No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

PARTNERSHIP FORMATION AND OPERATION

FORMATION
Problem 1: Marie, Paz and DJ formed a partnership. Marie contributed cash of P450,000; Paz
contributed an equipment with carrying amount of P250,000, fair value of P240,000 and agreed
value of P280,000; and DJ contributed inventories with cost of P100,000 and agreed value of
120,000. Partners also agreed for a profit and loss ratio of 40:35:25 ratio, respectively.

What is the capital interest of DJ after formation of the partnership?

Problem 2: Paul, Alger and Rod decided to form partnership. It was agreed that Paul will
contribute a merchandise inventory with cost of P420,000 and fair value of P400,000 and an
equipment with cost of P500,000 and accumulated depreciation of P100,000, the equipment has
an assessed value of P420,000. A day after the partnership formation, the equipment was sold
for P450,000. The partners agreed that Paul will have 10% capital interest in the partnership

Alger will contribute a land and building with book value of P1,200,000 and 1,500,000,
respectively with agreed value of P1,250,000 and P1,300,000, respectively. The land and building
is subject to a mortgage of 250,000 which is assumed by the partnership. Rod will contribute cash
and equipment with book value of P300,000 and fair value of 200,000.

What is the total cash contribution of Rod?

What is the total asset after the formation of partnership?

Problem 3: On June 1, 2022, Paul, the sole proprietor of ABC Co., expands the company and
establish a partnership with Anton and DJ. The partners plan to share profits and losses as
follows: Paul 40%; Anton 35% and DJ 25%. Paul asked Anton to join the partnership because his
image and reputation are expected to be valuable during the formation. Anton is also contributing
P420,000 cash and a building that was acquired for P4,040,000 with carrying amount of
P3,480,000 and a fair market value of P1,960,000. The building is subject to a mortgage that the
partnership did not assume. DJ is contributing P848,000 cash and marketable securities costing
P1,344,000 but are currently worth P1,900,000. Paul’s investment in the partnership is the ABC
Company. The statement of Financial Position for the ABC Company follows:

Cash 1,560,000 Accounts Payable 1,748,000

Accounts receivable 1,824,000 Notes Payable 2,368,000
Inventory 1,576,000 Paul, capital 3,316,000
Equipment, net 2,472,000
Total 7,432,000 Total 7,432,000

The partners agree that 35% of the inventory is considered worthless, the equipment is worth ¾
of its carrying amount, and 85% of the accounts receivable is collectible. Paul plans to pay off the
accounts payable with his personal assets. The other partners have agreed that the partnership
will assume the notes payable. The partners agreed that their capital balances upon formation
will be inconformity with their profit and loss ratio.

Which of the following statements is incorrect?

a. Assuming the partners will either invest or withdraw cash, using Anton capital as the base,
Paul and DJ will both withdraw cash with total amount of P1,948,800
b. Assuming the partners will either invest or withdraw cash, using DJ capital as the base, Paul
and Anton will both invest cash with total amount of P2,243,200
c. If the transfer of capital method is used the capital accounts of Paul and DJ will be debited in
the amount of P121,280 and P560,800, respectively.
d. Assuming the partners will either invest or withdraw cash, using Paul capital as the base,
Anton and DJ will both invest cash with a total amount of P303,200.

Problem 4: Which of the following is incorrect? The capital account is:

a. Credited for additional investments
b. Debited for permanent drawings
c. Credited for debit balance of the drawing account at the end of the period
d. Credited for credit balance of the drawing account at the end of the period

1|Pa g e RFERRER/ RL A C O/ A T A NG/ P DEJ ES US

 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Problem 5: The non-cash assets of the contributed by the partners are valued at:
a. Fair Value c. Book Value
b. Cost d. In the manner prescribed in the contract

Problem 6: Which of the following statement is correct?

Statement 1: The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s capital
account.

Statement 2: All partnerships should have at least one general partner.

Statement 3: Partner’s capital account is debited whenever the partner loan substantial amount
in the partnership.

Statement 4: A partnership is created by operation of the law.

a. I and III c. II and III e. II and IV

b. I and II d. III and IV f. All of the above

OPERATION
Problem 1: On March 1, 20x1, Jazh and Irish formed a partnership. The initial investments were
as follows: Jazh P800,000 and Irish P650,000. The profit ratio was 50:50 while the loss ratio was
60:40. The following are the agreements of the partners:

• Annual salary allowance of P90,000 and P120,000.

• Interest of 12% on average annual capital
• Bonus to Jazh of 20% of net income after her interest and bonus
• The remainder will be divided based on the profit or loss ratio.
• Withdrawals in excess of P20,000 is considered to be a direct reduction of capital.

The capital accounts of the partners shows the following information for 20x1:

Jazh Irish
Mar. 1 250,000 140,000
May 17 57,000
June 3 (10,000)
Aug. 14 (15,000)
Oct. 10 20,000 40,000
Nov. 1 (10,000) (20,000)
Dec. 1 6,000

The income summary has a credit balance of P195,000 for the year ended December 31, 20x1.

What is the capital balance of Irish on December 31, 20x1?

Assuming the income will be distributed to the extent of earnings only and the order of priority will
be (1) salary; (2) interest (3) bonus, how much is the share of Jazh in the net income of the
partnership?

Problem 2: ABC Company was organized and began operations on May 1, 2030. On that date,
John invested P1,000,000 cash and Ivan invested land and building with current fair values of
1,750,000 and 850,000, respectively. The average capital balances of John and Ivan were
determined to be 1,223,890 and 1,222,090, respectively. The partnership contract includes the ff.

Remuneration plan:
John Ivan
Annual salaries 152,200 151,800
Annual interest on Ave. balance 20% 30%
Remainder 60% 40%

2|Pa g e RFERRER/ RL A C O/ A T A NG/ P DEJ ES US

 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

During the year ended April 30, 2031, the partnership had net sales of P3,000,000, cost of goods
sold amounting to 1,000,000 and operating expenses of 391,090. The partner’s salaries had been
recorded as part of the operating expenses.

How much is the total share of John in the net income for the period?

Problem 3: Simon and Peter ae partners of ABC Company started its first year of operation on
June 1, 2021 with the following capital balances:

Simon, capital P360,000

Peter, capital P180,000

According to the partnership agreement, all profits and losses will be distributed as follows:
• Simon will be allowed an annual salary of P240,000 while Peter will be allowed a monthly
salary of P28,000.
• The partners will be allowed with interest equal to 15% of the capital balance as of the first
day of the year
• Peter will be allowed a bonus of 12% of the net income after bonus.
• The reminder will be divided equally.
• Each partner is allowed to withdraw up to P18,000 on the first year and up to P24,000 the
following year and for the next three years.
• The company uses calendar method.

Assume that the result of operations in 2021 from the date of formation is P140,000 net income
and P70,000 net loss the following year. Assume further that each partner withdraws the
maximum amount from the business each period. Which of the following statements is wrong?
a. There is a net increase of P24,375 in the capital account of Simon from the beginning to end
of 2021.
b. The capital balance of Peter at the end of the first year 2021 is P259,625.
c. The capital balance of Simon at the end of 2022 is P310,731.25
d. The share of Peter in the net loss in 2022 is a credit to capital of P3,643.75

Problem 4: In the absence of agreement as to distribution of loss, how shall the partnership net
loss be distributed to the partners?
a. The loss shall be distributed equally to all partners including the industrial partner.
b. The industrial partners shall be exempted from the partnership loss while the capitalists
partners shall share in accordance with their capital contributions.
c. The industrial partner shall be exempted from the partnership loss while the capitalists
partners shall share in accordance with profit agreement ratio
d. The industrial partner shall be exempted from the partnership loss while the capitalists
partners shall share equally.

Problem 5: Which of the following is not an expense of a partnership?

I. Salary of employees of the partnership
II. Salaries to partners of a partnership
III Interest on loan from partners to the partnership
IV Interest on partners’ capital account balances
a. I and III c. II and III
b. II and IV d. I and II

Problem 6: A and B form a partnership and agree to share profits in a 2:3 ratio. The partnership
net loss for the year is P100,000. The partners should share the losses:
a. Based on the ending capital balances
b. Based on the average capital balances
c. Based on 2:3 ratio
d. Based on original capital contribution

3|Pa g e RFERRER/ RL A C O/ A T A NG/ P DEJ ES US