DEPARTMENT OF ACCOUNTANCY 1st Semester A.Y.

2020-2021
Accounting for Special Transactions – Partnership Formation

Situation 1: Justine and Michelle, who are engaged in the same type of business, agree to combine
their businesses and form a partnership. On January 1, 2019, the following were taken from their
respective books:

Justine Michelle
Debit Credit Debit Credit
Cash 24,400 25,800
Accounts Receivable 62,600 75,000
Merchandise Inventory 128,000 192,000
Delivery Equipment 190,000 150,000
Furniture & Fixtures 175,000 100,000
Prepaid Insurance 4,800 5,000
Accounts Payable 83,000 64,000
Notes Payable 126,400 148,000
Allowance for DA 12,000 12,800
Accum. Depreciation – Delivery Equipment 38,000 45,000
Accum. Depreciation – Furniture & Fixtures 70,000 40,000
Capital 255,400 238,000
Total 584,800 584,800 547,800 547,800

It is agreed that the partnership shall acquire the assets and assume the liabilities of the businesses
at the following values:

Justine Michelle
Accounts receivable (net) 55,000 65,000
Furniture and Fixtures (FMV) 90,000 70,000
Merchandise Inventory 132,000 200,000

Required:

1. Amounted credited to Justine, Capital and Michelle, Capital if the partners are to be credited
for net assets invested?

Justine Michelle
Unadjusted capital balance 255,400 238,000
Adjustments on the specified assets:
Accounts receivable (net) 4,400 2,800
Furniture and Fixtures (FMV) (15,000) 10,000
Merchandise Inventory 4,000 8,000
Adjusted capital balance 248,800 258,800

Justine Michelle
CA FV ADJ CA FV ADJ
Accounts receivable (net) 50,600 55,000 4,400 62,200 65,000 2,800
Furniture and Fixtures (FMV) 105,000 90,000 (15,000) 60,000 70,000 10,000
Merchandise Inventory 128,000 132,000 4,000 192,000 200,000 8,000

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 2. How much additional cash should be invested by Justine and Michelle if they agree to have
starting capital of P800,000 each.
Justine Michelle
Adjusted capital balance 248,800 258,800
Cash Investment (Squeezed): 551,200 541,200
Adjusted capital balance 800,000 800,000

3. If the partners agreed to have in the total capital equally, how much is the bonus and to whom
is the bonus?

Total Actual Adjustment Total Agreed

Capital Capital
Justine 248,800 5,000 253,800
Michelle 258,800 (5,000) 253,800
507,600 - 507,600

The bonus is P5,000 and will be adjusted in favor of Justine.

4. Entries on the books of the partnership.

Cash 50,200
Accounts Receivable 120,000
Merchandise Inventory 332,000
Delivery Equipment 257,000
Furniture & Fixture 160,000
Prepaid Insurance 9,800
Accounts Payable 147,000
Notes Payable 274,400
Justine, Capital 248,800
Michelle, Capital 258,800

Take note that assets with contra asset accounts are presented at net value, because fair
value of these assets are presumed to also consider the impact of contra accounts on its
valuation.

5. Statement of Financial Position for the partnership.

Justine and Michelle Partnership

Statement of Financial Position
As of January 1, 2019

Cash 50,200
Accounts Receivable 120,000
Merchandise Inventory 332,000
Prepaid Insurance 9,800
Delivery Equipment 257,000
Furniture and Fixture 160,000
Total Assets 929,000

Accounts Payable 147,000

Notes Payable 274,400
Total Liabilities 421,400
Justine, Capital 248,800
Michelle, Capital 258,800
Total Liabilities and Capital 929,000

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 Situation 2: On July 1, 2019, Candy and Nikki decided to pool their assets and form a partnership.
After the formation, the partners will participate in the profits and loss ratio of 55% and 45% for Candy
and Nikki, respectively. The balance sheets on June 30 before adjustments were as follows:

Candy Nikki
Cash 16,500 26,400
Accounts Receivable 108,000 120,000
Allowance for Doubtful Accounts (2,700) (3,000)
Notes Receivable 30,000 -
Inventories 9,600 9,000
Prepaid Insurance - 3,000
Machinery 60,000
Accumulated Depreciation (6,000)
Furniture and Fixtures 48,000
Accumulated Depreciation (3,600)
Total Assets 215,400 199,800

Accounts Payable 3,000 3,600

Notes Payable 30,000
Capital 212,400 166,200
Total Liabilities and Capital 215,400 199,800

The firm is to take over business assets and assume business liabilities. Capitals are to be used on
net assets transferred after the following adjustments:

 The accounts receivable of Candy and Nikki are fairly valued.

 Interest at 12% on notes receivable dated May 12, 2019 should be accrued. (Use 360 days)
 The inventory of Candy should be valued at P9,000, while P1,000 of the inventory of Nikki is
considered worthless.
 The prepaid insurance of Nikki still amounted to P800.
 The machinery should be depreciated by P1,200 more.
 The furniture and fixtures is under depreciated by P1,200.
 Interest at 12% on notes payable dated April 17, 2019 should be accrued. (Use 360 days)
 Accrued rent receivable of P1,800 is to be recognized in Nikki’s books.

Required:

1. At how much should the machinery be recorded on the books of the partnership?

The machinery should recorded at its book value adjusted for additional depreciation. (P60,000
– P6,000 – P1,200 = P52,800)

2. At how much should the furniture be recorded on the books of the partnership?

The furniture should recorded at its book value adjusted for additional depreciation. (P48,000 –
P3,600 – P1,200 = P43,200)

3. Why should we accrued interest?

Interest is accrued whenever the collection or payment of principal and interest happens in the
succeeding accounting period. Accrual is done to account for the anticipated income or
expense in relation to the interest, which will be settled in succeeding accounting period. The
use of money and passage of time also allow the justification of the need to recognize accrued
interest.

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 4. Journal entries to record the investment of Candy and Nikki.

Candy’s investment:

Cash 16,500
Accounts Receivable 105,300
Notes Receivable 30,000
Interest Receivable 490
Inventories 9,000
Machinery 52,800
Accounts Payable 3,000
Candy, Capital 211,090

For interest computation: 49 days will be considered – 19 days in May and 30 days in June.
Remember that the balance sheet date is as of June 30.

Nikki’s investment:

Cash 26,400
Accounts Receivable 117,000
Rent Receivable 1,800
Inventories 8,000
Prepaid Insurance 800
Furniture and Fixtures 43,200
Accounts Payable 3,600
Notes Payable 30,000
Interest Payable 740
Nikki, Capital 162,860

For interest computation: 74 days will be considered – 13 days in April, 31 days in May and 30
days in June. Remember that the balance sheet date is as of June 30.

5. Journal entries to record the investment of Candy and Nikki using the bonus method. (Assume
interest ratio of 60% for Candy and 40% for Nikki)

Total Actual Adjustment Total Agreed

Capital Capital
Nikki 162,860 (13,280) 224,370 40%
Candy 211,090 13,280 149,580 60%
373,950 - 373,950

Nikki, Capital 13,280

Candy, Capital 13,280

Same as number 4, except that additional entry to record the adjustment on the capital
balance of the partners will take place.

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