Accounting for Partnership (70 points)

The partnership of Red and White admits Blue as a partner on January 1, 20CY. The partnership has
the following balances on December 31,20PY:

Red and White Partnership

Balance Sheet
December 31, 20PY
Asset Liabilities and Owner’s Equity
Cash P 450,000 Accounts Payable P 2,250,000
Other Assets 5,500,000 Red, Capital 2,250,000
White, Capital 1,200,000
Total Assets P 5,950,000 Total Liabilities and P 5,950,000
Owners Equity
Profits and losses for Red is 60% and 40% for White, respectively.

Requirements:

1. Suppose Blue pays White P 1,500,000 to buy out White. Red approves Blue as a partner.
A. Record the transfer of equity on the partnership book on January 1, 20CY.(2 points: 1 point for
each correct account and amount used)

Journal Entries
Date Particulars Debit Credit
Jan. 1 White, Capital P 1,200,000
Blue, Capital P 1,200,00
To transfer the capital of White to Blue
and admit him as a partner

B. Prepare the partnership balance sheet immediately after Blue is admitted as a partner.(25 points)

Red and Blue Partnership

Balance Sheet
December 31,20PY
Assets Liabilities and Owners Equity
Cash P 450,000 Accounts Payable P 2,500,000
Other Assets 5,500,000 Red, Capital 2,250,000
Blue, Capital 1,200,000
Total Assets P 5,950,000 Total Liabilities and P 5,950,000
Owner Equity

2. Suppose Blue becomes a partner by investing P1,550,000 cash on January 1, 20CY to acquire a 1/4
interest in the business.
A. Compute Blue’s capital balance, and determine whether there’s any bonus. If so, who gets the
bonus? (5 points)

Partnership capital before Blue is admitted (P 2,250,000 + P 1,200,000) P 3,450,000

Blue’s investment in the partnership P 1,550,000
Partnership capital after Blue is admitted P 5,000,000
Blue’s investment in the partnership (P 5,000,000 * 1/4) P 1,250,000
Bonus to the old partners (P 1,550,000 - P 1,250,000) P 300,000
B. Journalize Blue’s investment in the business. (4 points: 1 point for each correct account and
amount used)

Journal Entries
Date Particulars Debit Credit
Jan. 1 Cash P 1,550,000
Blue, Capital P 1,250,000
Red, Capital (P 300,000 * 60%) 180,000
White, Capital (P 300,000 * 40%) 120,000
To admit Blue as a partner

C. Prepare the partnership balance sheet immediately after Blue is admitted as a partner. Include the
heading (25 points)

Red and White Partnership

Balance Sheet
December 31,20PY
Assets Liabilities and Owners Equity
Cash P 2,000,000 Accounts Payable P 2,500,000
Other Assets 5,500,000 Red, Capital 2,430,000
White, Capital 1,320,000
Blue, Capital 1,250,000
Total Assets P 7,500,000 Total Liabilities and P 7,500,000
Owner Equity

3. Assume that Red and White partnership liquidates by selling its other assets for P 5,000,000.
Prepare the entries to liquidate the partnership on January 1, 20CY. (9 points: 1 point for each correct
account and amount used)

Journal Entries
Date Particulars Debit Credit
Jan. 1 Cash P 5,000,000
Red, Capital (P 500,000 * 60%) 300,000
White, Capital (P 500,000 * 40%) 200,000
Other Assets P 5,500,000

Red Capital
P 300,000 Bal.
P 2,250,000
End Bal.
P 1,950,000

White Capital
P 200,000 Bal.
P 1,200,000
End Bal.
P 1,000,000