Advanced Accounting A PROCEDURAL APPROACH Volume 1 PEDRO P. GUERRERO, BSC,C PA CPA Reviewer CPA Review School of the Philippines (CPAR) JOSE F. PERALTA, BBA , MBA , CPA President and CPA Reviewer Philippine School of Business Administration 2013 EDITIONCopyright 1979 2013 By PEDRO P. GUERRERO JOSE F. PERALTA Any copy of this book not bearing the signature of the Author on this page is una: be considered as preceding from an iflegy) source. ISBN 978-971-9919.38-4 Printed and Distributed by GICENTERPRISES & CO.,INC. 2019 C. M. Recto Avenixe Manila‘This 2013 Edition of Advanced Accounting contains 2 volumes, and is designed for financial accounting courses above the intermediate level. The 2013 edition has been updated to reflect recent business developments and changes in accounting standards, especially.the coverage of ip admission with revaluation of assets and goodwill recognition, joint arrangement (PFRS 11), consolidated financial statements (PFRS 10). ‘This edition continues to provide a strong presentation of advanced accounting topics, clear discussion, and integrated coverage based on continuous case examples. The texts highly illustrated ‘with complete presentation of worksheets, schedules, and financial statements so that students tan see the development of each topic. Inclusion of all recent Philippine Accounting Standards provides a current text for students preparing for the CPA Examination and current practices. ‘The key strengths ofthis book are the clear and readable disoussions of concepts and the procedural illustration of these concepts through illustrations: and explanations. The many favorable responses to earlier editions from both students and instructors confirm our belief that clear presentation and procedural illustrations are essential to learning the sophisticated topics in an advanced accounting course. ‘Alarge number of multiple choices, both theoretical and computational, and problems at the end of tach chapter are added to provide the opportunity to solidify understanding ofthe chapter material and assess mastery of the subject matter. The end-of-chapter materials progress from simple exercises to more complex problenis. PEDROP. GUERRERO JOSE F. PERALTAChapter 1 Partnership: Basic Considerations and Formation Definition of a Partnership Characteristics of a Partnership ‘Entity versus Proprietorship Theories Partnership Agreement Partner's Ledger Accounts Www ‘Accounting for the Formation of a Partnership Partnership Formation for the First Time Initial investments Bonus or Goodwill on Initial Investments Sole Proprietorship and Another Individual Form a Partnership Two Proprietors Form a Partnership Key Observation from the Illustrations Multiple Choices ~ Theoretical 19 Muhiple choices - Computational zB Problems 4l Chapter 2 Partnership Operations Division of Profits and Losses Mlustration of Profit Distribution 50 Financial Statements for a Partership Changes in the Profit and Loss Ratio Correction of Partnership Net Income of Prior Period Multiple Choices — Theoretical Multiple Choices — Computational Problems faa 22a 8 49Chapter 3 Partnership Dissolution — Changes in Ownership Admission of a New Partner Purchase of Interest from One or More Partners New Partner Invests in Partnership Profit and Loss Ratios and Capital Ratios are Different Determining a New Partner's Investment Cost Retirement ofa Partner Death ofa Partner Incorporation of a Partnership ‘Multiple Choices — Theoretical BL Multiple Choices — Computational 135 Problems 15S Chapter 4 Partnerships: Liquidation Accounting Problems in Partnership Liquidation Methods of Partnership Liquidation Tamera Pea Liquidation Realization of Assets Expenses of Liquidation Liquidation Procedures Mlustration of Lump-Sum Liquidation Multiple Choices ~ Theoretical 178 Multiple Choices ~ Computational 181 Problems 193 Chapter 5 Partnerships: Liquidation by Installment Procedures for Liquidation by Installment Periodic Computation of Safe Payments to Partners Illustration of Installment Liquidation Cash Withheld Comprehensive Illustrative Problem Preparation of a Cash Distribution Program Multiple Choices ~ Theoretical Multiple Choices ~ Computational Problems B88 vi 108 109 121 121 168 168 168 169 12 125 126 16 168 1688 201 213 216 107 167 201Chapter 6 Joint Arrangements (PFRS 11) Contractual Arrangements Joint Control Classification of Joint Arrangements Joint Operations Joint Venture ‘Structure of Joint Arrangements Joint arrangements not structured shough a separate Vehicle Joint arrangements structured through a separate vehicle Legal form of the separate vehicle Contractual terms Other facts and circumstances Accounting for joint operation 249 249 249 250 250 251 252 Transactions between a joint operator and a joint operation 258 Accounting for joint ventures Appendix: ih , Investment in Joint Venture for Small and Medium-sizéd Entities (SMEs) Joint Ventures defined Forms of Joint Ventuire Jointly Conirolled Operation Jointly Controlled Assets Jointly Controlled Entities Cost Model 269 Equity Method 270 Fair Value Model 272 Transactions between a Venturer and Joint Venture Venturer contributes or sells assets to a joint venture Venturer controlled an asset to its jointly controlled entity Venturer sells an asset to its jointly controlled entity Venturer purchases assets from a joint venture ‘Multiple Choice — Theoretical Multiple Choice— Computational Problems Problems. 26 vil 264 266 268 274 274 275 276 BEE BRR BR 8 247 BRSChapter 7 Corporations in Financial Difficulty: Liquidation Insolvency Liquidation versus Reorganization and Debt ing ‘Corporation Liquidation Financial Report : 298 Statement of Affairs 298 Format of Statement of Affairs 300 Statement of Affairs Illustrated 302 Estimated Amounts to be Recovered by Each Class of Creditors 304 Accounting and Reporting for Trustee/Receiver Statement of Realization and Liquidation 307 Multiple Choices - Theoretical 315 Multiple Choices - Computational 317 Problems 331 Chapter 8 Corporations in Financial Difficulty: Reorganization and ‘Troubled Debt Restructuring ilo, Plan for Reorganization 338 Accounting for Re izatic 338 Troubled Debt Restructuring Mlustration of Troubled Debt Restructuring 343 Multiple Choices — Theoretical 347 Multiple Choices - Computational 350 Problems 359 Chapter 9 Installment Sales Methods of Gross Profit Recognition on Installment Sales Gross Profit Recognized at the Time of Sale 364 Gross Profit Recognized in the Period in which Cash is Collected 364 The Installment Method of Accounting 565 Expenses on Installment Sales Interest on Installment Ccmtract Receivable Accounting Procedures (Under Installment Method Allocation of Cost of Goods Sold Defaults and Repossessions Trade Ins - Alternative Procedures for Computing Realized Gross Profits for a Series of Years vill BB 337 8 SSSSRR g 297 337 363Financial Statements Presentation Installment Sales of Real Estate Multiple Choices — Theoretical Multiple Choices ~ Computational Problems Chapter 10 Long Term Construction Contracts as Construction Contract Revenue from Construction Contracts Contract Costs ‘Types of Contract Costs Cost incurred to data 421 Estimated costs to complete 421 Subcontractor Costs Costs of Materials Purchased in Advance of their Use Combining and Segmenting Contracts ‘Computation and Recognition of Construction Revenue Illustrative Problem Financial Statements Presentation ‘Anticipated Losses on Long Term Construction Projects Contract Retention Financial Statement Presentation Requirements Under PAS 11 Disclosure Requirements under PAS 11 ‘Appendix: Accounting under Special Situations- Guidance from US GAAP als Multiple Choices - Theoretical 417 Multiple Choices - Computational 420 Problems 458 Chapter 1 Franchise Accounting Franchise Fees ‘Revenue Recognition — Initial Franchise Fees Revenue Recognition — Continuing Franchise Fees Revenue Recognition — Area Franchise Fees Continuing Sale of Supplies Tangible Assets Included in the Franchise Fee Option to Purchase Multiple Choices — Theoretical 414 Multiple Choices - Computational 416 Problems 486 Re abee 8 688 88 8 413 4n 473 43 419 465Chapter 1 Partnerships: Basic Considerations And Formation Partnerships are a popular form of business because they are easy to form and because they allow several individuals to combine their talents and skills in a particular business venture. In addition, partnerships provide a means of obtaining ‘more capital than a single individual can obtain and allow the sharing of risks for rapidly growing businesses. Partnerships are particularly common in the service professions, especially law, medicine, and accounting. These professions have generally not adopted the corporate form of business because of their long-standing tradition of close professional association with clients and the total commitment of the professional’ association with clients and the total commitment of the professional’s business and personal assets to the propriety of the advice and service given to clients. Definition of a Partnership ‘The Partnership Law is the general governing authority for partnerships. Accountants advising partnerships must be familiar with this law because it describes many of the rights of each parmer and of creditors during creation, operation, anc liquidation of the partnership. Article 1767 of the Partnership Law embodies the definition of partnership. Itstates that “by the contract of partnership, two or more persons bind themselves to contribute money, property or industry to acommon fund with the intention of dividing the profits among themselves.” This definition encompasses three distinct factors: 1. Association of Two or More Persons. The “persons” are usually individuals. Any natural person who possesses the right to enter into a contract can become a partner. Z2 Chapter 1 2. To Carry On as Co-Owners. A partnership is an aggregation of partners’ individual rights. This means thatall partners are co-owners of partnership property and are co-owners of the profits or losses of the parmership. 3. Business for Profit. A partnership may be formed to perform any legal business, trade or profession, or other service. However, the partnership must. attempt to make a profit; therefore, non-profit organizations may not be partnerships. Characteristics ofa Partnership Before taking up the accounting problems encountered in partnerships, itis helpful to know the important characteristics of the} partnership form of organization. Separate Legal Personality, Article 1768 of the Partnership Law states that the partnership has a juridical personality separate and distinct from that of each of the partners. A partnership may, therefore, acquire property in its own name and may enter into contracts. Ease of Formation. The formation ofa partnership does not require as many formalities asa corporation. The partnership may be created by oral or written agreement between two or more persons, or merely by inferences from the implication of their conduct. Co-ownership of Partnership Property and Profits. All assets invested in the Partnership become the property ofthe partnership. The right of each partner to possess partnership property for partnership purposes is equal to the Tight of each of the other partners. Each partner has a proprietary interest in the Partnership. This interest refers toeach partner’s share in the earnings and in the capital, Limited Life. Any change in the agreement of the Partners termmates the partnership contract. A partnership may also expire any time when there isa change in the relationship Mutual Agency. Each partner has an equal right to act for the partnership and to enter into contracts binding upon it, as long as he acts within the normal scope of business operations. Each partneris a principal as well as an agent of the partnership.Partnerships: Basic Considerations and Organizations a Unlimited Liability. Each partner may be held personally liable for all the debts of the partnership. All of his business and. personal properties may be used for the settlement of partnership liabilities. There is, however, aspecial type of parmership, called limited partnership, wherein certain partners are allowed to limit their personal liabilities to the extent of their capital contributions only. Entity Versus Proprietorship Theories ‘The proprietorship theory views the assets ofa business as belonging to the proprietor, the liabilities as debts of the proprietor, and the income of the business as an increase in the proprietor’s net worth (capital). In practice, however, proprietorship assets and liabilities are treated separatcly from the personal assets and liabilities of the proprietor. ‘Thus, in practice, proprietorship are treated as separate: entities, even though, in theory, they are not. On the other hand, small partnerships are usually viewed as a combination of two or more proprietorships, and the “proprietorship” theory would be the pertinent one for firms of this size. The death of one partner would usually cause a dissolution especially if there are only two partners. Despite the many similarities between partnerships and proprietorships (i.¢., unlimited liability, dissolution upon death), partnerships are generally viewed as entities separate and apart from the individual partners. Assets are viewed as belonging to the partnership. and notto the individual partners. Income eamed by the partnership is usually viewed as income to the “entity” with each partner entitled to a distributive share of the ‘income. Partnership Agreement ‘The formulation ofa partnership agreement must be ‘fone at the inception of organization of the partnership. This agreement is the framework within which the partners are to operate or conduct partnership business — from formation to operations then to the ‘eventual dissolution and liquidation of the partnership. Observations of these details will help minimize, ifnot eliminate, the confusion and disputes that may arise between or ‘among the partners. The partnership agreement may be oral, implied or written. However, it is best that the business of the partnership be organized on the basis of a written contract. It is not possible to cover in the partnership contract every issue;which may later arise. Among the more significant points that must be coveted by the parmership agreement are:Chapter 1 Names of the partners, and the name and nature of the partnership; The date on which the partnership contract takes effect and the duration of the contract; The capital to be invested by each partner, the procedure for valuingnoncash contributions, the treatment of any contribution (whether as capital oras loan) in excess of agreed amounts, and the penalties for failure to contribute and maintain the agreed amount of capital); - The authority, the rights and duties of each partner, . The accounting period to be used, the nature of accounting records, preparation of financial statements, and auditing of parmership books. . The method of sharing profits and losses including the frequency of income measurement and distribution to partners. - The drawings or salaries to be allowed to each partner and the disposition of partner's salary and drawing accounts including the penalties, ifany, forexcessive withdrawals; and - Provision of the arbitration of disputes and the liquidation of the partnership at the termination of the agreed time including those Concerning the contingency of partner’s death. Especially important are the rules on the valuation of assets including goodwill and the method of settlement with the estate ofa deceased Partner. Similar provisions should be made with respect to a partner’s retirement, Partnership agreements are usually with the aid of or in consultation with lawyers and certified public accountants. Some of the areas where the partners may seek the advice ofan accountant are as follows: 14 = ‘The determination of the current fair values to be assigned to the noncash assets initially invested to the partnership. The ascertainment of the individual partner’s initial interest in the partnership capital. The formulation ofthe plan for sharing in the profits or losses, The determination of the methods to compute the interest ofa withdrawing partner as a result of his retirement or death. A factorto be considered in cases of withdrawal is the necessity ofrevaluing the assets and recognizing intangible asset values such as goodwill. . The determination of the closing procedures tobe followed, that is, whether or not aii and withdrawals are to be closed to the capital account at the end ofthe: nting period, thereby, increasing or decreasing the total capital.Partuerships. Basic Considerations and Organizations 5 Partner’s Ledger Accounts Inapartnership, although it is possible to operate with only one equity account for each partner, it is desirable that the following partner’s accounts be maintained: 1. Capital accounts 2. Drawing or personal accounts 3. Account for loansto or from partners Capital and drawing accounts. The original investment of each partner is recorded by debiting the fair value of the assets invested, crediting the liabilities assumed by the firm, and crediting the partner’s capital account for the net assets contributed. Subsequent to the original investments, transactions between. the partnership and the partners will result to changes in the respective partner’s ownership interest. These changes are summarized in the respective partner’s capital and drawing accounts. Apartner’s equity is increased by the additional investment of cash or other property and bya share in the partnership profit. A parmer’s equity is decreased by the withdrawal of cash or other assets and by a share in the partnership loss. Normally, increases or decreases in capital that are interpreted as permanent capital changes are recorded directly in the capital account. Withdrawals, which are considered equivalent to salaries, made by the partner in anticipation of profits, and other increases or decreases of relatively minor amounts are recorded in the drawing account, At the end of the accounting period, the debit and credit balances in the drawing account are then closed to the respective partner’s capital account. Also, during this period, the profit or loss as shown by the Income Summary account is distributed in accordance with the profit and loss sharing agreement: The share of each partner in the profit or loss is recorded in their respective capital account. Individual partner’s capital and drawing balances are combined to reporting each partner’s interest in the statement of financial position. ‘The transactions that are usually debited and credited to partner’s capital and drawing accounts may be summarized as follows: The capital account is credited for: a. Original investment b. Additional investment. » c. Pariner’s share in the profits (sometimes this is closed to the drawing account).6 Chaprer 1 The capital account is debited for: a. Permanent withdrawal of capital, b. Debit balance of the drawing account at the end of the period, ¢. Partner’s share in the losses (sometimes this is. closed to the drawing account). The drawing account is credited for: a. Partnership obligations assumed or paid by the partner, b. Personal funds orclaims of partner collected and retained bythe partnership. ©. Periodic partner’s salaries depending on the accounting and disbursement procedures agreed upon, The drawing account is debited: for: a. Withdrawal of assets’ bythe partners in anticipation ofnet income. b. Partner’s personal indebtedness paid or assumed by the partnership. ¢. Funds orclaims of; Partnership collected and retained by the partner. Loans to and from partners. A withdrawal bya partner ofa substantial amount with the assumption ofits repayment to the firm may be debited to a Receivable from partner account rather than to the partner’s drawing account. On the other hand, an advance to the partnership by a partner with the assumption of its ultimate repayment by the Partnership is viewed as a loan rather than as an increase in the capital account. This type of transaction is credited to the Loans Payable to partners account or Notes Payable if the loan is evidenced by anote duly signed in the name of the partnership. ACCOUNTING FOR THE FORMATION OFA PARTNERSHIP ‘The formation ofa partnership presents relatively few difficult accounting problems. Accounting entries to record the formation will depend upon how the partnershi9 is formed. A partnership may be formed in several ‘ways, namely: 1. Formation of a partnership for the first time, 2a Conversion of a sole proprietorship toa partnership, ’ a. Asole proprietor allows another individual, who has no business ofhis own “tojoin his business. ~b- Twoorm Sole proprietors form a partnership. 3. Admission o} new partner (This is discussed in Chapter 3).Partnerships: Busie Considerations and Organizations 7 Partnership Formation for the First Time — Initial Investments Cash Investments Initial cash irivestments in a partnership are recorded in the capital accounts maintained for each partner. For example, Abad and Besa each invests P100,000 cash in anew partnership. The entry to record the investments would be: Cash 200,000 Abad, capital 100,000 Besa, capital 100,000 To record the investments of Abad and Besa. Noncash Investments When property other than cash is invested in a partnership, the noncash property is recorded at the current fair value of the property at the time of the investment. ‘Theoretically, independent appraisals should be made to determine the fair value. Despite the theoretical soundness of the independent appraisal procedure, the fair value on noncash asset is determined by agreement of the partners. The amounts involved should be specified in the written partnership agreement. Mlustration. Assume that Pedro and Jose form a partnership for the first time. Their investments are as follows: Pedro Jose _(Fair Value) (Fair Value) Cash P70,000 =z Merchandise inventory (cost, P10,000) P20,000 Computer equipment (cost, P50,000) 30,000 Total P70,000 P50,000& Chapter 1 The journal entries to record the inyestments are as follows: Cash 70,000 Pedro, capital 70,000 To record initial investment of Pedro Merchandise inventory 20,000 Computer equipment 30,000 Jose, capital 50,000 To record initial investments of Jose at their Jair values Recording partners’ noncash investments at their current fair value ensures that any gains or losses on the subsequent sale of the property will be equitably distributed in accordance with the partnership agreement. Bonus or Goodwill on Initial Investments Valuation problem arises when partners agree on capital interests that are not equal to. their net assets invested. For example, in the above illustration, the partners agree that each partner is to receive equal interest, even though Pedro invested P70,000 and Jose contributed, P50,000 in identifiable net assets. To meet this condition, the capital accounts. of Pedro and Jose should be adjusted using two methods — the bonus method or the goodwill method. Under the bonus meth od no assets is recorded in the partnership books. To equalize capital balances to P60,000, capital transfer of P10,000 from Pedro to Jose is made. The only entrynecessary is as follows: Pedro capital 10,000 Jose capital 10,000 To accomplish equeal capital interests of P60,000 by recording a P10,000 bonus to Jose from Pedro. The bonus method assumes pat Jose’s besioess Dy ag does not constittte a recordable partnership asset with a measurable cost. Hence, this approach recognizes only the assets that are: physically contributed to the business (such as cash, inventory, equipment). Althougfe these contributions determine total partnership capital, the recognition of specific capital balances is viewed as an independent process based solely on the partners” agreement. Because the initial capital balances result from negotiation, they do not: need to correspond directly with the individual investments. Inthe entry above, Jose received capital bonus of P10,000 from Pedro in recognition of business connections he brought into the partnership.Partnerships: Basic Considerations and Organizations 9 When the goodwill method is used, the equalization of capital interests isaccomplished byrecording goodwill of P20,000 with a corresponding increase in the capital account of Jose. The entry is: Goodwill 20,000 Jose capital 20,000 To establish equal capital interests of P70, 000 by recording goodwill of P20,000. The goodwill methods based on the assumption that an implied value can be estimated mathematically and iene any intangible contribution made by a partner. In the above illustration, Jose P20,000 less cash than Pedro’s investment but receives an equal amount of ‘capital according to the partners’ agreement. Proponents ofthe ‘goodwill method argue that Jose’s business connections has an apparent value of 20,000, a figure that shouldbe included as part of this partner’s capital investment. Ifnot recorded, Jose’s primary contribution to the business isignored completely within the accounting records. Inthe above entry, Jose received a goodwill attributed to his business connections. Comparison of Methods. Both approaches achieve the intent of the partnership agreement: to record equal capital balances despite a difference in the partners’ cash contributions. The bonus method allocates the P120,000 invested capital according to the percentages designated by the partners, whereas the goodwill method capitalizes the implied value of Jose’s intangible contribution. Although partnership accounting does not prohibit the use of either technique, the recognition of goodwill method poses definite theoretical problems. In the discussions of business combination in Volume 2, goodwill was recognized but only as aresultofan acquisition made by the reporting entity. Consequently, this asset had a historical cost in the traditional accounting sense. Partnership goodwill has no such cost; the business recognizes an asset even though no funds have been spent. ‘The partnership of Pedro and Jose, for example, is ableto record P20,000 in goodwill without any expenditure. Furthermore, the value attributed to this asset is based solely on. a negotiated agreement between the partners. Thus, although partnership goodwill is sometimes encountered in actual practice, the authors believe that this “asset” should be viewed with skepticism. the absence ofany agreement, the bonus method is preferable over the goodwill method. The justification to this is discussed above. ‘Adecision touse one method over the other will dependon the partner’s agreement. In10 Chapter-1 Sole Proprietor and Another Individual Forma Partnership An individual who has no business of his Own may join another individual who is already operating his own business, Under this type of formation, both the assets and liabilities of the sole proprietor are transferred to the newly formed Partnership. Normally, the partners agree on the revaluation of some of the. assets before the transfer. The journal entries to record this type of formation will depend on whether the books of the sole Proprietorship are to be used, [for the newly formed Partnership or new books are to be opened, Illustration. Assume that Jose has been ‘Operating a retail store for anumber of years. A’statement of financial Position on July 1, 2013 is Prepared for Jose Company as lows: ‘ Mlustration 1-1 Jose Company Statement of Financial Position July 1, 2013 Assets Cash P 60,000 Accounts receivable 1 50,000 Inventory 70,000 Less: accumulated depreciation 4,000 36,000 _ Total assets P216,000 Liabilities and Equity Accounts payable P 86,000 Jose capital 130,000 Total liabilities and equity P216,000Parinerships: Basic Considerations and Organizations il Jose needs additional capital to meet the increasing sales and offers Pedro an interest in the business. Jose and Pedro agree to form a partnership to be known as JP Partnership, Jose’s business is audited and its net assets are appraised. The audit and appraisal shows the following: 1. Allowance for bad debts of P5,000 is to be provided. 2. Inventory is to be recorded at its market value of P80.000. 3. The equipment hasa fair value of P35,000 4. P2,000 of accounts payable has not been recorded. Jose and Pedro prepare and sign articles of co-partnership that include all significant operating policies. On July 1, 2013 Pedro contribute P100,000 cash for a one-third ital interest. The JP Partnership is to acquire all of Jose’s business and assume its Sole Proprietorship’s Books are Retained for the Partnerships. lf the books of Jose are to be retained, the following accounting procedures are used to record the formation of the partnership: 1. Adjust the assets and liabilities of Jose to their fair market values a8 agreed by the partners. Adjustments are to be made to his capital account. 2. Record the investment of Pedro. Using the above procedures, the joumal entries to record the formation of the partnership are: Books of Jose (Now the Partnership Books) 2013 Julyl (1) Inventory 10,000 Accumulated depreciation-Equipment 4,000 Equipment 5,000 Allowance for bad debts 5,000 Accounts payable 2,000 Jose, capital 2,000 To adjust assets and liabilities of Jose. (2) Cash 100,000 Pedro, capital 100,000 To record investment of Pedro.12 Chapter After the formation, the statement of financial position of the. newly formed partnership Ss Mlustration 1-2 JP Partnership Statement of Financial Position July 1, 2013 Assets Cash P160,000 Accounts receivable P50,000 Less: Allowance for bad debts 5,000 45,000 Inventory 80,000 Equipment 35,000 Total assets 320,000 Liabilities and Equity Accounts payable P 88,000 Jose capital 132,000 Pedro capital 100,000 Total liabilities and equity 320,000 New Books are Opened for the Partnership. If new books are to be used for the partnership, the following accounting procedures tay be used to record the formation of the partnership: Books of Jose: 1. Adjust the assets and liabilities of Jose acccrding to the agreement. Adjustments are made to his capital account. 2. Close the books. New Books of the Partnership: 1. Record the investments of ose, His assets and liabilities, 2. Record the cash investment of Pedro.Partnerships: Basic Considerations and Organizations 13 Using the procedures, the journal entries to record the formation of the partnership are: Books of Jose (Sole Proprietorship): 2013 July! (1) Inventory 10,000 Accumulated depreciation — Equipment 4,009 Equipment 5,000 Allowance for bad debts 5,000 Accounts payable 2,000 Jose, Capital 2,000 To adjust assets and liabilities of Jose. (2) Accounts payable 88,000 Allowance for bad debts 5,000 Jose, Capital 132,000 Cash 60,000 Accounts receivable 50,000 Inventory 80,000 Equipment 35,000 To close all the adjusted balances of the accounts. New Books of the Partnership 2013 July (1) Cash 60,000, Accounts receivable 50,000 Inveniory 80,000 Equipment 35,000 Accounts payable 88,000 Allowance for bad debts 5,000 Jose, Capital 132,000 To record investments of Jose. (2) Cash 100,000 Pedro, Capital 100,000 To record cash investment of Pedro.14 Chapter 1 Two Proprietors Form a Partnership The accounting procedures described in the preceding section are also applicable when. two or more proprietorships join together to form a partnership. There should be an agreement on the determination of the partners’ interest in the new partnership. Itis also important that the partners agree on the values of the assets to be assigned and liabilities to be assumed by the partnership, Books of one of the sole proprietorship may be used for the newly formed partnership or a new set of partnership books may be used. Illustration. Assume that on June 30,2013, Gerry and Henry, competitors in business, decide to consolidate their business to form a partnership to be called GH Partnership. The statement of financial position of Gerryand Henry on this date are presented below. Mlustration 1-3 Gerry Company Statement of Financial Position Sune 30, 2013 Assets Cash P 5,000 Accounts receivable 10,000 Merchandise inventory 8,000 Furniture and fixtures 6,000 Total assets P29,000 Liabilities and Equity Accounts payable Gerry Capital Total liabilities and equity Henry Company ‘Statement of Financial Position June 30, 2013 Assets Cash Accounts receivable Merchandise inventory Furniture and fixtures Total assets Liabilities and Equity Accounts payable Henry capital Total liabilities and equityPartnerships: Basic Considerations and Organizations 15 snes aS 1G CORN Cr eelees OD TN a ‘The conditions agreed by the partners for purposes of determining their interests in the partnership are presented below: a. 10% ofaccounts receivable is to be set up as uncollectible in each book: b. Merchandise inventory of Henry is to be increased by P1,000. c. The furniture and fixtures of Gerry and Henry are to be depreciated by P600 and P900 respectively. Books of Henry are used as the Partnership Books. If the books of Henry are to be used as the partnership books, the accounting procedures to record the formation of the partnership are: Books of Gerry 1. Adjust the accounts of Gerry as agreed. Adjustments are made to his capital account. 2... Close the books. Books of Henry (Now the partnership books) 1. Adjust the accounts of Henry as agreed. Adjustments are made to his capital account. 2. Record the investment of Gerry, his adjusted assets and liabilities. The journal entries to record the formation of the partnership, using the above accounting procedures are: ‘ Books of Gerry 2013 June 30 (1) Gerry capital 1,600 Allowance for bad debts 1,000 Accu. depreciation — furniture and fixtures 600 To record adjustments of assets16 Chapter 1 (2) Accounts payable 3,000 Allowance for bad debts 1,000 Accu. depreciation — furniture and fixtures 600 Gerry capital 24,400 Cash 5,000 Accounts receivable 10,000 Merchandise inventory 8,000 Furniture and fixtures 6,000 To close the books. Books of Henry (Now the books of the partnership) 2013 June 30 (1) Merchandise inventory 1,000 Henry capital 700 Allowance for bad debts 800 Accu, depreciation — furniture and fixtures 900 To adjust assets of Henry. (2) Cash 5,000 Accounts receivable 10,000 Merchandise inventory 8,000 Furniture and fixtures 5,400 Accounts payable 3,000 Allowance for bad debts 1,000 Gerry capital 24,400 To record investments of Gerry. New Partnership Books will be used. If new books are to be opened for the partnership, the following accounting procedures may be used to record the formation of the partnership. Books of Gerry and Henry 1. Adjust the accounts of Gerry and Henry according to their agreement. Adjustments are to be made to their capital accounts. 2. Close the books.Partnerships: Basic Considerations and Organizations 17 New Book of the Partnership 1. Record the investments of Gerry, his adjusted assets and liabilities. 2. Record the investments of Henry, his adjusted assets and liabilities. Using the accounting procedures, the journal entries to record the formation of the partnership under this assumption are: Books of Gerry 2013 June 30 (1) Gerry capital 1,600 Allowance for bad debis 1,000 Accu. depreciation — furniture and fixtures 600 To record adjustments of assets. (2) Accounts payable 3,000 Allowance for bad debts 1,000 Accu. depreciation — furniture and fixtures 600 Gerry capital 24,400 Cash 5,000 Accounts receivable 10,000 Merchandise inventory 8,000 Furnitures and fixtures 6,000 To close the books. Books of Henry 2013 June 30: (1) Merchandise inventory 1,000 Henry capital 700 Allowance for bad debis 800 Accumulated depreciation — furn. and fixt. 900 To record adjustments of assets18 Chapter | (2) Accounts payable 6,000 Allowance for bad debts 800 Accumulated depreciation — furn. and fixt. 900 Henry capital 24,300 Cash — 4,000 Accounts receivable 8,000 Merchandise inventory 11,000 Furniture and fixtures 9,000 To close the books. New Books of the Partnership 2013 June 30 (1) Cash 5,000 Accounts receivable 10,000 Merchandise inventory 8,000 Furniture and fixtures 5,400 Accounts payable 3,000 Allowance for bad debts 1,000 Gerry capital 24,400 To record the investments of Gerry. (2) Cash 4,000 Accounts receivable 8,000 ‘Merchandise inventory 11,000 Furniture and fixtures 8,100 Accounts payable 6,000 Allowance for bad debis 800 Henry capital 24,300 To record the investments of Henry ‘Take note that the Fumiture and Fixtures accounts are recorded net of the accumulated depreciation.Partnerships: Basic Considerations and Organizations 19 eee eee ee ‘The statement of financial position of the partnership after the formation is as follows: ; Mustration 1-4 GH Partnership ‘Statement of Financial Position Tune 30, 2013 Assets Cash P 9,000 Accounts receivable 18,000 Less: Allowance for bad debts 1,800 16,200 Merchandise inventory 19,000 Furniture and fixtures 13,500 Total assets P57,700 Liabilities and Equity ‘Accounts payable Gerry capital Henry capital Total liabilities and equity Key Observation from the Ilustrations. Note that the partnership is an accounting entity separate from each of the partners, and that the assets invested are recorded at their current fair values at the time of the formation. No accumulated depreciation is carried forward to the partnership. All liabilities are recognized and recorded. ‘The capital of the partnership is the sum of the individual partners’ capital accounts and is also the value of the partnership’s net assets. The fundamental accounting equation (assets less liabilities equals capital) is used often in partnership accounting. Each partner’s capital interest recorded does not necessarily have to equal his capital contribution. The partners may decide to divide the total capital equally regardless of the actual contributions. The key point is that the partners may allocate the capital contributions in any manner they desire. The accountant must be sure that all partners _ agree to the allocation and must then record it accordingly.20 Chapter | . Apartner’s withdrawal of assets from a partnership that is considered a permanent reduction in the partner’s equity is debited to the partner's: Drawing account Retained earnings account .. Capital account . Loan receivable account Poe o . The partner’s drawing accounts areused: To record the partnez*s salaries To reduce the partner’s capital account balances at the end of the period. In the same manner as the partners’ loan accounts. |. To record the partners’ share ofnet income or loss for an accounting period. eege |. Apartner’s drawing account is: a. an expense account sb, .a.gapital account c. acontra-tapjtal account d. aliabilityaccourt A partnership is an association oftwo or more persons who carry on as co- . \ pa er ‘Thepersons who form the partnership may be: II. Corporations III. Fraternal nonprofit organization lonly. land Ill. 1, Il, and I. land I. pe oePartnerships: Basic Considerations and Organizations at 5. A partnershipis a (an). . Accounting entity. Il. Taxable entity. Tonly. Tlonly. Neither Ior II. Both and I pore 6. Partner X contributed equipment to the XYZ partnership. The equipment cost, 160,000 with accumulated depreciation of P10,000 but had a fair value of P70,000 at the date the partnership received it. At what amount should the equipment be reported? a.” P70,000 'b. P60,000 c. P10,000 d. P50,000 7. Which of the following accounts can be found in the MN partnerships’ general L Receivable fromM Tl. Mdrawing Ti. Mloan Tonly. land I. 1, 0, and IIL. and Il. aese 8. Which of the following statements about; partnership accounts is true? a. Two accourits are generally maintained for each partner, a drawing account anda capital account. b. The drawing account is credited with the partner’s withdrawals of cash o= other assets during the period. Answer (a) is correct but (b) is false. d. Answers (a), (b), and (c) are all correct. °10. uu. 12. Chapter 1 . Partner’s interest in a partnership is generally equal to: a. The fair value of net assets at date of contribution. b. The sunrof the fair values of the assets the partner contributes to the firm, increased by any liabilities of other partners assumed and decreased by any Personal liabilities that are assumed by other partners. ¢. The sum of the bases of the individual assets the partner contributes to the firm, decreased by the partner’s share of partnership liabilities. d. The unamortized cost of the assets to the partner. Which of the following statements, conceming partnership is true? a. Apartnershipisa legal entity, separate and distinct from the individual partners. b. Individual partners are jointly liable for the debts and obligations ofa partnership. ¢. Income tax is levied on the individual partners’ shares of the net income ofa partnership and is reported in their personal tax returns. d. Allofthe above is true. On July 1, 2013, Long and Short formed a partnership. Long contributed cash. Short, previouly a sole proprietor, contributed Property other than cash, including Tealty subject to a mortgage, which the partnership assumed. Short’s capital account of July 1, 2013, should be recorded at: a, Short’s book value of the property at July 1, 2013. b. Short’s book value of the property less mortgage payable at July 1, 2013. c. The fair value of the property less the mortgage payable at July 1, 2013. d. The fair value of the property at July 1, 2013. A partnership is formed by two individuals who were previously sole proprietors. Property other than cash that is part of the initial investment in the partnership is recorded for financial accounting purposes at the: a. Proprietor’s book values or the fair value of the property at the date of the investment, whicheveris higher. 6. Proprietor’s book values or the fair value of the property at the date of the investment, whichever is lower. c. Proprietor’s book values of the property atthe date of investment. d. Fair value of the property at the date of the investment.Partierships: Baste Consideranions and Organizations 23 13. OnApril 30,2013, Apple, Berry and Chetry formed apartnership by combining their separate business proprietorships. Apple contributed P50,000 cash, Berry contributed property with a P36,000 book value, a P40,000 original cost; and P80,000 fair value. The partnership assumed the P35,000 mortgage attached to the property, Cherry contributed equipment with a P30,000 carrying amount, a P75,000 original cost, and P55,000 fair value: The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, 2013, capital account balance? a. Apple b. Berry c. Cherry d. All capital account balances are equal.24 1-1: 1-2: 1-3: Chapter | On May 1, 2013, Jose and Maria formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Jose contributed a computer that cost him P50,000. Maria contributed P200,000 cash. The computer was sold for P55,000 on May 1, 2013 immediately after the formation of the partnership. What amount should be recorded in Jose’s capital account on formation of the partnership? a. PS55,000 b. P51,500 c. P60,000 d. P50,000 Red, White, and Blue form a partnership on May 1, 2013. They agree that Red will contribute office equipment with a total fair value of P40,000; White will contribute delivery equipment with a fair value of P80,000; and Blue will contribute cash. If Blue wanta one third interest in the capital and profits, heshould contribute the following of cash: a P 40,000 b. P 60,000 ce. P120,000 d. P180,000 Mateo and Julio formed a partnership on April | and contributed the following assets: Mateo Julio Cash P300,000 100,000 Land 300,000 The land was subject to a mortgage of P50,000, which was assumed by the partnership. Under the partnership contract, Mateo and Julio will share profit and loss in the ratio of one-third and two-thirds respectively. Julio’s capital account at April I should be: a. P350,000 6. P300,000 c. P400,000 d. P450,000Partnerships: Basic Considerations and Organizations 25 Pertierahips: Haale Conan On oa OS 1-4: 1-5: 16: Elsa and Perla form a new partnership, Elsa invests P300,000 in cash for her 60 percent interest in the capital and profits of the business. Perla contributes land that has an original cost of P40,000 and a fair market value of P70,000, anda building thathas a tax basis of P50,000 and a fair market value of P90,000. The building is subject to a P40,000 mortgage that the partnership will assume. What amount of cash should Perla contribute? a. P 40,000 b. P80,000 c. P110,000 d. P150,000 ‘Anton and Bauzon formed a partnership and agreed to divide initial capital equally, even though Anton contributed P100,000 and Bauzon contributed P84,000 in identifiable assets. Under the bonus method, to adjust the capital accounts, Bauzon’s intangible assets should be debited for: a. P46,000 b. P16,000 c. P 8,000 d. Zero Reyes and Santos drafted a partnership agreement that lists the following assets contributed at the partnership formation: Contributed by Reyes Santos Cash 200,000 ‘300,000 Inventory a 150,000 Building a 400,000 Equipment 150,000 = The building is subject to a mortgage of P100,000, which the partnership has assumed. The partnership agteement also specifies the profits and losses are to be distributed evenly. What amounts should be recorded as capital for Reyes and Santos at the formation of the partnership? Reyes Santos P350,000 P850,000 350,000 —_-P750,000 P550,000 — PS50,000 P600,000 P600,000 RO SR26 1-8: 1-9: Chapter On April 30, 2013, AA, BB and CC formed a partnership by combining their separate business proprietorships. AA contributed cash of P50,000. BB contributed property with a P36,000 book value, a P40,000 original cost, and P80,000 fair value. The partnership accepted responsibility for the P35,000 mortgage attached to the property. CC contributed equipment with a P30,000 book value, a P75,000 original cost and PS5,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partners has the largest April 30, 2013, capital balance? a. AA b. BB c CC d. All capital account balances are equal PP, RR, and SS are new CPA’s and are to form a partnership. PPis to contribute cash of 50,000 and his computer originally costing P60,000 but has a second hand value of P25,000. RR is to contribute cash of P80,000. SS, whose family is selling computers, is to contribute cash of P25,000 and abrand new ‘computer With a regular selling price of P60,000 but which cost is P50,000. Partners agree to share profits equally. The capital balances upon formation are: PP RR SS a. P75,000 — P80,000 P85,000 6. P110,000 — -P80,000 P75,000 c. P80,000 P80,000 P80,000 4. P83,333 88,333 P88,334 Maria and Nora entered into a partnership on March 1,2013 by investing the following assets: is 3 Maria Nora Cash P 30,000 P fe Merchandise Inventory - 90,000 Computer Equipment 160,000 Furniture and Fixtures 200,000Parmerships: Baste Considerations and Organizations 27 1-9: Continued 1-10: ‘The agreement between Maria and Nora provides that profits and losses are to be divided into 40% to Maria and 60% to Nora, and that the partnership is to assume a liability on the computer equipment of P60,000. The partners further agree that Norais toreceivea capital credit equal to her profit and loss ratio. How much cash is to be invested by Nora? a. P135,000 b. 145,000 c. PI155,000 d. P130,000 Roy, Sam and Tim decided to engage in a real estate venture'as a partnership. Roy invested P 140,000 cash and Sam provided an office and furnishings valued at P220,000. (There is a P60,000 note payable ie maining on the furnishings to be assumed by the partnership). Although Tim has no tangible assets to invest, both Royand Sam believe that Tim’s expert. salesmanship provides an adequate investment. The partners agree to receive an equal capital interest in the partnership. Using the bonus method, what is the capital balance of Tim? a. P 50,000 b. Zero c. P140,000 d. P100,000 + Lara and Mitra formed aparinership on July 1, 2013 and invested the following assets: Lara Mitra Cash 'P130,000 P200,000 Computer Equipment 50,000 ‘The computer equipment has a note payable: amounting to P10,000, which was) assumed by the partnership. The partnership agreement provides that Lara and’ ‘Mitra will have an equal capital credit. Using the goodwill method, the amount of goodwill to be recorded upon formation of the partnership is: a. P110,000 b. P120,000 c. P100,000 d. P130,00028 1-12: 1-13: Chapter 1 The partnership of Perez and Reyes was formed on March 31, 2013. At that date, Perez invested P50,000 cash and office equipment valued at P30,000. Reyes invested P70,000 cash, merchandise valued at P110,000, and furnitures valued at P100,000, subject to a notes payable of P50,000 (which the partnership assumes). The partnership provides that Perez and Reyes share profits and losses 25:75, respectively. The agreement further provides that the partners should initially have, an equal interest in the partnership capital. Under the goodwill and the bonus method, what is the total capital of the partners after the formation? Bonus Method Goodwill Method a. P310,000 460,000 b. —-P360,000 P510,000 c. P300,000 P410,000 d, —_ 350,000 P400,000 Ruiz and Pefia are combining their separate businesses to forma partnership. Cash and noncash assets are to be contributed for a total capital of P300,000. The noncash assets to be contributed and the liabilities to be assumed are: Ruiz Peaa Book Fair Book Fair value value value value ‘Accounts Receivable P2000 —_P20,000 = =, Inventories 30,000 40,000 P20,000 25,000 Equipment 60,000 45,000 40,000 50,000 ‘Accounts Payable 15,000 15,000 10,000 10,000 ‘The partner’s capital accounts should be equal after all the contribution of assets and the assumption of liabilities. How much cash is to be contributed by Ruiz? a. P150,000 b. P 60,000 ce. P210,000 d. P 85,000Partnerships: Basic Considerations and Organizations e 29 4-14: On March 1, 2013, Cruzand Ferrer formed apartnership with each contributing the following assets: Cruz Ferrer Cash P30,000 ‘70,000 Machinery and equipment / 28,000 75,000 Building ie 225,000 Furniture and fixtures 19,900 os The building is subject to a mortgage loan of P90,000, which is to be assumed by the partnership. The partnership agreement provides that Cruz and Ferrer share profits and losses 30 percent ‘and 70 percent, respectively. Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio, and using Ferrer’s capital as the base, how much cash is to be invested by Cruz? a. P19,000 b. P30,000 c. P40,000 d. P55,000 1-15: The statement of financial position as of July 31, 2013 forthe business owned by C. Borja shows the following assets and liabilities: Cash P2,500 Accounts Reccivable 10,000 Merchandise Inventory 15,000 Fixtures 18,000 Accounts Payable 6,000 Itis estimated that 5% of the receivables may proveincollectible. Merchandise inventory includes obsolete items costing P5,000 of which P2,000 might still be realized. Depreciation has never been recorded: the fixtures are two years old, have an estimated useful life of 10 years, and would cost P20,000 if currently purchased. D. Arce is to be admitted as a partner upon’ his investment of P20,000 cash and P10,000 worth of merchandise. What is the total assets of the partnership? 2 . P70,500 b. P48,000 c. P67,500 d. P74,000 4.30 Chapter t 1-16; 1-17: On September 30,2013, Lopez admits Mendez for an interest in his business, On this date, Lopez’s capital account shows a balance of P158,400. The following Were agreed upon before the formation ofthe partnership: 1. Prepaid expenses of P17,500 and accrued expenses of P5,000 are to be recognized. 2. 5% of the outstanding accounts receivable of Lopez amounting to P100,000 is to be recognized as uncollectibles. . 2 3. Mendez is to be credited with a one-third interest in the partnership and is to invest cash aside from the P50,000 worth of merchandise. The amount of cash to be invested by Mendez and the total capita! of the partnership are: P32,950 and P248,850 respectively, 55,300 and P221,200 respectively, P82,950 and P248,850 respectively, P32,950 and P171,200 respectively. ROR Moran and Nakar entered into apartnership on February 1, 2013 by investing the following assets: Moran ‘Nakar Cash PIS,000 = Merchandise Inventory pe 45,000 Land 4 15,000 Building = 65,000 Furniture and fixture 100,000. « z ‘The agreement between Moran and Nakar provides that profits and losses are to be divided into 40% (to Moran) and 60% (to Nakar), and that the partnership is to assume the P30,000 mortgage loan on the’ building. IfNakaris to receivea capital credit equal to his profitand loss ratio, how much cash must he invest’? a. P127,500 P172,500 P 97,500 P 77,500 ROSPartnerships. Basic Considerations and Organizations 34. 1-18: As of July 1, 2013, Flores and Garcia decided to form a partnership. Their statements of financial position on this date are: Flores Garcia Cash P 1,500 P 3,750 Accounts receivable 54,000 22,500 Merchandise Inventory 3 20.250 ‘Machinery and equipment 154 27,000 Total 70,500 P7350 ‘Accounts Payable 13,500 “24,000 Flores, capital $7,000 u Garcia, capital = 49,500 Total 70,500 P73,500 The partners agreed that the machinery and equipment of Flores. is underdepreciated by P1500 and that of Garcia by P4,500. Allowance for doubtful accounts is to be set up amounting to P12,000 for Flores and P4,500 for Garcia. The partnership agreement provides fora profit and loss ratio and capital interest of 60% to Flores and 40% to Garcia. How much cash must Flores invest to bring the partner’s capital balances proportionate to their profit and loss ratio? a. P14,250 b. P.5,250 ce. PI17,250 d. P10,250 1-19: Ortiz and Ponce are partners sharing profits in this proportion—-60:40. A statement of financial position prepared for the parmers on April 1, 2013: Cash P 48,000 Accounts Payable P 89,000 Accounts receivable 92,000 Ortiz, capital 133,000 Inventories 165,000 Ponce, capital 108,000 Equipment ” P70,000 Less’ Accumulated Depreciation . 45,000 __25,000 Total Assets P330,000 Total Liabilities & Capital __P330,00032 Chapter 1 ——.q$§_e_ —- ret 4-19: Continued 1-20: On this date, the partners agree to admit Roxas as q r. The eo ee Partner. The terms of the Assets and liabilities are to be restated as follows: _ a. Anallowance for possible uncollectibles of P4,500 is to be established. b. Inventories are to be restated at their present replacement value of P170,000. c. Accrued expenses of P4,000 are tobe recognized, - Ortiz, Ponce and Roxas will divide profits in the ratio of 5:3. Capital balances: the partners after the formation of the new fetes to be in he aforementioned ratio, with Ortiz and Ponce making cash settlement between themselves outside of the partnership to adjust their capitals, and Roxas investing cash in the partnership for his interest. How much cash is to be invested by Roxas? a. P60,250 b. P47,500 c. P50,000 d. P59,375 On July 1 of the current year, Jocson and Gomez froma: ip. Jocson is to invest certain business assets at values which are yet tobe agreed upon. He is to transfer his business liabilities and is to contribute sufficient cash to bring his total capital to P180,000, which is 60% ofthe total capital as had been agreed upon. Details regarding the book values of Jocson’s business assets and liabiliti their corresponding valuation follow;’ ied Book Agreed Values Valuations Accounts receivable PS4,000 ‘54,000 Allowance for doubtful accounts 3,600 6000 Merchandise inventory 96,600 105,000 Store equipment 27,000 - Accumulated depreciation — Store equipment 18,000 13,200 Office equipment 18,000 a Accumulated depreciation — Office equipment 9,600 _ 4300 Accounts Payable 48,000 48,000 ~Partnerships: Basic Considerations ancl Organizations 33 1-20: Continued 1-21: 1-22: Gomez agrees to invest cash of P30,000 and merchandise valued at current market price. The value of the merchandise to be invested by Gomez and the amount of cash to be invested by Jocson are: a. P120,000.and P48,000 respectively. b. P210,000 and P49,200 respectively. c. P105,000 and P50,000 respectively. d. P 90,000 and P48,000 respectively. On April 1, 2013, Ell and Emm pooled their assets to forma partnership, with the firm to take over their business assets and assume the liabilities, Partners capitals are to be based on net assets transferred after the following adjustments: Emm inventory is to be increased by’ P3,000; an allowance for doubtful accounts of P1,000 and P1,500 are to be set up in books of Ell and Emm, respectively; and accounts payable of P4,000 is to be recognized on Ell’s books. The individual trial balances on April 1, 2013, before adjustments follow: Ell Emm Assets 75,000 P113,000 Liabilities 5,000 34,500 Capital 70,000 78,500 How much is the capital of Ell after the above adjustments to his books? a. P70,000 b. P65,000 c. P68,500 d. P66,000 Cortez admits Divino for a partnership interest in his business. The statement of financial position of Cortez on November 30, 2013 prior to the admission of Divino shows the following: Debit Credit Cash P > Accounts receivable 96,000 Merchandise inventory 144,000 Accounts payable : P49,600 Cortez, capital 234 Chapter 1 1-22: Continued It is agreed that for purposes of establishing Cortez’s interest, the following adjustments should be made: 1. Anallowance for doubtful accounts of 2% of accounts receivable is to be established, 2. The merchandise inventory is to be valued at P160,000. 3. Prepaid expenses of P5,200 and accrued expenses of P3,200 are to be recognized. iZ Divino invested cash of P113,640 to give him a one-third interest in the total capital of the firm. What is the capital balance of Cortez before the admission of Divino? “a. P227,280 6., P230,120 c. P211,200 d. P250,500 Items 1-23 and 1-24 are based on the following data: On June 30, 2013 Eden and Flora formed a partnership with each contributing the following assets: Eden Flora = Book Value Fair Value Book Value Fair Value Cash 375,000 375,000 875,000 875,000 Office Equipment 350,000 312,000 872,500 937,500 Building ~ Net 2 — = 3,262'500 2812500 Furniture and Fixtures 95,000 125,000 & The building is subject to a mortgage loan of | P1,125,000 which is to beassumed by the partnership. The partnership agreement provides that Eden and Flora share profits and losses in the ratio of 30% and 70% respectively. Assuming that the partners agreed to bring their respective capital in proportion to their profit and loss ratio, and using Flora capital as the base: 1-23: Whatis the capital account balance of Flora on June 30, 2013? “a. P3,500,000 6. P4,000,000 c. P3,937,500 d. P3,837,500Partnerships: Basic Considerations and Organizations 35 1-24: 1-25: 1-26: How much is the additional cash to be invested by Eden? a: P2,687,500 b. P2,587,000 cP. 688,000 d, P 687,000 Rey, Sam, and Tim formed a partnership on May 31, 2013, with the following assets, measured at their fair market values, contributed by each partner: Rey Sam Tim Cash 60,000 P72,000 180,000 Delivery equipment * 900,000 Computer equipment 51,000 219,600 15,000 Although Tim has contributed the most cash to the partnership, Tim did not have the full amount of P180,000 available and was force to borrow personally P120,000. The delivery equipment contributed by Rey has a mortgage of P540,000 and the partnership is to assume the responsibility for the loan. The partners agree to divide profits and losses 40% to Rey; 40% to Sam; and 20% toTim. ‘The partners fuurther agreed to bring their respective capital interest in proportion to their profit and loss ratio. Using the bonus method, capital transfer among partners should be made as follows: a. From Rey and Tim, P87,960, and P3,480 respectively to Sam. b. From Sam to Rey, P87,960 and to Tim, P3,480. c. From Sam to Tim, P3,600 and from Sam to Rey, P88,200. d. From Rey to Tim, P3,480, and from Rey to Sam, P91,440. Candy and Dandy have just formed a partnership. Candy contributed cash of P126,000 and computer equipment that cost P54,000. The fair value of the computer is P36,000. Candy has a notes payable on the computer of P12,000 to be assumed by the partnership. Candy is to have 60% capital interest in the partnership. Dandy contributed only P90,000. The profit and loss ratio of the partners as agreed is equally:36 ‘Chapter 1 1-26: Continued Candy should make an additional investment (withdrawal) of: a. P 96,000 b. P 84,000 c. P(76,800) d. P(1S,000) Question 27 and 28 are based on the following data: On June 1, 2013, May and Nora formed a partnership. May is to invest assets at fair values. She is to transfer her liabilities and is to contribute sufficient cash to bring her total capital to P210,000 which is 70% of the total capital of the partnership. Details regarding the book values of May’s business assets and liabilities and their corresponding fair values arc: Book values Fair values Accounts receivable (net) 53,800 PS3,000 Inventory 98,400 107,000 Equipment 25,800 34,000 Notes payable 56,000 56,000 Nora agrees to invest cash of P42,000 and merchandise valued at current market Price. 1-27: Whats the value of the merchandise to be invested by Nora? a. P48,000 6. P84,000 c. P42,000 d P38,000 1-28: What is the amount of cash to be invested by May: P72,000 P62,000 P26,000 P65,000 ARS SRParinerships: Basic Considerations and Organizations, 37 1-29: 1-30: Alex and Carlos formed a partnership and agreed to divide initial capital equally, even though Alex contributed P100,000 and Carlos contributed P84,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Carlos unidentifiable asset should be debited for a. P46,000 5. P16,000 c P 8,000 dP 0 Noyand Bi agreed to combine their business into a partnership. The statement of financial position of Noy and Bi showed the following: Noy Bi Book Value Fair Value Book Value Fair Value Cash P1000 P0000» P1400 «= P14,000 Accounts receivable - net 92,000 92,000. 92,000 92,000 Merchandise inventory 180,000 216,000 144,000 150,000 Computer equipment 28,800 24,000 16,200 14,000 Furniture and fixtures 19,200 18,000 Z s Accounts payable 108,000 108,000 72,000 72,000. Agreed capitals of Noy and Bin the partnership are P250,000 and P200,000, respectively. The excess over the net assets contributed to the partnership is to be treated as goodwill. Which of the following statements is correct? The goodwill of Noy is P2,000 The goodwill of Bi is P2,000 The total capital of the partnership is 438,000. The total assets of t he partnership is P618,000. RP oR38 Chapter 1 1-31: 1-32: Villar and Roxas sole proprietorships formed a partnership. Villar contributed cash of P2,205,000 and office equipment that cost P945,000. The equipment had been used and had been 70% depreciated, the fair value of the equipment is 630,000. Villar also contributed a note payable of P210,000 to be assumed by the parmership. Villar is to have 60% interest in the parmership. Roxas contributed only P1,575,000 merchandise inventory at fair ‘value, The partners’ capital should be in conformity with their interest in the partnership. After the formation the partners agreed to share profits and losses equally. Assuming the use of the bonus method, which ofthe following statements is true? a. The agreed capital of Villar is P2,625,000 b. The total agreed capital of the partuership is P4,375,000 © The capital of Roxas will increase by 105,000 as a result of the transfer of capital. d. There is either an investment or withdrawal of asset. Loren and Jamby decide to combine their businesses and forma partnership on. July 1, 2013. The following are their assets and liabilities on July 1,2013 before formation: Loren Jamby Assets 210,750 103,000 Liabilities 91,500 36,000 The following agreements are made to adjusts assets and liabilities: a. Both partners will provide P5,000 allowance for doubtful accounts. b. Loren’s fixed assets were over-depreciated by P1,000 and Jamby’s fixed assets were under-depreciated by P500. c. Accrued expenses are to be recognized in the books of Loren and Jamby in the amount of P1,200 and P1,000, respectively. Obsolete inventory to be written off by Loren amounts to P3,500. ¢. Loren and Jamby also agreed to share profits and losses equally. a Whats the total asset of the partnership after the formation? ~ P297,550 300,750 P303,550 P298,550 ROSSPartmerships: Basic Considerations und Organizations 39 1-33: Gibo and Edu each operating a separate business agreed to form a partnership on July 1,2013. The assets and liabilities of the two sole proprietorships on the date of formation are as follows: Gibo Edu Cash P19,200 72,000 Accounts receivable 192,000 144,000 Merchandise inventory 240,000 216,000 Equipment 60,000 72,000 Accounts payable 60,000 96,000 Notes payable 12,000 - The partners agreed on the following adjustments: Gibo’s accounts receivable are to be taken over at book value less 15% and Edu’s accounts receivable at book value less 10%. Gibo’s equipment is new and considered adequate for the new business. Edu’s equipment is disposed at 90% of its book value. It is agreed that Gibo bear one-fourth of the loss resulting from the sale. Assuming Edu invest sufficient cash to give him a one-half interest in the partnership after charging to Gibo’s capital account his share of the loss on the sale by Edu of the equipment, how much must Edu invest? a. P16,800 5. P20,400 c P12,400 d. P18,20040 ‘Chapter I 1-34: Gamett and Bryant decided to combine their businesses and forma partnership. Below are their statements of financial position before the formation: Garnett Bryant Cash 2,048,400 1,098,360 Accounts receivable 1,031,960 2,498,716 Inventories 528,160 1,144,448 ” Property and equipment - net 613,380 852,224 Other assets 8,800 15,840 Total assets P4.230,700 5,609,588 Accounts payable 787,336 1,072,060 Notes payable 1,000,000 = Mortgage payable = 1,440,000 Garnett, capital 2,443,364 Bryant, capital 3,097,528 Total liabilities and equity P4230,700 5,609,588 The partners agreed that the property and equipment of Garnett is underdepreciated by P80,000 and that of Bryant is over-depreciated by P200,000. Accounts receivable of P108,000 in Garnett’s book and P140,000 in Bryant’s book are uncollectible. The partnership decided to assume the mortgage liability of Bryant. The partnership's agreement provides for a profit and lossratio and capital interest of 60% to Gamett and 40% to Bryant. Bryant is willing to invest or withdraw cash from the partnership to comply with the agreement. ‘What are the capital balances of Gamett and Bryant after the formation? 2,255,364 and P1,503,576, respectively. P2,255,364 and P3,157,528, respectively. P6,896,292 and P4,597,528, respectively. P6,896,292 and P3,157,528, respectively. ROSParinerships: Basic Considerations and Organizations 41 4-353 Using the data in No. 1-34, whats the total asset of the partnership after the formation: 1-36: g a. P8,058,336 b. P5,618,336 c P6,618,336 d P9,840,288 Gordon and Fernando sole proprietorships decided to forma partnership on June 1, 2013. The partnership will take over their assets and assume their liabilities. ‘As of June 1, 2013, the net assets of Gordon and Fernando are P220,000 and P309,375, respectively. The partners agreed ona 25:75 profit and loss ratio. Furthermore, the partners arrive on the following agreements to revalue their assets and liabilities: a.. Gordon’s inventory is undervalued by P11,000. b. Anallowance for doubtful account is to be set up in the books of Gordon and Fernando in the amount of P2,750 and P4, 125, respectively. ¢c. Accrued expenses of P20,250 was not recognized in Femando’s books. How much cash should Gordon invest (withdraw) so that their capital interest would be qual to their profit and loss ratio. P(133,250) ‘P( 95,000) P 133,250 P 95,000 RoR42 Chapter 1 PROBLEMS The statement of financial position of Pedro Castro on October 1, 2013 before accepting Pablo Bunag as his partner is shown below: Pedro Castro Statement of Financial Position October 1, 2013 Assets Cash P 6,000 Notes receivable 3,000 Accounts receivable P24,000 Less: Allowance for bad debts 1,000 23,000 Merchandise Inventory 8,000 Furniture and fixture 6,000 Less Accumulated depreciation 0 5,400 Total Assets 45,400 Liabilities and Equity Notes payable 4,000 Accounts payable 10,000 Pedro Castro, capital 31,400 Total Liabilities and Equity 45,400 Pablo Bunag offers to invest cash to give hima capital credit equal to one-half (1/2) of Pedro Castro’s capital after giving effect to the adjustment of the items below. Pedro Castro accepts the offer. 3 The merchandise is to be valued at P7,400. 2. The accounts receivable is estimated to be 95% realizable. 2 ae Interest accrued on the notes receivable enumerated below is to be reflected. P1,000, 6% dated July 1, 2010. P2,000, 6% dated August 1, 2010. . Interest accrued at 5% annually from April 1, 2010 on the notes payable is to be recorded. The furniture and fixtures is to be valued at P4,600. - Office supplies on hand which have been charged to expense in the past amounted to P400. These are still to be used by the partnership.Pabwerships: Basic Considerations and Organizations 43 Problem i-1: Continued Required: 1. Prepare the necessary journal entries in all the books to record the formation of the partnership if: a)’ The books of Pedro Castro will be retained by the partnership. b) Anew set of books will be used. 2. Prepare the statement of financial position of the partnership. On June 30, 2013 Jose, the sole proprietor of the Jose Company, expands the company and establish a partnership with Pedro and Pablo. The partners plan to share profits and losses as follows: Jose, 50 percent; Pedro, 25 percent; Pablo, 25 percent. They also agree that the beginning capital balances of the partnership will reflect this same Jationship. rel Jose asked Pedro to join the partnership because his many business contacts are expected to be valuable during the expansion. Pedro is also contributing P28,000 cash. Pablo is contributing P11,000 cash and marketable securities costing P42,000 to Pablo butare currently worth P57,500. Jose’s investment in the partnership is the Jose Company. He plans to pay off the notes with his personal assets. The other partners have agreed that partnership will assume the accounts payable. The statement of financial position for the Jose Company follows: Jose Company Statement of Financial Position Tune 30, 2013 Asseis Cash P 10,000 Accounts receivable (net) 48,000 Inventory 72,000 Equipment (Net of accumulated depreciation of P20,000) 70,000 Total Assets 200,000 Liabilities and Equity Accounts Payable P_ 53,000 Notes Payabl 62,000 Jose, Capital 85,000 Total liabilities and equity 200,000 ‘The partners agree that the inventory is worth P85,000, and the equipment is worth ha its original cost, and the allowance established for doubtful accounts is correct.44 Chapter 1 Problem 1-2: Continued Required: Prepare the statement of financial position of the partnership on June 30, 2013 under each of the following independent assumptions: 1. The partners agree to use the bonus method to record the formation. 2. The partners agree to use the goodwill approach to record the formation. On June 30, 2013, Carlo Torre and Pepe Basco, who has his own retail business, decided to form partnership wherein they will participate in the profits in the ratio of 60% and 40%, respectively. The statement of financial Position of Pepe Basco on this date is presented below, Pepe Basco Statement of Financial Position June 30, 2013 Assets Cash P 400 Accounts receivable P16,000 Less Estimated uncollectible accounts 1,600 14,400 Merchandise Inventory Lean 20,000 Furniture and fixtures P 5,000 Less Accumulated depreciation 1,000 4,000 Total assets 38,800 Liabilities and Equity Accounts payable - — P.3,600 Pepe Basco, capital 35,200 Total Liabilities and Equity P38,800 Conditions agreed upon before the formation of the partnership: a) The accounts receivable of Pepe Basco is estimated to be realizable at 70%. b) The furniture and fixtures of Pepe Basco is underdepreciated by P500. ¢) Allthe payables are to be assumed by the partnership, d) The capital of the partnership is based on the adjusted capital balance of Pepe Basco, and Carlo Torre is to‘contribute cash in order to make the partner’s capital balances proportionate to the profit 4nd loss ratio. €) Anew set of books will be used by the partnership.Partnerships: Basic Considerations and Organizations 45 Problem 1-3: Continued Required: 1. Prepare the necessary adjusting entries in the books of Pepe Basco. 2. Prepare the opening journal entries in the books of the partnership. Roces and Sales, who are engaged in the same type of business, agree to combine their resources and form a partnership on January 1, 2013. Their post-closing trial balances as of January 1, 2013 areas follows: Roces . Sales__ DR CR DR CR Cash’ P 14,400 P 4,800 Accounts receivable 57,600 72,000 Merchandise inventory 124,800 192,000 Delivery equipment ~ 19,200 48,000 Fixtures 144,000 96,000. Prepaid insurance 4,800 3,200 Accounts payable 104,000 64,000 Notes payable 40,000 Accrued taxes 6,400 8,000 Allowances for bad debts 12,800 ‘Accumulated depreciation Delivery equipment 12,800 8,000 Accumulated depreciation- Fixtures 80,000 88,000 Capital 161,600 195,200 "P364,800 _-P364800 416,000 _P416,000 It is agreed that the partnership shall acquire the assets and assume the liabilities of the businesses at the following values: Roces Sales Accounts receivable (net) 56,000 Fixtures (net) 80,000 P4,800 Merchandise inventory 132,800 Goodwill 49,000 32,000 Required. Prepare the necessary journal entries in the books of Roces, Sales, and the partnership assuming that: g a. Rocés” books will be used by the partnership. b. Sales’ books will be used by the partnership. i ¢. “Anew set of books will be opened by the partnership.46 Uae ‘The firm of J. Lagman has been operating for three years, during which time profits have been satisfactory but an additional investment is still needed both to strengthen its position in the market and to increase its profits. Chapter 1 In December 2013, Lagman agrees to admit Magno asan equal partner in the firm. The statement of financial position of the respective firms are as follows: Lagman Magno Assets Cash ; 8,000 5,000 Accounts receivable 21,000 13,000 Merchandise inventory 9,000 15,000 Equipment 5,000 3,000 Other assets 37,000 9,000 Total 80,000 Liabilities and Equity Accounts payable P12,000 6,000 Notes payable 5,000 10,000 J. Lagman, capital 63,000 R. Magno, capital 29,000 Total P80,000 45,000 Additional data: (a) Goodwill of P8,000 is to be allowed to Lagman. (b) Magno’s merchandise is to be valued at P12,000. (c) Magno’s notes payable have unrecorded P300 accrued interest. (d) Lagman is to set up an allowance for bad debts equal to one percent of his accounts receivable, and Magno’s accounts receivable is to be valued.at P12,000 though transferred gross to the new firm. (e) After giving effect to the above provisions, cach partner is to-withdraw or contribute sufficient capital to give him an investment of P35,000, Required: 1. Journal entries to close Magno’s books. 2. Journal entries to adjust the books of Lagman. 3. Journal entries to take up Magno’s investment on the books of Lagman, the books to be retrained by the new firm. 4. Statement of financial position of the new firm.Purinerships: Basic Considerations and Organizations 47 ROS tLe ed Toledo and Ureta each operating a separate business agreed to join in partnership as of July 1, 2013. The account balances presented by each partner as of this date were as follows: Toledo Cash P 3,200 Accounts Payable Accounts Receivable 3,200 Notes Payable Merchandise 40,000 Capital Office Equipment Ureta Cash P12,000 Accounts Payable P16,000 Accounts Receivable Capital 68,000 Merchandise Office Equipment The assets of the two partners were carefully examined and it was agreed that certain adjustments be made and the above balance sheets as adjusted be the basis on which the partnership begins operations. The adjustments agreed upon are as follows: Toledo’s accounts receivables are to be taken over at a book value less 15% and Ureta’s accounts receivable at book value less 10%. Toledo’s office equipment is new and is considered adequate for the new business; therefore, it isdecided that Ureta dispose of his equipment at the highest: cash price possible and that Toledo bear one- fourth of the loss resulting from the sale. Ureta’s office euipment is disposed of at book value less 10%. It is further agreed that Ureta pay sufficient cash to give him a one-half (1/2) interest in the business after charging to Toledo’s capital account his share of the Joss on the sale by Ureta of office equipment. Required: 1. Prepare the journal entries on the books of Toledo and on the books of Ureta to give effect to the agreement. 2. Openthebooks of the new partnership, making separate entries for the contributions of Toledo and Ureta. 3. Record Ureta’s cash contribution, which gives him half interest inthe newpartnership. 4. Prepare a statement of financial position for the new partnership after the consummation of the entire agreement. 6