PARTNERSHIP FORMATION

Part I: Theory of Accounts

1. This is the framework within which the partners are to operate or conduct partnership business.
a. Partnership agreement
b. Partnership virtue
c. PFRS
d. Mutual Agency

2. The following are true regarding the characteristics of a general partnership except,
a. Separate legal entity
b. Ease of formation
c. Unlimited liability
d. Unlimited life

3. If a sole-proprietor contributes a certain asset to the partnership, in recording in the new partnership
books, it involves a
a. Credit to the asset
b. Credit to the capital account of that partner
c. Debit to drawing account of that partner
d. Debit capital account of that partner

4. If a certain asset is contributed to the partnership, when recording that certain asset in the
partnership books, it is valued at
a. Fair market value
b. Assessed value
c. Agreed value
d. Promised value
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Part II: Problem Solving

1. A and B are combining their separate business to form a partnership. Cash and non-cash assets are
to be contributed for a total capital of P600,000. The contributed liabilities are to be assumed by
the partnership. They further agreed that their capital balances after formation must be equal.
The following are the assets and liabilities to be contributed by each entity:

A B
Book Value Fair Value Book Value Fair Value
Accounts receivable 40,000 40,000 - -
Inventories 60,000 80,000 40,000 50,000
Equipment 120,000 90,000 80,000 100,000
Accounts payable 30,000 30,000 20,000 20,000

1. What is the amount of the additional cash to be contributed by A in accordance with their
agreement?
a. 300,000
b. 120,000
c. 420,000
d. 170,000

2. What is the amount of the capital credit to B after formation?

a. 130,000
b. 100,000
c. 300,000
d. 150,000

2. E and F form partnership. E is to invest certain business assets and his liabilities will be assumed
by the partnership. E will also contribute sufficient cash to bring his total capital to an agreed
P360,000, which is 60% of the total agreed capital of the partnership. F on the other hand will
invest cash in the amount of P60,000 and a certain merchandise valued at the current market price.
The following are the assets and liabilities of E to be contributed to the partnership:
Book Value Agreed Value
Accounts receivable 108,000 108,000
Allowance for doubtful accounts 7,200 12,000
Inventories 193,200 210,000
Store equipment 54,000 54,000
Accumulated depreciation – store equipment 36,000 26,400
Office equipment 36,000 36,000
Accumulated depreciation – office equipment 19,200 9,600
Accounts payable 96,000 96,000

1. What is the amount of additional cash to be invested by E in accordance with their

agreement?
a. 96,000
b. 98,400
c. 100,000
d. 0

2. What is the current market value of the merchandise to be contributed by F?

a. 240,000
b. 410,000
c. 210,000
d. 180,000
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3. A and B decided to combine their businesses and form a partnership. The following were their
assets before formation:

A B
Assets 421,500 206,000
Liabilities 183,000 72,000

The following were the agreements made to adjust their assets and liabilities:

• Both parties will provide P10,000 for doubtful accounts.

• A and B’s fixed assets were over-depreciated by P2,000 and under-depreciated by P1,000
respectively.
• Accrued expenses are to be recognized in the books of A and B in the amount of P2,400 and
P2,000 respectively.
• Obsolete inventory to be written off by A amounted to P7,000
• A and B also agreed to share profits and losses equally.

What is the total asset of the partnership after formation?

a. 595,100
b. 601,500
c. 607,100
d. 597,100