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Chapter 1
Partnership Formation

NAME: Date:
Professor: Section: Score:

QUIZ:

1. The asset contributions of the partners to the partnership, and any related liabilities assumed by
the partnership, are initially recorded in the partnership books at
a. historical cost.
b. fair value.
c. carrying amount.
d. any of these

2. A and B formed a partnership. Although A and B contributed equal amounts of cash, it was
agreed that the initial credit to A’s capital account should be greater than that of B. If the bonus
method is used, which of the following statements is correct?
a. A capital bonus is given to B.
b. The initial capital of the partnership is equal to the sum of A and B’s contributions.
c. Partner B’s account is not affected by the agreement.
d. Goodwill must be recorded.

3. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at
the partnership’s formation:
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
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000
4. Mang and Ming agreed to form a partnership. The partnership agreement stipulates that Mang
shall contribute a noncash asset with fair value of ₱1,000 while Ming shall contribute cash of
₱1,000. However, since Ming will be bringing in a special skill to the partnership, the partners
agreed that Ming shall be entitled to a 70% interest in the partnership initial net assets and in
subsequent partnership profits and losses. Which of the following statements is correct?
a. Mang’s noncash asset contribution shall be debited at ₱300.
b. The net credit to Ming’s capital account is ₱1,400.
c. Mang is given a bonus.
d. The partnership’s total equity immediately after the formation is ₱2,400.
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5. A and B agreed to form a partnership. The partnership agreement stipulates the following:
 Initial capital of ₱300,000.
 A 25:75 interest in the equity of the partnership.

A contributed ₱100,000 cash, while B contributed ₱200,000 cash. Which partner should provide
additional investment (or withdraw part of his investment) in order to bring the partners’ capital
credits equal to their respective interests in the equity of the partnership?
a. A shall provide additional capital of ₱25,000.
b. B shall withdraw capital of ₱25,000.
c. B shall make an additional investment of ₱25,000.
d. No additional contribution or withdrawal shall be made.

Use the following information for the next two questions:

A and B formed a partnership. The following are their contributions:
A B
Cash 200,000 -
Accounts receivable 100,000 -
Inventory 160,000 -
Land 100,000
Building 240,000
Total 460,000 340,000
Note payable 120,000
A, capital 340,000
B, capital 340,000
Total 460,000 340,000

Additional information:
 Included in accounts receivable is an account amounting to ₱40,000 which is deemed
uncollectible.
 The inventory has an estimated selling price of ₱200,000 and estimated costs to sell of ₱20,000.
 An unpaid mortgage of ₱20,000 on the land is assumed by the partnership.
 The building is under-depreciated by ₱50,000.
 The building also has an unpaid mortgage amounting to ₱30,000, but the mortgage is not
assumed by the partnership. B agreed to settle the mortgage using his personal funds.
 The note payable is stated at face amount. A proper valuation requires the recognition of a
₱30,000 discount on note payable.
 A and B shall share in profits and losses 60% and 40%, respectively.

6. How much is B’s initial capital in the partnership books?

a. 250,000
b. 270,000
c. 290,000
d. 330,000
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7. Assume that a partner’s capital shall be increased accordingly by contributing additional cash to
bring the partners’ capital balances proportionate to their profit or loss ratio. Which partner
should provide additional cash and how much is the additional cash contribution?
a. A, ₱28,000
b. A, ₱75,000
c. B, ₱32,000
d. B, ₱78,000

8. A and B agreed to form a partnership. A shall contribute ₱80,000 cash while B shall contribute
₱200,000 cash. However due to the expertise that A will be bringing to the partnership, the
partners agreed that they should initially have an equal interest in the partnership capital. A’s
cash contribution should be debited at
a. 80,000.
b. 140,000.
c. 200,000.
d. 280,000

Use the following information for the next two questions:

A, B and C formed a partnership. Their contributions are as follows:

A B C
Cash 80,000 20,000 200,000
Equipment 160,000
Totals 80,000 180,000 200,000

Additional information:
 Although C has contributed the most cash to the partnership, he did not have the full amount of
₱200,000 available and was forced to borrow ₱80,000.
 The equipment contributed by B has an unpaid mortgage of ₱40,000, the repayment of which is
assumed by the partnership.
 The partners agreed to equalize their interest. Cash settlements among the partners are to be
made outside the partnership.

9. Which of the following statements is correct?

a. A pays C ₱60,000.
b. A receives ₱60,000 from C.
c. A and B pays C a total of ₱60,000.
d. A pays B ₱60,000.

10. The simple journal entries to record the partners’ contributions include
a. a debit to mortgage for ₱40,000.
b. a credit to loan payable for ₱80,000.
c. a ₱60,000 credit to cash.
d. a ₱60,000 debit to C’s capital account.

“A wise man will hear and increase learning, and a man of understanding will attain wise counsel.” (Proverbs 1:5)
- END –
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SOLUTIONS:
1. B
2. B
3. B (20K + 15K) = 35,000; (30K + 15K + 40K – 10K) = 75,000
4. B (1,000 + 1,000) x 70% = 1,400
5. C
Solution:
Agreed initial capital 300,000
A's required capital balance (300K x 25%) 75,000
B's required capital balance (300K x 75%) 225,000

A B Totals
Actual contributions 100,000 200,000 300,000
Required capital balance 75,000 225,000 300,000
Additional (Withdrawal) (25,000) 25,000 -

6. B
Solution:
A B Partnership
Cash 200,000 - 200,000
Accounts receivable (100K - 40K) 60,000 - 60,000
Inventory 160,000 - 160,000
Land 100,000 100,000
Building (240K - 50K) 190,000 190,000
Total 420,000 290,000 710,000

Note payable, net (120K - 30K) 90,000 90,000

Mortgage payable – land 20,000 20,000
A, capital 330,000 330,000
B, capital 270,000 270,000
Total 420,000 290,000 710,000

7. B
Solution:
Using first A’s capital, let us determine if B’s capital contribution has any deficiency.
A, capital 330,000
Divide by: Profit (loss) sharing ratio of A 60%
Total 550,000
Multiply by: B's profit (loss) sharing ratio 40%
Minimum capital required of B 220,000
B's capital 270,000
Deficiency on B's capital contribution -

It can be shown above that B’s contribution has no deficiency.

Now using B’s capital, let us determine if A’s capital contribution has any deficiency.

B, capital 270,000
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Divide by: Profit (loss) sharing ratio of A 40%

Total 675,000
Multiply by: A's profit (loss) sharing ratio 60%
Minimum capital required of A 405,000
A's capital 330,000
Deficiency on A's capital contribution 75,000

From the above computations, Partner A should provide additional cash contribution of
₧75,000 to make his contribution proportionate to its profit or loss ratio.

8. A – at face amount of cash contribution

9. A
Solution:
A B C Partnership
Cash 80,000 20,000 200,000 300,000
Equipment 160,000 160,000
Mortgage payable (40,000) (40,000)
80,000 140,000 200,000 420,000
Equal interest (420 ÷ 3) 140,000 140,000 140,000 420,000
Cash receipt (payment) (60,000) - 60,000 -

Answer: C shall receive P60,000 from A.

10. D
Solution:
Date Cash 80,000
A, Capital 80,000
to record A’s contribution
Date Cash 20,000
Equipment 160,000
Mortgage payable 40,000
B, Capital 140,000
to record B’s contribution 140,000
Date Cash 200,000
C, Capital 200,000
to record C’s contribution
Date C, Capital 60,000
A, Capital 60,000
to equalize the partners’ capital