Partnership Formation

Problem 1

On July 1, 2019, XX and YY decided to form a partnership. The firm is to take over
business assets and assume liabilities, and capitals are to be based on net assets
transferred after the following adjustments:

a) XX and YY’s inventory is to be valid at P31,000 and P22,000, respectively.

b) Accounts receivable of P2,000 in XX’s book and P1,000 in YY’s books are
uncollectible.
c) Accrued salaries of P4,000 for XX and P5,000 for YY are still to be recognized in
the books.
d) Unused office supplies of XX amounted to P5,000, while that of YY amounted to
P1,500.
e) Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in
the books of XX and YY, respectively.
f) XX is to invest or withdrew cash necessary to have a 40% interest in the firm.

Balance sheets for XX and YY on July 1 before adjustments are given below:
XX YY
Cash Php 31,000 Php 50,000
Accounts Receivable 26,000 20,000
Inventory 32,000 24,000
Office Supplies 5,000
Equipment 20,000 24,000
Accumulated Depreciation - Equipment (9,000) (3,000)
Total Assets Php 100,000 Php 120,000

Accounts Payable Php 28,000.00 Php 20,000.00

Capitals 72,000 100,000
Total Liabilities and Capital Php 100,000 Php 120,000

Determine:
1. The net adjustments – capital in the books of XX and YY:
a. XX, P7,000 net debit; YY, P2,000 net credit
b. XX, P5,000 net debit; YY, P7,000 net credit
c. XX, P7,000 net credit; YY, P2,000 net debit
d. XX, P5,000 net credit; YY, P7,000 net debit

2. The adjusted capital of XX and YY in their respective books.

a. XX – P65,000; YY – P102,000 c. XX – P77,000; YY – P98,000
b. XX – P63,000; YY – P107,000 d. XX – P77,000; YY – P93,000

3. The additional investment (withdrawal) made by XX:

a. P(15,000.00) c. P3,000.00
b. P( 6,666.50) d. P8,377.50
4. The total assets of the partnership after formation:
a. P235,333.50 c. P220,333.50
b. P230,000.00 d. P212,000.00

5. The total liabilities of the partnership after formation:

a. P57,000.00 c. P54,000.00
b. P48,000.00 d. P51,000.00
6. The total capital of the partnership after formation:
a. P180,000.00 c. P163,333.50
b. P178,333.50 d. P155,000.00

7. The capital balances of XX and YY in the combined balance sheet:

a. XX, P81,250; YY, P72,000 c. XX, P100,000; YY, P75,000
b. XX, P81,250; YY, P75,000 d. XX, P 62,000; YY, P93,000

Problem 2
On December 1, 2019, AA and BB formed a partnership with contributing the following
assets at fair market values:

AA BB

Cash ……………………………………… P 9,000 P 18,000

Machinery and equipment ….. 13,500 -
Land ……………………………………… - 90,000
Building ………………………………… - 27,000
Office Furniture ……………………. 13,500 -

The land and building are subject to a mortgage loan of P54,000 that the partnership
will assume. The partnership agreement provides that AA and BB share profits and
losses, 40% and 60%, respectively and partners agreed to bring their capital balances in
proportion to the profit and loss ratio and using the capital balance of BB as the basis.
The additional cash investment made by AA should be:

a. P18,000.00 c. P134,000.00
b. P85,500.00 d. P166,250.00
Problem 3

Baser and Michelle have just formed a partnership. Baser contributed cash of P920,000
and office equipment that costs P422,000. The equipment had been used in his sole
proprietorship and had been 70% depreciated. The current value of the equipment is
P295,000. Baser also contributed a note payable of P87,000 to be assumed by the
partnership. The partners agreed on a profit and loss ratio of 50% each. Baser is to have
a 70% interest in the partnership. Michelle contributed only a merchandise inventory
from her sole proprietorship carried at P550,000 on a first-in- first-out basis. The current
fair value of the merchandise is P525,000.

To consummate the formation of the partnership Baser should make additional

investment or (withdrawal) of:

A. P224,000 C. P97,000
B. P(30,000) D. P(80,000)

Problem 4

In 2018, Norma and Celso agreed to form a new partnership under the following general
agreements:

Partners’ contributions will be on a 5:4 ratio; (2) Profit and loss, 5:5, and (3) Capital
credits 57:43 ratio, respectively to Norma and Celso. Their respective contributions will
come from old proprietorships they owned.

Norma contributed the following items and amounts:

Cash P 748,800
512,000
Equipment (at book value per her proprietorship records)

Celso contributed the following items at their carrying amounts in the proprietorship
records:

Accounts receivable 96,000

Inventory 268,800
Furniture and fixtures 514,560
220,800
Intangibles

All the non-cash contributions are not properly valued. The two partners have agreed
that (a) P7,680 of the accounts receivable are uncollectible; (b) the inventories are
overstated by P19,200; (c) the furniture and fixtures are understated by P11,520; and
the intangibles include a patent with a carrying value of P13,440, which must now be
derecognized upon a court order. The rest of the intangible items are fairly valued.

1. How much is the total depreciable fixed asset recorded by the partnership?
a. P1,060,080 c. P1,116,480
b. P403,200 d. P1,041,480
 2. What is the capital balance of Celso after the formation of the partnership?

a. 1,036,541 c. 1,325,808
b. 1,339, 225 d. 1,071,360

Problem 5

A, B and C formed the ABC Partnership on July 1, 2018, with the following assets,
measured at book values in their respective records, contributed by each partner:

A B C

Cash P 200,000 P 150,000 P 150,000

Accounts receivable 38,500 68,900

Inventory 135,000 118,000 67,000

Plant, Property and Equipment (PPE) 950,000 460,000 380,000

A part of A’s contribution, P25,000, comes from his personal borrowings. Also, the PPE
of A and B are mortgaged with the bank for P160,000 and P16,500, respectively. The
partnership is to assume responsibility for these PPE mortgages. The fair value of the
accounts receivable contributed by C is P43,000 and her PPE at this date has a fair value
P365,000. All the other assets contributed are fairly valued. The partners have agreed to
share profits and losses on a 5:3:2 ratio, to A, B and C, respectively.

How much is the contribution of each partner? Calculate their contribution ratio.
Problem 6

On May 1, 2018, the business assets and liabilities of Nathan and Janice were as follows:
Nathan Janice
Cash 8,000.00 62,000.00
Receivables 200,000.00 600,000.00
Inventories 120,000.00 200,000.00
Land, Building and Equipment 650,000.00 535,000.00
Other Assets 2,000.00 3,000.00
Accounts Payable (180,000.00) (250,000.00)

Nathan and Janice agreed to from a partnership by contributing their net assets, subject
to the following adjustments:

• Receivables of P20,000 in Nathan’s books and P40,000 in Janice’s books are

uncollectible.
• Inventories of P6,000 and P7,000 in the respective books of Nathan and Janice
are worthless
• Other assets in both books are written off

Upon the partnerships formation:

1. The respective capital of partners Nathan and Janice would be ;

2. The total assets of the partnership would be .
 Problem 7

James admits Dani as a partner in business. Accounts in the ledger of James on June 1,
2018, just before the admission of Dani, show the following balances:

Cash P26,000 Accounts Payable P264,000

Accounts Receivable 120,000 James, Capital 62,000
Merchandise Inventory 180,000

It is agreed that for purposes of establishing James’s interest, the following adjustments
should be made:

• An allowance for doubtful accounts of 2% of accounts receivable is to be

established
• The merchandise inventory is to be valued at P202,000.
• Prepaid expenses of P6,500 and accrued expenses of P4,000 are to be
established

Dani is to invest sufficient funds in order to receive a 1/3 interest in the partnership.

1. How much is the adjusted capital of James?

2. How much cash should Dani invest?
3. How much is the total assets of the partnership.

Problem 8

Harold and Cherry are partners sharing profits 60:40. A balance sheet prepared for the
partnership on April 1, 2018 shows the following:

Cash 48,000.00 Accounts Payable 89,000

Accounts Receivable 92,000.00 Harold, capital 133,000
Inventory 165,000.00 Cherry, capital 108,000
Equipment 70,000.00
Accumulated Depreciation (45,000.00)
Total Assets 330,000.00 330,000.00

On this date, the partners agree to admit Lucas as a partner. The terms of the
agreement is that assets and liabilities are to be restated as follows:

• An allowance for possible uncollectible of P4,500 is to be established.

• Inventories are to be restated at their present replacement values of P170,000
• Equipment are to be restated at a value of P35,000
• Accrued expenses of P4,000 are to be recognized.

Harold, Cherry, and Lucas will divide profits in the ratio of 5:3:2. Capital balances for the
new partners are to be in this ratio with Harold and Cherry making cash settlement
outside of the partnership for the required capital adjustment between themselves and
Lucas investing cash in the partnership for his interest.
Questions:

1. How much cash Lucas should contribute?

Problem 9

Ferdinand and Daniel establish a partnership to operate a used-furniture business under

the name of F and D Furniture. Ferdinand contributes furniture that cost P60,000 and
has a fair value of P90,000. Daniel contributes P30,000 cash and delivery equipment
that cost P40,000 and has a fair value of P30,000. the partners agree to share profits
and losses 60% to Ferdinand and 40% to Daniel.

1. Calculate the peso amount of inequity that will result if the initial noncash
contributions of the partners are recorded at cost rather than fair market value.