1

PARTNERSHIP FORMATION
PROBLEM 1
On June 30, 20x8 PAANO, the sole proprietor of PAANO Inc,
expands the company and establishes a partnership with NGA and
BA. The partners plan to share profits and losses as follows:
PAANO, 50%; NGA, 25% and BA 25%. They also agree that the
beginning capital balances of partnership will reflect this same
relationship.

PAANO asked NGA to join the partnership because his many

business contacts are expected to be valuable during the
expansion. NGA is contributing P40,000 and a building that has
an original cost of P520,000, book value of P420,000, tax
assessment of P310,000 and fair value of P370,000. The building
is subject to a P242,000 mortgage that the partnership will
assume. BA is contributing P66,000 and marketable securities
costing P252,000 but are currently worth P345,000.

PAANO’s investment in the partnership is his business. He plans

to pay off the notes with his personal assets. The other
partners have agreed that the partnership will assume the
accounts payable. The balance sheet for the PAANO Inc follows:

Balance Sheet
June 30, 20x8
Assets Liabilities and Capital
Cash P60,000 Accounts payable P318,000
Accounts receivable (net) 288,000 Notes payable 372,000
Inventory 432,000 PAANO, Capital 510,000
Equipment-net (dept’n, 420,000
P120k)

The partners agree that the inventory is worth P510,000, and the
equipment is worth half its original cost, and the allowance
established for doubtful accounts is correct.

How much is the agreed capital of PAANO if the partners agree to

use the bonus method to record the formation and if the partners
agree to use the goodwill approach to record the formation?

PROBLEM 2
As of July 1, 20x8, UNA and HIRIT decided to form a partnership.
Their balance sheets on this date are:
UNA HIRIT
Cash P P 60,000
24,000
Accounts Receivable 864,000 360,000
Merchandise Inventory - 324,000
 2
PARTNERSHIP FORMATION
Machinery and Equipment 240,000 432,000
Total P1,128,00 P1,176,000
0

Accounts Payable P P 384,000

216,000
UNA, capital 912,000 -
HIRIT, capital - 792,000
Total P1,128,00 P1,176,000
0

The partners agreed that the machinery and equipment of UNA is

under depreciated by P24,000 and that of HIRIT, P72,000.
Allowance for doubtful accounts is to be set up amounting to
P192,000 for UNA and P72,000 for HIRIT. The partnership
agreement provides for a profit and loss ratio and capital
interest of 60% to UNA and 40% to HIRIT.

How much cash must UNA invest to bring the partners’ capital
balances proportionate to their profit and loss ratio?

PROBLEM 3
On August 1, JANE and JULIA pooled their assets to form a
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.
(Profit and loss are allocated equally.)

JULIA’s inventory is to be increased by P8,000; an allowance for

doubtful accounts of P2,000 and P3,000 are to be set up in the
books of JANE and JULIA, respectively; and accounts payable of
P8,000 is to be recognized in JANE’s books. The individual trial
balances on August 1, before adjustments, follow:

JANE JULIA
Assets P150,00 P226,00
0 0
Liabilities 10,000 39,000

What is the capital of JANE and JULIA after the above

adjustments?

PROBLEM 4
AM and CONFUSED formed a partnership with each partner
contributing the following items:
 3
PARTNERSHIP FORMATION

AM CONFUSED
Cash P120,00 P 60,000
0
Building – cost to AM 450,000
- fair value 600,000
Inventory – cost to CONFUSED 300,000
-fair value 420,000
Mortgage Payable 180,000
Accounts Payable 90,000

Assume that for tax purposes, AM and CONFUSED agree to share

equally in the liabilities assumed by the AM and CINFUSED
partnership. What is the balance in each partner’s capital
account for financial accounting purposes?

PROBLEM 5
On April 30, 20x8, WE, ARE, and BORED formed a partnership by
combining their separate business proprietorships. WE
contributed cash of P112,500. ARE contributed property with a
P81,000 carrying amount, a P90,000 original cost, and P180,000
fair value. The partnership accepted responsibility for the
P78,750 mortgage attached to the property. BORED contributed
equipment with a P67,500 carrying amount, a P168,750 original
cost, and P123,750 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 1, 20x8, capital balance?

PROBLEM 6
On January 1, 20x8, Al and Bert both sole proprietors decided to
form a partnership to expand both of their businesses.
According to their agreement they will split profits and losses
75:25 and their initial capital will also reflect that ratio.

The following are Al and Bert’s Statement of financial Position:

Al Proprietor
Statement of Financial Position
December 31, 20x7
ASSETS LIABILITIES & EQUITY
Cash 50,000 Accounts Payable 65,000
Accounts Receivables 100,000 Accrued Expenses 55,000
Inventories 75,000 Notes Payable 80,000
Equipment 250,000 Al, Capital 90,000
Acc Dept’n-Equipment (185,000
 4
PARTNERSHIP FORMATION
)
TOTAL 290,000 TOTAL 290,000

Bert Proprietor
Statement of Financial Position
December 31, 20x7
ASSETS LIABILITIES & EQUITY
Cash 30,000 Accounts Payable 75,000
Accounts Receivables 110,000 Accrued Expenses 90,00
Inventories 85,000 Notes Payable 100,000
Equipment 300,000 Bert, Capital 160,000
Acc Dept’n-Equipment (100,000
)
TOTAL 425,000 TOTAL 425,000

The values reflected in the Statement of Financial Position are

already at Fair Values except for the following accounts:

Al’s Accounts Receivable is now 20,000 less than what is stated

in his Statement of Financial Position. Both inventories of Al
and Bert are now 90,000 and 70,000 respectively. Equipment for
Bert has an assessed value of 275,000, appraised value of
250,000 and book value of 200,000. Additional accrued expenses
are to be established in the amount of 10,000 for Bert only
while additional accounts payable in the amount of P5,000 for
Al. It is also agreed that all liabilities will be assumed by
the partnership, except for the notes payable to Bert, which
will be personally paid by him.

1. How much is the adjusted capital balance of Bert upon

formation?
2. How much is the capital credit to Al upon formation?
3. How much should Al invest as additional cash to be in
conformity with their capital agreement?
4. How much is the total liabilities of the partnership
immediately after formation?

PROBLEM 7
On March 1, 20x8, X and Y formed a partnership. The partners
contributed the following:
X Y
Cash P500,000 P400,00
0
Accounts Receivable 300,000 200,000
Allowance for doubtful accounts 50,000 20,000
Inventory 150,000 100,000
Equipment 500,000 200,000
 5
PARTNERSHIP FORMATION
Accumulated depreciation 100,000 25,000
Accounts Payable 50,000 400,000
Note Payable 200,000

The partners agree on the following:

a. P10,000 of the accounts receivable of X is to be written-
off.
b. An allowance for doubtful accounts of 15% is to be
established on the remaining receivables of X and Y.
c. The inventory of Y is to be valued at P140,000.
d. The equipment of X is under depreciated by P20,000 and the
equipment of Y has a fair value of P190,000.
e. The note of X is dated December 1, 2017 and is subject to a
12% interest . Interest for the year had not yet been
accrued.
f. The partners agree on a 2:1 profit and loss ratio.
g. The partners agree to bring their capital balance
proportionate to their profit and loss ratio.

If Y's Capital is to be used as basis, how much is the

adjusted capital of X after the formation?

What is the total assets of the partnership immediately after

the formation?

If the goodwill method is to be used in determining the

capital of each partner, how much is the adjusted capital of Y
after the formation?

PROBLEM 8
On December 31, 20x7, Coke and Pepsi are combining their
separate businesses to form a partnership. Cash and noncash
assets are to be contributed. The noncash assets to be
contributed and the liabilities to be assumed are as follows:

Coke Pepsi
Book value Fair Value Book value Fair Value
Receivables P 500,000 P 525,000 P 400,000 P 390,000
Inventory 800,000 900,000 400,000 415,000
PPE 2,000000 1,825,000 1,725,000 1,660,000
Payables 300,000 300,000 225,000 225,000

Coke and Pepsi are to invest equal amounts of cash such that the
contribution of Coke would be 25% more than the investment of
Pepsi.
 6
PARTNERSHIP FORMATION
What is the amount of cash to be presented in the partnership’s
Statement of Financial Position on December 31, 20x7?