CHAPTER 11 PARTNERSHIP FORMATION

PROBLEM 2

1. VALUATION OF CONTRIBUTIONS OF PARTNERS

 Correct valuation of the partners contribution

A B Partnership
Cash 20,000 30,000 50,000
Inventory 20,000 20,000
Building (at fair value) 60,000 60,000
Furniture & fixtures 40,000 40,000
Total Assets 60,000 110,000 170,000
Less: Liabilities
Mortgage Payable (10,000) 10,000
Adjusted capital balances 60,000 100,000 160,000

 Journal Entry

Date Cash 50,000

Inventory 20,000
Building 60,000
Furniture & fixtures 40,000
Mortgage Payable
A, Capital 10,000
B, Capital 60,000
100,000

2. BONUS METHODS

Actual Contributions Bonus Method

A 600,000 1,100,000 x 40% 440,000
B 500,000 1,100,000 x 60% 660,000
Total 1,100,000 1,100,000

 Journal Entry

Date Cash 600,000

Equipment 400,000
A, Capital
440,000
B, Capital
660,000

VARIATIONS TO BONUS METHOD

3. Cash settlement among partners B shall receive 200,000 from C.

A B C Partnership
Cash 500,000 200,000 100,000 800,000
Accounts Receivable 700,000 700,000
Inventory 900,000 900,000
Equipment 2,000,000 2,000,000
Mortgage Payable (800,000) (800,000)
Net Contribution 1,200,000 1,400,000 1,000,000 3,600,000
Equal Interests 1,200,000 1,200,000 1,200,000 3,600,000
Cash receipt (payment) - 200,000 (200,000) -

 Journal Entry

Date Cash 800,000

Accounts Receivable 700,000
Inventory 900,000
Equipment 2,000,000
Mortgage Payable
A, Capital 800,000
B, Capital 1,200,000
C, Capital 1,200,000
1,200,000
4. Additional investment/Withdrawal of investment

Agreed initial capital 3,600,000

A’s required capital balance 1,200,000

B’s required capital balance 1,200,000
C’s required capital balance 1,200,000

A B C Totals
Actual Contributions 1,200,000 1,400,000 1,000,000 3,600,000
Required Capital Balances 1,200,000 1,200,000 1,200,000 3,600,000
Additional (Withdrawal) - (200,000) 200,000 -

B shall withdraw 200,000 from his initial contribution while C shall make an additional investment of
200,000.
PROBLEM 3

1. VALUATION OF CONTRIBUTIONS OF PARTNERS

 Correct valuation of the partners contribution

A B Partnership
Cash 500,000 30,000 530,000
Inventory (at NRV) 10,000 10,000
Land (at fair value) 600,000 600,000
Equipment (at NRV) 600,000 600,000
Total Assets 1,100,000 640,000 1,740,000
Less: Liabilities
Mortgage Payable (100,000) 100,000
Adjusted capital balances 1,100,000 540,000 1,640,000

 Journal Entry – contributions of the partners in the partnership books

Date Cash 530,000

Inventory 10,000
Land 600,000
Equipment 600,000
Mortgage Payable
A, Capital 100,000
B, Capital 1,100,000
540,000

2. BONUS METHOD

Actual Contributions Bonus Method

A 600,000 1,000,000 x 30% 300,000
B 400,000 1,000,000 x 70% 700,000
Total 1,000,000 1,000,000

 Journal Entry

Date Cash 600,000

Equipment 400,000
A, Capital
300,000
B, Capital
700,000

VARIATIONS TO BONUS METHOD

3. Cash settlement among partners

A B C Partnership
Cash 600,000 800,000 400,000 1,800,000
Accounts Receivable 700,000 700,000
Inventory 900,000 900,000
Building 1,400,000 1,400,000
Accounts Payable (300,000) (300,000)
Net Contribution 1,300,000 1,900,000 1,300,000 4,500,000
Equal Interests 1,500,000 1,500,000 1,500,000 4,500,000
Cash receipt (payment) (200,000) 400,000 (200,000) -

A & C shall receive 200,000 each from B.

 Journal Entry

Date Cash 1,800,000

Accounts Receivable 700,000
Inventory 900,000
Building 1,400,000
Accounts Payable
A, Capital 300,000
B, Capital 1,500,000
C, Capital 1,500,000
1,500,000
4. Additional investment/Withdrawal of investment

Agreed initial capital 4,500,000

A’s required capital balance 1,500,000

B’s required capital balance 1,500,000
C’s required capital balance 1,500,000

A B C Totals
Actual Contributions 1,300,000 1,900,000 1,300,000 4,500,000
Required Capital Balances 1,500,000 1,500,000 1,500,000 4,500,000
Additional (Withdrawal) 200,000 (400,000) 200,000 -

B shall withdraw 400,000 from his initial contribution while C & B shall make an additional investment of
200,000 each.