ABM 12 – Partnership Formation

Problems.
1. EE and PP form a new partnership. EE invests 300,000 in cash for her 60% interest in the capital and profits of the
business. PP contributes land that has an original cost of 40,000 and FMV of 70,000, and a building that has a tax basis of
50,000 and FMV of 90,000. The building is subject to 40,000 mortgage that the partnership will assume. What amount of
cash should PP contribute?
a. 40,000 b. 80,000 c. 110,000 d. 150,000

2. AA and BB formed partnership and agreed to divide initial capital equally, even though AA contributed 100,000 and
BB 84,000 in identifiable assets. Under bonus method, to adjust the capital accounts, BB intangible assets should be
debited for
a. 46,000 b. 16,000 c. 8,000 d. zero

3. PP, RR, and SS are new CPAs and are to form a partnership. PP is to contribute cash of 50,000 and his computer
originally costing 60,000 but has a second hand value of 25,000. RR is to contribute cash of 80,000. SS, whose family is
selling computers, is to contribute cash of 25,000 and band new computer with a regular selling price of 60,000 but
which cost is 50,000. Partners agree to share profits equally. Their capital balances upon formation are:
PP ______________________ RR _________________________ SS ______________________

4. RR, SS, and TT decided to engage in a real estate venture as a partnership. RR invested 140,000 cash and SS provided
and office and furnishings valued at 220,000. There is a 60,000 note payable remaining on the furnishings to be assumed
by the partnership. Although TT has no intangible assets to invest, both RR and SS believe that TT’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 TT?
a. 50,000 b. zero c. 140,000 d. 100,000

5. LL and MM formed partnership on July 1, 2023and invested the ff. assets: LL cash 130,000; MM cash 200,000 and
computer 50,000. The computer has a note payable amounting to 10,000, which was assumed by the partnership. The
partnership agreement provides that LL and MM have an equal capital credit. Using goodwill method, the amount of
goodwill to be recorded upon formation of the partnership is:
a. 110,000 b. 120,000 c. 100,000 d. 130,000

6. The partnership of PP and RR was formed on April 1, 2023. At that date, PP invested 50,000 cash and office equipment
valued at 30,000. RR invested cash of 70,000, merchandise valued at 110,000, and furniture valued at 100,000 subject to
note payable of 50,000 which the partnership assumes. The partnership provides that PP and RR shares profit and losses
25:75 respectively. The agreement provide further that the partners should initially have an equal interest in the
partnership capital. Under the goodwill method ________________________ and the bonus method
________________, what is the total capital of the partners after the formation?

7. On March 1, 2023, CC and FF formed partnership with each contributing the ff. assets: CC cash 30,000, machinery and
equipment 25,000, furniture and fixture 10,000; FF cash 70,000, machinery and equipment 75,000, building 225,000.
The building is subject to mortgage loan of 90,000 which is assumed by the partnership. The partnership agreement
provides that CC and FF share profits and losses 30% and 70% respectively. Assuming that the partners agreed to bring
their capital in proportion to their respective p/l ratio, and using FF’s capital as the base, how much cash is to be
invested by CC?
a. 19,000 b. 30,000 c. 40,000 d. 55,000
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8. On Sept. 16, 2023, LL admits MM for an interest on his business. On this date, LL’s capital account shows a balance of
158,400. The ff. were agreed upon formation of the partnership.
*prepaid expenses of 17,500 and accrued expenses of 5,000 are to be recognized
*5% of the outstanding AR of LL amounting to 100,000 is to be recognized as uncollectible
*MM is to be credited 1/3 interest in the partnership and is to invest cash aside from the 50,000 worth of
merchandise
The amount of cash to be invested by MM ___________________ and total capital of the partnership
________________

9. MM and JJ decided to form a partnership on March 15, 2023. Their statement of FP on this date were:
MM JJ
Assets 65,625 164,062.50
AR 1,487,500 896,875
Merch. Invty. 875,000 885,937.50
Equipment 656,250 1,268,750
Total 3,084,375 3,215,625

Liabilities and Capital

AP 459,375 1,159,375
MM Capital 2,625,000
JJ Capital 2,056,250
Total 3,084,375 3,215,625

They agreed the ff. adjustment shall be made:

*equipment of MM is under depreciated by 87,500 and that JJ is over depreciated by 131,250
*ADA is to be set up amounting to 297,500 to MM and 196,875 for JJ
*inventories of 21,875 and 15,312 are worthless in the books of MM and JJ respectively

The partnership agreed to share P/L ratio of 70% to MM and 30% to JJ.

Questions:
Upon formation of the partnership, how much is the capital of MM and JJ respectively?

Assuming that the capital balances are to be equaled to their P and L ratio, how much is the capital of MM and JJ
respectively?

Total assets of the partnership

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