COLLEGE OF ACCOUNTANCY

Midterm Examination in Financial Accounting and Reporting

NAME: _____________________________________________ SCORE: ___________ RATING: _______
YEAR/COURSE: _____________________________________

DIRECTION:
 You have three (3) hours to finish the examination.
 Use only BASIC CALCULATOR.
 Read the directions carefully.
 Avoid ERASURES.

TEST I
Direction: Analyze the following statements. Write the letter of the correct answer on the space provided before each number.

1. The admission of a new partner to an existing partnership

A. may be accomplished only by investing assets in the partnership.
B. requires purchasing the interest of one or more existing partners.
C. causes a legal dissolution of the existing partnership.
D. is almost always accompanied by the liquidation of the business.

2. When a partnership interest is purchased,

A. every partner’s capital account is affected.
B. the transaction is a personal transaction between the purchaser and the selling partner(s).
C. the buyer receives equity equal to the amount of cash paid.
D. all partners will receive some part of the purchase price.

3. When admitting a new partner by investment, a bonus to old partners:

A. is usually unjustified because book values clearly reflect partnership net worth.
B. is sometimes justified because goodwill may exist and it is not reflected in the accounts.
C. results if the debit to cash is less than the new partner's capital credit.
D. results if the debit to cash is equal to the new partner's capital credit.

4. A bonus to a new partner will:

A. increase the capital balances of existing partners based on their income ratios before the admission of the new
partner.
B. increase the capital balances of existing partners based on their income ratios after the admission of the new partner.
C. decrease the capital balances of existing partners based on their income ratios before the admission of the new
partner.
D. decrease the capital balances of existing partners based on their capital balances before the admission of the new
partner.

5. Statement 1: If a new partner is admitted into a partnership by investment, the total assets and total capital will change.
Statement 2: A bonus to old partners results when the new partner's capital credit on the date of admittance is greater than his
or her investment in the firm.
A. Only Statement 1 is true.
B. Only Statement 2 is true.
C. All statements are true.
D. All statements are false.

6. Statement 1: If a new partner invests in a partnership at book value and acquires a 1/4 interest in total partnership capital, it
indicates that a bonus was paid to the original partners.
Statement 2: A bonus to the remaining partners results when a retiring partner receives partnership assets which are less than
his or her capital balance on the date of withdrawal.
A. Only Statement 1 is true.
B. Only Statement 2 is true.
C. All statements are true.
D. All statements are false.

7. Sarah invests $20,000 in cash (admission by investment) in the Matty partnership to acquire a 1/4 interest. In this case,
A. the accounting will be the same as a purchase of an interest.

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting DATE OF EXAMINATION: ____________________
TIME: _____________________ DAY: ________________ TIME OF EXAMINATION: ____________________
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 B. the total net assets of the new partnership are unchanged from the previous partnership.
C. the total capital of the new partnership is greater than the total capital of the old partnership.
D. Sarah's income ratio will automatically be 1/4.
8. Which of the following is not a necessary action that the partnership must take upon the death of a partner?
A. Determine the net income or net loss for the year to date.
B. Discontinue business operations.
C. Close the books.
D. Prepare financial statements.

9. Transferrable interest of a partner includes all of the following except:

A. The partner’s share of the profits and losses of the partnership
B. The right to receive distributions
C. The right to receive any liquidating distribution
D. The authority to transact any of the partnership’s business operations

10. A partner assigned his partnership interest to a third party. Which statement best describes the legal ramifications to the
assignee?
A. The assignment of the partnership interest does not entitle the assignee to partnership assets upon liquidation.
B. The assignment dissolves the partnership.
C. The assignee has the right to share in the management of the partnership.
D. The assignee does not become a partner but has the right to share in future partnership profits and to receive the
proper share of partnership assets upon liquidation.

11. What portion of the partnership’s assets must be revalued when a partner withdraws from the partnership?
A. The withdrawing partner’s share must be revalued.
B. All of the partnership’s assets must be revalued.
C. Any or all of the partnership’s assets may be revalued but none have to be revalued.
D. Partnership assets may not be revalued when a partner withdraws.

12. If A is the total capital of a partnership before the admission of a new partner, B is the total capital of the partnership after the
admission of the new partner, C is the amount of the new partner's investment, and D is the amount of capital credited to the
new partner, then there is:
A. goodwill to the new partner if B > (A + C) and D < C.
B. goodwill to the old partners if B = A + C and D > C.
C. a bonus to the new partner if B = A + C and D > C.
D. neither bonus nor goodwill if B > (A + C) and D > C.

13. The dissolution of a partnership occurs:

A. Only when the partnership sells its assets and permanently closes its books
B. Only when a partner leaves the partnership
C. At the end of each year, when income is allocated to the partners
D. When there is any change in the individuals who make up the partnership

14. When admitting a new partner by investment, a bonus to old partners is allocated on
A. the basis of capital balances.
B. the basis of the original investment of the old partners.
C. the basis of income ratios before the admission of the new partner.
D. a seniority basis.

For items 15-18:

A = The amount of tangible assets contributed by the new partner into the partnership
B = The amount of capital credited to the new partner
C = Total capital of the partnership before the admission of a new partner
D = Total capital of the partnership after the admission of a new partner

15. Which statement below is correct if a new partner receives a bonus upon contributing assets into the partnership?
A. B < A and D = C – A
B. B > A and D = C + A
C. A = B and A = D + C
D. B > A and C = D + A

16. Which statement below is correct if the old partners receive a bonus upon the contribution of assets into the partnership by a
new partner?
A. B < A and D = C – A
B. B + A and D > C + A
C. B < A and D = C + A
D. B > A and D = C + A

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 2
 17. Which statement below is correct if goodwill of the old partners is recognized upon the contribution of assets into the
partnership by a new partner?
A. B = A and D < C + A
B. B = A and D > C + A
C. B < A and D = C + A
D. B > A and D < C + A

18. Which statement below is correct if a new partner purchases an interest in capital directly from the old partners?
A. C < D
B. C = D
C. C = D and B = A
D. C < D and B = A

TEST II
Direction: Read and analyze the following problems. Write the correct answer on the space provided after each required items.

19. Lani and Jaya formed a partnership and agreed to divide initial capital equally, even though Lani contributed P 25,000 and
Jaya contributed P 21,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Jaya’s
unidentifiable assets should be debited for:

20. Jolina and Marvin are partners who share profits and losses equally and have capital balances of $560,000 and $490,000,
respectively. Kristine is admitted into the partnership by investing $490,000 for 30% capital interest. The account balance of
Marvin, Capital after the admission of Kristine would be:

21. Vico, Isko and Koko have partnership capital account balances of $225,000, $450,000 and $105,000, respectively. The
income sharing ratio is Vico, 50%; Isko, 40%; and Koko, 10%. Vico desires to withdraw from the partnership and it is agreed
that partnership assets of $195,000 will be used to pay Vico for his partnership interest. The balances of Isko's capital account
after Vico's withdrawal would be:

22. Joy, Leila and Leni are partners with capital balances on June 30, 2016 of P 60,000, P 60,000 and P 40,000, respectively.
Profits and losses are shared equally. Leni withdraws from the partnership. The partners agree that Leni is to take certain
furniture at their second hand value of P2,400 and cash for the balance of her interest. The furniture is carried on the books as
fully depreciated. The amount of cash to be paid to Leni is:

23. Salvador Panelo is admitted to a partnership with a 25% capital interest by a cash investment of $120,000. If total capital of
the partnership is $520,000 before admitting Salvador Panelo, the bonus to Salvador Panelo is:

24. Alex and Mikee partnership’s statement of financial position at December 31, 2012, reported the following:

Total assets P 100,000

Total liabilities 20,000
Alex, Capital 40,000
Mikee, Capital 40,000

On January 2, 2013, Alex and Mikee dissolved the partnership and transferred all assets and liabilities to a newly formed
corporation. At the date of incorporation, the fair value of the net assets was P 12,000 more than the carrying amount on the
partnership’s books, of which P7,000 was assigned to tangible assets and P5,000 was assigned to goodwill. Alex and Mikee
were each issued 5,000 shares of the corporation’s P1 par value common stock.

What is the additional paid-in capital in excess of par that should be credited?

For items 25-26:

Babot, Emma and Marie were partners with capital balances on January 2, 2016 of P300,000, P200,000 and P100,000, respectively.
On July 1, 2016, Babot retires from the partnership. On the date of retirement, the partnership net loss is P60,000 and the partners
agreed that certain asset is to be revalued at P80,000 from its original cost of P50,000. The partners agreed further to pay Babot
P225,000 in settlement of her interest. The remaining partners continue to operate under a new partnership, Viceral Partnership.

25. What is the capital balance of Emma after the retirement of Babot?
26. What is the total capital of Viceral Partnership after the retirement of Babot?

For items 27-30:

Kathryn, Nadine and Liza are partners sharing profits in a 5:3:2 ratio, and with capital balances of P 95,000, P 80,000 and P 60,000,
respectively on December 31, 2011. The partners decided to admit Maine as a new partner on January 1, 2012. Maine will contribute
cash of P 80,000 to the partnership and also pay P 10,000 for 15% of Nadine’s share. Maine is to have 20% share in profits. After the
admission of Maine, the total capital will be P 330,000 and Maine’s capital will be P70,000.

27. How much capital will be transferred to Maine upon admission?

28. How much is Nadine’s capital balance after the admission of Maine?
29. How much bonus will be allocated to Liza upon admission of Maine?
COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 3
 30. How much goodwill will be allocated to Kathryn after Maine’s admission in the partnership?

For items 31-33:

A summary balance sheet for the Pinty, Bonoy and Jojo partnership appears below. Pinty, Bonoy and Jojo share profits and losses in a
ratio of 2:3:5, respectively.

ASSETS
Cash $ 50,000
Inventory 62,500
Marketable securities 100,000
Land 50,000
Building-net 250,000
Total Assets $ 512,500

EQUITIES
Pinty, Capital $ 212,500
Bonoy, Capital 200,000
Jojo, Capital 100,000
Total Equities $ 512,500

The partners agree to admit Carol for a one-fifth interest. The fair market value of partnership land is appraised at $100,000 and the
fair market value of inventory is $87,500. The assets are to be revalued prior to the admission of Carol and there is $15,000 of
goodwill that attaches to the old partnership.

31. By how much will Pinty’s capital increase due to the revaluation of the assets and the recognition of goodwill?
32. How much should Carol invest to acquire a one-fifth interest?
33. What will the profit and loss sharing ratios be after Carol’s investment?

For items 34-36:

Davis has decided to retire from the partnership of Bea, Angelica and Shaina. The partnership will pay Bea $200,000. Goodwill is to
be recorded in the transaction as implied by the excess payment to Bea. A summary balance sheet for the Bea, Angelica and Shaina
partnership appears below. Bea, Angelica and Shaina share profits and losses in a ratio of 1:1:3, respectively.

ASSETS
Cash $ 75,000
Inventory 82,000
Marketable securities 38,000
Land 150,000
Building-net 255,000
Total Assets $ 600,000

EQUITIES
Bea, Capital 160,000
Angelica, Capital 140,000
Shaina, Capital 300,000
Total Equities $ 600,000

34. What goodwill will be recorded?

35. What partnership capital will Angelica have after Bea retires?
36. What partnership capital will Shaina have after Bea retires?

For items 37-41:

On August 1, 2012, Maria Gloria and Maria Bandalaria formed a partnership. Maria Gloria contributed inventory of P500,000 with a
fair value of P 300,000 while Maria Bandalaria contributed cash of P 250,000 and a land that cost her P 900,000 and a fair value of
P1,250,000. The partnership did not assume the mortgage attached to the property worth P 250,000.

The partners agree to allocate profits and losses as follows:

 Each partner shall receive 5% interest on their beginning capital balance.
 Maria Gloria will receive a salary of P 8,000 per month for managing the business.
 The remainder will be divided equally on the first year of operation and 6:4 on subsequent years.
 Maria Gloria and Maria Bandalaria are allowed to withdraw P5,000 per month. Any withdrawal is treated as direct reduction
of capital.

In 2012, the partnership has a net income of P100,000. On July 1, 2013, Maria Juliana was admitted in the partnership by investing
P800,000 for a 25% interest. Goodwill is to be recorded.

After the admission of Maria Juliana, the partners agreed to divide profits as follows:

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 4
  Each partner shall receive 5% interest on the amount of their beginning capital.
 All partners will receive a salary of P2,000 per month.
 The balance to be divided 45% to Maria Gloria, 30% to Maria Bandalaria and 25% to Maria Juliana.
 Each partner is allowed to withdraw P2,000 per month. Any withdrawal is treated as a direct reduction of capital.

In 2013, the partnership earned a profit of P 300,000 evenly throughout the year.

37. How much profit would be allocated to Maria Gloria in 2012?

38. What is the ending capital balance of Maria Gloria in 2012?
39. What is the ending capital balance of Maria Bandalaria in 2012?
40. What is the ending capital balance of Maria Juliana in 2013?
41. Goodwill to be recognized upon admission of Maria Juliana?

For items 42-43:

A summary balance sheet for the Salazar partnership on December 31, 2006 is shown below. Partners Teddie, Bobbie and Gabbie
allocate profit and loss in their respective ratios of 4:5:7. The partnership agreed to pay partner Gabbie $227,500 for his partnership
interest upon his retirement from the partnership on January 1, 2007. Any payments exceeding Gabbie’s capital balance are treated as
a bonus from partners, Teddie and Bobbie.

ASSETS
Cash $ 75,000
Inventory 87,500
Marketable securities 60,000
Land 90,000
Building-net 150,000
Total Assets $ 462,500

EQUITIES
Teddie, capital $ 212,500
Bobbie, capital 112,500
Gabbie, capital 137,500
Total Equities $ 462,500

42. What should be Teddie’s capital after the retirement of Gabbie?

43. What should be Bobbie’s capital after the retirement of Gabbie?

Items 44-46:
Taylor and Selena have capital accounts of $480,000 and $420,000, respectively. Ariana and Demi are to join the partnership. Ariana
invests $450,000 in the partnership for which she receives a capital credit of $450,000. Demi purchases a one-half interest from Taylor
for $300,000 and a one-fourth interest from Selena for $90,000.

44. What should be the capital of Ariana upon her admission?

45. What should be the amount to be recorded to Demi’s capital upon her admission?
46. How much should be the total assets of the partnership?

Items 47-48:
The capital accounts of the partnership of Savannah, Neil and Bonita on June 1, 2013 are presented below with their respective profit
and loss ratios:

Savannah.............................................. P 139,200 1/2

Neil........................................................ 208,800 1/3
Bonita................................................... 96,000 1/6

On June 1, 2013, Hector is admitted to the partnership when Hector purchased, for P 132,000, a proportionate interest from Savannah
and Bonita in the net assets and profits of the partnership. As a result of a transaction, Hector acquired a one-fifth interest in the net
assets and profits of the firm.

47. What is the amount of capital to be transferred to the new partner, Hector?
48. What is the combined gain realized by Savannah and Bonita upon the sale of a portion of their interest in the partnership to
Hector?

Items 49-50:
Presented below is the condensed balance sheet to the partnership of Korina K. Kanchez, Jessica Soco and Mel Tiyan-ko who share
profits and losses in the ratio of 6:3:1, respectively:

Cash P 55,000 Liabilities P 65,000

Other Assets 415,000 Tiyan-ko, Loan 15,000

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 5
Kanchez, Receivable 30,000 Kanchez, Capital 252,000
Soco, Capital 126,000
Tiyan-ko, Capital 42,000
P 500,000 P 500,000

The partners agree to sell Bernadette Sembra-know 20% of their respective capital and profit and loss interests for a total payment of
P90,000. The payment of Bernadette is to be made directly to the individual partners.

49. How much will be the capital balance of Mel Tiyan-ko after the admission of Bernadette Sembra-know?
50. How much capital of Korina K. Kanchez will be transferred to the new partner, Bernadette Sembra-know?

-o0o-
“When you feel like stopping, think about why you started.”
Good Luck!

Prepared by: Ms. ANGELA MICHELLE LEI P. SARMIENTO, CPA

Instructor, Financial Accounting and Reporting (AE 13)

Checked by: Ms. KATHIA MARCELINA A. ENCARNACION, CPA, MBA

Program Coordinator, College of Accountancy

Noted by: Atty. ALLEN GABRIEL C. JAMILLA, CPA, MSA

Dean, College of Accountancy

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 6