

Capital 59,625 33,500
Total P105,375 P51,500
They agreed to have the following items recorded in their books:

1. Provide 2% allowance for doubtful accounts.
2. PP’s furniture and fixtures should be P31,000, while QQ’s office equipment is
underdepreciated by P250.
3. 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.
4. The fair market value of inventory amount to:
For PP ...............................P29,500
For QQ ...............................P21,000
Compute the net (debit) credit adjustment for PP and QQ:

PP QQ
a. P 2,870 P 2,820
b. (2,870) (2,820)
c. 870 180
d. (870) 180
5. The same information in number 4, compute the total liabilities after formation:
a. P 65,550 c. 63,750
b. 61,950 d. 63,950
1. Which of the following is not a characteristic of most partnership?

a. Limited liability c. Mutual agency
b. Limited life d. Ease of formation

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Suggested answer (a) limited liability The liability of the partners in a partnership is unlimited.
2. Which of the following is not a characteristic of the proprietary theory that influences accounting for
partnerships?
a. Partner’s salaries are viewed as a 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 the
partnership.
Suggested answer (c) A partnership is characterized by limited liability
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
Suggested answer (c) A partnership is created by mere agreements of the partners
4. 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?
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
Suggested answer (a) Fair value at the date of contribution
5. Partnership capital and drawings accounts are similar to the corporate
a. Paid in capital, retained earnings, and c. Paid in capital and retained earnings accounts
dividends accounts
d. Preferred and common stock accounts
b. Retained earnings account
Suggested answer (a)Partnership capital accounts are similar to corporate paid in capital and retained
earnings; while partnership drawing accounts are similar to corporate dividends accounts
For questions 6-10:
On May 1, 2015, the business assets of Jessyreen and Leilani appear below:
Jessyreen Leilani

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Cash P 11, 000 P 22, 354

Accounts receivable 234, 536 567, 890
Inventories 120, 035 260, 102
Land 603, 000
Building 428, 267
Furniture and fixtures 50, 345 34,789
Other assets _ _2, 000__ __ 3,600_
Total P 1,020,916 P 1,317,002
Accounts payable P 178,940 P 243,650

Notes payable 200,000 345,000
John, capital 641,976
Paul, capital ________ 728, 352
Total P 1,020,916 P1,317,002
Jessyreen and Leilani agreed to form a partnership contributing their respective assets and equities
subject to the following adjustments:
a. Accounts receivable of P20,000 in Jessyreen’s books and P35,000 in Leilani’s are uncollectible
b. Investors of P5,500 and P6,700 are worthless in Jessyreen’s and Leilani’s respective books
c. Other assets of P2,00 and P3,600 in Jessyreen’s and Leilani’s respective books are to be
written off
6. The capital accounts of the partner’s after adjustments will be:
a. Jessyreen’s 614,476
Leilani’s 683, 052
b. Jessyreen’s 615, 942
Suggested answer (a)

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Jessyreen Leilani
Unadjusted capital balances p641,976 P728,352
Adjustments:
Uncollectible accounts (20,000) (35,000)
Worthless inventories (5,500) (6,700)
Other assets written off (2,000) (3,600)
Adjusted capital balances P614,476 P683,052
7. How much assets does the partnership have?

a. 2,337,918 c. 2,265,118
b. 2,237,918 d. 2,365,218
Suggested answer (c)
Jessyreen Leilani Total
Unadjusted asset bals. 1020916 1317002 2337918
Adjustments:
Uncollectible accounts (20000) (35000) (55000)
Worthless inventories (5500) (6700) (12200)
Other assets written off (2000) (3600) (5600)
Adjusted assets bals. 993416 1271702 2265118
8. Shamira offered to join for a 20% interest in the firm. How much cash should he contribute?
a. 330,870 c. 344,237
b. 337,487 d. 324,382
Suggested answer (d)
New capital of the partnership [(614476+683052)/80%] P1621910
Multiply by 20%
Cash to be contributed by Shamira P324382
9. After Shamira’s admission, the profit and loss sharing ratio was agreed to be 40:40:20, based on
capital credits. How much should the cash settlement be between Jessyreen and Leilani.
a. 33,602 b. 32,930

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c. 32,272 d. 34,288
Suggested answer (d)

Jessyreen Leilani
Capital balances at P614476 683052
40:40:20 ratio
New capital ratio:
@ 40% each (1621910) 648764 648764
Cash settlement bet.
Jessyreen and Leilani P34288 (P34288)
10. During the first year of their operations, the partnership earned P325,000. Profits were distributed in
the agreed manner. Drawings were made in these amounts: Jessyreen, p50,000; Leilani, 65,000;
Shamira, P28,00.
How much are the capital balances after the first year?
A. Jessyreen, capital 750,627 c. Jessyreen, capital 757,915
Leilani, capital 735,177 Leilani, capital 742,315
Shamira, capital 372,223 Shamira, capital 375, 837
d. Jessyreen, capital 743,121
b. Jessyreen, capital 728,764
Leilani, capital 727,825
Leilani, capital 713,764
Shamira, capital 368,501
Shamira, capital 361,382
Suggested answer (b)
Jessyreen Leilani Shamira
Capital balances at P648764 P648764 P324382
40:40:20 ratio
Drawings (50000) (65000) (28000)
Share in profit (40:40:20) 130000 130000 65000
Capital balances P728764 P713764 P361382
Use following information for question 1 to 5

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On July 1, 2015, A and B decided to form a partnership. The firm is to take over the business assets
and assume liabilities, and the capitals are to be based on net assets transferred after the ff.
adjustments:
 A and B’s inventory is to be valued at 31,000 and 22,000 respectively.

 Accounts receivable of 2,000 in A’s book and 1,000 in B’s books are uncollectible.
 Accrued salaries of 4,000 for A and 5,000 for B are still to be recognized in the books.
 Unused office supplies of A and B amounted to 5,000 and 1,500.
 Prepaid rent of 7,000 and 4,500 are to be recognized in the books A and B, respectively.
 A is to invest or withdraw cash necessary to have a 40% interest in the firm.
Balance sheet for A and B before adjustments
A B
Cash ₱ 31,000 ₱ 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies 5,000
Equipment 20,000 24,000
Accum. Depreciation- Equipment (9,000) (3,000)
Total Assets ₱ 100,000 120,000
Accounts Payable ₱ 28,000 20,000

Capitals 72,000 100,000
Total Liabilities and Capital ₱ 100,000 ₱ 120,000
1. The additional investment (withdrawal) made by A:

a. ₱(15,000) c. ₱3,000
b. ₱(6,667) d. ₱8,333
2. The total assets of the partnership after formation:

a. ₱235,333 c. ₱220,333
b. ₱230,000 d. ₱212,000
3. The total liabilities of the partnership after formation:

a. ₱57,000 c. ₱54,000
b. ₱48,000 d. ₱51,000
4. The total capital of the partnership after formation:

a. ₱180,000 c. ₱163,333
b. ₱178,000 d. ₱155,000
5. The total capital balances of A and B in the combined balanced sheet:

a. A, ₱81,250; B, ₱72,000 c. A, ₱100,000; B, ₱75,000
b. A, ₱81,250; B, ₱75,000 d. A, ₱62,000; B, ₱93,000

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6. On June 1, 2015, T, U and V formed a partnership by combining their separate business

proprietorships. T contributed cash of ₱100,000. U contributed property with a ₱80,000
carrying amount, a ₱95,000 original cost, and ₱120,000 fair value. The partnership accepted
the responsibility for the ₱55,500 mortgage attached to the property. V contributed equipment
with a ₱65,000 carrying amount, a ₱90,000 original cost, and ₱78,000 fair value. The
partnership agreement specifies that P & L are to be shared equally but is silent regarding
capital contributions. Which partner has the largest capital balance at the beginning of the
partnership?
a. T c. V
b. U d. All capital account balances are equal
7. For financial accounting purposes, assets of an individual partner contributed to a partnership

are recorded by the partnership at:
a. Historical cost c. Fair market value
b. Book value d. Lower of cost or market
8. A unique feature of partnership:

a. They do not have to follow GAAP c. Books have to be maintained on the tax
basis
b. They are not governed by laws d. They do not file income tax return
9. Which of the following is not an advantage of a partnership over a corporation?

a. Ease of formation c. The elimination of taxes at the entity level
b. Unlimited liability d. All of the above
10. A partner’s withdrawal of assets from a limited liability partnership that is considered a
permanent reduction in that partner’s equity is debited to the partner’s:
a. Drawing account c. Capital account
b. Retained earnings account d. Loan receivable account
1. A partner who is entitled to a share of the profits from a partnership is known as:
a) A salaried partner.
b) A managing partner.
c) An equity partner.
d) A limited liability partner.
Answer:An equity partner.
A partner on a fixed salary is known as a salaried partner.
2. The maximum number of persons who are legally allowed to operate in a partnership is:
a) 2
b) 20
c) There is no legal limit
d) 100
Answer:There is no legal limit

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3. Sparkle Ltd is a private limited company limited by shares. It has one director. How many
shareholders does the law require it to maintain?
a) One provided it is a different person from the director.
b) Five.
c) Two.
d) One which can be the same person as the director.
Answer:One which can be the same person as the director.
The law allows private limited companies to exist with one shareholder who is the same person
as the director.
4. Which one of the following statements about limited liability partnerships (LLPs) is incorrect?
a) An LLP has a legal personality separate from that of its members.
b) The liability of each partner in an LLP is limited.
c) Members of an LLP are taxed as partners.
d) A limited company can convert to an LLP.
Answer:A limited company can convert to an LLP.
A general partnership can convert to an LLP but a limited company cannot.
5. An organisation running a business has the following attributes: the assets belong to the
organisation, it can create a floating charge over its assets, change in membership does not
alter its existence, and members cannot transfer their interests to others. What type of
organisation is it?
a) A private limited company
b) A limited liability partnership
c) A general partnerships
d) A private limited company
Answer:A limited liability partnership.
In the question the attributes of the organisation are the same for LLPs as companies except
members of a company (private and public) can transfer their interests to others.
6. Roberts and Smith drafted a partnership agreement that lists the following assets
contributed at the partnership’s formation:
Contributed by
Roberts Smith
Cash $20,000 $30,000
Inventory -- 15,000
Building -- 40,000
Furniture & equipment 15,000 --
The building is subject to a mortgage of $10,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the
partnership? Roberts Smith

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a. $35,000 $85,000 c. $55,000 $55,000

b. $35,000 $75,000 d. $60,000 $60,000
Answer: (b) The requirement is to determine the amounts to be recorded as capital for Roberts
and Smith at the formation of the partnership. Unless otherwise agreed upon by the partners,
individual capital accounts should be credited for the fair market value (on the date of
contribution) of the net assets contributed by that partner. It is necessary to assume that the
amounts listed are fair market values. The amount of net assets that Roberts contributed is
$35,000 ($20,000 + $15,000). The fair market value of the net assets Smith contributed is
$75,000 ($30,000 + $15,000 + $40,000 – $10,000). The partners’ profit and loss sharing ratio
does not affect the initial recording of the capital accounts.
7. On April 30, year 1, Algee, Belger, and Ceda formed a partnership by combining their
separate business proprietorships. Algee contributed cash of $50,000. Belger contributed
property with a $36,000 carrying amount, a $40,000 original cost,and $80,000 fair value. The
partnership accepted responsibility for the $35,000 mortgage attached to the property. Ceda
contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000
fair value. The partnership agreement specifies that profits and losses are to be shared equally
but is silent regarding capital contributions. Which partner has the largest April 30, year 1
capital account balance?
a. Algee. d. All capital account balances are
b. Belger. equal.
c. Ceda.
Answer: (c) The requirement is to determine which partner has the largest capital account
balance. Use the solutions approach to solve the problem.
Algee Belger Ceda
Partner contribution 50,000 80,000 55,000
Less: Liabilities assumed
by the partnership 0 (35,000) 0
Ending capital balance $50,000 $45,000 $55,000
Each partner values his contribution to the partnership at its fair market value. The fair market
value becomes the partner’s balance in his capital account and is basis to the partnership under
generally accepted accounting principles. Any liabilities assumed by the partnership, reduces
the partners’ capital balance by the amount assumed.
8. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though
Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus
approach to adjust the capital accounts, Carr’s unidentifiable asset should be debited for
a. $46,000 c. $ 8,000
b. $16,000 d. $0

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Answer: (d) Under the bonus method, unidentifiable assets (i.e., goodwill) are not recognized.
The total resulting capital is the FV of the tangible investments of the partners. Thus, there
would be no unidentifiable assets recognized by the creation of this new partnership.
9. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data summarizes
2004 activity:
Partnership net income, 2004 $68,000

Ellis capital, 1/1/2004 90,000
Ellis additional investment in 2004 10,000
Ellis drawings in 2004 12,000
Nossiter capital, 1/1/2004 80,000
Nossiter drawings in 2004 20,000
What amount of net income is allocated to Nossiter’s capital account for 2004?
a. $26,600 c. $34,000
b. $27,600 d. $47,600
Answer: (d) (68,000×.7)
10. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data
summarizes 2004 activity:
Partnership net income, 2004 $68,000

Ellis capital, 1/1/2004 90,000
Ellis additional investment in 2004 10,000
Ellis drawings in 2004 12,000
Nossiter capital, 1/1/2004 80,000
Nossiter drawings in 2004 20,000
What is the value of Ellis’s capital account at 12/31/2004?

a. $20,400 c. $111,400
b. $108,400 d. $120,400
Answer: (b) (90,000+10,000-12,000+(68,000×.3))
Chapter 1 Partnership Formation
1.On July 1,1997, Monuz and Pardo form a partnership, agreeing to share profits and losses in the ratio
of 4:6,respectively. Monuz contributed a parcel of land that cost him P25,000. Pardo contributed
P50,000 cash. The land was sold for P50,000 on July 1,1997 four hours after formation of the
partnership. How much should be recorded in Munoz capital account on formation of the partnership?

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a) P10,000 c) P25,000
b) P20,000 d) P50,000
2.Moonbits partnership had a net income of P8,000.00 for the month ended September 30,1997.
Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by paying Liz P 32,000.00 for
half of her capital and half of her 50 percent profit sharing interest on October 1,1997. At this time Liz
capital balance was P24,000.00 and Dick capital balance was P56,000.00. Liz should receive a debit to
her capital account of:
a) P 12,000.00 c) P 16,000.00
b) P 20,000.00 d) P 26,667.00
3.On March 1,1997, Santos and Pablo formed a partnership with each contributing the following assets:
Santos Pablo
Cash P 30,000 P 70,000
Machinery and Equipment 25,000 75,000
Building -0- 225,000
Furniture & Fixtures 10,000 -0-
The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership. The
partnership agreement provides that Santos and Pablo share profits and losses 30% and 70%,
respectively. On March 1,1997 the balance in Pablo’s capital account should be:
a) P 290,000.00 c) P 314,000.00
b) P 305,000.00 d) P 370,000.00
4. The business assets of John and Paul appear below:
John Paul
Cash P 11,000 P 22,354
Land 603,000
Building 428,267
Furniture & Fixtures 50,435 34,789
Total P 1,020,916 P 1,317,002
Accounts Payable 178,940 243,650

John, Capital 641,976
Paul, Capital 728,352
Total P 1,020,916 P 1,317,002

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John and Paul agreed to form a partnership contributing their respective assets and equities subject to
the following adjustments:
a. Accounts receivable of P 20,000 in John’s books and P 35,000 in Paul’s are uncollectible.
b. Inventories of P 5,500 and P 6,700 are worthless in John’s and Paul’s respective books.
c. Other assets of P 2,000 and P 3,600 in John’s and Paul’s respective books are to be written off.
The capital account of the partners after the adjustment will be:
a) John’s P 614,476 c) John’s P 649,876

Paul’s P 683,052 Paul’s P 712,345
b) John’s P 615,942 d) John’s P 613,576
Paul’s P 717,894 Paul’s P 683,350
5. The following is the condensed balance sheet of the partnership Jo, Li and Bi who share profits and
losses in the ratio of 4:3:3.
Cash P 180,000 Accounts Payable P 420,000

Other Assets 1,660,000 Bi, Loan 60,000
Jo, receivable 40,000 Jo, Capital 620,000
Li, Capital 400,000
Bi, Capital 380,000
Total P1,880,000 Total P1,880,000
Assume that the assets and liabilities are fairly valued on the balance sheet and the partnership decides
to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be recorded. How much
Mac contributes to cash or other assets?
a) P 350,000 c) P 355,000
b) P 280,000 d) P 284,000
Solution and Explanation
1. D. The requirement is Munoz’ capital account balance upon formulation of the partnership. As in the
case with all entities, investment in the capital of a partnership should be measured at the fair market
value of the assets contributed. In this case, the FMV of the land would be measured at the fair market
value by its sales price on the date of sale (P50,000) which is also the date of the partnership formation.
Recording the land of Munoz’ cost would result in the partners sharing the gain from the sale in

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accordance with their profit and loss ratio. This is not equitable since the gain accrued while the land
was held by Monuz.
2. A. Under the admission by purchase only the transfer of the capital purchase by the selling partner
(Liz) to the buying partner (Sunshine) is recorded. Therefore 50% of the capital of Liz (P24,000) or P
12,000 is to be debited to her capital account.
3. A. P 290,000.00
Assets contributed by Pablo P 370,000

Less: Mortgage assumed by partnership (80,000)
Capital balance of Pablo P 290,000
Note that the profit and loss sharing ratio is irrelevant to the solution of this problem.
4. A. John’s P 614,476
Paul’s P 683,052
John Paul
Capital balance before adjustments P641,976 P 728,352
Adjustments:
Uncollectible accounts (20,000) (35,000)
Inventories Written Off (5,500) 6,700
Other Assets written off (2,000) (3,600)
Capital balances after adjustments P 614,476 P 683,052
5. A. P 350,000
Total agreed capital of the new partnership ( 1,400,000 ÷ 80% ) P 1,750,000
Total contributed capital of the old partners ( 1,400,000)
Mac’s contribution P 350,000
1. Partnership capital and drawing accounts are similar to the corporate

A. Paid-in capital, retained earnings, and dividend accounts
B. Retained earnings account.
C. Paid-in capital and retained earnings accounts.
D. Preferred and common stock accounts
2. For individuals who were previously sole proprietors form a partnership. Each partner contributes
inventory and equipment for use by the partnership. What basis should the partnership use to record
the contributed assets?
A. Inventory at the lower of FIFO cost or market.

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B. Inventory at the lower of weighted-average cost or market.

C. Equipment at each proprietor’s carrying amount.
D. Equipment at fair value.
3. Meca and Came formed a partnership on January 1,2015 with each contributing the following assets:
Meca Came
Cash P30,000 P70,000
Machinery 25,000 75,000
Inventory 10,000 -
Building 225,000
The building is subject to a mortgage loan of P90,000 which is to be assumed by the partnership.
On January 1,2015, the capital account of Came would show a balance of:
A. P280,000 B. P305,000 C. P314,000 D. P370,000
4. 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. Becca should make additional
investment of
a. P234,000 b. P490,000 c. P256,000 d. P210,000
5. The business assets of LL and MM appears below:
LL MM
Cash P11,000 P22,354
Land 603,000 ----------
Building ---------- 428,267
Furniture and Fixtures 50,345 34,789
P1,020,916 P1,317,002
Accounts Payable P178,940 P 243,650
LL,Capital 641,976 -------------
MM, Capital ---------- 728,352
P1,020,916 P1,317,002
LL and MM agreed to form a partnership contributing their respective assets and equities subject
to the following adjustments:
a. Accounts receivable of P20,000 in LL’s books and P35,000 in MM’s are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books.
c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be written off.
The capital account of the partners after the adjustments will be:
a. LL, P615,942; MM, P717,894 c. LL, P640,876; MM, P683,050
b. LL, P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052
6. Langley invests his delivery van in a computer repair partnership with McCurdy. What amount should
the van be credited to Langley’s partnership capital?
A. The tax basis.

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B. The fair value at the date of contribution.

C. Langley’s original cost.
D. The assessed valuation for property tax purposes.
7. On April 30, 1993, Algee, Belger, and Ceda formed a partnership by combining their separate
business proprietorships. Algee contributed cash of $50,000, Belger contributed property with a
$36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership accepted
responsibility for the $35,000 mortgage attached to the property. Ceda contributed equipment with a
$30,000 carrying amount, a $75,000 original cost, and $55,000 fair value. The partnership
agreement specifies that profits and losses are to be shared equally but is silent regarding capital
contributions. Which partner has the largest April 30, 1993, capital account balance?
A. Algee. c. Ceda.
B. Belger. d. All capital account balance are equal.
8. Jamby and Minam just formed a partnership. Jamby 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. Jamby also contributed a
note payable of P210,000 to be assumed by the partnership. Jamby is to have 60% interest in the
partnership. Miriam 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 a partnership, which of the following is true?
A. The agreed capital of Jamby upon formation is P2,625,000

B. The total agreed capital of the partnership is P4,375,000
C. The capital of Miriam 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
9. Alley and Barvey established a partnership on December 1, 20x4. They agreed that Alley will
contribute cash of P20,000; Land of P15,000 and Building of P50,000. Alley’s accounts payable of
P10,000 is to be assumed by the partnership. Barvey will contribute cash of P30,000 and furniture
and fixtures of P25,000.
Assume that each partner initially should have an equal interest in partnership capital with no
contribution of intangible asset (bonus method). How much are the capital balances of each
partner?
a. P85,000 for Alley and P55,000 for Barvey
b. P65,000 for Alley and P65,000 for Barvey.
c. P75,000 for Alley and P55,000 for Barvey
d. P75,000 for Alley and P75,000 for Barvey.
10. The partnership agreement is an express contract among the partners (the owners of the business).
Such an agreement generally does not include
a. A limitation on a partner’s liability to creditors.
b. The rights and duties of the partners.
c. The allocation of income between the partners.
d. The rights and duties of the partners in the event of partnership dissolution.
1. The partnership form of business is:

a. An economic entity.
b. A separate legal entity, just as a corporation is a legal entity.
c. A taxable entity.
d. A fiscal entity.
2. A distinct and major advantage of the professional corporation form of organization in comparison
with the partnership form of organization is:
a. Limited liability with respect to damages arising from professional services.

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b. Greater allowable tax deductions for retirement plans.

c. Ease of formation
d. Book value
e. Historical cost
f.
3. Which of the following is not a characteristic of a partnership?
a. The partnership itself pays no income taxes.
b. It is easy to form a partnership.
c. Any partner can be held personally liable for all debts of the business.
d. A partnership requires written Articles of Partnership.
e. Each partner has the power to obligate the partnership for liabilities.
4. The advantages of the partnership form of business organization, compared to corporations,
include
a. Single taxation d. Limited Liability

b. Ease of raising capital e. Difficulty of formatio
c. Mutual Agency
5. Which of the following is NOT a characteristic of the proprietary theory that influences accounting
for partnerships?
a. Partners’ salaries are viewed as a distribution of income rather than a component of net
income.
b. A partnership is not viewed as a separate, 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 the
partnership.
PROBLEMS
6. Albert, Claude, and Jamie form a partnership by contributing P25,000, P70,000, and
P80,000, respectively. In addition, the partners agree that Albert should receive P20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Claude when the partnership is formed?
a. P60,000
b. P65,000
c. P70,000
d. Some other amount

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Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in
capital and profits and Ken is to have a 40% interest in capital and profits. Bill
contributes the following:
Cost Fair value

Land P10,000 P20,000
Building P100,000 P60,000
Equipment P20,000 P15,000
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken
contributes P50,000 cash to the partnership. Bill and Ken agree that Ken’s capital
account should equal Ken’s P50,000 cash contribution and that goodwill (revaluation of
asset) should be recorded. Goodwill (revaluation of asset) should be recorded in the
amount of:
a. P10,000 c. P16,667
b. P15,000 d. P20,000
7. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of P290,000, P100,000, and
P400,000, respectively. The building is initially recorded on the partnership’s books at
Juan’s book value (P190,000). Two years later the building is sold for a P270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. P20,000 c. P210,000
b. P90,000 d. P230,000
8. Jones and Smith formed a partnership with each partner contributing the following
items:
Jones Smith
Cash P80,000 P40,000
Building-Cost to 300,000
Jones
-Fair Value 400,000
Inventory- Cost 200,000
Smith
-Fair Value 280,000
Mortgage Payable 120,000
Account Payable 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities
assumed by the Jones and Smith partnership. What is the balance in each partner’s
capital account for financial accounting purposes?
a. Jones- P350,000 and Smith- P270,000
b. Jones- P260,000 and Smith- P180,000
c. Jones- P360,000 and Smith- P260,000
d. Jones- P500,000 and Smith- P300,000

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9. On July 1, ML and PP formed a partnership, agreeing to share profits and losses in the
ratio of 4:6, respectively. ML contributed a parcel of land that cost her P25,000. PP
contributed P50,000 cash. The land was sold for P50,000 on July 1, four hours after
formation of the partnership. How much should be recorded in ML’s capital account on
the partnership formation?
a. P10,000 c. P25,000
b. P20,000 d. P50,000
1.1 A partnership is formed by two individuals who were previously sole proprietors.
Property other than cash which is part of the initial investment in the partnership would
be recorded for financial accounting purposes at the:
Chapter 1
a. Proprietors’ book values or the fair value of the property at the date of the investment,
whichever is higher 1. B.
2. A.
b. Proprietors’ book values or the fair
3. value
D. of the property at the date of the investment,
whichever is lower. 4. A.
5. C. at the date of the investment.
c. Proprietors’ book values of the property
6. C.
d. Fair value of the property at the date
7. A.of the investment.
8. B.
1.2.
9. C.
10. D.
When property other than cash is invested in a partnership, at what amount should the
non-cash property be credited to the contributing partner’s capital account?
a. Contributing partner’s tax basis.
b. Contributing partner’s original cost.
c. Assessed valuation for property tax purposes.
d. Fair value at the date of contribution.
1.3. 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.
1.4. When property other than cash i invested in a partnership, at what amount should
the noncash 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
1.5. Partnership capital and drawings are similar to the corporate
a. Paid in capital, retained earnings and dividends accounts

b. Retained earnings account
c. Paid in capital and retained earnings accounts

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d. Preferred and common stock accounts
PROBLEMS 1.8. G. Macalino and W. Nolasco form a

partnership and agree to divide initial
1.6. Abena and Buendia establish a capital equally, even though Macalino
partnership to operate a used-furniture contributed P100,000 and Nolasco gave
business under the name of A and B P84,000 in identifiable assets.
Furniture. Abena contributes furniture
that cost P60,000 and has a fair value of Under the bonus approach to adjust
P90,000. Buendia contributes P30,000 capital accounts, Nolasco’s
cash and delivery equipment that cost unidentifiable assets should be debited
P40,000 and has a fair value of for
P30,000. The partners agree to share
profits and losses 60% to Abena and a . P8,000 c. P-0-
40% to Buendia.
b . P16,000 d . P46,000
The peso amount of gain (loss) that will
result if the initial noncash contributions 1.9. L. Molina and R. Nepomuceno
of the partners are recorded at cost enter into a partnership agreement in
rather than fair market value will be which Molina is to have a 60% interest
in capital and profits and Nepomuceno
a. P30,000 and (P10,000) to Abena is to have a 40% interest in capital and
and Buendia, respectively profits. Molina contributes the following:
b. P12,000 and P8,000 to Abena
and Buendia, respectively Cost Fair
c. (P18,000) and P18,000 to Abena Value
and Buendia, respectively
d. P 18,000 and (P18,000) to Abena Land P 20,000 P
and Buendia, respectively 40,000
1.7. On April 30, 2003, Bautista, Building 200,000

Jimenez and Laxamana formed a 120,000
partnership by combining their separate
Equipment 40,000
business proprietorships. Bautista
30,000
contributed cash of P100,000. Jimenez
contributed property with a carrying There is a P60,000 mortgage on the
amount of P72,000, original cost of building that the partnership agrees to
P80,000, and fair value of P160,000. assume. Nepomuceno contributes
The partnership accepted responsibility P100,000 cash to the partnership.
for the P70,000 mortgage attached to Molina and Nepomuceno agree that
the property. Laxamana contributed Nepomuceno’s capital account should
equipment with a carrying amount of equal Nepomuceno’s P100,000 cash
P60,000, original cost of P150,000, and contribution and that goodwill should be
fair value of 110,000. The partnership recorded.
agreement specifies that profits and
losses are to be shared equally but is Goodwill should be recorded in the
silent regarding capital contributions. amount of
Which partner has the largest capital a. P20,000 c. P33,333
account balance as of April 30, 2003?
b. P30,000 d. P40,000
a. Bautista c.
Laxamana 1.10. On March 1, 2003, Z Roxas and B.
b. Jimenez d. All Poe decided to combine their business
capital and form a partnership. The balance
account balances are equal

lOMoARcPSD|7063929
sheet of Roxas and Poe on March 1, b. P58,320 and P32,945

before adjustment is presented below. respectively
c. P59,070 and P32,195
Roxas Poe respectively
d. P104,820 and P50,195
Cash P 9,000 P respectively
3,750 1. Which of the following is not a
characteristic of a partnership?
Accounts 18,500
a. The partnership itself pays no income
13,500
Receivable taxes
b. It is easy to form a partnership
Inventories 30,000 c. Any partner can be held personally liable
19,500 for all debts of the business
d. A partnership requires written Article of
Furniture 30,000 Partnership
9,000
and fixtures (net) 2. The partnership form of business is:
a. An economic entity
Office Equipment 11,500
b. A taxable entity
2,750
(net) c. A fiscal entity
d. A separate legal entity, just as a
Prepaid Expenses 6,375 corporation is a legal entity
3,000
3. Which of the following is not an
P105,375 advantage of partnership over a
P51,500 corporation?
a. Ease of formation
Accounts Payable P 45,750
b. Unlimited liability
P18,000 c. The elimination of taxes at the entity
level
Z. Roxas, Capital 59,625 d. All of the above
B. Poe, Capital 4. A partner’s withdrawal of assets

33,500 from a limited liability partnership that is
considered a permanent reduction of in
P105,375 P that partner’s equity is debited to the
51,500
partner’s:
They agreed to provide 3% for doubtful a. Drawing account
accounts on their accounts receivable b. Retained earnings account
and found Poe’s furniture to be under c. Capital account
depreciated by P900. d. Loan receivable account
If each partner’s share in equity is to be 5. For financial accounting purposes, assets

equal to the net assets invested, the of an individual partner contributed to
capital accounts of Roxas and Poe partnership are recorded by the partnership
would be at:
a. Historical cost
a. P58,170 and P33,095
b. Book value
respectively
c. Fair market value
d. Lower of cost or market

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6. On December 1, 2009, DD and EE formed a partnership with each contributing the following
asset at fair market values:
DD
Cash 9,000
Machinery and Equipment 13,500
The land and building are subject to a mortgage loan of P54,000 that the partnership will
assume. The partnership agreement provides that DD and EE share profits and losses, 40% and
60%, respectively and partners agreed to bring their capital balances in proportion to the profit
and loss ratio and using the capital balance of EE as the basis. The additional cash investment
made by DD should be:
a. 18,000
b. 85,500
c. 134,100
d. 166, 250
DD, Capital= 9+13.5+13.5=36
EE, Capital= 18+90+27-54=81
81/.60=135
135*.40=56-36=18 A
7. JJ and KK are joining their separate business to form a partnership. Cash and noncash asset are
to be contributed for a total capital of 300,000. The noncash assets to be contributed and
liabilities to be assumed are:
JJ KK
Book Value Fair Value Book Value
Inventories 22,500 33,750 60,000
The partner’s capital are to be equal after all contributions of assets and assumptions of
liabilities. The total assets of the partnership.
a. 318,750
b. 300,000
c. 281,250
d. 225,000
Equity=Assets-Liabilities
300,000=X-(11,250+7,500)
Assets=X=318,750 A
8. Refer to number 8, the amount of cash that each partner must contribute.
a. JJ=75,000; KK=18750
b. JJ=75,000; KK=11,250
c. JJ=161,250; KK= 157,500
d. JJ= 127,500; KK= 11,250
For JJ; 150,000=Cash to be contrubuted+22,500+33,750+30,000+(-11250)
Cash to be contributed=75,000
For KK; 150,000=Cash to be contributed+67,500+71,250+(-7500)
Cash to be contributed=18,750 A

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9. Jones and Smith formed a partnership with each partner contributing the following items:
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership. Refer to the above information. What is the balance in each
partner’s capital account for financial accounting purposes?
C
Jones
Assets at fair value
Jones: 80,000+400,000 480,000
Smith: 40,000+280,000
10. MM, NN, and OO are partners with capital balances on December 31, 2012 of P300,000,
P300,000 and P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is
agreed that OO is taken certain equipment with second-hand value of P50,000 and a note for
the balance of OO’s interest. The equipment are carried on the books at P65,000. Brand new
equipment may cost P80,000. Compute for: (1) OO’s acquisition of the second-hand equipment
will result to reduction in capital; (2) the value of the note that will OO get from the
partnership’s liquidation,
a. 15,000 each for MM and NN (2) 150,000
b. (1) 5,000 each for MM, NN, and OO (2) 145,000
c. (1) 5,000 each for MM, NN, and OO (2) 195,000
d. (1) 7,500 each for MM and NN (2) 145,000

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B
1. Reduction in Capital:
Equipment at carrying value
Equipment at secondhand value (fair value)
1. Cat and Dog formed a partnership, each contributing assets to the business. Cat contributed
inventory with a current market value in excess of its carrying amount. Dog contributed real estate
with a carrying amount in excess of its current market value. At what amount should the
partnership record each of the following assets?
Inventory Real estate

a. Market value Market value
b. Market value Carrying amount
c. Carrying amount Market value
d. Carrying amount Carrying amount
2. Recording of Cash Investment
a. Face Value b. Agreed value c.memorandum entry d. none of these
3. Recording of Property Investment
4. Recording of the investment(industry)
5. Which of the following statements are true when comparing corporations and partnerships?
a. Partnership entities provide for taxes at the same rates used by corporations
b. In theory, partnerships are more able to attract capital
c. Like corporations, partnerships have an infinite life
d. Unlike shareholders, general partners may have liability beyond their capital balances
Problems

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1. On May 1, 2015, Cat and Meow formed a partnership and agreed to share profits and losses in
the ratio of 3:7, respectively. Cat contributed a parcel of land that cost her P10,000. Meow
contributed P40,000 cash. The land has a fair value of P15,000. Cat insisted that the value of the
land should be P18,000. The partners agreed to value the land at P18,000. What amount should
be recorded in Cat’s capital account on formation of the new partnership?
a. P18,000 b. P17,400 c. P15,000 d. P10,000
2. On July 1, Manny and Floyd formed a partnership, agreeing to the profit and loss in the ratio of
4:6, respectively. Manny contributed a parcel of land that cost him P25,000. Floyd contributed
P50,000 cash. The land was sold for P50,000 on July 1, for hours after formation of the
partnership. How much should be recorded in Manny’s capital account on the partnership
formation?
a. P10,000 b. P20,000 c. P25,000 d. P50,000
3. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital
and profits and Ken is to have a 40% interest in capital and profits. Bill contributes the ff:
Cost Fair Value
Land P10,000 P20,000

Building P100,000 P60,000
Equipment P20,000 P15,000
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken
contributes P50,000 cash to the partnership. Bill and Ken agree that Ken’s capital account should
equal Ken’s P50,000 cash contribution and that goodwill should be recorded. Goodwill should be
recorded in the amount of:
a. P10,000 b. P15,000 c. P16,667 d. P20,000
Solution:
Cash contribution of Ken P50,000
Divided by Ken capital interest ÷ 40%
Total agreed capital P125,000
Less: Bill’s Contribution 65,000
Ken’s agreed capital P 60,000
Less: Ken’s contribution 50,000
Goodwill P 10,000
For 4 and 5
Cat admits Dog as partner in business. Accounts in the ledger for Cat on November 30, 2015, just before
the admission of Dog, show the following balances:
Cash P6,800
Accounts Receivable P14,200
Merchandise Inventory P20,000
Accounts Payable P8,000
Cat, capital P33,000
It is agreed that or the purposes of establishing Cat’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 P23,000
c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized.
4. Dog is to invest sufficient cash to obtain a 1/3 interest in the partnership. Cat’s adjusted capital
before the admission of Dog

lOMoARcPSD|7063929
a. P28,174 b. P35,347 c. P35,374 d. P36,374

5. The amount of cash investment by Dog
a. P11,971 b. P35,347 c. P17,687 d. P18,790
Solution:
Cat, capital P33,000 Cat’s capital contribution P35,347
Less: Allowance for Divided by Cat’s capital interest ÷ 2/3
doubtful accounts 426 Total agreed capital P53,061
Accrued rent Multiply by Dog’s capital interest x 1/3
expense 800 Dog’s cash contribution P17,687
Total P 31,774
Add: Inventory 3,000
Prepaid rent 600
Cat’s adjusted capital P 35,374

Partnership Exercises

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Partnership Exercises

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Accounting (Mindanao State University)

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Chapter 1: Partnership Formation

The following are Ernie and Bert’s Statement of Financial Position:

Cash 50,000 Accounts payable 65,000

1. How much is the adjusted capital balance of Bert upon formation?

2. How much is the capital credit to Ernie upon formation?

Cost Fair value

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2. How much is the total asset of the partnership upon formation?

Suggested Answer: (b) 35,000 & 75,000

Suggested Answer: (d) 60,000

Contributed Capital Agreed Capital Increase (Decrease)

Suggested Answer: (b) 20,000 bonus to Redd

Contributed Capital Agreed Capital Increase (Decrease)

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Accounts Payable P 178,940 P 243,650

Suggested Answer: (c) 2, 265, 118

Problems equipment account to a certain amount, and

3. When a partnership is formed, noncash

4. A limited liability company (LLC): 5. Which of the following accounts could be

and Bauzon contributed P84,000 in

7. Roy, Sam and Tim decided to engage in

8. Lara and Mitra formed a partnership on

9. Ana and Elsa form a new partnership.

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Roy Sam Tim

Office Equipment – P220,000 –

Note payable ________ _( 60,000) ______

Net asset invested P140,000 P160,000 P –

Agreed capitals, equally (P300,000/3) = P100,000

Cash P130,000 P200,000

Computer equipment – 50,000

Note payable ________ _( 10,000)

Net asset invested P130,000 P240,000

Goodwill (P240,000 - P130,000) = P110,000

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1.1 THEORIES. 4. Two individuals who were previously sole

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2. On July 1, Manny and Floyd formed a a. P280,000 b.

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B. Jones: P 360,000, Smith: P 260,000 D. Jones: P 260,000, Smith: P 180,000

2. The business assets of LL and MM appear below:

Accounts Payable P 178,940 P 243,650

a. LL: P615,942, MM: P717,894 c. LL: P640,876, MM: P712,345

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Accounts Payable P45,750 P18,000

They agreed to have the following items recorded in their books:

Compute the net (debit) credit adjustment for PP and QQ:

1. Which of the following is not a characteristic of most partnership?

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Cash P 11, 000 P 22, 354

Accounts payable P 178,940 P 243,650

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7. How much assets does the partnership have?

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Suggested answer (d)

Use following information for question 1 to 5

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 A and B’s inventory is to be valued at 31,000 and 22,000 respectively.

Balance sheet for A and B before adjustments