Partnership Formation Review

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_PROBLEMS_
I - Partnership Formation - Individual versus Individual
The following items are being invested by A and B to form AB Partnership:
Agreed Values
Investment by A Investment by B
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 120,000 P120,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 -
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 240,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 480,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 480,000 P 840,000
Mortgage on building assumed by the partnership. . . . - _240,000
P 480,000 P 600,000
Required:
1. Prepare entries to record the formation of partnership assuming that A and B agree that each partner is to
receive a capital credit equal to the agreed values of the net assets each partner invested.
2. Prepare entries to record the formation of partnership assuming that A and B agree that each partner is to
receive an equal capital interest.
II - Partnership Formation: Bonus and Revaluation Methods
John, Jeff, and Jane decided to engage in a real estate venture as a partnership. John invested P100,000 cash and Jeff
provided office equipment that is carried on his books at P82,000. The partners agree that the equipment has a fair
value of P110,000. There is a P30,000 note payable remaining on the equipment to be assumed by the partnership.
Although Jane has no physical assets to invest in the partnership, both John and Jeff believe that her experience as a
real estate appraiser is a valuable skill needed by the partnership and is a basis for granting her a capital interest in
the partnership.
Required: Assuming that each partner is to receive an equal capital interest in the partnership,
1. Record the partnership formation under the bonus method.
2. Record the partnership formation under the revaluation of asset method, and assume a total revaluation of
P90,000.
III - Partnership Transactions and Capital Statements
Tom and Julie formed a management consulting partnership on January 1, 20x4. The fair value of the net assets
invested by each partner follows:
Tom Julie
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P13,000 P12,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 6,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 800
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 -
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 30,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 5,000
Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18,800
During the year, Tom withdrew P15,000 and Julie withdrew P12,000 in anticipation of operating profits. Net profit
for 20x4 was P50,000, which is to be allocated based on the original net capital investment.
Required:
1. Prepare journal entries to:
a. Record the initial investment in the partnership.
b. Record the withdrawals.
c. Close the Income Summary and Drawing accounts.
2. Prepare a statement of changes in partners’ capital for the year ended December 31, 20x4.
IV - Partnership Formation - Individual versus Sole Proprietor
The balance sheet of H on November 30, 20x4 before accepting I as his partner to form HI Partnership is presented
below:
H
Balance Sheet
V O L U M E I | Advanced Financial Accounting - (A Comprehensive and Procedural Approach)

PROBLEMS 21
November 30, 20x4

Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 120,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 48,000
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . 3,000 45,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 72,000
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . 6,000 66,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P318,000
Liabilities and Capital

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,000
Total liabilities and capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 318,000
It is agreed that for purposes of establishing H’s interest the following adjustments shall be made:
a. The accounts receivable is estimated to be 90% realizable.
b. Interest at 8% on notes receivable dated March 1, 20x4 is to be accrued.
c. The merchandise inventory is to be valued at P21,000.
d. The equipment is under-depreciated by P4,800.
e. Prepaid expenses of P2,400 and accrued expenses of P7,200 are to be recognized.
I is to invest cash to obtain a one-third interest in the partnership.
Required:
1. Prepare the following entries in the books of H, as to:
a. Adjustments
b. Closing
c. Investments
2. Prepare the balance sheet after the formation of the partnership.
V - Partnership Formation - Sole Proprietor versus Sole Proprietor
On October 1, 20x4, J and K decided to pool their assets and form a partnership. They allocate profit and loss in the
ratio of 44:56 for J and K, respectively. The firm is to take over business assets and assume business liabilities, and
capitals are to be based on net assets transferred after the following adjustments:
a. J’s inventory amounting to P12,000 is worthless, while K’s agreed value of inventory amounted to P150,000.
b. Uncollectible accounts of P7,200 for J is to be provided; a 5% allowance is to be recognized in the books of K.
c. Accrued rent income of P12,000 on J, and accrued salaries of P9,600 on K should be recognized on their
respective books.
d. Interest at 16% on Notes Receivable dated August 17, 20x4 should be accrued.
e. The office supplies unused amounted to P24,000.
f. The equipment’s agreed value amounted to P60,000.
g. The furniture and fixtures has a fair market value of P108,000.
h. Interest at 12% on Notes Payable dated July 1, 20x4 should be accrued.
i. K has an unrecorded patent amounting to P48,000 and is to invest the additional cash necessary to have a 60%
interest in the new firm.
In cases, wherein days are considered, use 360 days as the basis.
Balance sheets for J and K on October 1, 20x4 before adjustments are given below:
Accounts J K
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 90,000 P 54,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,000 180,000
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . ( 4,800) ( 6,000)
Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,000 144,000
Office Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,400
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . ( 54,000)
V O L U M E I | Advanced Financial Accounting - (A Comprehensive and Procedural Approach)

22 C H A P T E R 1
Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,000
Accumulated depreciation – furniture and fixtures . . . . . . . _________ ( 24,000)
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 591,600 P 552,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 159,600 P 120,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 -0-
Capitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372,000 432,000
Total Liabilities and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . P 591,600 P 552,000
Required:
1. Prepare the following entries in the books of J and K:
a. Adjusting
b. Closing
2. Prepare the following entries in the new set of books, as to the investments (or withdrawal, if any) made by
the respective partners
3. Determine the following:
a. Net adjustments in the books of J and K (identify net debit or net credit adjustments).
b. The adjusted capital of J and K in their respective books.
c. The additional investment made by K.
4. Prepare the balance sheet after the formation of the partnership.
VI
Two sole proprietors, L and M, agreed to form a partnership on January 1, 20x4. The trial balance for each
proprietor is shown below as of January 1, 20x4.
L M
Book Value Fair Value Book Value Fair Value
Cash . . . . . . . . . . . . . . . . . . . . . . . . P 40,000 P 40,000 P 30,000 P 30,000
Accounts receivable (net) . . . . . . . 60,000 52,000 70,000 56,000
Merchandise Inventory . . . . . . . . . . 100,000 94,000 100,000 114,000
Building (net) . . . . . . . . . . . . . . . . . . 280,000 320,000 250,000 280,000
Furniture and Fixtures (net) . . . . . . . 60,000 64,000 40,000 44,000
Accounts payable . . . . . . . . . . . . . . 110,000 110,000 80,000 80,000
Mortgage payable . . . . . . . . . . . . . 200,000 200,000 150,000 150,000
L, Capital . . . . . . . . . . . . . . . . . . . . 230,000
M, Capital . . . . . . . . . . . . . . . . . . . . 260,000
The LM partnership will take over the assets and assume the liabilities of the proprietors as of January 1, 20x4.
Required: Determine the following items after formation of the partnership.

1. Total assets 2. Total liabilities 3. Total capital
V O L U M E I| Advanced Financial Accounting - (A Comprehensive and Procedural Approach)

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V O L U M E I | Advanced Financial Accounting - (A Comprehensive and Procedural Approach)

November 30, 20x4

Liabilities and Capital

V O L U M E I | Advanced Financial Accounting - (A Comprehensive and Procedural Approach)

Required: Determine the following items after formation of the partnership.

V O L U M E I| Advanced Financial Accounting - (A Comprehensive and Procedural Approach)

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