Partnership Formation and Operations

PARTNERSHIP FORMATION:
1. On December 1, 20x5, EE and FF form a partnership, agreeing to share for profits and losses in the ration of
2:3, respectively. EE invested a parcel of land that cost him P25,000. FF invested P30,000 cash. The land was
sold for P50,000 on the same date, three hours after formation of the partnership.
How much should be the capital balance of EE right after formation?
a. P 25,000 c. P 60,000
b. 30,000 d. 50,000
Explanation:
Retaining the recorded cost for such asset would be inequitable to any partners investing appreciated property.
Therefore, the contribution of noncash assets to a partnership should be recorded based on fair values. In this case
the fair value of land would be measured by its sales price on the date of sale, P50,000.
2. On March 1, 20x5 II and JJ formed a partnership with each contributing the following assets:
II JJ
Cash…………………………………………………..P 300,000 P 700,000
Machinery and Equipment…………………………… 250,000 750,000
Building ……………………………………………… — 2,250,000
Furniture and Fixtures……………………………….. 100,000 —
The building is subject to mortgage loan of P800,000, which is to be assumed by the partnership agreement provides
that II and JJ share profits and losses 30% and 70%, respectively. On March 1, 20x5 the balance in JJ's capital
account should be:
a. P 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000 (AICPA)
Solution:
JJ
Cash ………………………………………………………. P 700,000
Machinery and Equipment …………………………………… 750,000
Building ………………………………………………………. 2,250,000
Total Asset Invested…………………………………………... 3,700,000
Less: Mortgage Loan…………………………………………. 800, 000
Capital Balances of JJ on March 1, 20x5…………………….. 2,900,000
3. The same information in Number 2 except that the mortgage loan is not assumed but the partnership. On March
1, 20x5 the balance in JJ's capital account should be:
a. P 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000
Solution:
JJ
Cash……………………………………………………….. P 700,000
Machinery and Equipment ……………………………….. 750,000
Building ………………………………………………….. 2,250,000
Total Asset Invested……………………………………… 3,700,000
Less: Mortgage Loan…………………………………….. 0
Capital Balances of JJ on March 1, 20x5………………… 3,700,000
4. As of July 1, 20x5, FF and GG decided to form a partnership. Their balance sheets on thus dates are:
FF GG
Cash P 15,000 P 37,500
Accounts Receivable 540,000 225,000
Merchandise Inventory — 202,500
Machinery and Equipment 150,000 270,000
Total P 705,000 P 735,000
Accounts Payable P 135,000 P 240,000
FF. Capital 570,000
GG. Capital 495,000
Total P 705,000 P 735,000
The partners agreed that the machinery and equipment of FF is under depreciated by P 15,000 and that of GG by P
45,000. Allowance for doubtful accounts is to be set up amounting to P 120,000 for FF and P 45,000 for GG. The
partnership agreement provides a profit and loss ratio and capital interest of 60% to FF and 40% to GG. How much
cash must FF invest to bring the partners' capital balances proportionate to their profit and loss ratio?
a. P 52,560 c. P 142,560
b. 102,500 d. 172,500
Solution:
GG's adjusted capital* P 405,000

Divided by: GG's P&L Percentage 40%
Total Agreed Capital P 1,012,500
Multiplied by: GG and P&L Percentage 60%
FF's Agreed Capital 607,500
Less: Adjusted Contributed capital* 435,000
Additional Cash to Be Invested by FF P 172,500
*Computation at adjusted contributed capital:
FF GG
Unadjusted Capital P 570,000 P 495,00
Add (deduct): adjustments:
Accumulated Depreciation (15,000) (45,000)
Allowance for Doubtful Accounts (120,000) (45,000)
Adjusted Contributed Capital (P435,000) (P405,000)
5. On August 1, AA and BB pooled their assets to form a partnership, with the firm to take over their business
assets and assume the liabilities. Partners capitals are to be based on net assets transferred after the following
adjustment. (Profits and loss are allocated equally.)
BB's inventory is to be increased by P 4,000; an allowance for doubtful accounts of P 1,000 and P 1,500 are to
be set up in the books of AA and BB, respectively; and accounts payable of P 4,000 is to be recognized in AA's
books. The individual trial balances on August 1, before adjustment, follow:
AA BB
Assets P 75,000 P 113,000
Liabilities 5,000 34,500
What is the capital of AA and BB after the above adjustment?
a. AA, P 68,750; BB P 77,250 c. AA, P 65,000; BB P 76,000

b. AA, P 75,000; BB P 81,000 d. AA, P 65,000; BB P 81,000
Solution:
AA BB
Assets P 75,000 P 113,000
Less: Liabilities P 5,000 P 34,500
Unadjusted Capital P 70,000 P 78,500
Increase in Inventory 4,000
Allowance for Doubtful Accounts (1,000) (1,500)
Accounts Payable (4,000)
Adjusted Contributed Capital P 65,000 P 81,000
6. CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 20x5, just before the
admission of DD, show the following balances.
Cash………………………………………… P6,800
Accounts Receivable……………………… 14,200
Merchandise Inventory…………………… 20,000
Accounts Payable…………………………. 8,000
CC, Capital……………………………….. 33,000
It is agreed that for purpose of establishing CC's interest, the following adjustments shall be made:
(a) An allowance for doubtful accounts of 3% of accounts receivable is to be established.

(b) The merchandise inventory is to be valued at P23,000.
(c) Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized.
DD is to invest sufficient cash to obtain a 1/3 interest in the partnership.

Compute for (1) CC's adjusted capital before the admission of DD; and (2) the amount of cash investment by DD.
a. (1) P35,347 (2) P11,971 b. (1) 36,374 (2) 18,487

c. (1) 35,374 (2) 17,687 d. (1) 28,174 (2) 14,087
Solution:
Unadjusted Capital balance of CC………………………………… P33,000

Add (deduct): Adjustments
Allowance for Doubtful Accounts (3% x P14,200) ……… (426)
Increase in Merchandise Inventory (P23,000-P20,000) …. 3000
Prepaid Salary …………………………………………….. 600
Accrued Rent Expense …………………………………….. (800)
Adjusted Capital Balance of CC………………………………….. P35,374
Divide by: Capital Interest of CC………………………………… 2/3
Total Capital of the Partnership………………………………….. P53,061
Less: Adjusted Capital Balance of CC………………………….. 35,374
Capital Balances of DD…………………………………………. P17,687
7. MM, NN and OO are partners with capital balances on December 31,20x5 of P300,000, P300,000 and
P200,000, respectively. Profits are shared equally. OO wishes to withdraw and its agreed that OO is to take
certain equipment with second-hand value of P50,000 and a note for the balance of OO's interest. The
equipment are carried on the books of P65,000. Brand new equipment may cost P80,000. Compute for: (1) OO's
acquisition of the second-hand equipment will result to reduction in capital: (2) the value of the note that will
OO get from the partnership's liquidation.
a. (1) P15,000 each for MM and NN (2) P150,000

b. (1) P5,000 each for MM, NN and OO (2) P145,000
c. (1) P5,000 each for MM, NN and OO (2) P195,000
d. (1) P7,500 each for MM and NN (2) P145,000
Solution:
(1) Reduction in capital:
Equipment of carrying value………………………………… P 65,000
Equipment of second hand value (fair value) ………………….. 50,000
Decrease in equipment………………………………………….. P 15,000
Multiply by Profit and Loss ratio of MM, NN and OO………… 1/3
Reduction in Capital…………………………………………….. P 5,000
(2) Notes Payable to OO:
Unadjusted capital of OO………………………………………. P200,000
Less: Share in the decrease of equipment 5,000
Adjusted Capital of OO………………………………………… P195,000
Less: Equipment received at second hand value……………….. 50,000
Value of notes Payable…………………………………………. P145,000
*Journal Entry:
OO, Capita 200,000
NN, Capital 5,000
MM, Capital 5,000
Equipment Carrying Value 65,000
Notes Payable 145,000
8. Jones and Smith formed a partnership with each partner contributing the following items:
Jones Smith
Cash P 80,000 P 40,000
Building - Cost to Jones 300,000
-Fair Value 400,000
Inventory - Cost to Smith 200,000
-Fair Value 280,000
Mortgage Payable 120,000
Accounts Payable 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and
Smith partnership. What is the balance in each partner's capital account for financial accounting purpose?
Jones Smith
A. P350,000 P270,000
B. P260,000 P180,000
C. P360,000 P260,000
D. P500,000 P300,000
a. Option A c. Option C
b. Option B d. Option D
Solution:
Jones Smith
Assets at Fair Value
Jones: P80,000 + P400,000 P480,000
Smith: P40,000 + P280,000 P320,000
Less: Liabilities Assumed 120,000 60,000
Capital P360,000 P260,000
9. The business assets of LL and MM appear below:

LL MM
Cash P 11,000 P22,354
Inventories 120,035 260,102
Land 603,000 -
Building - 428,267
Furniture and Fixture 50,345 34,789
Other Assets 2,000 3,600
Total P1,020,916 P1,317,002
Notes Payable 200,000 345,000
LL, Capital 641,976 -
MM, Capital - 728,352
Total P1,020,916 P1,317,002
LL and MM agreed to form a partnership by contributing their respective assets and equities subject to the following
adjustments:
a. Accounts receivable of P20,000 in LL's books and P35,000 in MM's are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LL's and MM's respective books.
c. Other assets of P2,000 and P3,600 in LL's and MM's respective books are to be written off.
The capital account of the partners after the adjustments will be:
a. LL, P615,942; MM, P717,894 b. LL, P640,876; MM, P712,345

c. LL, P640,876; MM, P683,050 d. LL, P614,476; MM, P683,052
Solution:
LL MM
Unadjusted Capital Balance P641,976 P728,352
Add (deduct): Adjustments:
Uncollectible Receivables (20,000) (35,000)
Write-off of Inventories (5,500) (6,700)
Write-off of Assets (2,000) (3,600)
Adjusted Capital Balances P614,476 P683,052
10. The same information in Number 9, how much total assets does the partnership have after formation?
a. P2,337,918 c. P 2,265,118
b. 2,237,918 d. 2,365,218
Solution:
Unadjusted total assets (P1,020,916 + P1,317,200) ……………………………… P2,337,918
Add (deduct): Adjustments:
Uncollectible Receivables (P20,000 + P35,000) …………………………… (55,000)
Write-off of Inventories (P5,500 + P6,700) ………………………………. (12,200)
Write-off of Other Assets (P2,000 + P3,600) ……………………………. (5,600)
Adjusted Total Assets After Formation………………………………………….. P2,265,118
11. On March 1, 20x5, PP and QQ decide to combine their businesses and form a partnership. Their balance sheets
on March 1, before adjustments, showed the following:
PP QQ
Cash P 9,000 P 3,750
Furniture and Fixtures (net) 30,000 9,000
Office Equipment (net) 11,500 2,750
Prepaid Expenses 6,375 3,000
Total P 105,375 P 51,500
Capital 59,625 33,500
Total P 105,375 P 51,500
They agreed to have the following items. Recorded in their books:

1. Provide 2% allowance for doubtful accounts.
2. PP’s furniture and fixtures should be P31, 000, while QQ's office equipment is under-depreciated by P250.
3. Rent expense incurred previously by PP was not yet recorded amounting to P1, 000, while salary expense
incurred by QQ was not also recorded amounting to P800.
4. The fair market value of inventory amounted to:
For PP P29.500
For QQ 21,000
Compute the net(debit) credit adjustment for PP and QQ:
PP QQ PP QQ
a. P 2,870 P 2,820 c. P (870) P 180
b. (2,870) (2.820) d. 870 (180)
Solution:
Debit (credit) adjustments to capital accounts: PP QQ
Allowance for Doubtful Accounts:
PP: 2% x P18.500 P(370)
QQ: 2% x P13.500 P(270)
Furniture and Fixture (P31,000-P30,000) 1,000
Office Equipment (250)
Accrued Rent Expense (1,000)
Accrued salary Expense (800)
Inventory adjustments:
PP (P 29.,500-P 30.000) (500)
QQ (P 21,000-P 19.500) 1,500
Net adjustments (P 870) P 180
12. The same information in Number 11, compute the total liabilities after formation:
a. P 61,950 c. P 65,550
b. 63,750 d. 63,950
Solution:
Unadjusted total liabilities (P45,750+P18,000) …………………………… P 63,750
Accrued rent expense ……………………………………………. 1,000
Accrued salary expense ………………………………………….. 800
Unadjusted total liabilities after formation………………………………… P 65,550
13. The same information in Number 11, compute the total assets after formation:
a. P 157,985 c. P 160,765
b. 156,875 d. 152,985
Solution:
Unadjusted total assets (P105.375+P51,500) ……………………………….. P156,875
Allowance for Doubtful Accounts (P370+P270) …………………. (640)
Furniture and Fixtures……………………………………………… 1,000
Office Equipment ………………………………………………….. (250)
Inventory (P1,500-P500) ………………………………………. 1,000
Adjusted Total Assets After Formation …………………………………. P 157,985
14. On April 30, 20x5, XX, YY and ZZ formed a partnership by combining their separate business proprietorships.
XX contributed cash of P75,000. YY contributed property with a P54,000 carrying amount, a P60,000 original
cost, and P120,000 fair value. The partnership accepted responsibility for the P52,500 mortgage attached to the
property. ZZ contributed equipment with a P45,000 carrying amount, a P112,500 original cost, and P82,500 fair
value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding
capital contributions. Which partner has the largest April 30,2015, capital balance?
a. XX c. ZZ
b. YY d. All capital account balances are equal
Solution:
XX YY ZZ
Cash P75,000
Property P120.000
Equipment P82,500
Less: Mortgage Assumed. 52,500
Capital Balances P 75,000 P 67,500 P 82,500
Items 15 to 17 are based on the following data:

On January 1, 20x4, Jackson and Kendall formed a partnership. Jackson, who has many years of experience in this
line of business, contributed P100,000 in cash. Kendall contributed assets having the following: book values and fair
market values:
Book value Market value
Merchandise P 15,000 P 25,000
Building 40,000 150,000
Equipment 60,000 85,000
The partnership assumed a mortgage of P40, 000 on the building. Capital accounts are set equal to net assets
invested.
15. The increase in capital of Kendall:
a. None c. by P160, 000

b. by P100,000 d. by P220,000
Solution:
Cash 100,000
Merchandise 25,000
Building 150,000
Equipment 85,000
Mortgage payable 40,000
Capital, Jackson 100,000
Capital, Kendall 220,000
16. The partners have an equal interest in the initial total partnership capital, and the bonus method is used, the
increase in the capital of Jackson:
a. None c. by P 160,000
b. By P 100,000 d. by P 220,000
Solution:
Cash P 100,000.00
Merchandise P 25,000.00
Building P 150,000.00
Equipment P 85,000.00
Mortgage Payable P 40,000.00
Capital, Jackson P 160,000.00
Capital, Kendall P 160,000.00
17. The partner has an equal interest in the initial total partnership capital, and the goodwill method is used, the
increase in capital of Jackson:
a. None c. by P 160,000
b. By P 100,000 d. by P 220,000
Cash P 100,000.00
Merchandise P 25,000.00
Building P 150,000.00
Equipment P 85,000.00
Goodwill P 120,000.00
Mortgage Payable P 40,000.00
Capital, Jackson P 220,000.00
Capital, Kendall P 220,000.00
Solution:
18. JJ and KK are partners who share profits and losses in the ratio of 60%:40%, respectively. JJ’s salary is P60,000
and P30,000 for KK. The partners are also paid interest on their average capital balances. In 2005, JJ received
P30,000 of interest and KK, P12,000. The profit and loss allocation is determined after deductions for the salary
and interest payments. If KK’s share in the residual income (income after deducting salaries and interest) was
P60,000 in 2005, what was the total partnership income?
a. P 192,000 c. P 282,000
b. P 345,000 d. P 387,000
(1) Given
(2) P60,000 ÷ 40% profit and loss ratio = P150,000
JJ KK Total
Salary P 60,000.00 P 30,000.00 P 90,000.00
Interest P 30,000.00 P 12,000.00 P 42,000.00
Balance or Residual
profit P 60,000.(1) P 150,000.00 (2)
P 282,000.00
19. The partnership has the following accounting amounts:

(1) Sales = P 70,000
(2) Cost of Goods Sold = P 40,000
(3) Operating Expenses = P 10,000
(4) Salary allocations to partners = P 13,000
(5) Interest paid to banks = P 2,000
(6) Partners’ withdrawals = P 8,000
The partnership net income (loss) is:
a. P 20,000 c. P 5000
b. P 18,000 d. (P 3000)
Sales P 70,000.00
Less: Cost of Goods Sold P 40,000.00
Gross Profit P 30,000.00
Less: Operating Expenses P 10,000.00
Operating Income P 20,000.00
Less: Other expenses: Interest Expense P 2,000.00
Net Income P 18,000.00
Solution:
20. Lancelot is trying to decide whether to accept a salary of P 40,000 or a salary of P 25,000 plus a bonus of 10%
of net income after salary and bonus as a means of allocating profit among the partners. Salaries traceable to the
other partners are estimated to be P 100,000. What amount of income would be necessary so that Lancelot
would consider the choices to be equal?
a. P 165,000 c. P 265,000
b. P 290,000 d. P 305,000
Solution:
Bonus = 10 % (NI-Salaries-Bonus)
P 15,000 = .10[NI- (P 100,000 + P 25,000) – P 15,000]
P 15,000 = .10 (NI- P 140,000)
P 29,000/.10 = NI
NI = P 290,000
21. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of years. Peter has
indicated that he is going to reduce his involvement in the partnership so the profit and loss ratio is being
modified to 45/55. At the date of the change in the profit and loss ratio, the partnership owns vacant land with a
market value of P 300,000 and a book value of P100,000. Peter and Ronald compile a list of assets with market
and book value differences. Two years after the change in the profit and loss ratios, the land is sold for
P450,000. How much of the gain is allocated to Peter?
a. P 157,500 c. P 227,500
b. P 197,500 d. P 287,500
Solution:
(P 300,000 – P 100,000) (.65) + (P 450,000 – P 300,000) (.45) = P 197, 500
22. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40 to 45/55. At the date of
the change, the partners to revalue assets with market value different from book value. One asset revalued is
land with a book value of P 50,000 and a market value of P 120,000. Two years after the profit and loss ratio is
changed, the land is sold for P 200,000. What is the amount of change to Robert’s capital account at the date the
land is sold?
a. P 32,000 c. P 60,000
b. P 44,000 d. P 82,500
Solution:
(P 200,000 – P 120,000) (.55) = P 44,000
23. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus based on the store’s
operating income. The bonus is 8 percent of operating income in excess of P 200,000 after deducting the bonus.
If operating income for the year is P 250,000, what is Shawn’s bonus (rounded to the nearest peso)?
a. P 3,703 c. P 20,000
b. P 40,000 d. P 40,000
Solution:
Bonus = .08 (P 250,000 – P 200,000 – B)
24. James has a bonus as part of his profit allocation. The bonus is based on partnerships net income. James
receives a bonus equal to 5 percent that the net income exceeds P 150,000. If the net income in the current year
is P 180,000, how much bonus does James received?
a. P 30,000 c. P 7,500
b. P 9,000 d. P 1,500
Solution:
Bonus = .05 (P 180,000 – P 150,000)
=P 1, 500
25. Cheryl is the manager of a local store. She is also a partner in the company and she receives a bonus as part of
the profit and loss allocation. Cheryl’s bonus is based on the increase in revenues recorded during the period.
The bonus arrangement is that Cheryl receives 1 percent of net income for every full percentage point growth
for revenues in excess of a 5 percent revenue growth. During the most recent period, revenues grew from
P 500,000 to P 540,000 and net income grew from P98,000 to P120,000. How much bonus does Cheryl receive
for this period?
a. P 2,000 c. P 3,600
b. P 1,100 d. P 6,000
Solution:
Bonus = {[(P 540,000 – P 500,000) / P 500,000] - .05) P 120,000
26. Nick, Joe, and Mike are partners. The company has P 150,000 net income for the period. How is this income
divided to the partners if the following profit and loss allocation process is followed?
Nick Joe Mike

Weighted average capital P 200,000 P 350,000 P 180,000
Salary 25,000 15,000 35,000
Bonus .1 (N1 – P100,000)
Residual profit/loss ratios 25 .45 .30
Return on invested capital 9%
Nick Joe Mike

a. P 43,000 P 46,500 P 60,500
b. P 45,325 P 50,865 P 53,990
c. P 50,000 P 50,000 P 50,000
d. P 44,075 P 48,435 P 57,490
Solution:
Nick Joe Mike Total

Interest on capital
P 200,000 x .09 P 18,000
P 350,000 x .09 P 31,500
P 180,000 x .09 P 16,200 P 65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1(P 150,000 – P100,000) 5,000 5,000
Residual
P 4,300 x .25 1,075
P 4,300 x .45 1,935
P 4,500 x .30 1,290 4,300
Total P44,075 P48,435 P57,490 P150,000
27. Cab and Jo are considering forming a partnership whereby profits will be allocated through the uses of salaries
and bonuses. Bonuses will be 10% of net income after total salaries and bonuses. Cab will receive a salary of
P 30,000 and bonus. Jo has the option of receiving a salary of P 52,000. Both partners will receive the same
amount of bonus.
Determine the level of net income that would be necessary so that Jo would be indifferent to the profit sharing
option selected.
a. P 240,000 c. P 94,000
b. P 300,000 d. P 334,000
Solution:
To equate P 52,000 to P40,000 plus bonus. The bonus should amount to P 12,000 (P 52,000 – P 40,000) to be
indifferent under the two profit-sharing options. Since Cab would receive the same bonus, the total bonus would
have to be P 24,000 (P 12,000 x 2). Based on the foregoing, the following equation should be developed:
Bonus = 10% (Net income – salaries – bonus)

P 24,000 =.10(NI – P 30,000 + P 40,000) – P 24,000
P 24,000 =.10(NI – P 94,000)
P 24,000 =.10 NI – P 9,400
P 33,400 =.10 NI
P 33,400 /.10 = NI
NI = P 334,000
Or alternatively:
Bonus = P 52,000 – P 40,000 = P 12,000 X 2 = P 24,000
P 24,000 = .10(NI – salaries – bonus)
P 24,000 =.10(NI – P 70,000 – P 24,000)
P 24,000 =.10 NI – P 9,400
P 24,000 =.10 NI – P 9,400
P 33,400 /.10 = NI
NI = P 334,000
28. The partnership agreement of XX, YY & ZZ provides for the year-end allocation of net income in the following
order.
● First, XX is to receive 10% of net income up to P 200,000 and 20% over P 200,000.
● Second, YY and ZZ each are to receive 5% of the remaining income over P 300,000.
● The balance of income is to be allocated equally among the three partners.
The partnership’s 20x5 net income was P 500,000 before any allocation to partners. What amount should
be allocated to XX?
a. P 202,000 c. P 206,000
b. P 216,000 d. 220,000
Solution:
XX YY ZZ Total
XX First P 200,000 X 10% P 20,000 P 20,000
Over P 200,000: (P 500,00-
P 200,000)X 20% P 60,000 P 60,000
YY and ZZ: 5% at remaining income
Over P 300,000: (P 500,000-P 20,000-
P 60,000-P 300,000)X5% P 6,000 P 6,000 P 12,000
Balance: Allocate equally P 136,000 P 136,000 P 136,000 P 408,000
P 216,000 P 142,000 P 142,000 P 500,000
29. The partnership agreement of RR and SS provides that interest at 10% per year is to be credited to each partner
on the basis of weighted-average capital balances. A summary of the capital account of SS for the year ended
December 31, 20x5, is as follows:
Balance, January 1 P 240,000
Additional Investment, July 1 120,000
Withdrawals, August 1 (45,000)
Balance, December 31 495,000
What is the amount of interest should be credited to SS’s capital account for 20x5?
a. P 45,750 c. P 46.125
b. P 49,500 d. P 51,750 (AICPA)
Solution:
January 1 – July 1 : P 420,000 x 6 months P 2,520,000

July 1- August 1 : P 540,000 x 1 months 540,000
August 1- December 1: P 495,000 x 5 months P 2,475,000
P 5,535,000
Divided by: 5 months
Weighted-average capital P 461,250
Multiply by: interest rate per year 10%
Amount of interest per year P 46,125
30. AA, BB, and CC are partners with average capital balance during 20x5 of P 360,000, P180,000, and P 120,000,
respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of P
90,000 to AA and P60,000 to CC the residual profit or loss divided equally. In 20x5 the partnership sustained a
P 99,000 loss before interest and salaries to partners. By what amount should AA’s capital amount change?
a. P 21,000 increase c. P 105,000 decrease

b. P 33,000 decrease d. P 126,000 increase
Solution:
AA BB CC Total
Interest on Average Capital
AA: P 360,000 X 10% P 36,000
BB: P 180,000 X 10% P 18,000
CC: P 120,000 X 10% P 12,000 P 66,000
Salaries 90,000 60,000 150,000
Residual: Equality (105,000) (105,000) (105,000) (315,000)
Increase (Decrease) P 21,000 (P 87,000) (P 13,000) (P 99,000)
31. AA and DD created a partnership to own and operate a health-food store. The partnership agreement provided
that AA receive a salary of P 10,000 and DD a salary of P 5,000 to recognize their relative time spent in
operating the store. Remaining profits and losses were divided 60:40 to AA and DD, respectively. Income for
20x5, the first year of operations, of P 13,000 was allocated P 8,800 to AA and P 4,200 to DD.
On January 1, 20x6, the partnership agreement was changed to reflect the fact that DD could no longer devote
any time to the store’s operations. The new agreement allows AA a salary of P 18,000, and the remaining
profits and losses are divided equally. In 20x6 an error was discovered such that the 20x5 reported income was
understated by P 4,000. The partnership income of P 25,000 for 20x6 included that P 4,000 related to year 20x5.
In the reported net income of P 25,000 for the year 20x6, AA and DD would have:
AA DD AA DD
a. P 21,900 P 3,100 c. P 0.00 P 0.00
b. P 17,100 P 17,100 d. P 12,500 P 12,500
Solution:
AA DD Total
Salary P 18,000 P 18,000
Balance: Equally 1,500 1,500 3,000
Income for year 20x6 only 19,500 1,500 21,000
Income for year 20x5 (60:40) 2,400 1,600 4,000
Reported income for the year 20x6 P 21,900 P 3,100 P 25,000
32. On January 1, 20x5, DD and EE decided to form a partnership. At the end of the year, the partnership made a
net income of P 120,000. The capital accounts of the partnership show the following transaction:
DD, Capital EE, Capital

Debit Credit Debit Credit
January 1 --- P 40,000 --- P 25,000
April 1 P 5,000 --- --- ---
June 1 --- --- --- 10,000
August 1 --- 10,000 --- ---
September 1 --- --- P 3,000 ---
October 1 --- 5,000 1,000 ---
December 1 --- 4,000 --- 5,000
Assuming that an interest of 20% per annum is given on average capital and the balance of the profits is allocated
equally, the allocation o0f profits should be:
a. DD, P 60,000; EE, P 59,400 c. DD, P 67,200; EE, P 52,800

b. DD, P 61,200; EE, P 58,800 d. DD, P 68,800; EE, P 51,200
Solution:
Interest on Average Capital: DD EE Total
DD: 20% x P 42,000 P 8,400
EE: 20% x P 30,000 P 6,000 P 14,400
Balance: Equally 52,800 52,800 105,600
P 61,200 P 58,800 P 120,000
Average Capitals:
DD:
1/1 – 4/1: P 40,000 x 3 P 120,000
4/1 – 8/1: P 35,000 x 4 140,000
8/1 – 10/1: P 45,000 x 2 90,000
10/1 – 12/1: P 50,000 x 2 100,000
12/1 – 12/31: P 54,000 x 1 54,000
P 504,000
Weighted – average capital P 42,000
EE:
1/1 – 6/1: P 25,000 x 5 P 125,000
6/1 – 9/1: P 35,000 x 3 105,000
9/1 – 10/1: P 32,000 x 1 32,000
10/1 – 12/1: P 31,000 x 2 62,000
12/1 – 12/31: P 36,000 x 1 36,000
P 360,000
Weighted – average capital P 30,000
33. The partnership of DD and BB was formed and commenced operations on March 1, 20x5, with DD contributing
P30,000 cash and BB investing cash od P 10,000 and equipment with an agreed upon valuation of P 20,000. On
July 1, 20x5, BB invested an additional P 10,000 in the partnership; DD made a capital withdrawal of P 4,000on
May 2, 20x5 but reinvested the P 4,000 on October 1, 20x5. During 20x5, DD withdrew P 800 per month and
BB, the managing partner, withdrew P 1,000 per month. These drawings were charge to salary expense. A pre-
closing trial balance taken at December 31, 20x5 is as follows:
Debit Credit
Cash P 9,000
Receivable-net P 15,000
Equipment-net 50,000
Other Assets 19,000
Liabilities 17,000
DD, Capital 30,000
BB, Capital 40,000
Service Revenue 50,000
Supplies Expense 17,000
Utilities Expense 4,000
Salaries to partners 18,000
Other miscellaneous expenses 5,000
Total P 137,000 P 137,000
Compute for the share of DD and BB in the partnership net income assuming monthly salary allowances P 800 and
P 1,000 for DD and BB, respectively; interest allowance at a 12% annual rate on average capital balances; and
remaining profits allocated equally.
a. DD, P 10,520; BB, P 13,480 c. DD, P 10,800; BB, P 13,200

b. DD, P 12,000; BB, P 12,000 d. DD, P 10,600; BB, P 13,400
Solution:
DD BB Total
Salary Allowances P 8,000 P 10,000 P 18,000
Interest on Average Capital 2,800 3,600 6,400
Balance (equally) (200) (200) (400)
P 10,600 P 13,400 P 24,000
Service revenue P 50,000

Less: Expenses
Supplies 17,000
Utilities 4,000
Other miscellaneous expenses 5,000 (26,000)
Net income P 24,000
DD: P 800 x 10 = P 8,000

BB: P 1,000 x 10 = P 10,000
Interest on average capital:
DD: P 30,000 x 2 = P 60,000
P 26,000 x 5 = 130,000
P 30,000 x 3 = 90,000
P 280,000
10-month Average Capital: P 280,000/10 = P 28,000 x 12% x 10/12 = P 2,800

Annual Average Capital: P 280,000/12 = P 23,333 x 12% =P 2,800
BB: P 30,000 x 4 = P 120,000
P 40,000 x 6 = 240,000
P 360,000
10-month Average Capital: P 360,000/10 = P 36,000 x 12% x 10/12 = P 3,600

Annual Average Capital: P 360,000/12 = P 30,000 x 12% =P 3,600
34. AA and BB formed a partnership in 20x5 and made the following investments and capital withdrawals during
the year:
AA BB
Investment Draws Investments Draws
March 1 P 30,000 P 20,000
June 1 P 10,000 P10, 000
August 1 P 20,000 P 2,000
December 1 P 5,000
The partnership’s profit and loss agreement provides for a salary of which P 30,000 was paid to each partner for
20x5. AA is to receive a bonus of 10% on net income after salaries and bonus. The partners are also to receive
interest of 8% on average annual capital balances affected by both investments and drawings. Any remaining profits
are to be allocated equally among the partners.
Assuming net income of P 60,000 before salaries and bonuses, determine how the income would be allocated among
the partners:
a. AA, P 31,138; BB, P 28,862 c. AA, P 30,633; BB, P 29,367
b. AA, P 33,537; BB, P 26,463 d. AA, P 30,684; BB, P 29,316
Solution:
AA BB Total
Salaries P 30,000 P 30, 000 P 60,000
Interest on Average Capital 2,167 800 2,967
Balance (equally) (1,483) (1,484) (2,967)
P 30,684 P 29,316 P 60,000
35. Partners A first contributed P 50,000 of capital into an existing partnership on March 1, 20x5. On June 1, 20x5,
the partner contributed another P 20,000. On September 1,20x5, the partner withdrew P 15,000 from the
partnership. Withdrawals in excess of P 10,000 are charges to the partner’s capital account. The annual
weighted-average capital balance is
a. P 62,000 c. P 60,000
b. P 51,667 d. P 48,333
Solution:
March 1: P 50,000 x 3 P 150,000
June 1: P 70,000 x 3 P 210,000
September 1: P 65,000 x 4 P 260,000
P 620,000
Divided by: Months per annum 12 months
P 51,667
36. WW and RR share profits and losses equally, WW and RR receive salary allowances of P 20,000 and P 30,000,
respectively, and both partners receive 10% interest on their average capital balances. Average capital balances
are calculated at the beginning of each month regardless of when the capital contributions and capital
withdrawals were made, and partners’ drawings are not used in determining the average capital balances. Total
net income for 20x5 is P 120,000.
WW RR
Yearly drawings (P 1,500 a month) 18,000 18,000

Permanent Withdrawals of Capital:
June 3 (12,000)
May 2 (15,000)
Additional Investments of Capital:
July 3 40,000
October 2 50,000
What is the weighted average capital for WW and RR respectively for 20x5?
a. P 110,667 and P 119,583 c. P 100,000 and P 120,000

b. P 105,333 and P 126,667 d. P 126,667 and P 105,333
Solution:
The weighted average capital would be:
WW:
January P 100,000 x 6 (Jan. – June) P 600,000
July P 88,000 x 1 (July) 88,000
August P 128,000 x 5 (Aug. – Dec.) 640,000
P 1,328,000
Divided by: Months per Annum 12 months
P 110,667
RR:
January P 120,000 x 5 (Jan. – May) P 600,000
June P 105,000 x 5 (June – Oct.) 525,000
November P 155,000 x 2 (Nov. – Dec.) 310,000
P 1,435,000
P 119,583
37. HH, MM, and AA formed a partnership on January 1, 20x5, and contributed P150,000, P200,000, and
P250,000, respectively. Their articles of co-partnership provide that the operating income be shared among the
partners as follows: as salary, P24,000 for HH, P18,000 for MM, and P12,000 for AA; interest of 12% on the
average capital during 20x5 of the three partners; and the remainder in the ratio of 2:4:4, respectively.
The operating income for the year ending December 31, 20x5 amounted to P176,000. HH contributed additional
capital of P30,000 on July 1 and made a drawing of P10,000 on October 1; and, AA made a drawing of P30,000
on November 1.
The partner’s capital balances o December 31, 20x5 are:
a. HH, P179,680; MM, P229,360; and AA, P239,360

b. HH, P179,760; MM, P229,520; and AA, P239,520
c. HH, P189,680; MM, P239,360; and AA, P269,360
d. HH, P223,180; MM, P272,060; and AA, P280,760
Solution:
HH MM AA Total
Capital, January 1, 20x5 P150,000 P200,000 P250,000 P600,000
Add: Investment 30,000 20,000 - 50,000
Net Income 53,180 62,060 60,760 176,000
Total P233,180 P282,060 P310,760 P826,000
Less: Withdrawals 10,000 10,000 30,000 50,000
Capital, December 31, 20x5 P223,180 P272,060 P280,760 P776,000
HH MM AA Total
Salary P 24,000 P 18,000 P 12,000 P 54,000
Interest on Average Capital*
HH: 12% x P162,500 19,500
MM: 12% x P205,833 24,700
AA: 12% x P245,000 29,400 73,600
Balance: 2:4:4 9,680 19,360 19,360 48,400
P 53,180 P 62,060 P 60,760 P176,000
*Average Capitals:
HH:
1/1 – 7/1: P150,000 x 6 P 900,000
7/1 – 10/1: P180,000 x 3 540,000
10/1 – 12/31: P170,000 x 3 510,000
P1,950,000
MM:
1/1 – 8/1: P200,000 x 7 P1,400,000
8/1 – 10/1: P220,000 x 2 440,000
10/1 – 12/31: P210,000 x 3 630,000
P2,470,000
AA:
1/1 – 11/1: P250,000 x 10 P2,500,000
11/1 – 12/31: P220,000 x 2 440,000
P2,940,000
38. Merlin, a partner in the Camelot Partnership, has a 30% participation in partnership profits and losses. Merlin’s
capital account has a net decrease of P1,200,000 during the calendar year 20x5. During 20x5, Merlin withdrew
P2,600,000 (charged against his capital account) and contributed property valued at P500,000 to the partnership.
What was the net income of the Camelot Partnership for year 20x5?
a. P3,000,000 c. P 7,000,000
b .4,666,667 d. 11,000,000
Solution:
Withdrawals P (2,600,000)
Investment 500,000
Share in net income (balancing figure) 900,000
Net (decrease) increase P (1,200,000)
Net income of the partnership: P90,000 30% P3,000,000
39. On January 2, 20x5, BB and PP formed a partnership. BB contributed capital of P 175,000.00 and PP,
P25,000.00. They agreed to share profits and losses 80% and 20%, respectively. PP is the general manager and
works in the partnership full time and is given a salary of P5,000.00 a month; an interest of 5% of the beginning
capital (of both partner) and a bonus 15% of net income before the salary, interest and the bonus.
The profit and loss statement of the partnership for the year ended December 31, 20x5 is as follows:
Net Sales P875,000
Cost of Good Sold 700,000
Gross Profit P175,000
Expenses (including the salary, interest, and the bonus) 143,000
Net income P 32,000
The amount of bonus to PP in 20x5 amounted to:
a. P13,304 c. P18,000
b. 16,456 d. 20,700
Solution:
Bonus = .15 (NI before salaries, interest and bonus)
B = .15 (NI after salaries, interest and bonus + salaries + interest + bonus)
B = .15 [P32,000 + (P5,000 x 12) + (5% x P200,000) + B]
B = .15 [P32,000 + P60,000 + P10,000 + B]
B = .15 [P102,000 + B]
B = P15,300 + .15B
B - .15 B = P15,300
.85 B = P15,300
B = P15,300/.85
B = P18,000
40. On January 1, 20x5, A, B, C and D formed Bakya Trading Co., a partnership, with capital contributions as
follows: A, P 50,000; B, P25,000; C, P25,000; and D, P20,000. The partnership contract provided that each
partner shall receive a 5 % interest on contributed capital, and that A and B shall receive salaries of P5,000 and
P3,000, respectively. The contract also provided that C shall receive a minimum of P2,500 per annum, and D a
minimum of P6,000 per annum, which is inclusive of amounts representing interest and share if remaining
profits. The balance of the profits shall be distributed to A, B, C, and D in a 3:3:2:2 ratios.
What amount must be earned by the partnership, before any charge for interest and salaries, so that A may
receive an aggregate of P12,500 including interest, salary and share of profits?
a. P16,667 c. P30,667
b. 30,000 d. 32,333
Solution:
A B C D Total
5% interest on capital* P 2,500 P 1,250 P 1,250 P 1,000 P 6,000
Salaries 5,000 3,000 -- -- 8,000
Balance (3:3:2:2) 5,000 5,000 3,333 3,333 16,666
Additional profit -- 1,667 1,667
P12,500 P 9,250 P 4,583 P 6,000 P32,333
* A : P50,000 x 5% = P 2,500
B : P25,000 x 5% = 1,250
C : P25,000 x 5% = 1,250
D : P 20,000 x 5% = 1,000
41. AA , BB and CC are partners with average capital balance during 20×5 of P472,500,P238,650,and
P162,350,respectively. The partners receive 10% interest on their average capital balances; after deducting
salaries of P122, 325 to AA and P82, 625 to CC, the residual profits or loss is divided equally.
In 2015, the partnership had a net loss of P125, 624 before the interest and salaries to partners.
By what amount should AA ‘s and CC’ s capital account change – increase (decrease)?
AA CC AA CC
a. P30, 267 P (40,448) c. P (40,844) P 31,235
b. P 29,476 17,536 d. P 28 ,358 32,458
Solution:
AA BB CC TOTAL
P47, 250 P23,865 P16,235 P87,350
122,325 82,625 204,950
(139,308) (139,308) (139,308) (417,924)
P 30,267 P (115,443) P (40,448) P (125,624)
AA: 10% × P472,500 = P47,250

BB. 10% × P238,650 = P23,865
CC. 10% × P162,350 = P16,235
42. The same information in number 41, except the partnership had a loss of P125,624 after the interest and salaries
to partners, by what amount should BB’s capital account change – increase (decrease).
a. P (115,443) c. P (41,875)
b. P 23 ,865 d. P (18,010)
Solution:
AA BB CC TOTAL
P47,250 P23,865 P16,235 P87,350
122,325 82,625 204, 950
(41,875) (41,875) (41,874) (125,624)
P 85, 000 P 18,010 P 56,985 P 166, 676
43. XX, YY and ZZ formed a partnership on January 1,2015. Each contributed P120,000. Salaries were to be
allocated as follows:
XX YY ZZ
P 30,000 P 30,000 P45, 000
Drawing were equal to salaries and be taken out evenly throughout the year. With sufficient partnership net income,
XX and YY could split a bonus equal to 25 percent of partnership net income after salaries and bonus (in no event
could the bonus go below zero).
Remaining profits were to be split as follows: 30% for YY, and 40% for ZZ. For the year, partnership net income
was P120,000.
Compute the ending capital for each partner:
a. XX, P 155,100; YY, 155,100; ZZ, P 169,800

b. XX, P 126,000; YY, P 126,000; ZZ, P124,500
c. XX, P 125,100; YY, P 125,100; ZZ, P 124,800
d. XX, P 125,500; YY, P 125,500; ZZ, P 124,000
Solution:
XX YY ZZ Total
Capital, January 1 2015 P120,000 P120, 000 P120, 000 P360,000
Salaries P30,000 P30,0,000 P45,000 P105,000
Bonus 1,500 1,500 ---- 3,000
30%:30%:40% 3600 3,600 4,800 12,000
Share in net income P35,100 P35, 100 49,800 P120,000
Less: Drawings 30,000 30,000 45,000 105,000
5,100 5,100 4,800 15,000
Capital: P125,100 P125,000 P124,800 375,500
44. CC, PP, and AA, accountants, agree to form a partnership and to share profits in the ratio of 5:3:2. They also
that AA is to be allowed a salary of P28,000, and that PP is to be guaranteed P21,000 as his share of the profits.
During the first year of operation, income from fees are P180,000, while expenses total P96,000. What amount
of net income should be credited to each partner’s capital account?
a. CC, P28,000, PP, P16,800, AA, P11,200 b. CC, P25,000, PP, P21,000, AA, P 38,000
c. CC, P24,000, PP, P22,000, AA, P38,000 d. CC, P25,000, PP, P21,000, AA, P 39,000
Solution:
CC PP AA Total
Salary P28,000 P28,000
Balance (84,000 – P28,000) P28,000 P16,000 P11,200 56,000
Additional Profit (21,000 – 16,000) (3,000) 4,200 (1,200) ------
P25,000 P21,000 P38,000 P84,000
Fees: 180,000
Less: Expense 96,000
P84,000
45. Hunt, Rob, Turman, and Kelly own a publishing company that they operate as a partnership. The partnership
agreement includes the following:
● Hunt receives a salary of P20 ,000 and a bonus of 3% of income after all bonuses.
● Rob receives a salary of P10,000 and a bonus of 2% of income after all bonuses.
● All partners are to receive 10% interest on their average capital balances.
The average capital balances are as follows:
Hunt P 50,000
Rob P 45,000
Turman P 20,000
Kelly P47, 000
Any remaining profits and loss are to be divided equally among the partners.
Determine how a profit of 105,000 would be allocated among the partners.
a. Hunt.P41, 450; Rob, P29,950; Turman, P15,450; Kelly, 18,150

b. Hunt: P28,000; Rob, 16,500; Turman, P2,000; Kelly, 4,700
c. Hunt, P39,700; Rob, P 29,200: Turman, P16,700: Kelly, P19,400
d. Cannot be determined
Solution:
Hunt Rob Turman Kelly Total

Salaries P20, 000 P10, 000 — — P30, 000
Bonus 3,000 2,000 — — 5, 000
10% interest 5,000 4,500 2,000 4,700 16, 200
13,450 13,450 13,450 13,450 53,800
41,450 29,950 15,450 18,150 105,000
46. RR and PP share profits after the provision of annual salary allowances of P14, 400 and P13, 200, respectively
in the ratio of 6:4. However, if partnership’s net income is insufficient to provide for said allowances in full
amount, the net income shall be divided equally between the partners. In 20x5, the following errors were
discovered: Depreciation for 20x5 is understated by P2,100 and the inventory on December 31, 20x5 is
overstated by P11, 400. The partnership net income for 20x5 was reported to be P19, 500.
The capital accounts of the partners should be increased (decreased) by:
a. RR, P (6,540); PP, P (6,540) c. RR, P (6,960); PP, P 6,540

b. RR, P 3,000; PP, P 3,000 d. RR, P (6,750); PP, P (6,750)
Solution:
RR PP Total
Correct Allocation of Net Income, equally P3,000 P3, 000 P6,000*
Allocation of Net Income per Books, equally 9,750 9750 19,500
Adjustments increased (decreased) P(6,750) P(6,750) P(13,500)
*The adjusted/corrected net income for 20x5 would be:

Unadjusted Net Income (per books) P19,500
Understatement of Depreciation P(2,100)
Overstatement of Ending Inventory (11,400)
Adjusted Net Income P6,000
47. JJ and KK are partners sharing profits 60% and 40% respectively. The average profits for the past two years are
to be capitalized at 20% per year (for purposes of admitting a new partner) in determining the aggregate capital
of JJ and KK, after adjusting the profits for the following items omitted from the books:
Omissions at Year- End 20x5 20x6
Prepaid Expense P1,600
Accrued Expense 1,200
Deferred Income P1,400
Accrued Income 1,000
Other pertinent information are as follows:
20x5 20x6
Net Income of Partnership P14,400 P13,600
Capital Acounts, end of the year:
JJ 45,400 54,000
KK 45,000 55,000
The aggregate capital of JJ and KK after capitalizing the average profits at 201% per annum is:
a. P67,765 c. P69,000
b. P72,105 d. P71,000
Solution: 20x5 20x6

Unadjusted net income P14,400 P13,600
Prepaid Expense – 20x5 1,600 (1,600)
Accrued Expense – 20x5 (1,200) 1,200
Deferred Income – 20x6 (1,400)
Accrued Income – 20x6 1,000
Adjusted Net Income P14,800 P12,800
Total Adjusted Net income (P14,800 + P12,800) P27,600

Divided by 2
Average Net Income P13,800
Divided by (capitalized at) 20%
Average Capital P69,000
48. MM, NN and OO partners, share profits on a 5:3:2 ratio. On January 1, 20x6, PP admitted into the partnership
with a 10% share in profits. The old partners continue to participate in profits in their original ratio.
For the year 20x6, the net income of the partnership was reported as P12,500. However, it was discovered that
the following items were omitted in the firm’s books:
Unrecorded at year end 20x5 20x6
Prepaid Expense P800
Accrued Expense P600
Unearned Income 700
Accrued Income 500
(1) The new profit and loss ratio for N, and (2) the share of partner OO in the 20x6 net income:
a. (1) 30%; (2) P2,214 c. (1) 27%; (2) P2,286

b. (1) 27%; (2) P2,214 d. (1) 30%; (2) P2,286
Solution:
(1) Profit and loss ratio:
Old New
MM 50% x 90% 45%
NN 30% x 90% 27%
OO 20% x 90% 18%
PP -- 10% 10%
100% 100% 100%
(2) Reported Net Income P12,500

Add (deduct): adjustments
a. Prepaid Expense – 20x5 (800)
b. Accrued Expense – 20x6 (600)
c. Unearned Income – 20x5 700
d. Accrued Income – 20x6 500
Adjusted Net Income P12,300
Multiply by: Profit and Loss Ratio of OO 18%
Share of OO in Net income P2,214
49. A, B, and C are partners in an accounting firm: Their capital account balances at year- end were A P90,000: B
P110,000 and C P50,000. They share profits and losses on a 4:4:2 ratio, after the following special terms:
1. Partner C is to receive a bonus of 10% of net income after the bonus.
2. Interests of 10% shall be paid on that portion of a partner’s capital in excess of P100,000
3. Salaries of P10,000 and P12,000 shall be paid to partner’s A and C respectively.
Assuming a net income of P44,000 for the year, the total profit share of Partner C was:
a. P7,800 c. P19,400
b. P16,800 d. P19,800
Solution: A B C Total
Bonus* P4,000 P4,000
Interest: 10% (P110,000- P100,000) - P1,000 - 1,000
Salaries P10,000 - 12,000 22,000
Balance: 4:4:2 3,400 17,000
P19,400 P44,000
Bonus = 10% (Net income- Bonus)

B = .10 (P44,000-B)
B = P44,000 - .10B
1.10B = P4,400
B=P4,000
50. X, Y and Z a partnership formed on January 1, 20x5 had the following initial investments:
X – P100,000
Y – P150,000
Z – P225,000
The partnership agreement states that profits and losses are to be shared equally by the partners after
consideration is made for the following:
- Salaries allowed to partner; P60,000 for X, P48,000 for Y and P36,000 for Z
- Average partner’s capital balances during the year shall be allowed 10%
Additional information:
- On June 30, 201x5 X invested on additional P60,000
- Z withdrew P70,000 from the partnership on September 30, 20x5.
- Share in the remaining partnership profit was P5,000 for each partner.
The total partnership capital on December 31, 20x5 was:
a. P405,000 c. P480,000
b. 671,500 d. 672,750
Solution:
Capital, January 1, 20x5 P475,000
Add: Investment 60,000
Net Income* 207, 750
Total P742,750
Less: Withdrawals 70,000
Capital, December 31, 20x5 P672,750
*Net income:
X Y Z Total
Salaries P60,000 P48,000 P36,000 P144,000
Interest on Average Capital:
X: 10% x P130,000 13,000
Y: 10% x P150,000 15,000
Z: 10% x P207,000 20,750 48,750
Balance 5,000 5,000 5,000 15,000
P207,750
51. X and Y are in partnership, sharing profits equally and preparing their accounts to 31 December each year. On 1
July 20x5, Z joined in the partnership, and from that date profits are shared X 40%, Y 40%, and Z 20%.
In the year ended 31 December 20x5, profits were:
6 months to 31 June 20x5 P 200,000
6 months to 31 December 20x5 300,000
It was agreed that X and Y only should bear equally the expense for a bad debt of P40,000 written- off in the six
months to 31 December 20x5 in arriving at the P300,000 profit. Which of the following correctly states X’s profit
share for the year?
a. P216,000 c. P220,000
b. 200,000 d. 224,000 (ACCA)
Solution:
First 6 months X Y Z Total
Equally 100,000 100,000 200,000
Second 6 months
Bad Debts Expense (equally) (20,000) (20,000) (40,000)
Balance (40%:40%:20%) (136,000) 136,000 68,000 340,000
300,000
Share in profit 216,000 500,000
52. S and T are in partnership and prepare their accounts to 31 December each year. On 1 July 20x5, U joined the
partnership. Profit sharing arrangements are:
6 months to 30 June 20x5 6 months to 31 December 20x5
Salary S P 15,000 P 25,000
Share of balance in profit S 60% 40%
T 40% 40%
U 20%
The partnership profit for the year ended 31 December 20x5 was P 350,000 accruing evenly over the year. What are
the partners' total profit shares for the year ended 31 December 20x5?
S T U___
a. P 196,000 P124, 000 P 30,000
b. 217,000 108,000 25,000
c. 155,000 130,000 65,000
d. 175,000 145,000 35,000
Solution:
First 6 months S T U Total
Salaries 15,000 15,000
Balance (60%:40%) 96,000 64,000 160,000
175,000
Second 6 months
Salaries 25,000 25,000
Balance (40%:40%:20%) 60,000 60,000 30,000 150,000
175,000
Evenly means average 196,000 124,000 30,000 350,000
53. AA and BB entered into a partnership as of March 1, 20x5 by investing P 125,000 and 75,000 respectively.
They agreed that AA, as the managing partner, was to receive a salary of P30,000 per year and a bonus
computed at 10% of the net profit after adjustment for the salary; the balance of the profit was to be distributed
in the ratio of their original capital balances. On December 31, 20x5 account balances were as follows:
Cash ………………… P70, 000 Accounts payable……… P 60,000
Accounts receivable... 67,000 AA, capital……………. 125,000
Furniture and Fixtures... 45,000 BB, capital …………… 75,000
Sales returns ………… 5,000 AA, drawing …………. (20,000)
Purchases …………… 196,000 BB, drawing …………. (30,000)
Operating expenses … 60,000 Sales …………………. 233,000
Inventories on December 31, 20x5 were as follows: supplies, P2, 500, merchandise, P73, 000. Prepaid insurance
was P950 while accrued expenses were P1, 550. Depreciation was 20% per year.
The partners' capital balances on December 31, 20x5, after closing the net profit and drawing account were:
AA BB AA BB_
a. 135,940 47,960 c. 139,680 48,680
b. 139,540 49,860 d. 142,350 47,670
Solution:
AA BB Total
Capital, March 1, 20x5 125,000 75,000 200,000

Add: Net Income* 34,540 4,860 39,400
Total 159,540 79,860 239,400
Less: Drawings 20,000 30,000 50,000
Capital, December 31, 20x5 139,540 49,860 189,400
*Allocation of Net Income AA BB Total
Salary (10 months) 25,000 - 25,000
Bonus* 1,440 - 1,440
Balance: 125:75 8,100 4,860 12,960
34,540 4,860 39,400
Sales 233,000
Less: Sales Returns 5,000
Net Sales 228,000
Less: Cost of Goods Sold:
Inventory, March 1 P -0-
Add: Purchases 196,000
Cost of Goods Available for Sale 196,000
Less: Inventory, December 31 73,000 123,000
Gross Profit 105,000
Less: Operating Expenses [60,000-2,500-950
+1,550+ (20% x 45,000 x 10/12) 65,600
Net Income P39, 400
*Bonus = 10% (NI – Salaries)
B = .10 [39,400 – (30,000 x 10/12)]
B = .10 (14,400)
B = 1,440
54. There are Craig are partners. Their current profit and loss ratios (70/30) are being changed to (60/40). The
partners decide to adjust their capital accounts at the date of the change in the profit and loss ratios to reflect the
difference between market value and book value of assets and liabilities. At the date of change, land has a
market value of 250,000 and a book value of 120,000. How much will Craig's capital account be adjusted at the
date of the change in the profit and loss ratios?
a. 52,000 increase c. 52,000 decrease

b. 13,000 increase d. 13,000 decrease
Solution:
(250,000 – 120,000) (.70 - .60)
55. James and Bruce are partners. They have shared profits and losses 70/30 for several years. The partnership
profit allocation agreement is currently being modified to 60/40. At the date of the change, the partners choose
to revalue assets with market value different from book value. One asset revalued is a building with a book
value of 370,000 and a market value of 520,000. One year after the profit and loss ratio is changed the building
is sold for 650,000. What is the amount of change to Bruce's capital account at the date the building I revalued?
a. 105,000 c. 45,000
b. 91,000 d. 39,000
Solution:
(650,000 – 370,000) (.30)
56. Using the same information on No. 55, what is the amount of change to Bruce’s capital account at the date the
building was sold?
a. P91,000 c. P39,000
b. P78,000 d. P52,000
Solution:
(P650,000 – P520,000) (.40)
Items 57 and 58 are based on the following information:
57. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the current 60/40 to 70/30.
At the date of the change, vacant land owned by the partnership has a book value of P50,000 and a market value
of P60,000. The partners chose to prepare an itemized list of assets with market values different from the book
values. If the land is sold in the future for P80,000, how much of the gain will be assigned to Johnson?
a. P18,000 c. P21,000
b. P20,000 d. P27,000
Solution:
(P60,000 – 50,000) (.60) + (P80,000 – 60,000) (.70)
58. If the land is sold in the future for P80,000, how much of the gain will be assigned to Pritchard?
a. P9,000 c. P12,000
b. P10,000 d. P13,000
Solution:
(P60,000 – 50,000) (.40) + (80,000- P60,000) (.30)
59. Karen and Andrea are currently changing their partnership profit and loss ratios from 75/25 to 60/40. They have
created a list of assets that have market and book value differences. One of the assets is a building with a
P300,000 market value and P200,000 book value. Two years after changing the profit and loss ratios, the
building is sold for P380,000. How much of the profit is allocated to Karen?
a. P108,000 c. P135,000
b. P123,000 d. P183,000
Solution:
(P300,000 – P200,000) (.75) + (P380,000- P300,000) (.60)
60. Eric and Phillip have been partners for several years. During that time, they have shared profits and losses
(60/40). They are currently revising the profit and loss ratios to (70/30). Eric and Phillip decide to adjust the
capital accounts at the date of the change to reflect the difference between market value and book value of
assets and liabilities. At the date of the change, the partnership owns a building with a book value of P350,000
and a market value of P600,000. How much will Eric’s capital account be adjusted at the date of the change in
the profit and loss ratio?
a. P25,000 increase c. P25,000 decrease

b. P50,000 increase d. P50,000 decrease
Solution:
(P600,000-350,000) (.70 - .60)
ASSIGNMENT OF INTEREST TO A THIRD PARTY:
61. Capital balances and profit and loss sharing ratios of the partners in the BIG Entertainment Gallery are as
follows:
Betty, capital (50%) P 140,000
Iggy, capital (30%) 160,000
Grabby, capital (20%) 100,000
Total P 400,000
Betty needs money and agrees to assign half of her interest in the partnership Yessir for P 90,000 cash. Yessir
pays directly to Betty. Yessir does not become a partner.
What is the total capital of the BIG partnership immediately after the assignment of the interest to Yessir?
a. P 310,000 c. P 490,000
b. 200,000 d. 400,000
Solution:
Betty, capital (50%) P 140,000
Iggy, capital (30%) 160,000
Grabby, capital (20%) 100,000
Total P 400,000
Betty, capital (P 140,000 x 50%) 70,000

Yessir, capital 70,000
62. Jenna is about to purchase some of Cynthia’s partnership interest. Cynthia currently has partnership equity of
P 84, 500. If Jenna pays Cynthia P 30,000 for 30 percent of her capital, what amount will be recorded in the
partnership accounting records?
Jenna Cynthia Jenna Cynthia
a. P30,000 credit P25,350 debit c. P30,000 credit P30,000 debit
b. P25,350 credit P25,350 debit d. P25,350 debit P25,350 credit
Solution:
P 84, 500 x 30% = P25, 350.
* If problem is silent, book value method is used.
PARTNERSHIP DISSOLUTION: ADMISSION OF A NEW PARTNER – PURCHASE OR INVESTMENT
63. Presented below is the condensed balance sheet of the partnership of KK, LL and MM who share profits and
losses in the ratio of 6:3:1, respectively:
Cash P 85,000 Liabilities P 80,000
Other Assets 415,000 KK, Capital 252,000
LL, Capital 126,000
________ MM, Capital 42,000
Total P500,000 Total P500,000
The partner agree to sell NN 20% of their respective capital and profit and loss interests for a total payment of
P90,000. The payment by NN is to be made directly to the individual partners. The capital balances of KK, LL and
MM, respectively after admission of NN are:
a. P198,000; P 99,000; P 33,000. c. P216,000; P108,000; P36,000.

b. P201,600; P100,800; P 33,600. d. P255,600; P127,800; P42,600.
Solution:
The capital balances after admission are as follows:
KK: P 252,000 x 80% = P 201,600
LL: P 126,000 x 80% = 100,800
MM: P 42,000 x 80% = 33,600
64. Using the same information in No. 58, assuming that implied goodwill (or revaluation of asset) is to be recorded
prior to the acquisition by NN. The capitals of KK, LL, and MM, respectively after admission of NN are:
a. P198,000; P 99,000; P33,000. c. P216,000; P108,000; P36,000.

b. P201,600; P100,800; P33,600. d. P255,600; P127,800; P42,600.
Solution:
Amount paid P 90,000
Less: Book value of interest acquired:
(P250,000 + P126,000 + P42,000) x 20% 84,000
Excess P 6,000
Divided by: 20%
Goodwill P 30,000
KK: [(P252,000 + (P30,000 x 60%)] x 80% = P 216,000

LL: [(P126,000 + (P30,000 x 30%)] x 80% = P 108,000
MM: [(P42,000 + (P30,000 x 10%)] x 80% = P 36,000
65. XX, YY and ZZ are partners who share profits and losses in the ratio of 5:3:2, respectively. They agree to sell a
25% of their respective capital and profits and losses ratio for a total payment directly to the partners in the
amount of P140,000. They agree that goodwill or revaluation of assets of P 60,000 is to be recorded prior to
admission of AA. The condensed balance sheet of the XYZ partnership is as follows:
Cash P 60,000 Liabilities P100,000
Non-cash Assets 540,000 XX, Capital 250,000
YY, Capital 150,000
_______ ZZ, Capital 100,000
Total P600,000 Total P600,000
The capital of XX, YY and ZZ respectively after the payment and admission of AA are:
a. P187,500; P112,500; P 75,000. c. P280,000; P168,000; P112,000

b. P210,000; P126,000; P 84,000. d. P250,000; P150,000; P100,000.
Solution:
Amount paid P140,000

(P250,000 + P150,000 + P100,000) x 25% 125,000
Excess P 15,000
Divided by: 25%
Goodwill / asset adjustments P 60,000
XX: [(P250,000 + (P60,000 x 50%)] x 75% = P210,000
YY: [(P150,000 + (P60,000 x 30%)] x 75% = P126,000
ZZ: [(P100,000 + (P60,000 x 20%)] x 75% = P 84,000
66. On June 30, 20x5, the balance sheet of Western Marketing, a partnership, is summarized as follows;
Sunday Assets P 150,000
West, Capital 90, 000
Tern, Capital 60,000
West and Tern share profit and losses at a 60:40 ratio, respectively. They agreed to take in Cuba as a new partner,
who purchases 1/8 interest of West and Tern for P 25,000. What is the amount of Cuba’s capital to be taken up in
the partnership books if book value method is used?
a.12,500 c. 25,000
b. 18,750 d. 31, 250
Solution:
Amount paid P 25,000
Less: Book values of interest acquired:
P 150, 000 x 1/8 18, 750
Gain of West and Tern P 6,250
67. PP contributed P 24,000 and CC contributed P 48, 000 to form a partnership, and they agreed to share profits in
the ratio of their original capital contributions. During the first year of operations, they made a profit of P 16,
290; PP withdraw P 5, 050 and CC P 8, 000. At the start of the following year, they agreed to admit GG into the
partnership. He was to receive a one- fourth interest in the capital and profits upon payment of P 30, 000 to PP
and CC, whose capitals accounts were to be reduced by transfers to GG’s Capital account of amounts of
sufficient to bring them back to their original capital ratio. How should the P 30, 000 paid by GG be divided
between PP and CC?
a. PP, P 9, 825; CC, P 20, 175 c. PP, P 10, 000; CC, P 20,000
b. PP, P 15,000; CC, P 15,000 d. PP, P 9,300; CC, P 20, 700
Solution:
PP CC TOTAL
Capital balance before net income P 24, 000 P 48, 000 P 72, 000
Net income (24:48) or (1/3: 2/3) 5,430 10, 860 16, 290
Drawings (5, 050) (8,000) (13, 050)
Capital Balances before admission P 24, 380 P 50, 860 P 75, 240
Amount Paid P 30, 000
Less: Book value of interest acquired (75, 240 x ¼) 18, 810
Gain of PP and CC P 11, 190
Therefore, the P 30, 000 cash should be allocated as follows:

PP CC TOTAL
Capital balances before Admission P 24, 380 P 50,860 P 75, 240
Required capital balances
[P & L ratio – 1/3: 2/3 of
P 56, 430 (P 75, 240- P 18, 810)] 18, 810 37, 620 56, 430
Transfer of capital to needed to
Bring back to original capital ratio P 5, 570 P 13, 240 P 18, 810
Add: Personal Gain (refer above), 1/3: 2/3 3, 730 7, 460 11, 190
Personal cash distribution P 9, 300 P 20, 700 P 30, 000
68. The capital accounts of the partnership of NN, VV, and JJ on June 1, 20x5 are presented below with their
respective profit and losses ratios:
NN P 139, 200 ½
VV 208, 800 1/3
JJ 96, 000 1/6
On June 1, 20x5, LL is admitted to the partnership when LL purchased, for P 132, 000, a proportionate interest from
NN and JJ in the net assets and Profits of the Partnership. As a result of a transaction LL acquired a one fifth
interest in the net asset and profits of the firm. What is the combined gain realized by NN and JJ upon the same of a
portion of their interest in the partnership to LL?
a. P 0.00 c. P 62, 400
b. P 43, 200 d. P 82, 000
Solution:
Amount paid P 132, 000
(P 139, 200 + P 208, 800 + P 96, 000) x 1/5 88, 800
Gain P 43, 200
69. Sam and Ray are partners with capital accounts of P 150, 000 and P 225, 000, respectively. They considering
allowing Richard to purchase 30 percent of Ray’ s equity. At the date of the proposed transaction, Sam and Ray
want to revalue the partnerships assets and allocate any differences based on their 40/60 profit sharing
agreement. Assume that the net market versus book value differences is P 100, 000. What amount would
Richard pay for the 30 percent interest?
a. P 67, 500 c. P 97, 500

b. 76, 500 d. The amount cannot be determining from the information provided
Solution:
The amount that Richard will pay Ray depends on many factors and cannot be determined from the information
provided here.
70. On January 31. 20x5, partners of Lon, Mac & Nan, LLP, had the following loan and capital balances (after
closing entries for January) :
Loan receivable from Lon P 20, 000 dr.
Loan payable to Nan 60, 000 cr.
Lon, Capital 30, 000 dr
Mac, Capital 120, 000 cr.
Nan, Capital 70, 000 cr.
The partnerships income sharing ratio was Lon, 50%; Mac, 20%, and Nan, 30%. On January 31, 20x5, Ole was
admitted to the partnership for 20% interest in total capital of the partnership in exchange for an investment of P 40,
000 cash. Prior to Ole’s admission, the existing partners agreed to increase the carrying amount of partnership’s
inventories to current fair value, up P 60, 000 increase. The capital account to be credited to Ole:
a. P 60, 000 c. P 52, 000

b. P 40, 000 d. P 46, 000
Solution:
Total agreed capital of the new partnership
(equal to total contributed capital*) P 260, 000
Multiplied by: interest acquired 20%
Capital account to be credited to Ole P 52, 000
71. MM and OO are partners with capital balances of P50, 000 and P70, 000, respectively, and they share profits
and losses equally. The partners agree to take PP into the partnership for 40% interest in capital and profits,
while MM and OO each retain a 30% interest. PP pays P60, 000 cash directly to MM and OO for his 40%
interest, and goodwill implied by PP’s payment is recognized on the partnership books. If MM and OO transfer
equal amounts of capital to PP, the capital balances after PP’s admittance will be:
a. MM, P35, 000; OO, P55,000; PP, 60, 000 c. MM, P36,000; OO, P36, 000; PP, P48, 000
b. MM, P45,000; OO, P45,000; PP, P60,000 d. MM, P26,000; OO, P46, 000; PP, P48, 000
Solution:
Amount Paid P60, 000

(P50, 000 + P70, 000) x 40% 48, 000
Excess P12, 000
Divided by 40%
Goodwill P30, 000
MM: [P50, 000 + (P30, 000 x P 50%)] – (1/2 x P60, 000) P35, 000
OO: [P70, 000 + (P30, 000 x P 50%)] – (1/2 x P60, 000) P55, 000
PP: Amount P60, 000
Or: MM OO PP Total
Capital Balances Before Admission P 50, 000 P70, 000 P -
P120, 000
Goodwill (equally) 15, 000 15, 000 - 30, 000
P65, 000 P85, 000 P - P150, 000
Admission by purchase
(transfer ½ of P60, 000) 30, 000 30, 000 60, 000 -
Capital balances after admission P35, 000 P55, 000 P60, 000 P150, 000
72. Using the same information in Number 71, and the partner’s decided to have a cash settlement among
themselves right after the admission of PP, i.e., the capital balance should be made in accordance with the new
profit and loss ratio, what would be the capital balances after such transaction?
a. MM, P35, 000; OO, P55,000; PP, 60, 000 c. MM, P36,000; OO, P36, 000; PP, P48, 000
b. MM, P45,000; OO, P45,000; PP, P60,000 d. MM, P26,000; OO, P46, 000; PP, P48, 000
Solution:
MM OO PP Total
Capital Balance After Admission P 35, 000 P55, 000 P60, 000 P150, 000
Cash Settlement 10, 000 ( 10, 000) - -
Capital Balance After Cash
Settlement P45, 000 P45, 000 P60, 000 P150, 000
Profit and Loss Ratio P 30% 30% 30% 30%
73. The following condensed balance sheet is presented for the partnership of LL, PP and QQ, who share profits
and losses in the ratio of 4:3:3, respectively:
Cash P 90, 00
Other Assets 830,000
LL, Loan 20,000
P 940, 000
Accounts Payable P 210, 000

QQ, Loan 30, 000
LL, Capital 310, 000
PP, Capital 200, 000
QQ, Capital 190, 000
P940, 000
Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership decides to admit
FF as a new partner, with a 20% interest. No goodwill or bonus is to be recorded. How much should FF contribute
in cash or other assets?
a. P 140, 000 c. P175, 000

b. P 142, 000 d. P 177, 500 (AICPA)
Solution:
Total agreed capital of the new partnership

(P310, 000 + P200, 000 + P190, 000 /40%) P875, 000
Less: Contribution of old partners (LL, PP, and QQ) 700,000
Cash investment of FF P 175, 000
or, alternatively:
Total agreed capital of the new partnership P875, 000
Multiplied by: capital interest of FF 20%
P 175, 000
74. CC and DD are partners who share profits and losses in the ratio of 7:3, respectively. On October 21, 20x2, their
respective capital accounts were as follows:
CC P35, 000
DD 30, 000
P65, 000
On the date they agreed to admit EE as a partner with a one-third interest in the capital and profits, and upon his
investment of P 25, 000. The new partnership will begin with a total capital of P90, 000. Immediately after EE’s
admission, what are the capital balances of CC, DD and EE, respectively?
a. P30, 000; P 30, 000; P 30,000 c. P31, 667; P28, 333; P31, 000
b. P31, 500; P 28,500; P 30, 000 d. P35, 000; P30, 000; P25, 000
Solution:
Total Agreed Capital of the New Partnership P90, 000

Less: Total Contributed Capital (P35, 000 + P25, 000) 90, 000
P 0
CC [P35, 000 – (70% x P5, 000)] P 31, 500

DD [P30, 000 – (30% x P5, 000)] 28,500
EE (P90, 000 x 1/3) 30,000
Total Agreed Capital P 90, 000
75. The capital accounts for the partnership of LL and MM at October 31, 20x5 are as follows:
LL, Capital P80, 000
MM, Capital 40, 000
P 120, 000
The partners share profits and losses in the ratio of 3:2 respectively.
The partnership is in desperate need of cash, and the partners agree to admit NN as a partner with one-third in the
capital and profits and losses upon his investment of P30, 000. Immediately after NN’s admission, what should be
the capital balances of LL, MM and NN respectively, assuming bonus is to be recognized?
a. P50, 000; P50, 000; P50, 000 c. P66, 667; P33, 333; P50, 000
b. P60, 000’ P60, 000; P60, 000 d. P68, 000; P32, 000; P50, 000
Solution:
Total Agreed Capital (P120, 000 + P30, 000) P150, 000

Multiplied by: NN’s Capital Interest of FF 1/3
Agreed Capital to be Credited to NN P 50, 000
Contributed/Invested Capital of NN 30, 000
Bonus to NN (new partner) P20, 000
The bonus to NN will be deducted to LL and MM:

LL: [P80, 000- (P 20,000 x 3/5)] P 68, 000
MM: [P40, 000- (P 20,000 x 2/5)] 32,000
NN 50,000
Total Agreed Capital P 150, 000
76. OO and TT are partners with capital balances P60,000 and P20,000, respectively. Profits and losses are divided
in the ratio of 60:40. OO and TT decided to form a new partnership with GG, who invested land valued at
P15,000 for a 20% capital interest in the new partnership. GG’s cost of the land was P12,000. The partnership
elected to use the bonus method to record the admission of GG into the partnership. GG’s capital account
should be credited for:
a. P12,000 c. P16,000
b. P15,000 d. P19,000
Solution:
Total agreed capital (P60,000 + P20,000 + P15,000) P95,000
Multiplies by: GG’s capital interest 20%
Agreed capital to be credited interest P19,000
77. The partnership of Marissa and Olga is being dissolved, and the assets and equities at book value and fair value
and profit and loss ratios at January 1.20x5 are as flows:
Book Value Fair Value
Cash P20,000 P20,000
Accounts receivable-net 100,000 100,000
Plant assets-net 100,000 120,000
P270,000 P440,000
Marissa and Olga agree to admit Trent into the partnership for a one-third interest. Trent invest P95,000 cash and a
building to be used in the business with a book value to Trent for P100,000 and a fair value of P120,0005. Compute
the capital balance of Olga after the admission, assuming that the assets are valued and goodwill is recognized.
a. P175,000 c. P195,000
b. P155,000 d. P205,000
Solution:
Total agreed capital (P95,000 + P12,000) +1/3) P645,000
Less: Total contributed capital* 605,000
Goodwill to old partners P40,000
Marissa: P120,000 + (P44,000, FV- P120,000, BV)x1/2 P205,000
Olga: P100,000 + (P170,000x1/2) 185,000
Total contributed capital of Marissa and Olga P390,000
Add: Contribution of Trent(P95,000 + P120,000) 215,000
Total contributed capital P605,000
Olga: P185,000 + (P40,000x1/2) P205,000
78. AA and BB entered into a partnership on May 31, 20x5, contributing cash of P48,000 and 32,000, respectively,
and agreeing to divide earnings in the ratio of their initial investment after allowing annual salary allowance of
P12,000 each. On December 31, 20x5 the Income Summary account had a credit balance of P14,000 for AA
and P10,000 for BB.
At the beginning of the next year, CC was admitted into the firm as a new partner with a 33-1/3% interest for a
capital credit equal to his cash investment of P60,000. AA and BB then effected a private cash settlement
between themselves in order to make the capital balances conform to anew profit-sharing ratio of 4:2:3,
respectively, with salary allowances scrapped. How much of the amount of the private cash settlement effected
between the old partners?
a. P5,000 c. P12,000
b. P9,000 d. P15,000
Solution:
Total agreed capital (P60,000, 33 1/3%) P180,000
Less: Total contributed capital:
Initial investments (P48,000 + P32,0000) P80,000
Net Income 34,000
Drawings (P140,000 + P10,000) (24,000)
Contributed Capital of AA and BB P90,000
Investment of CC 60,000 150,000
Goodwill to old partners (AA and BB) P30,000
AA BB CC TOTAL
Initial Investments, 5/31/x4 P 48,000 P 32,000 - P 80, 000
Net Income 19,000 15,000 - 34,000
Drawings (14,000) 10,000 - (24,000)
Capital Balance, 12/31/x4 P 53,000 P37,000 - P 90,000
Additional Investment - - 60,000 60,000
Goodwill (refer to page 78) 18,000 12,000 - 20,000
Total agreed capital P 71,000 P 49,000 P 60,000 P 180,000
Required capital balance 80,000 40,000 60,000 180,000
(P&L ratio 4:2:3)
Private cash settlement 9,000 (9,000) - -
79. AA, BB and CC are partners sharing profits in a 5:3:2 ratio, and with capital balances of P95,000, P80,000 and
P60,000, respectively, on December 31, 20x5. The partners decided to admit DD as a new partner on January
1,20x6. DD will contribute cash of P80,000 to the partnership and also pay P10,000 for 15% of BB’s share. DD
is to have a 20% share in profits. After the admission of DD, the total capital will be P330,000 and DD’s capital
will be P70,000. After the admission of DD, BB’s capital balance would 3be:
a. P72,600 c. P79,100
b. P74, 600 d. P81,100
Solution:
AA BB CC TOTAL
P 95,000 P 80,000 P 60,000 P- P 235,000
(12,000) 12,000 -
80,000 80,000 80,000
P 95,000 P 68,000 P 60,000 P 92,000 P 315,000
11,00 6,600 4,400 (22,000) -
7,5000 4,500 3,000 - 15,000
P 113,500 P 79,100 P67, 400 P 70,000 P 3330,00
Capital balances before admission of DD
Admission by purchase: book value:

(15%x P80,000)
Admission by investment
Total contributed capital
Bonus to old partners (5:3:2)
Goodwill to old (5:3:2)
Total Agreed Capital
80. Jesse, Joseph and Leslie are partners with capital accounts of P70,000, P120,000 and P90,000, respectively. The
partnership shares profits and losses 45%, 30% and 25%, respectively. They are considering allowing Hans to
join the partnership by investing directly into the partnership. The partners intend to revalue the assets before
Han’s admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds book value
P15,000, how much will Hans invest to acquire a 20% equity interest in the partnership?
a. P 107,500 c. P 86,000
b. P 100,000 d. P 70,000
Solution:
-[{P70,000 + P120,000 + P90,000 + P150,000 + }/.80](.20)
81. Sandra and Joshua are partners. They have capital account balances of P250,000 and P200,000, respectively,
and they share profits and losses 70/30. The partners are considering admitting Judy as a new partner with a 25
percent equity interest for an investment in the partnership of P180,000. Before admission, Sandra and Joshua
will revalue the partnership’s assets. If the net increase in the partnership’s assets is P125,000, what will be the
balance in Sandra’s capital account immediately before Judy’s admission?
a. P262,500 c. P528,500
b. P337,500 d. P575,000
Solution:
P250,000 + P22,500
82. The following are capital account balances and profit and loss ratios of the partners in Precious Company.
Capital P & L Ratio
LL P2,250,000 2
OO P 750,000 1
They agree to admit RR as a partner with a 25% interest in capital upon her investment of P1,000,000. LL, OO, and
RR are to share profits 5:3:2, respectively. Subsequently, TT joins the partnership by investing P1,200,000 for a
20% interest in profits and capital, the old partners are to share profits in their original ratio. Assuming the goodwill
method is used, how much is the goodwill to be recorded upon the admission of TT?
a. P800,000 c. P400,000
b. P600,000 d .P200,000
Solution:
Total agreed capital (P1,000,000 / 25% or P3,000,000 /75%) P4,000,000

Less: Total contributed capital
(P2,250,000 + P750,000 + P1,000,000) 4,000,000
P -0-
With the admission of TT:
Total agreed capital (P1,200,000 / 20%) P6,000,000
Less: Total contributed capital (which is the total agreed
Capital in the previous admission of
P4,000,000 + 1,200,000) 5, 200,000
Goodwill P 800,000
83. RR and XX formed a partnership and agreed to divide initial capital equally, even though RR contributed
P25,000 and XX contributed P21,000 in identifiable assets. Under the bonus approach to adjust the capital
accounts. XX’s unidentifiable asset should be debited for:
a. P11,500 c. P2,000
b. P4,000 d. 0
Solution:
Under the bonus method, unidentifiable assets (i.e., Goodwill) are not recognized. The total resulting capital is the
FMV of the tangible investments of the partners. Thus, there would be no unidentifiable assets recognized by the
creation of this new partnership.
84. In the AD partnership, Allen’s capital is P140,000 and Daniel’s is P40,000 and they share income in a 3:1 ratio,
respectively. They decided to admit David to the partnership. Each of the following questions is independent of
the others. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased
before David is admitted. David invests P40,000 for a one-fifth interest. What is the amount of inventory
written down?
a. P4,000 c. P15,000
b. P10,000 d. P20,000
Solution:
Total agreed capital after the admission of David:
(P40,000 x 5) P 200,000
Less: Contribution/Investment of David 40,000
Capital balances of AD before the admission of David P 160,000
Capital contribution (P140,000 + P 40,000) 180,000
Reduction of inventory P 20,000
85. Using the same information in no. 84, David directly purchases a one-fifth interest by paying Allen P34,000 and
Daniel P10,000. The land account is increased before David is admitted. By what amount is the land account
increased?
a. P40,000 c. P20,000
b. P36,000 d. P10,000
Solution:
Amount paid: (P34,000 + P10,000) P 44,000
(P140,000 + P40,000) x 1/5 36,000
Excess P 8,000
Divided by / capitalized at 1/5
Amount of land to be increased. P 40,000
86. MM and NN are partners who have capitals of P6,000 and P4,800 and share profits in the ratio of 3:2. OO is
admitted as a partner upon investing cash of P5,000, with profits to be shared equally. Assume that OO is
allowed a 25% interest in the firm. (1) the capital balance of MM after the admission of OO using goodwill
method and (2) how much will NN gain or lose by the use of bonus method over goodwill method.
a. [1] P7,120; (2) NN will lose P140 c. [1] P8,520; (2) NN will lose P1,260
b. [1] P7,120; (2) NN will gain P1,260 d. [1] P8,520; (2) NN will gain P140
Solution:
(1) Goodwill method:
Total agreed capital (P5,000+25%) P20,00
Less: Total contributed capital (P6,000+4,800+5,000) P15,800
Goodwill to all partners P4,200
Capital balances after the admission of OO:
MM: [P6,000+P(P4,200×3/5)] P8,520
NN: [P4,800+P(4,200×2/5)] P6,480
OO: P5,000
Total agreed capital P20,000
(2) Bonus method:
Total agreed capital (P6,000+P4,800+P5,000) P15,800
Multiply by: OO's capital interest 25%
Agreed capital to be creditto OO P 3,950
Contributed/invested capital of P 5,000
Bonus to MM and NN (old partner) P 1,050
The bonus would be added to MM and NN:
MM: [(P60,000+(P1,050×3/5)] P 6,630
NN: [ P4,800+(P1,050×2/5)] P 5,220
OO: P3,950
Total agreed capital P 15,800
For purposes of comparing bonus and goodwill, there are two alternatives presented:
(1) If goodwill is found to exist:
MM NN OO
Goodwill method is used P8,520 P6,480 P5,000
Bonus method is used P6,630 P5,220 P3,950
Add: Goodwill (allocated equally) P1,400 P1,400 P1,400
P 8,030 P6,620 P 3.25
(Gain) loss - bonus method P490 P (140) P 350
(2) If goodwill is not realized and written off as a loss:
MM NN OO
Goodwill method is used P8,520 P6,480 P5,000
Less: Write off of goodwill
(allocated equally) P1,400 P1,400 P1,400
P 7,120 P5,060 P3,600
Bonus method is used P6,630 P5,220 P 3,950
(Gain) loss- bonus method P490 (P140) P350
87. AA and BB are partners who have capital of P600,000 and P480,000 sharing profits in the ratio of 3:2. CC
admitted as a partner upon investing P500,000 for 25% interest in the firm, profits to be shared equally. Given
the choice between goodwill and bonus method. CC will:
a. Prefer bonus method due to CC's gain of P35,000

b. Prefer bonus method due to CC's gain of P140,000
c. Prefer goodwill method due to CC's gain of P140,000
d. Be indifferent for the goodwill and bonus methods are the same.
Solution:
Goodwill method:
Total agreed capital (P500,000+25%) P2,000,000
Less: Total contributed capital (P600,000+P480,000+P500,000) P1,580,000
Goodwill to old partners P420,000
AA: [(P600,000+(P420,000×3/5)] P852,000

BB: [(P480,000+(P420,000×2/5)] P648,000
CC: P500,000
Total agreed capital P2,000,000
Bonus Method:
Total agreed capital [(P600,000+P480,000+P500,00)] P1,580 ,000
Multiplied by: CC's capital interest 25%
Agreed capital to he credited CC P395,000
Contributed / invested capital at CC P 500,000
Bonus to AA and BB ( old partner ) P105,000
The bonus would be added to AA and BB:
AA: [(P600,000+(P105,000×3/5)] P 663,000
BB: [(P460,000+(P105,000×2/5)] P522,000
CC: 395,000
Total agreed capital P1,580,000
For purpose of comparing and goodwill assume that goodwill is not realized and it should be written off as a loss:
AA BB CC
Goodwill method is used P852,000 P 648,000 P500,000
Less: White off
goodwill (equally) P140,000 P140,000 P140,000
P 712,000 P508,000 P360,000
Bonus method is used P 663,000 P 522,000 P395,000
Gain (loss)- bonus method P49,000 (P114,000) P35,000
88. On June 30, 20x5 the statement of financial position for the partnership of CC, MM, and PP together with their
respective profit and loss ratios were as follows:
Asset at cost P180,000
CC, loan P9,000

CC, capital (20%) P 42,000
MM, capital (20%) P39,000
PP, capital (60%) P 90,000
Total P 180,000
CC decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to their fair value of
P216,000 at June 30, 20x5.It was agreed that the partnership interest, including CC's loan which is to be repaid in
full. No goodwill is to be recorded. After CC's retirement, what is the balance of MM's capital account?
a. 36,450 c. 45,450
b.39,000 d. 46,200
Solution:
Amount paid P61,200
Less: Book value of interest of CC (20%) P58,200
Bonus to retiring partner P3,000
Total interest of CC:
Loans: P9,000
Capital P 42,000
Add: Share in adjustment of asset
(P216,000-P180,000×20% P7,200
Total interests P49,200
Therefore, the capital balance of MM would be: P58,200
MM: [P39,000+(P216,000-P180,000)×20%
(P3,000×2/8)] P 45,450
New profit and loss ratio:
MM: 2/8
PP: 6/8
89. The December 31,2x15 statement of financial position of the BB, CC, and DD partnership is summarized as
follows:
Cash P100,00 CC, loan P100,000
Other assets at cost P500,000 BB, Capital P100,000
CC, Capital P200,000
DD, capital P200,000
P600,000 P600,000
The partners share profits and losses as follows: BB:20%, CC: 30% and DD: 50%. CC is retiring from the
partnership and the partners have agreed that other assets should be adjusted to their fair value of P600,000 at
December 31, 2x15.They further agree that CC will receive P244,000 cash for his partnership interest exclusive of
the loan, which is to be paid in full. No goodwill implied by CC's payment will be recorded. After CC's retirement l,
the capital balances of BB and DD, respectively, will be:
a. P116,000 and P240,00 c. P100,000 and P200,000

b. P101,714 and P254,286 d. P73,143 and P182,857
Solution:
BB: P100,000 + (P600,000 - P500,000) × 20% = P120,000 - (P14,000 × 2/7) = P116,000
CC: P200,000 + (P600,000 - P500,000) × 30% = P230,000
DD: P200,000 + (P600,000 - P500,000) × 50% = P250,000 - (P14,000×5/7) = P240,000
Less: By at interest of CC P230,000
90. On June 20,2015 the condensed balance sheet for the partnership of DD, FF, and GG, together with their
respective profit and loss sharing percentage was as follows:
Assets, net of liabilities P320,000
DD, Capital (50%) P160,000
FF, Capital (30%) P96,000
GG, Capital (20%) P64,000
P320,000
DD decided to retire from the partnership and by mutual agreement is to be paid P180,000 out of partnership funds
for his interest. Total goodwill or adjustment in asset implicit in the agreement is to be recorded. After DD's
retirement, what is the capital balance of the other partners?
FF GG FF GG
a. P 84,000 P56,000 c. P 108,000 P72,000
b. P102,000 P68,000 d. P120,000 P80,000
Solution:
Less: BV of interest of CC P160,000
Excess/partial goodwill P20,000
Divided by 50%
Total goodwill P40,000
Therefore, the capital of the remaining partners

PP: [P96,000+(P40,000×30%)] P108,000
GG: [P64,000+(P40,000×20%)] P72,000
91. PP, RR and SS were partners with capital balances as of January 1, 20x5, of P20,000, P30,000 and P40,000
respectively, sharing profit and losses on a 5:3:2 ratio.
On July 1, 20x5 PP withdraw from the partnership. Partners agreed that at the time of withdrawal, certain
inventories had to be revalued at P14,000 from its cost of P10,000. For six month period ending June 30,20x5,
the partnership generated a net income of P28,000. Further, partners agreed to pay PP, P39,000 for his interest
and that the remaining partners’ capital accounts, would be adjusted for whatever goodwill the settlement would
generate. The payment of PP included a goodwill of:
a. P3,000 c. P10,000
b. P5,000 d. P8,500
Solution:
Amount paid P39,000

Less: Book value of interest of PP* (50%) 36,000
Partial goodwill (to PP) P 3,000

*Total interest of PP:
Capital P20,000
Add: Share in adjustment of asset (P14,000 – P10,000) x 50% 2,000
Share in net income (P28,000 x 50%) 14,000
P36,000
92. The condensed balance sheet of the partnership of EE, FF and GG with corresponding profit and loss sharing
percentage as of June 30, 20x5 was as follow:
Net Assets P480,000
EE, Capital (50%) P240,000
FF, Capital (30%) 144,000
GG, Capital (20%) 96,000
P480,000
As of said date, EE retired from the partnerships. By mutual agreement, he was paid P270,000 for his interest in the
partnership. Partial goodwill or adjustment in assets was to be recorded. After EE’s retirement, the total net assets of
the partnership was:
a. P300,000 c. P240,000
b. P210,000 d. P270,000
Solution:
Amount Paid P270,000
Less: Book Value of Interest of EE (50%) 240,000
Partial Goodwill P 30,000
Journal Entry:
EE, capital 240,000

Goodwill 30,000
Cash 270,000
Net Assets, Before Retirement P480,000

Partial Goodwill 30,000
Cash Paid (270,000)
P240,000
93. Using the same information in Number 92, except that total goodwill or adjustments in assets was to be
recorded. What will be the total net assets of the partnership after EE’s retirement?
a. P300,000 c. P240,000
b. P210,000 d. P270,000
Solution:
Less: Book Value of Interest of EE (50%) 240,000
Excess / Partial Goodwill P 30,000

Total Goodwill P 60,000
Journal Entry:
EE, capital 240,000
Goodwill 60,000
Cash 270,000
FF, capital (P60,000 x 30%) 18,000
GG, capital (P60,000 x 20%) 12,000
Net assets before retirement P480,000

Total goodwill 60,000
Cash paid (270,000)
P270,000
94. A, Smith, a partner in an accounting firm, decided to withdraw from the partnerships, Smith’s share of the
partnership profits and losses was 20%. Upon withdrawing from the partnership he was paid P88,800 in final
settlement for his interest. The total of the partner’s capital accounts before recognition of partnership goodwill
prior to Smith’s withdrawal was P252,000. After his withdrawal the remaining partner’s capital accounts,
excluding their share of goodwill, totaled P192,000. The total goodwill of the firm was:
a. P144,000 c. P192,000
b. P168,000 d. P300,000
Solution:
Amount Paid P88,800
Less: Book Value of Interest of - Smith (20%)
Total Partner’s Capital After Withdrawal P252,000
Less: Total Partner’s Capital after Withdrawal 192,000 60,000
Excess / Partial goodwill P28,800
Total Goodwill P144,000
95. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent, and 45 percent,
respectively. Bob informed Claire and Jack that he is withdrawing from the partnership. The partner’s capital
accounts at the date of Bob’s withdrawal are P150,000, P135,000 and P225,000, respectively. The partnership
agreement states that the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners determine that the goodwill
associated with Bob is P22,500. Assuming that Bob’s equity is purchased by a new partner (Deborah) approved
by Claire and Jack, what is the amount of Deborah’s initial capital account?
a. P150,000
b. P170,000
c. P172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s equity is not known
Solution:
P150,000 + P22,500= P172, 500
96. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent, and 45 percent,
respectively. Bob informed Claire and Jack that he is withdrawing from the partnership. The partners’ capital
accounts of the date of Bob’s withdrawal are P150,000, P135,000, and P225,000, respectively. The partnership
agreement states that the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners determine that the goodwill
associated with Bob is P22,500. Assuming that Bob’s equity is purchased by Claire (60 percent) and Jack (40
percent), what is the amount of Claire’s capital account at the date of Bob’s withdrawal?
a. P307,500 c. P186,750
b. P238,500 d. P180,000
Solution:
P135,000 + (150,000 + P22,500) (.60)
97. Bonnie. Gwen, and Sally are partners with capital account balances of P350,000, P280,000 and P200,000
respectively. Sally informed Bonnie and Gwen that she is withdrawing from the partnership. The partners’ share
profits and losses 45 percent, 30 percent, and 25 percent, respectively. The partnership agreement states that the
goodwill, if any, of the withdrawing partner will be recognized at the date of withdrawal. In this instance, the
partners determine that the goodwill associated with Sally is P40,000. Assuming that Sally’s Equity is
purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of Gwen’s capital account at the
date of Sally’s withdrawal?
a. P494,000 c. P424,000
b. P446,000 d. P376,000
Solution:
P280,000 + (P200,000 + P40,000) (.40)
98. Bonnie, Gwen, and Sally are partners with capital account balances of P350,000, P280,000 and P200,000
respectively. Sally informed Bonnie and Gwen that she is withdrawing from the partnership. The partners’ share
goodwill of the partnership will be recognized at the date of withdrawal. In this instance, the partners determine
that the partnership’s goodwill/revaluation of assets P150,000. Assuming that Sally’s equity is purchased by a
new partner (Mary) approved by Bonnie and Gwen, what is the amount of Mary’s initial capital account?
a. P87,500
b. P237,500
c. P350,000
d. The amount cannot be determined because the amount Mary paid for Sally’s equity is not known.
Solution:
P200,000 + (P150,000 x .25)
Items 99 to 102 are based on the following information;
Erika, Frederic and Gustav are partners in a manufacturing concern. Relevant data regarding income-sharing
relationships and capital balances are as follows:
Partner Capital Balance Income Share
Erica P 150,000 35%
Frederic 100,000 30%
Gustav 200,000 35%
Frederic decided to retire and receives P145,000 in cash from the partnership.
99. If the bonus method is used to account for the retirement, Erica’s capital balance subsequent to Fredric’s
retirement will be:
a. P105,000 c. P134,250
b. P127,500 d. P150,000
Solution:
Erica’s capital balance is reduced by (35%/70%) x P45,000 bonus to Frederic or P22,500. Therefore, the
capital of Erica amounted to PO125,000 = P150,000 – P22,500.
100. If the excess payment is attributed entirely to goodwill, and the partial goodwill approach is used, goodwill will
be recognized at:
a. P45,000 c. P100,000
b. P55,000 D. P150,000
Solution:
Goodwill = P145,000 – P100,000 = P45,000
101. If the excess payment is attributed entirely to goodwill, and the total goodwill approach is used, Gustav’s
capital balance after Fredric’s departure will be:
a. P200,000 c. P263,000
b. P252,500 d. P275,000
Solution:
P45,000/30% = P150,000
Gustav’s share of goodwill = 35% x P150,000 = P52,500
P200,000 + P52,500 = P252,500
102. Using the partial goodwill approach, Erica’s capital balance, after Fredric’s departure, will be:
a. P127,500 c. P150,000
b. P 134,250 d. P165,750
Solution:
103. CC, DD and EE shared profits and losses based on 5:3:2. EE was allowed to withdraw from the partnership on
31 December 20x5 with P600,000 cash as full settlement. The condensed balance sheet of the partnership as of
that was as follows:
Assets
Due from EE P 250,000
Goodwill 2,000,000
Other Assets 4,750,000
Total assets P 7,000,000
Liabilities and Capital
Liabilities P 2,000,000
Due to DD 750,000
CC, Capital 1,750,000
DD, Capital 1,500,000
Total liabilities and capital P 7,000,000
Using the partial adjustment of goodwill method, the new capital balances of the remaining partners of the
remaining partners after EE’s withdrawal are:
a. CC, P1,842,750 and DD, P1,556,250

b. CC, P1,375,000 and DD, P1,275,000
c. CC, P2,000,000 and DD, P1,650,000
d. CC, P1,750,000 and DD, P1,500,000
Solution:
Less: Book Value of Interest of EE (20%)
(P1,000,000 – P250,000) 750,000
Deficit – to be deducted to existing goodwill P150,000
Journal Entries:
EE, Capital P1,000,000
Cash P600,000
Due from EE 250,000
Goodwill 150,000
Capital balance of CC and DD:

CC P1,750,000
DD P1,500,000
104. Using the same information in Number 103, except that the entire shrinkage in asset method or total adjustment
in goodwill is used, the new capital balance of the remaining partners after EE’s withdrawal are:
a. CC, P1,843,750 and DD, P1,556,250

b. CC, P1,375,000 and DD, P1,275,000
c. CC, P2,000,000 and DD, P1,650,000
d. CC, P1,750,000 and DD, P1,500,000
Solution:
Less: Book value of interest of EE (20%) 750,000
Deficit P(150,000)
Divided by: 20%
Goodwill P(750,000)
Journal Entries:
CC, Capital P 375,000
DD, Capital 225,000
EE, Capital 1,000,000
Cash P600,000
Due from EE 250,000
Goodwill 750,000
Capital balance of CC and DD:

CC: (P1,750,000 – P375,000) P1,375,000
DD: (P1,500,000 – P225,000) P1,275,000
105. Bonnie, Gwen, and Sally are partners with capital account balances of P350,000, P280,000 and P200,000,
respectively. Sally informed Bonnie and Gwen that she is withdrawing from the partnership. The partner’s share
goodwill, if any, of the withdrawing partner will be recognized at the date of withdrawal. In this instance, the
partners determine that the goodwill associated with Sally is P40,000. Assuming that Sally’s equity is purchased
by Bonnie (60 percent) and Gwen (40 percent), what is the amount of Bonnie’s capital account at the date of
Sally’s withdrawal?
a. P376,000 c. P464,000
b. P424,000 d. P494,000
Solution:
P350,000 + (P200,000 + P40,000) (0.60)
= P350, 000 + (P240,000) (0.60)
= P350,000 + P144,000
= P494,000
106. The partner’s capital (income-sharing ratio in parentheses) of Nunn, Owen, Park & Quan LLP on May 31,
20x5, were as follows:
Nunn (20%) P 60,000
Owen (20%) 80,000
Park (20%) 70,000
Quan (40%) 40,000
Total partner’s capital (20%) P 250,000
On May 31, 20x5, with the consent of Nunn, Owen, and Quan:
a. Sam Park retired from the partnership and was paid P50,000 cash in full settlement of his interest in
the partnership.
b. Lois Reed was admitted to the partnership with a P20,000 cash investment for a 10% interest in the net
assets of Nunn, Owen and Quan.
The capital account to be credited to Reed is:
a. P22,000 c. P20,000
b. 27,000 d. 25,000 (Adopted)
Solution:
Total capital P250,000

Less: Retirement of Park 70,000
Add: Bonus to remaining partners due to retirement of Park 20,000
Capital balance before the admission of Reed P200,000
Add: Cash investment of Reed 20,000
Total agreed, capital of the partnership (equal to the contributed capital) P220,000
Multiplied by: Interest acquired 10%
Capital account to be credited to Reed P 22,000
107. AA, BB, and CC are partners sharing profits in the ratio of 3:2:1, respectively. Capital accounts are P50,000,
P30,000, and P20,000 on December 31, 20x5, when CC decides to withdraw. It is agreed to pay P30,000 for
CC’s interest. Profits after the retirement of CC are to be shared equally.
The capital balance of BB after retirement of CC, using total goodwill approach, and (2) assume the usage of
bonus, partial, and total goodwill approach for the retirement, which of these methods will be preferred by BB?
a. (1) P50,000; (2) Bonus method

b. (1) P20,000; (2) Bonus method
c. (1) P30,000; (2) Partial goodwill
d. (1) P50,000; (2) Total goodwill (Adopted)
Solution:
(1) Amount paid P30,000

Less; Book value of interest of CC (1/6) 20,000
Excess / partial goodwill P10,000
Divided by (capitalized at) 1/6
Therefore, the capital balance of BB after retirement of CC:
BB: P30,000 + (2/6 x P60,000) P50,000
(2) Bonus Method:

Amount paid P30,000
Less: Book value of the interest of CC 20,000
Therefore, the capital balance of the remaining partners using:

Bonus Method:
AA: P50,000 – (3/5 x P10,000) P44,000
BB: P30,000 – (2/5 x P10,000) P26,000
AA P50,000
BB P30,000
Total Goodwill:
AA: P50,000 + (3/6 x P60,000) P80,000
BB: P30,000 + (2/6 x P60,000) P50,000
For purposes of comparing bonus and goodwill:

AA BB
Bonus Method is used P44,000 P26,000
Partial goodwill Method is used P50,000 P30,000
Less: Write-off Partial goodwill (equally) 5,000 5,000
P45,000 P25,000
Total goodwill method is used P80,000 P50,000
Less: Write-off total goodwill (equally) 30,000 30,000
P50,000 P20,000
BUSINESS COMBINATION: EACH PARTNERSHIP HAS UNDERVALUED TANGIBLE ASSETS AND

GOODWILL
108. The partnership of A, B, C, and D has agreed to combine with the partnership of X and Y. The individual
capital accounts and profit and loss sharing percentage of each partner follow:
P & L Sharing %
Capital Accounts Now Proposed
A …………………………………………………………. P 50,000 40 28
B …………………………………………………………. 35,000 30 21
C …………………………………………………………. 40,000 20 14
D …………………………………………………............. 25,000 10 7
150,000 100 70
X …………………………………………………………. P 60,000 50 15
Y …………………………………………………………. 40,000 50 15
P100,000 100 30
A, B, C, and D’s partnership has undervalued tangible assets of P20,000, and X and Y partnership has undervalued
tangible assets of P8,000. All the partners agree that:
(a) The partnership of A, B, C, and D possesses goodwill of P30,000 and
(b) The partnership X and Y possesses goodwill of P10,000
The combined business will continue to use the general ledger of A, B, C, and D. Assume that tangible assets are to
be revalued and goodwill is to be recorded. Compute the amount of goodwill recognize in the partnership books:
a. Zero c. P40,000
b. P30,000 d. P68,000 (Adopted: Advanced Accounting by Pahier)
Solution:
Goodwill of A, B, C, and D Partnership P30,000
Goodwill of X and Y Partnership 10,000
109.Using the same information in No. 108, compute the capital balance of A and X respectively:
a. A, P70,000; X, P69,000 c. A, P58,000; X, P64,000

b. A, P62,000; X, P65,000 d. A, P50,000; X, P60,000
Solution:
A X
Unadjusted Capital Balances P50,000 P60,000
Undervalued Tangible Assets:
A: P20,000 x 40% 8,000
X: P8,000 x 60% 4,000
Goodwill:
A: P30,000 x 40% 12,000
X: P10,000 x 60% 5,000
Adjusted Capital Balances P70,000 P69,000
110.Using the same information in NO. 109 except that bonus method is to be used with respect to undervalued
assets and goodwill. Compute the amount of goodwill recognized in the books:
a. Zero c. P40,000
b. P30,000 d. P68,000
Solution:
Zero, since bonus method was used to account for the undervalued tangible assets and goodwill.
111.Using the same information in No. 82 except that bonus method is to be used with respect to undervalued
assets and goodwill. Compute for the capital balances of A and X, respectively:
a. A. P70, 000; X P69, 000 c. A. P58, 000; X P64, 000

b. A. P50, 000; X P60, 000 d. A. P50, 960; X P58, 000
Solution:
A: P50, 000 + (P2, 400* x 40%) P 50, 960
X: P 60,000 - (P2, 400* x 50%) P 58,800
Undervalued tangible asset of P 20, 000 x 30%

(X and Y's new profit and loss sharing percentage) P 6, 000
Goodwill of P 30,000 x 30% (X and Y's new profit and loss
sharing percentage) 9, 000
Total bonuses to A, B, C, and D 15,000
Bonuses to X and Y: This is the portion of X and Y undervaluation that A, B, C and D might share in it realized or
allocated as bonus.
Undervalued tangible asset of P 8,000 x 70% (A, B, C, and D's new profit and loss
sharing percentage) P 5, 600
Goodwill of P 10,000 x 70% (A, B, C, and D's new profit and loss
sharing percentage) 7, 000
Total bonus to X and Y 12, 600
Net bonus to A, B, C, and D 2,400

Proof of Net bonus to A, B, C, and D to achieve equally
(1) Assume full realization of items not recognize on the books:
A, B, C, and D:
Undervalued assets P 20, 000
Goodwill 30,000
Total 50, 000
X and Y :
Undervalued assets. P 8, 000
Goodwill 10,000
Total 18, 000
Total 68, 000
(2) Allocation of P 68,000 assumed to be realized:

A, B, C and D: X and Y
70% 30%
70% of P68,000 P47, 600
30% of P68, 000 P20, 400
Amounts not recognized on the books 50, 000 18, 000

P2, 400 (P2, 400)
INCORPORATION OF A PARTNERSHIP
112.Roy and Gil are partners sharing profits and losses in the ratio of 1:2, respectively. On July 1, 20x5, they
decided to form the R & G Corporation by transferring the assets and liabilities from the partnership to the
Corporation in exchange of its shares. The following is the post-closing trial balance of the partnership:
Debit Credit
Cash P 45,000
Accounts Receivable (net) 60,000
Inventory 90,000
Fixed assets (net) 174,000
Liabilities P 60,000
Roy, Capital 94,800
Gil, Capital 214,200
P 369,000 P 369,000
It was agreed that the adjustments be made to the following assets to be transferred to the corporation:
Accounts Receivable P 40, 000
Inventory 68, 000
Fixed Assets 180, 600
The R & G Corporation was authorized to issue P100 per preference shares and P10 per ordinary share. Roy and Gil
agreed to receive for their equity in the partnership 720 ordinary share each, plus even multiples of 10 shares for
their remaining interest. The total number of shares of preference and ordinary share issued by the corporation in
exchange of the assets and liabilities of the partnership are:
Preference Share Ordinary Share Preference Share Ordinary Share

a. 2,540 shares 1, 500 shares c. 2, 642 shares 1, 440 shares
b. 2, 592shares 1, 440 shares d. 2,642 shares 1, 550 shares
Solution:
Total Roy Gil
Capital, before adjustment P 309,000 P94, 800 P214, 200
Less: Net adjustment 35,400 11, 800 23, 600
Capital, After adjustment P 273, 600 P 83, 000 P190, 600
Less: Portion covered by ordinary share,
Par P10(720 share to each partner) 14, 400 7,200 7,200
Portion to be covered by preference
Share, par P100 P 259,200 P 75,800 P183, 400
Shares to be issued:
Preference share 2,592 758 1,834
Ordinary share 1, 440 720 720
*FV, 40,000 + P68, 000+180, 600-BV, P60,000+90,000+174,000.
113.Partners Art and Tony, who share equally in the profits and losses, have the following balance sheet as
December 31, 20x5:
Cash P 120, 000 A/payable P 172, 000

A/Receivable 100, 000 Accum. dep’n 8, 000
Inventory 140,000 Art, Capital 140, 000
Equipment 80,000 Tony, Capital 120, 000
Total P440, 000 Total P440, 000
They agreed to incorporate their partnership, with the new corporation absorbing the net assets after the following
adjustment : provision of allowance for bad debts of P10, 000; restatement of the inventory at its current fair value
of P160, 000; and, recognition of further depreciation on the equipment of P3, 000. The corporation's capital stock is
to have a par value of P100, and the partners are to be issued corresponding total shares equivalent to their adjusted
capital balances. The total par value of the shares of capital stock that were issued to partners Art and Tony was:
a. P260, 000 c. P273, 000

b. P267, 000 d. P280,000
Solution:
Unadjusted capital balances (120, 000 +140, 000) P 260, 000

Add(deduct): adjustments
Allowance for doubtful accounts (10, 000)
Revaluation of inventory( P 160,000- P 140,000) 20, 000
Additional depreciation (3,000)
Adjusted capital balances equivalent to the
the total share issued 267, 000
114.JJ & KK partnership's balance sheet at December 31, 20x5, reported the following:
Total assets P 100, 000

Total liabilities 20, 000
JJ, Capital. 40, 000
KK, Capital 40,000
On January 2, 20x6, JJ and KK 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 in the partner's book, of which 7, 000 was assigned to tangible asset and 5, 000 was assigned to goodwill. JJ
& KK were each issued 5, 000 shares of the corporations P1 par value ordinary share, immediately following
incorporation, share premium/additional paid-in-capital excess of par should be credited for:
a. P68, 000 c. P77, 000

b. 70,000 d. 82, 000
Solution:
Carrying Value of Net Assets (100, 000 -20,000) P 80, 000
Add: Adjustment to Reflect Fair Value 12,000
Fair Value of Net Assets 92,000
Less: Common Stock, par P1(5, 000 shares x 2 x P1) 10,000
Additional paid in capital/ share premium 82,000
THEORIES
1. Which one of the following is a characteristic of a general partnership?
a. All partners must agree to legal agreements or they are nonbinding.

b. Each general partner is personally liable for all of the partnership obligations.
c. Each partner is entitled to reasonable remuneration for conducting for partnership business.
d. Partnership income is separately taxed.
2. In a limited partnership, the entity ceases to legally exist when,
a. An existing partner retires or dies.

b. A new partner enters the partnership.
c. A limited partner transfers his/her interest.
d. A general partner is no longer present.
3. Partnership net income is defined as,
a. The interest allocation to the partners, based on weighted average invested capital.
b. Partnership income after deducting partner salaries and interest.
c. Partnership income after deducting partner salaries.
d. Partnership income before deducting salaries and interest.
4. Which of the following is false regarding the measurement of partnership income?
a. Partnerships employ the same revenue and expense recognition criteria as corporations.
b. Salaries to partners are deducted as expenses in measuring partnership income.
c. Interest allocated to partners is not deducted as an expense in measuring partnership income.
d. Partnership do not report income tax expense.
5. A partnership's income-share ratio,
a. Applies to partnership income after salaries and interest are deducted.

b. Applies to partnership income before salaries are deducted but after interest is deducted.
c. Applies to partnership income after salaries are deducted but before interest is deducted.
d. Applies to partnership income before both salaries and interest are deducted.
6. Which of the following business entity forms is (are) required to maintain their financial information in
accordance with Generally Accepted Accounting Principles?
a. Corporations c. Partnership and Proprietorships

b. Corporation and Partnership d. Corporation, Partnerships, and Proprietorships
7. Which of the following is not a similarity that exist between proprietorship and partnerships?
a. Neither requires approval by a state to form

b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company's income on the owner's individual tax return
d. All of the above are similarities of proprietorships and partnerships.
8. Which of the following is not an area where there are differences when comparing partnerships and
corporations?
a. The ease of formation

b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ
9. Which of the following is not a difference when comparing partnerships and corporation?
a. Corporations must conform to GAAP whereas partnerships are not required to conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
c. Partnerships have unlimited liability while corporation’s shareholders generally do not have unlimited
liability
d. Corporations are required to pay income tax while partnerships are not required to pay income taxes
10. What theory of equity is applicable for partnerships?
a. Proprietary theory c. A mix of proprietary and entity theory

b. Entity theory d. Partnerships theory
11. Which of the following is not an example of the proprietary theory of equity?
a. Partnerships do not have claims to specific assets

b. Individual partners are liable for all debts of the partnerships
c. A partner's income tax includes the partners share of partnerships net income, and the partnerships does
not pay income taxes
d. Salaries of partners are viewed as distribution of income, not components of net income
12. Which of the following is not example of the entity theory of equity?
a. Continuity of the partnerships when admission or withdrawal of partners occurs

b. A partnership can enter into contracts
c. Assets contributed to the partnerships retain the existing tax basis to the partner contributing
d. Partnerships creditors have priority claim to partnerships assets and the creditors of partners have priority
claim to the partner’s assets in the event of liquidation
13. Which of the following statements is correct with regard to the creation of initial capital account balances on a
partnership's financial records?
a. The capital accounts can be created for any peso amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial capital balances
c. Each partner’s capital accounts must have a non-zero value assigned to it
d. All of the above statement are correct
14. Which of the following statement is not true with regard to assigning the carrying value of noncash assets
contributed to those assets at the date of a partnership formation?
a. Use of the noncash assets historical cost can result in the misstatement of the partners’ capital accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may require thr partnership
agreement to address profit/ loss distribution that will occur when the contributed assets is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will not cause partner taxable
income to differ from the partner's share of partnerships income
d. All of the above statement are correct
15. Which of the following statement is correct with regard to the contribution of asset and associated liabilities to a
partnership?
a. Liabilities associated with asset contributed to a partnership remain the liability of the contributing
partner
b. Liabilities associated with assets contributed to a partnership become the liability of the partnership
c. Liabilities associated with assets contributed to the partnership become the liability of both the
contributing partner and the partnership
d. Asset may not be contributed to a partnership if there is a liability associated with line asset
16. When can the bonus method be applied?
a. When a partnership is formed

b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances
17. The goodwill/revaluation method always results in which of the following?
a. A change in the peso value assigned to two or more partners’ capital accounts
b. A decrease in a partner’s capital account
c. An increase in a partner’s capital account
d. An increase in a partner’s capital account and a decrease in at least one partners’ capital account
18. Which of the following statements is correct with regards to drawing accounts that may be used by a
partnership?
a. Drawing accounts are closed to the partners’ capital accounts at the end of the accounting period.
b. Drawing accounts established the amount that may be taken from the partnership by a partner in a given
time period
c. Drawing accounts are similar to Retained Earnings in the corporation
d. Drawing accounts appear on the balance sheet as a contra equity account
19. Which of the following interest component calculation bases is least susceptible to manipulation when
allocating profits and losses to partners?
a. Beginning capital account balance

b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance
20. Which component of the partnership profit and loss allocation compensates partners for the routine time and
effort expended in the business?
a. Interest on capital balance c. Salary

b. Bonus d. Residual Interest
21. Which component of the partnership profit and loss allocation is most commonly offered to the partner who
manages the business?
a. Interest on capital balance c. Salary

b. Bonus d. Residual Interest
22. Which of the following statements is true with regard to partnership residual profit and loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements
23. Which of the following should be done when the partnership profit and loss ratios are changed?
a. The book and market value of assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios.
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.
24. Which of the following occurs every time a new partner is admitted to a partnership or an existing partner
leaves the partnership?
a. Dissolution c. Dissolution and termination

b. Termination d. None of the above occurs
25. Which of the following forms of new partner admission will not result in a change in the partnership’s net
assets?
a. Purchase of an ownership interest directly from the partnership

b. Purchase of an ownership interest directly from the existing partnership
c. Either of the above
d. Neither of the above
26. When a new partner joins a partnership by investing assets into the partnership, what method may be used to
record the admission of the new partner?
a. Revaluation of existing assets c. Application of the bonus method

b. Recognition of goodwill d. Any of the three or a combination may be applied
27. When method of recording the admission of a new partner into a partnership potentially results in the existing
partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Existing bonus method or goodwill/revolution method
d. Existing partners’ capital accounts never change when a new partner is admitted into a partnership
28. A partnership is formed with three equal partners. However, each partner invests a different amount of net
assets. Which of the following statement is true?
a. Under the bonus method, all partners will have equal initial capital balances
b. Under the goodwill method, each partner will have equal initial capital balances
c. Because the investments are unequal, setting each partner’s capital balance equal to the amount invested
cannot be used
d. The capital balances will be equal no matter which method – bonus, goodwill, or fair value of investment
is used
29. Which of the following is true regarding the admission of a new partner by purchase of an existing partnership
interest?
a. Using the transfer of capital interest’s approach, total partnership capital increases
b. Using the transfer of capital interest’s approach, partnership capital of existing partners does not change
c. Using the revaluation or total adjustments in asset/implied goodwill approach, recognized adjustment in
asset/goodwill equals the new partner’s investment divided by his/her capital percentage
d. Using the revaluation or total adjustments in asset/implied goodwill approach, the recognized adjustment
in asset/goodwill is shared among only the existing partners
30. Which of the following statements is false concerning a comparison of a bonus and goodwill methods of
recording admission of a new partner y investment of new capital?
a. The goodwill method will typically result in a larger total partnership capital than the bonus method
b. When the investment by the new partner exceed that partner’s share of the firm’s total capital, the
existing partners will receive either a bonus or goodwill
c. Both the bonus and goodwill methods deal with the presence of unrecorded assets, as indicated by the
amount invested by the new partner
d. While the bonus method recognizes a new basis of asset valuation when a new partner invests assets in
the partnership, the goodwill method does not.
31. Which of the following will occur when the existing partners contribute goodwill and a new partner is admitted
to the partnership?
a. The existing partner’s capital accounts will be decreased

b. The existing partner will receive cash from the partnership
c. The partnership’s total asset will increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio
32. Which of the following statement is false with regard to goodwill recognized for a new partner entering a
partnership?
a. The new partner’s capital account balance will exceed the amount invested
b. The existing partner’s capital account will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the partnership’s book
value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction is completed
33. Which of the following statement present a reason that goodwill may be recorded with regard to a new partner
at the date of the partner’s admission to the partnership?
a. The existing partnership is worth more than the appraised value of tangible net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner’s contribution to the partnership is greater than the value of the
unidentifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30 percent
34. What portion of the partnership’s asset must be revalued when a partner withdraws from a partnership?
a. The withdrawing partner’s share must be revalued

b. All of the partnership’s asset must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be revalued
d. Partnerships assets must not be revalued when the partner withdraws
35. Who may acquire the ownership interest of a partner who is withdrawing from a partnership?
a. Existing partners c. The partnership

b. New investor d. All of the above
36. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the equity?
a. In any manner they choose

b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
37. Which of the following must exist to create the potential for a retiring partner to have a bonus recognized at the
date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner's equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
38. In what manner do the remaining partners share in the bonus paid to a withdrawing partner?
a. In proportion to their residual profit and loss ratios

b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
39. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner

b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
40. What change occurs to continuing partners' capital accounts when a withdrawing partner is assigned
goodwill/revaluation of asset at the date of withdrawal?
a. Continuing partners' capital accounts decrease by their profit and loss ratio
b. Continuing partners' capital accounts increase
c. Continuing partners' capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
41. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner's portion of goodwill

b. The continuing partners' portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner's portion of goodwill/revaluation or the goodwill/revaluation attributable
to the entire partnership
42. Which of the following is true regarding to the admission of a new partner by purchase of an existing
partnership interest?
a. Using the transfer of capital interest’s approach, total partnership capital increases.
b. Using the transfer of capital interests approach, partnership capital of existing partners do not change.
c. Using the revaluation or total adjustments in asset/implied goodwill approach, recognized adjustment in
asset/goodwill equals the new partner's investment divided by his/her capital percentage.
d. Using the revaluation or total adjustments in asset/implied goodwill approach, the recognized adjustment
in asset/goodwill is shared among only the existing partners.
43. D, E and F are partners who shares income in 5:4:3 ratio. Each has a capital balance of P60,000. D retires from
the partnership and is paid P95,000. In recording the retirement no entry was made to E's capital account.
Which method of recording the retirement was used?
a. Bonus c. Total goodwill

b. Partial goodwill d. Transfer of asset
43. M, who has a 40 percent interest in a partnership retires and receive a settlement payment that is 10000 less than
her capital balance. Which of the following statements is correct?
a. Under the bonus method, the capital of the remaining partners will increase.
b. Under the partial goodwill method, partnership assets will be written up by P10,000.
c. Under the total goodwill method, partnership assets will be written down by P10,000.
d Under the bonus, partial goodwill and total goodwill methods, the capital of the remaining partners will
change.
44. When the partnership agreement does not specify how to value a retiring partner's interest, this valuation will
be;
a. based on a process agreed to by all partners.

b. based on the book value of the capital interest.
c. based on outside appraisal of the partner's interest.
d. based on five times earnings over the last three years.
45. Which of the following statements supports the use of partial good will method (aside from the total goodwill)
to record a retirement of a partner?
a. A change in partnership interests requires revaluation of all assets to fair value.

b. Retirement is not an arm's length transaction.
c. The partial goodwill method mirrors goodwill valuation for corporate mergers.
d. The retirement transaction provides evidence for inferring the total fair value of a partnership.
46. Which statement is false regarding the method use to report the retirement of a partner, when the partnership
pays the retiring partner an amount which is greater than the value of his/her capital?
a. the bonus method requires no revaluation of partnership assets.

b. if the payment to the retiring partner seems excessive in relation to the market value of a partnership, the
total goodwill method should be used.
c. the partial goodwill method requires no revaluation of partnership assets.
d. the total goodwill approach values total goodwill based on the goodwill attributable to the retiring
partner.
47. If a partnership pays the retiring partner an amount which is greater than the value of his/ her capital account?
a. the total goodwill and partial goodwill approaches result in recognition of goodwill, and tangible assets
may be written up but not written down.
b. the total goodwill and partial goodwill approaches may involve revaluation of tangible assets.
c. the total goodwill and partial goodwill approaches may involve revaluation of tangible assets
d. the total goodwill approach always results in recognition of more goodwill than the partial goodwill
approach.
48. Which of the following would be a cause of a capital deficiency to a partner?
a. A partner has borrowed money from the partnership

b. A partner has lent money to the partnership.
c. The partnership has incurred partner for the year.
d. Partnership assets are liquidated for more than book value.
49. If an individual partner is insolvent and the partnership is being liquidated, a creditor may petition the court to
specify that any partnership payments to which the individual partner becomes entitled shall be made to the
creditor. This specification is called?
a. charging order c. rule of dual priorities

b. foreclosure d. right of offset
50. When an individual partner uses personal assets to pay partnership creditors, this payment is recorded as;
a. an investment of capital in the partnership c. a receivable owing to the partnership

b. a liability to the partnership d. a deduction in a partnership asset
51. Which statement is true concerning the safe payment and cash distribution plan approaches to liquidation?
a. Both approaches are used in simple liquidations

b. The safe payment approach determines how the current available cash is distributed, but not future
payments
c. The safe payment approach is more conservative than the cash distribution plan
d. The safe payment approach uses the right of offset, but the cash distribution plan does not
52. Which statement below is false concerning liquidation of a partnership?
a. All assets can be sold at fair value in a single transaction to a competitor or to others who wish to
continue the business
b. Assets can be sold at distress prices in a single transaction to an interested party
c. Assets can be sold piecemeal over an extended period of time to interested parties
d. Assets must be liquidated solely through sale transactions
53. Which of the following is not a responsibility of an accountant during a partnership liquidation?
a. To protect the creditors

b. To manage the liquidation process in a manner that results in the greatest amount of cash collected
c. To distribute the most cash to the partner with the greatest capital account
d. To ensure that partner distribution do not jeopardize payments to creditors
54. To accomplish a partnership liquidation, the accountant should understand;
a. The rights of the partners c. The right of the partner’s creditors

b. The rights of the partnership’s creditors d. All of the above
55. Which of the following is not correct with regard to creditor claims against partnerships and individual
partners?
a. Partnership creditors can have claims against partnership assets and individual partner assets
b. Partnership creditors can have claims against partnership assets and individual partner assets only to the
extent that the partner has a deficit capital account balance
c. Partner creditors can have claims against individual partner assets and partnership assets to the extent of
the partner’s capital account balance
d. All of the above
56. Which of the following is not a possible claim against a partner's personal assets?
a. Personal creditors of other partners

b. Other partners. If the partner in question has a deficit capital account
c. Personal creditors of partner in question
d. Partnership creditors if claim is not fully paid from partnership assets
57. Which of the following is not a part of the partnership liquidation process?
a. Allocation at any remaining profit or loss to partner's capital account

b. Liquidation of noncash assets
c. Closing of the accounting records
d. Recognition of market value adjustments of assets and liabilities
58. Which of the following describes a partnership lump-sum liquidation?

a. Keeping the partnership assets and liabilities separate from the partners' personal assets and liabilities
b. The sale of all noncash assets and payment of liabilities before a single distribution to partners
c. A series of interim distributions to partners while the sale of noncash assets and the payment of liabilities
is occurring
d. The combining of a partner's capital account
59. Which of the following describes a partnership installment liquidation?
a. Keeping the partnership assets and liabilities separate from the partners' personal assets and liabilities
b. The sale of all noncash assets and payment of liabilities before a single distribution to partners
c. A series of interim distributions to partners while the sale of noncash assets and the payment of liabilities
is occurring
d. The combining of a partner's capital account
60. Which of the following is not correct with regard to a partnership Statement of Realization and Liquidation?
a. Gains and losses are allocated to capital accounts

b. The statement details all business transactions during the partnership liquidation
c. Residual profit and loss ratios are typically used to make allocations to partners' capital account
d. Balance sheet and income statement accounts appear on the statement
61. Which of the following might not be required of a supervising accountant during a partnership installment
liquidation?
a. Pay liabilities as quickly as possible

b. Determine the amount of distribution that can be made to partners during the liquidation
c. Protect the creditors' interest
d. Estimate cash flows over the remaining life of the partnership
62. Which of the following is an assumption on accountant would make when assisting with a partnership
installment liquidation?
a. That remaining assets can be sold at book value

b. That partners have sufficient resources to make contribution should a deficit capital account occur
c. That the business will not generate a positive cash flow during the remainder of its life
d. That the partners will all receive equal amounts of cash when distributions are made
63. Which of the following is true with regards to partnership liquidation when a deficit balance occurs in a partners
capital account?
a. The liquidation stops until the partner with the deficit invests enough to cover the shortfall.
b. All the partners invest additional money into the partnership on their profit and loss residual ratios.
c. The partner with the deficit capital account balance must invest an amount equal to the deficit or the
other partners must share the deficit in proportion to their respective profit and loss residual ratios.
d. Creditor liabilities are reduced by the amount of the partners deficit capital account balance.
64. Why might a particular partner have a deficit occur in his/her capital account during a partnership liquidation?
a. The partner with the deficit may have the greatest profit and loss residual ratio
b. The partner with the deficit may have made the greatest withdrawals from the partnership.
c. The partners with the deficit may have the smallest profit and loss residual ratio.
d. Both a. and b. are correct.
65. Which of the following statements is correct with regards to a cash contribution plan prepared for a partnership
liquidation?
a. It guarantees to partners the amount of distribution that will be made.
b. It informs the partners of the allocation that will occur when cash distributions are made.
c. It informs the partners when cash distributions will be made.
d. Cash contribution plans are not prepared for a partnership liquidation.
66. Which of the following is not part of the calculation to determine the loss absorption power when preparing a
cash distribution plan?
a. Loans to partners by the partnership or loans to the partnership by partners

b. Partner capital account balances
c. Partner profit and loss residual ratios
d. All of the above are considered when calculating the loss absorption power.
67. When making a distribution to partners during a partnership liquidation, the partner who should receive the first
allocation of the distribution is the one who has which of the following?
a. The largest capital account balance

b. The largest loss absorption power
c. The smallest capital account balance
d. The smallest absorption power
68. When it is possible to use a schedule of sale payments during partnership liquidation?
a. When partners share profits differently than they share losses

b. When one or more partners enter the liquidation with a deficit capital account balance
c. When either a or b occur
d. A schedule of safe payments is not used for a partnership liquidation
69. Which of the following assumptions is made when a schedule of safe payments is prepared?
a. All of the noncash assets will be sold for book value

b. Profits and losses are shared equally among the partners
c. Partnership capital will earn a 10 percent rate of return
d. Capital account deficits will not result in additional investment into the partnership
70. Which of the following assumptions is made when a schedule of safe payments is prepared?
a. All of the noncash assets will be sold for book value
b. Profits and losses are shared equally among the partners
c. Partnership capital will earn a 10 percent rate of return
d. Capital account deficits will not result in additional investment into the partnership

Partnership Formation and Operations

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PARTNERSHIP FORMATION:

GG's adjusted capital* P 405,000

What is the capital of AA and BB after the above adjustment?

a. AA, P 68,750; BB P 77,250 c. AA, P 65,000; BB P 76,000

(a) An allowance for doubtful accounts of 3% of accounts receivable is to be established.

DD is to invest sufficient cash to obtain a 1/3 interest in the partnership.

a. (1) P35,347 (2) P11,971 b. (1) 36,374 (2) 18,487

Unadjusted Capital balance of CC………………………………… P33,000

a. (1) P15,000 each for MM and NN (2) P150,000

9. The business assets of LL and MM appear below:

a. LL, P615,942; MM, P717,894 b. LL, P640,876; MM, P712,345

Adjusted Capital Balances P614,476 P683,052

Adjusted Total Assets After Formation………………………………………….. P2,265,118

They agreed to have the following items. Recorded in their books:

Compute the net(debit) credit adjustment for PP and QQ:

Items 15 to 17 are based on the following data:

15. The increase in capital of Kendall:

a. None c. by P160, 000

19. The partnership has the following accounting amounts:

Nick Joe Mike

Nick Joe Mike

Nick Joe Mike Total

Bonus = 10% (Net income – salaries – bonus)

January 1 – July 1 : P 420,000 x 6 months P 2,520,000

a. P 21,000 increase c. P 105,000 decrease

DD, Capital EE, Capital

a. DD, P 60,000; EE, P 59,400 c. DD, P 67,200; EE, P 52,800

a. DD, P 10,520; BB, P 13,480 c. DD, P 10,800; BB, P 13,200

Service revenue P 50,000

DD: P 800 x 10 = P 8,000

10-month Average Capital: P 280,000/10 = P 28,000 x 12% x 10/12 = P 2,800

10-month Average Capital: P 360,000/10 = P 36,000 x 12% x 10/12 = P 3,600

Yearly drawings (P 1,500 a month) 18,000 18,000

a. P 110,667 and P 119,583 c. P 100,000 and P 120,000

The partner’s capital balances o December 31, 20x5 are:

a. HH, P179,680; MM, P229,360; and AA, P239,360

AA: 10% × P472,500 = P47,250

a. XX, P 155,100; YY, 155,100; ZZ, P 169,800

a. Hunt.P41, 450; Rob, P29,950; Turman, P15,450; Kelly, 18,150

Hunt Rob Turman Kelly Total

a. RR, P (6,540); PP, P (6,540) c. RR, P (6,960); PP, P 6,540

*The adjusted/corrected net income for 20x5 would be:

Solution: 20x5 20x6

Adjusted Net Income P14,800 P12,800

Total Adjusted Net income (P14,800 + P12,800) P27,600

a. (1) 30%; (2) P2,214 c. (1) 27%; (2) P2,286

(2) Reported Net Income P12,500

Bonus = 10% (Net income- Bonus)

b. 139,540 49,860 d. 142,350 47,670

Capital, March 1, 20x5 125,000 75,000 200,000

a. 52,000 increase c. 52,000 decrease

Items 57 and 58 are based on the following information:

a. P25,000 increase c. P25,000 decrease

ASSIGNMENT OF INTEREST TO A THIRD PARTY:

Betty, capital (P 140,000 x 50%) 70,000

PARTNERSHIP DISSOLUTION: ADMISSION OF A NEW PARTNER – PURCHASE OR INVESTMENT

a. P198,000; P 99,000; P 33,000. c. P216,000; P108,000; P36,000.

a. P198,000; P 99,000; P33,000. c. P216,000; P108,000; P36,000.

KK: [(P252,000 + (P30,000 x 60%)] x 80% = P 216,000