“Partnership Formation”

Exercise 2-1
Cholo and Mitos formed a partnership on Feb. 1 2013 and contributed the following assets:
Cholo Mitos
Cash P 80,000
Equipment P 50,000
The equipment was subject to a chattel mortgage of P 10,000 that was assumed by the
partnership. The partners agreed to share profits and losses equally.
Required:
Prepare the necessary journal entry the contribution of each partner in the books of
partnership.

Date Explanation P.R Debit Credit

2013
Feb. 1 Cash 80,000
Cholo, Capital 80,000
To record the contribution of Cholo

 Equipment 50,000
Mortgage Payable 10,000
Mitos, Capital 40,000
To record the contribution of Mitos

Exercise 2-2
On March 01, 2009, Sanchez and Docabo formed a partnership with each contributing the
following assets:
Sanchez Docabo
Cash P 30,000 P 70,000
Machinery and Equipment 25,000 75,000
Building 225,000
Furniture and Fixtures 10,000
The building is subject to mortgage loan of P 80,000, which is to be assumed by the partnership.
Agreement provides that Sanchez and Docabo share profits and losses 30% and 70%,
respectively.
Required:
Prepare the necessary journal entry the contribution of each partner in the books of
partnership.

Date Explanation P.R Debit Credit

2009
Mar. 1 Cash 30,000
Machinery and Equipment 25,000
Furniture and Fixtures 10,000
Sanchez, Capital 65,000
To record the contribution of Sanchez

 Cash 70,000
Machinery and Equipment 75,000
Building 225,000
Mortgage payable 80,000
Docabo, Capital 290,000
To record the contribution of Docabo

Exercise 2-3
On June 01, 2013, Arnel and Jerome decided to combine their businesses and form a
partnership. Their statement of financial position on June 1, before adjustments, showed the
following:
Arnel
Debit Credit
Cash P 9,000
Accounts Receivable 18,500
Inventories 30,000
Furniture and Fixtures (net) 30,000
Office Equipment (net) 11,500
Prepaid expenses 6,375
Total 105,375
Accounts payable P 45,750
Arnel, Capital 59,625
Total 105,375
Jerome
Debit Credit
Cash P 3,750
Accounts Receivable 13,500
Inventories 19,500
Furniture and Fixtures (net) 9,000
Office Equipment (net) 2,500
Prepaid expenses 3,000
Total 51,250
Accounts payable P 18,000
Jerome, Capital 33,250
Total 51,250
They agreed to have the following items recorded in their books:
1. Accounts receivable net realizable value is estimated to 90%
2. Arnel’s furniture and fixtures should be P 31,000, while Jerome’s office equipment is
under-depreciated by P 250.
3. Rent expense incurred previously by Arnel was not yet recorded amounting to P 1,000.
While salary expense incurred by Jerome was not also recorded amounting to P 800.
4. The fair market values of inventory amounted to:
For Arnel P 29,500
For Jerome 21,000
Required:
Prepare the necessary journal entry on the books of each partner and on the books of
partnership.
Books of Arnel
 Date Explanation P. R Debit Credit
2013
Jun. 1 Arnel, capital 16,650
Accounts receivable 16,650
To record the net realizable value of
accounts receivable

 Furniture & Fixtures 31,000

Arnel, capital 31,000
To record furniture and fixtures

 Arnel, capital 1,000

Rent payable 1,000
To record incurred rent payable

 Inventory 29,500
Arnel, capital 29,500

Closing

Date Account Title PR Debit Credit

2013
Jun. 1 Accounts payable 45,750
Rent payable 1,000
Arnel, capital 102,475
Cash 9,000
Accounts receivable 1,850
Inventory 59,500
Furniture and Fixtures 61,000
Office equipment 11,500
Prepaid expenses 6,375
To close the books of Arnel

Books of Jerome
 Date Explanation P. R Debit Credit
2013
Jun. 1 Jerome, capital 12,150
Accounts receivable 12,150
To record the net realizable value of
accounts receivable

 Jerome, capital 2,250

Accumulated Dep.-Office Equip. 2,250
To record the under-depreciated
office equipment

 Jerome, capital 800

Salary payable 800
To record incurred salary payable

 Inventory 21,000
Jerome, capital 21,000

Closing

Date Account Title PR Debit Credit

2013
Jun. 1 Accounts payable 18,000
Salary payable 800
Accumulated Dep.- Office Equipment 2,250
Jerome, capital 39,050
Cash 3,750
Accounts receivable 1,350
Inventories 40,500
Furniture and Fixtures 9,000
Office equipment 2,500
Prepaid expenses 3,000
To close the books of Jerome
Books of partnership (Arnel)

Date Account title PR Debit Credit

2013
Jun. 1 Cash 9,000
Accounts receivable 1,850
Inventories 59,500
Furniture and Fixtures 61,000
Office equipment 11,500
Prepaid expenses 6,375
45,750
Accounts payable
1,000
Rent payable
102,475
Arnel, capital
To record the new books of Arnel

Books of partnership (Jerome)

Date Account title PR Debit Credit

2013
Jun. 1 Cash 3,750
Accounts receivable 1,350
Inventories 40,500
Furniture & Fixtures 9,000
Office equipment 250
Prepaid expenses 3,000
18,000
Accounts payable
800
Salary payable
39,050
Jerome, capital
To record the new books of Jerome

Exercise 2-4
On January 31, 2011, Timmy who has her own retail business and Vince decided to form a
partnership wherein they will divide profits in the ratio of 60:40, respectively. The statement of
the financial position of Santos is as follows:
Timmy Marketing
Statement of Financial Position
January 31, 2011
Assets
Cash P 4,000
Accounts receivable P 160,000
Less: Allowance for Uncollectible Accts. (16,000) 144,000
Inventory 200,000
Equipment P 50,000
Less: Accumulated Depreciation (10,000) 40,000
Total Assets P 388,000
Liabilities and Capital
Accounts payable P 36,000
Timmy, Capital 352,000
Total liabilities and Capital 388,000
Conditions agreed upon before the formation of the partnership:
a. The accounts receivable of Santos is estimated to be 70% realizable.
b. The accumulated depreciation of the equipment will be increased by P 10,000.
c. The accounts payable will be assumed by the partnership.
d. The capital of the partnership is based on the adjusted capital of Santos, Salvador is to
contribute cash in order to make the partner’s capital balances proportionate to the
profit and loss ratio.
Required:
1. Prepare the necessary journal entries in the books of Timmy.
2. Prepare the opening journal entries in the books of partnership.
Books of Timmy

Date Account title and Explanation PR Debit Credit

2011
Jan. 31 Timmy, Capital 32,000
Allow. for Doubtful Accts. 32,000
To record the estimated allowance
for doubtful accounts
 Timmy, Capital 10,000
Accumulated Dep- Equip. 10,000
To record the accumulated
depreciation of equipment
Vince Salvador cash contribution based on the adjusted capital of Timmy Santos

Date Account title and Explanation PR Debit Credit

2011
Jan. 31 Cash 465,000

Salvador, capital 465,000

To record the investment of Vince

Closing

Date Account title PR Debit Credit

2011
Jan. 31 Accounts payable 36,000
Allow. for Doubtful Accts. 32,000
Accumulated Dep.-Equip. 20,000
Timmy, capital 310,000
Cash 4,000
Accounts receivable 144,000
Inventory 200,000

Equipment 50,000
To close the books of Timmy

Books of Partnership (Timmy)

Date Account title PR Debit Credit

2011
Jan. 31 Cash 4,000
Accounts receivable 144,000
 Inventory 200,000
Equipment 30,000
Accounts payable 36,000
Allowance for Doubtful Accts. 32,000
Timmy, capital 310,000

To record the new books of Timmy

Exercise 2-5
Calaguas and Dela Cruz formed a partnership and invested the following assets and liabilities:
Fair Market Value Carrying Value
Calaguas:
Cash P 300,000 P 300,000
Land 450,000 280,000
Dela Cruz:
Cash 100,000 100,000
Building 600,000 820,000
Mortgage payable (400,000) (400,000)
The partners will share profit and losses equally.
Required:
Prepare the opening journal entry in the books of the partnership.

Date Account title and Explaination PR Debit Credit

Cash 300,000
 Land 450,000
Calaguas, Capital 750,000
To record the investment of Calaguas

Cash 100,000
Building 600,000
Mortgage payable 400,000
Dela Cruz, Capital 300,000
To record the investment of Dela Cruz

“Partnership Operations”
Exercises 3
The following data are available in the books of Will Smith and Chris Rock Partnership for the
year 2021.
Smith, Capital

May 1 P 100,000 Jan. 1 P 2,500,000

EB: 3,150,000 Apr. 1 250,000
3,250,000 Oct. 1 500,000
3,250,000

Rock, Capital

June 1 150,000 Jan. 1 P 1,500,000

Dec. 1 50,000 Sept. 1 500,000
200,000 2,000,000
EB: 1,800,000
2,000,000

Prepare the entry to record the allocation of the partnership profit (600,000) to individual
capital accounts under each of the following assumptions:
1. Profit is divided equally.
2. Profit is divided in the ratio of 3:4 to Will and Chris.
3. There is no profit sharing agreement
4. Profit is allocated based on the beginning capital ratio
5. Profit is allocated based on the ending capital ratio
6. Profit is allocated based on the average capital ratio
7. Each profit is allowed 10% interest on ending capital and the remaining income is divided on
60%, 40%
8. Will is allowed 350,000 salaries and the remaining profit divided in the ratio of 1:4
9. Chris, the managing partner, is allowed a bonus of 20% of profit before bonus and tax and
the remainder is divided in the beginning capital
10. The partners are allowed 5,000 and 10,000 weekly salaries respectively, 10% interest on
average capital, and the remainder is divided in the ratio of 2:3
11. Assume the same agreement as in #10 except that instead of a profit, the partnership has
incurred a loss of 100,000
Computation
1.

Smith Rock Total

Divided 300,000 300,000 600,000

equally

Journal entry:

Date Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 300,000
Rock, Capital 300,000
To record profit to be divided
equally

2.

Smith Rock Total

Divided ratio- 257,142.8 342,857.14 600,000

3:4 6

Journal entry:

Date Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 257,142.86
Rock, Capital 342,857.14
To record profit to be divided a
ratio of 3:4
 3.

Smith Rock Total

Based on 375,000 225,000 600,000

original
capital
Journal entry:

Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 375,000
Rock, Capital 225,000
To record profit based on
original capital

4.

Smith Rock Total

Based on 375,000 225,000 600,000

beginning
capital
Journal entry:

Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 375,000
Rock, Capital 225,000
To record profit based on
beginning capital

5.

Smith Rock Total

Based on 381,818.1 218,181.82 600,000

 ending 8
capital
Journal entry:

Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 381,818.18
Rock, Capital 218,181.82
To record profit based on
ending capital

6.

Smith Rock Total

Based on 381,292.1 218,707.81 600,000

average 9
capital ratio
Journal entry:

Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 381,292.19
Rock, Capital 218,707.81
To record profit based on
average capital ratio
Smith

Date Amount Months Average Capital

Unchanged
Jan. 1 2,500,000 3/12 625,000
Apr. 1 2,750,000 1/12 229,166.67
May 1 2,650,000 5/12 1,104,166.67
Oct. 1 3,150,000 3/12 787,500
Average Capital P 2,745,833.34

Rock

Date Amount Months Average Capital

Unchanged
Jan. 1 1,500,000 5/12 625,000
Jun. 1 1,350,000 3/12 337,500
Sept. 1 1,850,000 3/12 462,500
Dec. 1 1,800,000 1/12 150,000
Average Capital P 1,575,000
 Total Average Capital P 4,320,833.34

7.

Smith Rock Total

Interest 315,000 180,000 495,000

(10%)
Balance is on 63,000 42,000 105,000
60:40

Total 378,000 222,000 600,000

Journal entry:

Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 378,000
Rock, Capital 222,000
To record profit based on
ending capital with a 10%
interest and a balance of 60:40

8.

Smith Rock Total

Salaries 350,000 - 350,000

Remaining 50,000 200,000 250,000

profit divided
on 1:4

Total 400,000 200,000 600,000

Journal entry:

Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 400,000
Rock, Capital 200,000
To record the salaries of Smith
and the remaining profit
divided in the ratio of 1:4
 9.

Smith Rock Total

Bonus (20%) - 120,000 120,000

Remainder is 300,000 180,000 480,000

divided
based on
beginning
capital
Total 300,000 300,000 600,000

Journal entry:

Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 300,000
Rock, Capital 300,000
To record the bonus of Smith
and the profit divided based
on beg. capital

10.

Smith Rock Total

Salaries 260,000 520,000 780,000

Interest 274,583.33 157,500 432,083.33

(10%) on
Ave. capital
Remainder is (244,833.33) (367,250) (612,083.33)
divided in the
ratio 2:3
Total 289,750 310,250 600,000
Journal entry:

Account title and Explanation PR Debit Credit

Income Summary 600,000
Smith, Capital 289,750
Rock, Capital 310,250
 To record the weekly salaries
and an interest of 10% and the
remaining to be divided in the
ratio of 2:3

11.

Smith Rock Total

Salaries 260,000 520,000 780,000

Interest 274,583.33 157,500 432,083.33

(10%) on
Ave. capital
Remainder is (524,833.33) (787,250) (1,312,083.33)
divided in the
ratio 2:3
Total 9,750 (109,750) (100,000)
Journal entry:

Account title and Explanation PR Debit Credit

Smith, Capital 9,750
Rock, Capital 109,750
Income Summary 100,000
To record the interest of 10%
on average capital with a
remainder to be divided in the
ratio 2:3

“Partnership Dissolution”

Exercise 4

Admission of a Partner (No Asset Revaluation)

Dolores Aguilar, Isolde Sustrina, and Beth Bigalbal are partners in Cavite Realty Company. Their capital
balances as at July 31, 2019, are as follows:

Aguilar, Capital Sustrina, Capital

P 450,000 P 150,000

Bigalbal, Capital
 P 300,000

a. Pascual paid Aguilar P 125,000 for 20% of Aguilar’s interest in the partnership.

Date Account title and Explanation PR Debit Credit

Aguilar, Capital 90,000
Pascual, Capital 90,000
To record Aguilar’s interest in the partnership
b. Pascual invested P 200,000 cash in the partnership and received an interest equal to the
investment.

AC CC Bonus

Old 900,000 900,000 -

New 200,000 200,000 -

Total 1,100,00 1,100,000 -

0

Date Account title and Explanation PR Debit Credit

Cash 200,000
Pascual, Capital 200,000
To record the investment of Pascual
c. Pascual invested P 300,000 cash in the partnership for a 20% interest in the business. A bonus is
to be recorded for the original partners on the basis of their capital balances.

AC CC Bonus
Old (80%) 960,000 900,000 60,000

New (20%) 240,000 300,000 (60,000)

Total(100% 1,200,000 1,200,000 -

)
 Date Account title and Explanation PR Debit Credit
Cash 300,000
Pascual, Capital 240,000
Aguilar, Capital 30,000
Sustrina, Capital 10,000
Bigalbal, Capital 20,000
To record the bonus for the original partners on
the basis of their capital balance with the
investment of Pascual
d. Pascual invested P 300,000 cash in the partnership for a 40% interest in the business. The
original partners gave Pascual a bonus according to the ratio of their capital balances on July 31,
2019.

AC CC Bonus
Old (60%) 720,000 900,000 (180,000)

New (40%) 480,000 300,000 180,000

Total(100% 1,200,000 1,200,000 -

)

Date Account title and Explanation PR Debit Credit

Cash 300,000
Aguilar, Capital 90,000
Sustrina, Capital 30,000
Bigalbal, Capital 60,000
Pascual, Capital 480,000
To record the bonus of Pascual and the original
partners ratio capital balances

Exercise 5

Admission of a Partner (Asset Revaluation)

Magdaraog and Mercado are partners in Magdaraog and Mercado Partnership with capital balances of P
550,000, respectively; they share income and loss in the ratio 1:3, respectively. The partners are
considering the admission of San Pedro.

Required:

Prepare the entries to record the admission of San Pedro under each of the following independent
situations:
 1. San Pedro invested P 100,000 cash in the partnership for a one-tenth interest. The net assets of
the partnership are fairly valued.

AC CC Bonus
900,000 900,000 -
Old

New
100,000 100,000 -

Total 1,000,000 1,000,000 -

Date Account title and Explanation PR Debit Credit

Cash 100,000
San Pedro, Capital 100,000
To record the investment of San
Pedro in the partnership for a one-
tenth interest

2. San Pedro invested P 140,000 cash in the partnership for a one-eight interest. Assets of the
partnership are fairly valued except for equipment, which is undervalued by P 80,000. Net assets
of the partnership are to be revalued and San Pedro is to be admitted.

AC CC Bonus/
Asset
Old Revaluation
980,000 900,000 80,000

New 140,000 140,000 -

Total 1,120,000 1,040,000 80,000