CPA Review & Training Center AFAR-0106

Urdaneta City, Pangasinan Partnership Formation, Operation & Dissolution

ACCOUNTING FOR PARTNERSHIP

As per Civil Code of the Philippines, a partnership is formed when two or more persons agree to
bind themselves to contribute money, property or industry into a common fund, with the
intention of dividing profits among themselves.
Major Problems in Accounting for Partnership include the following:
1. Formation
2. Operation
3. Dissolution
4. Liquidation
PROBLEM 1.
kAKA and BABA decided to form a partnership on October 1, 2014. Their Statement of
Financial Position on this date were:

KAKA BABA
Cash 65,625.00 164,062.50
Accounts Receivable 1,487,500.00 896,875.00
Merchandise Inventory 875,000.00 885,937.50
Equipment 656,250.00 1,268,750.00
Total 3,084,375.00 3,215,625.00

Accounts Payable 459,375.00 1,159,375.00

AK, Capital 2,625,000.00
BK, Capital 2,056,250.00
Total 3,084,375.00 3,215,625.00

They agreed the following adjustments shall be made:

 Equipment of KAKA is under depreciated by P87,500 and that BABA is over depreciated by
P131,250.
 Allowance for doubtful accounts is to be set up amounting to P297,500 for KAKA and
P196,875 for BABA.
 Inventories of P21,875 and P15,312.50 are worthless in the books of KAKA and BABA
respectively.
 The partnership agreement provides for a profit and loss ratio of 70% to AK and 30% to BK.
Assuming the use of transfer of capital method, how much is the agreed capital of KAKA to
bring the capital balances proportionate to their profit and loss ratio.
A. P2,390,937.50 C. P2,218,125.00
B. P2,935,406.25 D. P1,024,687.50

PROBLEM 2.
On January 1, 2014, LIN and WIN agreed to form a partnership. The following are their assets
and liabilities:

Accounts LIN WIN

Cash 136,000 76,000
Accounts Receivable 88,000 48,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Accounts Payable 216,000 144,000
Notes Payable 140,000 60,000

LIN decided to pay off his notes payable from his personal assets. It was also agreed that WIN
inventories were overstated by P24,000 and LIN machinery was over depreciated by P20,000.

A. ALVAREZ
CPA Review & Training Center AFAR-0106
Urdaneta City, Pangasinan Partnership Formation, Operation & Dissolution

WIN is to invest/withdraw cash in order to receive a capital credit that is 20% more than LIN’s
total net investment in the partnership.
How much cash will be presented in the partnership’s statement of financial position?
A. P486,400 C. P450,400
B. P410,400 D. P274,400

PROBLEM 3.
On December 1, 2014, MAMI and DADI agreed to invest equal amounts and share profits
equally to form a partnership. MAMI invested P3,120,000 cash and a piece of equipment. DADI
invested some assets which are shown on the next page:

Book value
Accounts Receivable 400,000
Inventory 1,120,000
Machineries, net 2,240,000
Intangibles, net 920,000

The assets invested by DADI are not properly valued, P32,000 of the accounts receivable are
proven uncollectible. Inventories are to be written down to P1,040,000. Included in the
machineries is an obsolete apparatus acquired for P384,000 with an accumulated depreciation
balance of P336,000. Part of the intangibles is a patent with a carrying value of P56,000 which
was sued upon by a competitor. DADI unsuccessfully defended the case and the final decision
of the court was released on November 29, 2014.
What is the fair value of the equipment invested by MAMI?
A. P1,400,000 C. P1,344,000
B. P968,000 D. P1,560,000

PROBLEM 4.
On December 1, 2014, GENE and NAR 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:
GENE NAR
Book value Fair value Book value Fair value
Accounts Receivable 250,000 262,500 200,000 195,000
Inventory 400,000 450,000 200,000 207,500
PPE 1,000,000 912,500 862,500 822,500
Accounts Payable 150,000 150,000 112,500 112,500

GENE and NAR are to invest equal amount of cash such that the contribution of GENE would
be 10% more than the investment of NAR.

What is the amount of cash presented on the partnership’s statement of Financial Position on
December 1, 2014?
A. P2,762,500 C. P5,525,000
B. P2,512,500 D. P5,025,000

PROBLEM 5.
DESREM Partnership began operations on June 1, 2014. On that date, DES and REM have
capital credits of P175,000 and P240,000, respectively. The partnership has the following profit-
sharing plan:
a.) 10% interest on partners’ capital balances at the end of the year
b.) P60,000 and P75,000 annual salaries for DES and REM, respectively.
c.) Remaining profit will be divided to DES and REM on a 3:2 ratio, respectively.

A. ALVAREZ
CPA Review & Training Center AFAR-0106
Urdaneta City, Pangasinan Partnership Formation, Operation & Dissolution

During the year, DES invested P150,000 worth of merchandise and withdrew P40,000 cash,
while REM invested P120,000 cash. The partnership earned a profit of P266,375 during the
year.
How much is DES’ capital balance at the end of 2014?
A. P422,375 C. P426,625
B. P444,825 D. P413,625

PROBLEM 6.
MARY and RUTH are partners who have the agreement to share profit and loss in the following
manner:

MARY RUTH
Annual salaries 261,000 259,000
Interest on average balances 5% 10%
Bonus (based on net income after salaries and interest) 10%
Remainder 50% 50%

During the year ended December 31, 2014, the partnership generated a profit of P575,000
before any deductions. MARY’s and RUTH’s average capital balances for the year are
P600,000 and P300,000, respectively. Income is distributed to the partners only as far as it is
available.

How much is the total share of RUTH in the net income for the year ended 2014?
A. P286,500 C. P288,500
B. P287,500 D. P295,665

PROBLEM 7.
Hans, Lance, Arthur and Sidd own a publishing company that they operate as a partnership.
Their agreement includes the following:

 Hans will receive a salary of P20,000 and a bonus of 3% of income after all the bonuses.
 Lance will receive a salary of P10,000 and a bonus of 2% of income after all the bonuses.
 All the partners are to receive the following: Hans – P5,000; Lance – P4,500; Arthur –
P2,000; and Sidd – P4,700, representing 10% interest on their average capital balances.
 Any remaining profits are to be divided equally among the partners
 Partnership reports a profit of P40,000
How much is Lance’s share in the profit if profit is distributed in the following order of priority:
interest on invested capital, then bonuses, then salary and then according to profit and loss
percentage?
A. P12,560 C. P12,433
B. P13,235.75 D. P12,830.75

PROBLEM 8.
Partners POL, LIS and DIN have average capital balances of P96,000, P48,000 and P32,000,
respectively, during 2014. Each partner receives 10% interest on his capital balance. After
deducting salaries of P24,000 for POL and P16,000 for DIN, the residual profit or loss is divided
equally. In 2014, the partnership sustained a P26,400 net loss before partners’ interests and
salaries.
By how much would DIN’s capital account change?
a. P12,800 decrease c. P8,800 decrease
b. P19,200 increase d. P8,000 increase

A. ALVAREZ
CPA Review & Training Center AFAR-0106
Urdaneta City, Pangasinan Partnership Formation, Operation & Dissolution

PROBLEM 9.
Vida, Vina and Vita, sharing profits and losses 50%, 30% and 20%, have capital credit balances
of P400,000, P300,000 and P200,000 respectively. They decided to admit a new partner, Vera
to a 30% interest in the partnership upon Vera’s investment of an amount equal to five-sixths of
her capital credit with no asset adjustment recognized.
Immediately after the admission of Vera, the capital credit balance of Vina will be:
a. P300,000 c. P330,000
b. P318,000 d. P282,000

PROBLEM 10.
REM, LIN and WIN are partners with capital balances of P784,000, P2,730,000 and P1,190,000
respectively, sharing profits and losses in the ratio of 3:2:1. GIN is admitted as a new partner
bringing with him expertise and is to invest cash for a 25% interest in the partnership which
includes a credit of P735,000 for bonus upon his admission.
How much cash should GIN contribute?
A. P1,323,000 C. P2,100,000
B. P1,575,000 D. P588,000

PROBLEM 11.
POL, TIM and RUTH were partners in Omaha Investments Corp. Their profit ratio is 5:3:2 while
their original capital interest ratio is 4:4:2. On July 1, 2014, ANN was admitted by the
partnership for 20% interest in capital and 25% in profits by contributing P87,500 cash, and the
old partners agree to bring their interest to their original capital and profit interest sharing ratio.
ANN is the recipient of the transfer of capital of P280,000 from the existing partners. The
partnership had net income of P210,000 before admission of ANN and the partners agree to
revalue its overvalued equipment by P35,000. Capital balance of TIM increased by P10,500 as
a result of the admission of ANN while the capital balance of RUTH at the start of the year is
P700,000.
The capital balance of POL at the start of the year is:
a. P577,500 c. P354,200
b. P350,000 d. P441,000

PROBLEM 12.
PV, BK and TF were partners with capital balances on January 2, 2014 of P350,000, P525,000
and P700,000, respectively. Their profit ratio is 5:3:2 while their capital interest ratio is 4:4:2. On
July 1, 2014, JP was admitted by the partnership for 20% interest in capital and 25% in profits
by contributing P87,500 cash, and the old partners agree to bring their interest to their old
capital and profit interest sharing ratio. The partnership had net income of P210,000 before
admission of JP and the partners agree to revalue its overvalued equipment by P35,000.
The capital balance of PV after admission of JP is:
a. P297,500 c. P588,000
b. P354,200 d. P470,400

PROBLEM 13.
On December 30, 2014, the Statement of Financial Position of DG Co. has the following
balances: Total assets P2,250,000; VL loan P125,000; VL Capital P518,750; MD Capital
P481,250; and LV capital P1,125,000. The partners share profits and losses in the ratio of 25%
to VL, 25% to MD, and 50% to LV. It was agreed among the partners that VL retires from the
partnership and the partnership assets be adjusted to their fair value of P2,550,000 as of

A. ALVAREZ
CPA Review & Training Center AFAR-0106
Urdaneta City, Pangasinan Partnership Formation, Operation & Dissolution

December 31, 2014. The partnership also suffered net loss of P750,000. The partnership would
pay VL the amount of P542,500 cash for his total interest in the partnership.
What is the total capital of MD after retirement of VL?
a. P383,750 c. P365,000
b. P368,750 d. P380,000

PROBLEM 14.
TD decided to withdraw from his partnership with SM and MR. Before his withdrawal, TD’s
capital balance was P101,500, while SM’s was P112,000 and MR’s was P134,750. Also, the
partnership’s total assets amounted to P787,500, but the partners agreed that a fixed asset was
under depreciated by P26,250. TD, SM and MR share profits and losses in the ration of 2:4:4,
respectively. If TD was paid P93,100 upon his retirement, how much is the remaining
partnership net assets after TD’s withdrawal?
a. P228,900 c. P346,150
b. P319,900 d. P281,400

PROBLEM 15.
Ester, Judith and Martha were partners with capital balances on January 2, 2014 of P70,000,
P84,000 and P56,000, respectively. Their loss sharing ratio is 3:5:2. On July 1, 2014, Ester
retires from the partnership. On the date of retirement the partnership net profit from operations
is P48,000. The partners agreed further to pay Ester P76,560 in settlement of her interest.
How much will be the capital of Judith after retirement of Ester?
a. P103,200 c. P108,864
b. P114,743 d. P107,904

PROBLEM 16.
On January 1, 2014, LIN, WIN, and INN formed a partnership with capital contributions of
P625,000; P750,000; and P937,500, respectively. The partners agreed that profit and loss
would be allocated as follows: P75,000 salary to each partner, 3% interest on initial capital
contributions, the remainder divided in the ratio 2:4:4, respectively to LIN, WIN, and INN. The
partnership generated income amounting to P375,000 for the year 2014. During 2014, the
following partnership errors were discovered before the distribution of profit:

 In 2014, a purchase of piece of equipment costing P50,000 was expensed. The equipment
has an estimated life of ten years with equal service potential each year.
 On December 31, 2014, ending inventory was understated by P50,000.
On January 1, 2015, INN decided to retire from the partnership.
If the balance of the capital of LIN after retirement amounts to P770,000, how much is the
settlement to INN for his retirement?
a. P1,120,000 c. P1,085,000
b. P1,062,500 d. P1,110,875
If the balance of the capital of WIN after retirement amounts to P890,000, how much is the
settlement to INN for his retirement?
a. P1,127,500 c. P1,231,500
b. P1,090,500 d. P1,152,500

PROBLEM 17
The partnership of MAMA, NANA, and OPPA was dissolved on May 31, 2013, and the account
balances after all noncash assets are converted to cash on July 1, 2013, along with residual P/L
sharing ratios, are:

A. ALVAREZ
CPA Review & Training Center AFAR-0106
Urdaneta City, Pangasinan Partnership Formation, Operation & Dissolution

Cash P262,500 Accounts payable P630,000

NC, Capital (30%) 315,000 MB, Capital (30%) 472,500
OP, Capital (40%) 525,000

Personal assets and liabilities of the partners at July 1, 2013 are:

Personal Personal
Assets Liabilities
MAMA P420,000 P472,500
NANA 525,000 320,250
OPPA 997,500 420,000

If OPPA contributed P367,500 to the partnership to provide cash to pay the creditors, what
amount of MAMA’s P472,500 partnership equity would appear to be recoverable:
A. P414, 750 C. P425,250
B. P472,500 D. P 0
PROBLEM 18
The partnership of DB, SG and MM became insolvent on December 31, 2012 and is to be
liquidated. DB, SG and MM has the following balances respectively, P455,000, (P210,000),
(P28,000). After paying their personal liabilities, DB has still P70,000 while SG has P105,000 of
their personal assets. However, MM has still unpaid personal liabilities amounting to P280,000
and his personal assets amounted only to P210,000. The partners share profits and losses
equally.
How much is the maximum amount that DB can expect to receive from the partnership?
C. P217,000 C. P427,000
D. P245,000 D. P322,000
PROBLEM 19
The partnership of CD, AY, and GP decided to liquidate their partnership on May 31, 2013.
Before liquidating and sharing of net income, their capital balances are as follows: CD (30%)
P875,000, AY (30%) P630,000, and GP (40%) P770,000. Net income from January 1 to May 31
is P420,000. Liabilities of the partnership amounted to P735,000 and its total assets include
cash amounting to P245,000. Unsettled liabilities are P385,000. CD invested additional cash
enough to settle their partnership’s indebtedness. AY is personally solvent, GP is personally
insolvent, and CD becomes insolvent after investing the cash needed by the partnership.
How much were the partnership’s non-cash sold for?
A. P157,500 C. P105,000
B. P3,080,000 D. P525,000
How much cash will AY invest in the partnership?
A. P315,000 C. P294,000
B. P168,000 D. P70,000
How much will CD receive as a result of their liquidation?
C. P385,000 C. P315,000
D. 0 D. P462,000
PROBLEM 20
AK, BS and CM are partners in a business being liquidated. The partnership has cash of
P132,000, noncash assets with a book value of P1,584,000 and liabilities of P1,039,500. The
following data relates to the partners as of June 1, 2013: AK has capital balance of P775,000,
personal assets of P165,000, personal liabilities of P82,500.
BS extended a loan to the partnership in the amount of P82,500, deficit of P231,000, personal
assets of P247,500, personal liabilities of P99,000. CM has a capital balance of P49,500,
personal assets of P412,500 and personal liabilities of P247,500. Their profit and loss ratio is
3:1:1 AK, BS, and CM, respectively.
On June 12, 2013, assets with a book value of P495,000 were sold for P330,000 cash. The
proceeds were used to pay off liabilities of the partnership. During the remainder of June, no

A. ALVAREZ
CPA Review & Training Center AFAR-0106
Urdaneta City, Pangasinan Partnership Formation, Operation & Dissolution

additional assets were realized and outside creditors began to pressure the partnership for
payment. On July 3, the partners agreed to contribute personal assets, to whatever extent
possible, in order to eliminate their respective deficits. Shortly thereafter, assets with book value
of P330,000 and a fair value of P379,500 were distributed to AK. Assuming additional noncash
assets with book value of P660,000 were sold in July for P891,000.
How much cash would be distributed to CM?
A. P72,600 C. P23,100
B. P52,800 D. P3,300
PROBLEM 21
On January 1, 2013, ACJ Partnership entered into liquidation. The partners’ capital balances on
this date were as follows: A (25%) P2,500,000; C (35%) P5,400,000; J (40%) P3,700,000. The
partnership has liabilities amounting to P4,400,000, including a loan from C P600,000. Cash on
hand before the start of liquidation is P800,000.
With the information given, answer the following independent situations:
(1) Noncash assets amounting to P7,400,000 were sold at book value and the rest of the
noncash assets were sold at a loss of P4,200,000. How much cash will be distributed to
the partners?
A. P8,000,000 C. P4,400,000
B. P7,400,000 D. P11,800,000
(2) After exhausting the noncash assets of the partnership, assuming all partners has
personal assets more than their personal liabilities. How much cash must be invested by
the partners to satisfy the claims of the outside creditors and to pay the amount due to
the partner/s?
A. P3,680,000 C. P4,480,000
B. P4,360,000 D. P3,800,000
(3) If C received P2,255,000, How much was the loss from the realization of the noncash
assets?
A. P5,255,000 C. P10,700,000
B. P10,525,000 D. P9,945,000
PROBLEM 22
YES Partnership had the following condensed financial position prior to liquidation:

Assets Liabilities and Capital

Cash P588,000 Liabilities P328,000

Noncash assets 2,880,000 Loan payable to NY 180,000
NY, Capital (25%) 776,000
RB, Capital (40%) 1,320,000
IS, Capital (35%) 864,000
Total P3,468,000 Total P3,468,000

Assuming noncash assets with a book value of P1,360,000 were sold for P1,660,000 and that
all available cash was distributed.

Which of the following statements is false for Partner NY to receive a total of P704,000 cash
after liquidation?
A. The proceeds from the sale of the remaining noncash assets amount to P212,000
B. The loss on realization on the sale of the remaining noncash assets amount to P708,000
C. Partner RB will receive the amount of P832,000 on the first distribution of cash
D. Partner IS will receive a total of P511,200 cash after liquidation
PROBLEM 23
UMMA, OPPA, and NANCY are partners who share profits and losses as follows: UMMA 45%,
OPPA 15% and NANCY 40%. The Statement of Financial Position of UON Partnership as of
December 31, 2012 is given below:

A. ALVAREZ
CPA Review & Training Center AFAR-0106
Urdaneta City, Pangasinan Partnership Formation, Operation & Dissolution

UON Partnership
Statement of Financial Position
As of December 31, 2012
Assets Liabilities and Equity
Cash P268,000 Liabilities P532,000
Noncash Assets 1,940,000 Loan from OPPA 44,000
UMMA, Capital 694,000
OPPA, Capital 354,000
NANCY, Capital 584,000
Total assets PP2,208,000 Total Liabilities & Equity P2,208,000

On January 1, 2013, the partners decided to liquidate. For the month of January, some assets
were sold at a gain of P56,000. Payment to partner OPPA from the initial sale of assets was
P181,400. Cash withheld for possible liquidation expenses and unrecognized liabilities
amounted to P146,800.
Which of the following statements is false?
A. The book/carrying value of the noncash assets sold in January amount to P642,800
B. Payment to partner UMMA from the initial sale of assets was P44,200
C. The share of NANCY in the maximum possible loss is P600,000
D. The total amount of cash paid and distributed for the month of January is P764,000
PROBLEM 24
HELO, COME and BABY of The HCB Partnership has the following account balances before
liquidation:
Cash P420,000 Liabilities P524,000
Noncash assets 3,880,000 Loan from BABY 100,000
Loan to CM 192,000 HELO, Capital (25%) 1,120,000
Receivable from HM 44,000 COME, Capital (15%) 1,624,000
Expenses 2,556,000 BABY, Capital (60%) 2,256,000
Revenues 1,468,000

During June, some noncash assets were sold that resulted to a gain of 72,000. Liquidation
expenses of P124,000 were paid and additional expenses amounting to P96,000 were expected
to be incurred through the following months of liquidating the partnership. Liabilities to outsiders
amounting to P316,000 were paid.
For COME to receive P874,000 on the first distribution of cash, which of the following
statements is correct?
A. The total maximum possible loss for the month of June amount to P2,704,000
B. The total amount of cash paid to partners in June amount to P1,144,000
C. The proceeds from the sale of the noncash assets sold in June amount to P1,396,000
D. The amount of cash withheld considered in the computation of maximum possible loss
amount to P304,000
*** END ***

A. ALVAREZ