PARTNERSHIP FORMATION

Exercises
 EXERCISE 1

• Dorothy, Marks and Spencer decided to form a partnership. They are to engage in the business of selling
computers and related gadgets. Dorothy contributed cash of P 400,000. Marks contributed a house and lot which
he inherited from his grandfather three years ago. At the time of inheritance, the house and lot was valued at P
900,000 for transfer tax purposes. A week before the partnership was formed, several buyers indicated their
intention to buy the property for P 1,250,000. Spencer, being a computer science graduate, is to contribute his
skills and knowledge to the partnership. They agreed that Spencer is to be given a 20% share in the partnership
profits.

REQUIRED: Prepare the entries to record the formation of the partnership.

 EXERCISE 2

L. Paras and M. Parayno formed a partnership on October 1,2019 with the following investments:

L. Paras M. Parayno
Cash P 350,000
Land 1,050,00
Equipment P 550,000
L. Paras and M. Parayno agree to divide profits and losses in the ratio of 70:30, respectively and to assume the
mortgage payable amounting to P 200,000 on the land of M. Parayno.

REQUIRED:
a.) Prepare the entries to record the formation of the partnership.
b.) Assume the partnership will not assume the mortgage payable on the land of M. Parayno. Give the entries in the
books of the partnership to record its formation.
 EXERCISE 3

• J. Jay admits K. Kho as a partner in his business. Accounts in the ledger of J.Jay on December 31,2019, just before the
admission of K. Kho show the following balances:
Cash P 26,000
Accounts receivable 120,000
Merchandise Inventory 180,000
Accounts payable 62,000
J.Jay, Capital 264,000
It is agreed that for purposes of establishing J.Jay’s interest, the following adjustments should be made:
• an allowance for uncollectible accounts of 2% of accounts receivable is to be established.
• The merchandise inventory is to be valued at P 202,000
• Prepaid Expenses of P 6,500 and accrued liabilities of P 4,000 are to be recognized.
K. Kho is to invest sufficient cash to obtain a 1/3 interest in the partnership. The partnership will use a new set of books.
REQUIRED:
a.) Give the entries to adjust and close the books of J. Jay.
b.) Give the necessary entries in the new set of books of the partnership.
 EXERCISE 4

The statement of financial position of Irvin Company, a single proprietorship on December 1,2019 is as follows:
Irvin Company
Statement of Financial Position
December 1,2019

Assets
Cash P 360,00
Accounts Receivable P 960,000
Less: Allowance for Uncollectible accounts 40,000 920,000
Merchandise Inventory 320,000
Property, plant and equipment P 240,000
Less: Accumulated Depreciation 20,000 220,000
Total Assets P 1,820,000

Liabilities and Capital

Accounts payable P 560,000
Irvin Co, Capital 1,260,000
Total Liabilities and Capital P 1,820,000

I
Irvin Co admits Jester Yu and the latter is to invest cash to give him a capital credit equal to ¼ of Irvin Co’s capital
after giving effect to the adjustments of the items below:
• The merchandise inventory is to be valued at P 280,000
• The accounts receivable is estimated to be 95% collectible.
• The property, plant and equipment is underdepreciated by P 40,000
The partnership will use Irvin Co’s old set of books.

REQUIRED:
a.) Give the necessary entries to adjust the books of Irvin Co and to record the formation of the partnership.
b.) Prepare a statement of financial position for Irvin. Co and Jester Yu on December 1, 2019.
 EXERCISE 5

On September 30, 2019, R.Rob and J.Jon , CPAs decided to form a partnership wherein they will participate in the profits in
the ratio of 40% and 60%, respectively. Their balances are as follows:

Rob Company
Statement of Financial Position
September 30,2019

Assets
Cash P 80,00
Accounts Receivable P 800,000
Less: Allowance for Uncollectible accounts 80,000 720,000
Equipment P 250,000
Less: Accumulated Depreciation 50,000 200,000
Total Assets P 1,000,000

Liabilities and Capital

Accounts payable P 400,000
R.Rob, Capital 600,000
Total Liabilities and Capital P 1,000,000
 Jon Company
Statement of Financial Position
September 30,2019
Assets
Cash P 350,000
Accounts Receivable P 300,000
Less: Allowance for Uncollectible accounts 30,000 270,000
Equipment P 450,000
Less: Accumulated Depreciation 90,000 360,000
Total Assets P 980,000

Liabilities and Capital

Accounts payable P 290,000
J.Jon, Capital 690,000
Total Liabilities and Capital P 980,000
Conditions agreed upon before the formation are as follows:
• The accounts receivable of both parties are estimated to be 15% uncollectible.
• The equipment of R.Rob should be valued at P 180,000.
• The equipment of J. Jon should be valued at P 375,000.
• Prepaid expenses of P 20,000 and accrued expenses of P 25,000 are to be taken up in the books of J.Jon.
• The new capital of the partnership is based on the adjusted capital balance of J.Jon so that R. Rob may either withdraw
or contribute additional cash in order to make the partner’s capital balance proportionate to their profits or loss ratio.
This is not recorded in the books of R.Rob.
REQUIRED:
a.) Prepare journal entries in the books of R.Rob and J.Jon to record the adjustments of assets and liabilities and the closing of their
respective books of accounts.
b.) Prepare the required journal entries in the new partneship books, to record the investment of the partners.